Intangible assets consist of acquired sports entertainment film libraries, trademarks and trade names. We have classified these costs as intangible assets and amortize them over the period of the expected revenues to be derived from these assets, generally from three to six years.
Amortization expense for the three months and nine months ended January 27, 2006 was $507 and $1,521, respectively, and was $640 and $1,635 for the nine months ended January 28, 2005, respectively.
Estimated amortization expense for each of the fiscal years ending is as follows:
Short-term investments consisted of the following as of January 27, 2006 and April 30, 2005:
World Wrestling Entertainment, Inc.
Notes to Consolidated Financial Statements
(dollars in thousands)
(unaudited)
| | April 30, 2005 | |
| |
| |
| | Cost | | Unrealized
Holding
Loss | | Fair
Value | |
| |
|
| |
|
| |
|
| |
Fixed-income mutual funds and other | | $ | 158,317 | | $ | (2,677 | ) | $ | 155,640 | |
United States Treasury Notes | | | 45,945 | | | (98 | ) | | 45,847 | |
| |
|
| |
|
| |
|
| |
Total | | $ | 204,262 | | $ | (2,775 | ) | $ | 201,487 | |
| |
|
| |
|
| |
|
| |
9. Commitments and Contingencies
Legal Proceedings-
World Wide Fund for Nature
There has been no significant development in this legal proceeding subsequent to the disclosure in Note 11 of the Notes to Consolidated Financial Statements in our Annual Report on Form 10-K for the fiscal year ended April 30, 2005, except as follows:
In January 2006, the English High Court held a hearing to determine as a preliminary issue whether the World Wide Fund for Nature (“Fund”) is legally entitled to claim restitutionary damages in the form of a percentage of certain of our gross revenues. By Judgment dated February 16, 2006, the Court ruled that the Fund is entitled in point of law to seek restitutionary damages, but that the question whether the Fund is entitled in point of fact to claim or recover damages on that basis remains to be determined. The Fund has been ordered to provide further clarification of its claim by March 2, 2006, and the Fund has made a filing with the Court. We have been granted permission to appeal parts of the judgment; if we appeal, the proceedings will be stayed pending the outcome of any such appeal.
Shenker & Associates; Bell; THQ/Jakks
There has been no significant development in these related legal proceedings subsequent to the disclosure in Note 11 of the Notes to Consolidated Financial Statements in our Annual Report on Form 10-K for the fiscal year ended April 30, 2005, except as follows:
There has been no significant development in our litigation with Stanley Shenker & Associates, Inc. (“SSAI”).
As previously reported, in our Connecticut state court litigation against James Bell, our former employee, and certain entities related to him, on or about August 10, 2005, we entered into an agreement to settle only our pending state law claims against Bell and entities related to him on favorable terms, while specifically preserving all federal claims. Under the terms of the settlement of the state law claims against Bell and entities related to him, Bell agreed to pay, and paid, $2,500 to WWE and further agreed to cooperate fully with WWE and to provide complete and truthful testimony regarding various pending legal matters, including the federal litigation described below involving THQ/Jakks Pacific LLC, et al.
In our litigation with THQ/Jakks Pacific LLC, Jakks Pacific, Inc., THQ, Inc., Shenker, Bell, and various other related persons and entities, the U.S. District Court for the Southern District of New York issued an Order dated August 18, 2005 setting an initial briefing schedule with respect to the defendants’ motions to dismiss our amended complaint, and such briefing has now been completed. Oral argument on the pending motions to dismiss was held on January 11, 2006.
11
World Wrestling Entertainment, Inc.
Notes to Consolidated Financial Statements
(dollars in thousands)
(unaudited)
IPO Class Action
There has been no significant development in this legal proceeding subsequent to the disclosure in Note 11 of the Notes to Consolidated Financial Statements in our Annual Report on Form 10-K for the fiscal year ended April 30, 2005.
Other Matters
We are not currently a party to any other material legal proceedings. However, we are involved in several other suits and claims in the ordinary course of business, the outcome of which is not expected to have a material adverse effect on our financial condition, results of operations or liquidity. We may from time to time become a party to other legal proceedings.
10. Discontinued operations
In early May 2001, we formalized our decision to discontinue operations of the XFL and in fiscal 2003 we closed the restaurant and retail operations of The World. The results of the XFL and The World business and the assets and liabilities of the XFL and The World have been classified as discontinued operations in our consolidated financial statements and are summarized as follows:
| | Three months ended | | Nine months ended | |
| |
| |
| |
| | January 27,
2006 | | January 28,
2005 | | January 27,
2006 | | January 28,
2005 | |
| |
|
| |
|
| |
|
| |
|
| |
Discontinued operations: | | | | | | | | | | | | | |
Income (loss) from discontinued operations, net of minority interest and taxes of $13 and $60 for the three and nine months ended January 27, 2006, respectively, and net of minority interest and tax expense of $0 and $718 for the three and nine months ended January 28, 2005, respectively | | $ | 6 | | $ | (69 | ) | $ | 34 | | $ | 1,264 | |
| |
|
| |
|
| |
|
| |
|
| |
| | As of | |
| |
| |
| | January 27,
2006 | | April 30,
2005 | |
| |
|
| |
|
| |
Assets: | | | | | | | |
Cash | | $ | 445 | | $ | 544 | |
| |
|
| |
|
| |
Liabilities: | | | | | | | |
Accrued expenses | | | 68 | | | 74 | |
Minority interest | | | 226 | | | 180 | |
| |
|
| |
|
| |
Total liabilities | | $ | 294 | | $ | 254 | |
| |
|
| |
|
| |
Assets of the discontinued operations are stated at their estimated net realizable value.
12
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Background
We are an integrated media and entertainment company principally engaged in the development, production and marketing of television programming and live events and the licensing and sale of branded consumer products featuring our highly successful brands.
Our operations are organized around two principal activities:
| • | Live and televised entertainment, which consists of live event and television programming and feature films. Revenues consist principally of pay-per-view buys, attendance at live events, domestic and international television rights fees and sponsorships. Revenues also include the sale of television advertising time in Canada and, until October 2005, in the United States. |
| | |
| • | Branded merchandise, which consists of licensing and direct sale of merchandise. Revenues include sales of consumer products through third party licensees, direct marketing and sales of merchandise both at our live events and via our website, magazines, home videos and various services through our websites. |
Results of Operations
Third Quarter Ended January 27, 2006 compared to Third Quarter Ended January 28, 2005
(Dollars in millions, except as noted)
Net Revenues | | January 27,
2006 | | January 28,
2005 | | better
(worse) | |
| |
|
| |
|
| |
|
| |
Live and televised | | $ | 60.4 | | $ | 57.1 | | | 6 | % |
Branded merchandise | | | 42.6 | | | 25.6 | | | 66 | % |
| |
|
| |
|
| | | | |
Total | | $ | 103.0 | | $ | 82.7 | | | 25 | % |
| |
|
| |
|
| | | | |
Operating Income | | January 27,
2006 | | January 28,
2005 | | better
(worse) | |
| |
|
| |
|
| |
|
| |
Live and televised | | $ | 18.3 | | $ | 18.7 | | | (2 | )% |
Branded merchandise | | | 21.7 | | | 12.3 | | | 76 | % |
Corporate | | | (19.3 | ) | | (18.6 | ) | | (4 | )% |
| |
|
| |
|
| | | | |
Total operating income | | $ | 20.7 | | $ | 12.4 | | | 67 | % |
| |
|
| |
|
| | | | |
Income from continuing operations | | $ | 13.6 | | $ | 11.0 | | | 24 | % |
| |
|
| |
|
| | | | |
Our live and televised revenues increased due to several successful international tours and increased pay-per-view buys due in part to the airing of one additional pay-per-view event in the current quarter as compared to the prior year. These increases were partially offset by the absence of domestic television advertising revenues as a result of our new distribution agreement with USA Network.
Branded merchandise revenues increased based on the performance of our home video business, which included a release detailing the story of Bret “Hitman” Hart. Additionally, merchandise sales via our website increased significantly during the Christmas season primarily due to the additional number of orders received and a higher amount per order being spent by our customers.
13
The following chart reflects comparative revenues and key drivers for each of the businesses within our live and televised segment:
Live and Televised Revenues | | January 27,
2006 | | January 28,
2005 | | better
(worse) | |
| |
|
| |
|
| |
|
| |
Live events | | $ | 18.2 | | $ | 11.3 | | | 61 | % |
Number of North American events | | | 53 | | | 76 | | | (30 | )% |
Average North American attendance | | | 5,200 | | | 4,000 | | | 30 | % |
Average North American ticket price (dollars) | | $ | 36.06 | | $ | 36.49 | | | (1 | )% |
Number of international events | | | 19 | | | 1 | | | 1800 | % |
Average international attendance | | | 8,600 | | | 7,700 | | | 12 | % |
Average international ticket price (dollars) | | $ | 63.15 | | $ | 35.38 | | | 78 | % |
Pay-per-view | | $ | 19.1 | | $ | 15.5 | | | 23 | % |
Number of pay-per-view events | | | 4 | | | 3 | | | 33 | % |
Number of buys from pay-per-view events | | | 1,362,900 | | | 1,043,300 | | | 31 | % |
Average revenue per buy (dollars) | | $ | 13.79 | | $ | 14.30 | | | (4 | )% |
Domestic retail price (dollars) | | $ | 34.95 | | $ | 34.95 | | | 0 | % |
Advertising | | $ | 2.3 | | $ | 10.8 | | | (79 | )% |
Sponsorship revenues | | $ | 0.5 | | $ | 1.3 | | | (62 | )% |
Television rights fees: | | | | | | | | | | |
Domestic | | $ | 13.5 | | $ | 13.4 | | | 1 | % |
International | | $ | 6.9 | | $ | 6.1 | | | 13 | % |
Ratings: | | | | | | | | | | |
Average weekly household ratings for RAW | | | 3.9 | | | 3.6 | | | 8 | % |
Average weekly household ratings for SmackDown | | | 2.8 | | | 3.4 | | | (18 | )% |
The increase in live event revenues is attributable to additional international events, which generate significantly more revenue per event than our North American events due to the combination of higher average ticket price and higher average attendance. The increased number of international events is due to the timing of our tours. For the full fiscal year 2006, we are planning a total of 56 international events as compared to 49 international events in fiscal 2005.
We aired four pay-per-view events in the third quarter of fiscal 2006 as compared to three pay-per-view events in the prior year quarter. The additional event, Taboo Tuesday, generated approximately 215,000 buys in the current quarter, and was included in the second quarter in fiscal 2005. The remaining three events that aired in the current quarter all exceeded the buys recorded for the same events in the prior year quarter. We will produce sixteen pay-per-view events in fiscal 2006, as compared to fourteen events in fiscal 2005.
As previously mentioned, we have entered into a new distribution agreement whereby our RAW program and a one-hour weekend RAW branded program air on USA Network. Under the terms of this agreement, we no longer sell or participate in any advertising revenue generated by these programs. The impact of this change in revenue for the quarter was a reduction of approximately $7.0 million as compared to the prior year. The remaining impact of this change for fiscal 2006, for the period of February through April 2006, is estimated to be a reduction in revenues of approximately $9.8 million as compared to the aggregate fiscal 2005 advertising revenue. Under the terms of the agreement, we receive rights fees from USA Network similar to those received from SpikeTV, which aired this program until October 2005. Advertising revenues in the current quarter include sales of advertising on our Canadian television programs and various sponsorship packages.
14
The increase in international television rights fees was primarily due to additional fees received from India and South Korea.
The following chart reflects comparative revenues and certain drivers for selected businesses within our branded merchandise segment:
Branded Merchandise Revenues | | January 27,
2006 | | January 28,
2005 | | better
(worse) | |
| |
|
| |
|
| |
|
| |
Licensing | | $ | 12.3 | | $ | 10.4 | | | 18 | % |
Merchandise | | $ | 9.5 | | $ | 4.4 | | | 116 | % |
Domestic venue per capita spending (dollars) | | $ | 9.32 | | $ | 8.70 | | | 7 | % |
WWE Shop per order spending (dollars) | | $ | 62.37 | | $ | 49.32 | | | 26 | % |
Magazine publishing | | $ | 3.0 | | $ | 3.5 | | | (14 | )% |
Net units sold | | | 1,093,900 | | | 1,097,800 | | | 0 | % |
Home video | | $ | 15.1 | | $ | 4.8 | | | 215 | % |
Gross units sold | | | 933,800 | | | 524,300 | | | 78 | % |
Digital media | | $ | 2.6 | | $ | 2.3 | | | 13 | % |
Other | | $ | 0.1 | | $ | 0.2 | | | (50 | )% |
Licensing revenues increased due in part to approximately $1.9 million of additional revenues in the multimedia games category. Approximately $4.7 million of the $12.3 million of licensing revenues were derived from international sales.
The increase in merchandise revenues is primarily due to a $4.0 million increase in our WWE Shop website sales as compared to the prior year quarter. Orders delivered from our WWE Shop website increased from approximately 35,600 orders in the prior year quarter to approximately 92,600 orders in the current quarter.
Home video revenues increased due in part to an increase of approximately 0.4 million gross units sold and an approximate $4.02 per unit increase in the average sales price of our DVDs due to the release of additional higher priced multi-disc titles in the quarter. Successful titles in the current quarter included Bret “Hitman” Hart: The Best There Is, The Best There Was, The Best There Ever Will Be, which sold approximately 178,000 gross units, and the continued sale of our WrestleMania: The Complete Anthology box sets. Our home video business continues to benefit from the investment in our original programming and third-party libraries as well as increased distribution with key retailers and the ongoing shift in consumer media buying and viewing behavior.
Digital media revenues increased primarily as a result of increased advertising, due in part to changes in our website design that allow advertisers additional options and more prominent advertisement placement.
Cost of Revenues | | January 27,
2006 | | January 28,
2005 | | better
(worse) | |
| |
|
| |
|
| |
|
| |
Live and televised | | $ | 37.6 | | $ | 33.5 | | | (12 | )% |
Branded merchandise | | | 18.6 | | | 10.9 | | | (71 | )% |
| |
|
| |
|
| | | | |
Total | | $ | 56.2 | | $ | 44.4 | | | (27 | )% |
| |
|
| |
|
| | | | |
Profit contribution margin | | | 45 | % | | 46 | % | | | |
The following chart reflects comparative cost of revenues for each of the businesses within our live and televised segment:
Cost of Revenues-Live and Televised | | January 27,
2006 | | January 28,
2005 | | better
(worse) | |
| |
|
| |
|
| |
|
| |
Live events | | $ | 14.3 | | $ | 9.4 | | | (52 | )% |
Pay-per-view | | $ | 7.3 | | $ | 5.5 | | | (33 | )% |
Advertising | | $ | 0.4 | | $ | 3.5 | | | 89 | % |
Television production costs | | $ | 13.5 | | $ | 12.8 | | | (5 | )% |
Other | | $ | 2.1 | | $ | 2.3 | | | 9 | % |
15
Live events cost of revenues increased due to the production of eighteen additional international events during the current quarter as compared to last year.
Pay-per-view costs of revenues increased due to the airing of one additional pay-per-view event as four events were produced in the current quarter as compared to three events in the year ago quarter.
Advertising cost of revenues decreased primarily due to the absence of the television advertising participation costs under our new agreement with USA Network.
Television production costs in the current quarter include the production of two international event broadcasts.
The following chart reflects comparative cost of revenues for certain of the businesses within our branded merchandise segment:
Cost of Revenues — Branded Merchandise | | January 27,
2006 | | January 28,
2005 | | better
(worse) | |
| |
|
| |
|
| |
|
| |
Licensing | | $ | 2.8 | | $ | 2.9 | | | 3 | % |
Merchandise | | $ | 6.0 | | $ | 3.0 | | | (100 | )% |
Magazine publishing | | $ | 1.9 | | $ | 1.9 | | | 0 | % |
Home video | | $ | 6.4 | | $ | 2.4 | | | (166 | )% |
Digital media | | $ | 1.4 | | $ | 0.6 | | | (133 | )% |
Other | | $ | 0.1 | | $ | 0.1 | | | 0.0 | % |
Licensing cost of revenues decreased despite the 16% increase in licensing revenues due to a greater proportion of non-commission bearing royalties received in the current quarter.
Merchandise and Home video cost of revenues increased due to the costs associated with the additional units sold in the current quarter.
| | January 27,
2006 | | January 28,
2005 | | better
(worse) | |
| |
|
| |
|
| |
|
| |
Selling, general and administrative expenses | | $ | 21.9 | | $ | 21.7 | | | (1 | )% |
The following chart reflects the amounts and percent change of certain significant overhead items:
| | January 27,
2006 | | January 28,
2005 | | better
(worse) | |
| |
| |
| |
| |
Staff related | | $ | 12.0 | | $ | 9.6 | | | (25 | )% |
Legal | | | 1.6 | | | 3.4 | | | 53 | % |
Consulting and accounting | | | 1.3 | | | 1.3 | | | 0 | % |
Advertising and promotion | | | 0.8 | | | 2.0 | | | 60 | % |
Bad debt | | | 0.2 | | | (0.7 | ) | | (129 | )% |
All other | | | 6.0 | | | 4.7 | | | (28 | )% |
| |
|
| |
|
| | | | |
Total SG&A | | | 21.9 | | $ | 21.7 | | | (1 | )% |
| |
|
| |
|
| | | | |
SG&A as a percentage of net revenues | | | 21 | % | | 26 | % | | | |
The increase in staff related expenses is primarily due to additional accrued bonus payments that are linked to the Company’s achievement of certain performance thresholds.
16
| | January 27,
2006 | | January 28,
2005 | | better
(worse) | |
| |
|
| |
|
| |
|
| |
Stock compensation costs | | $ | 1.7 | | $ | 1.2 | | | (42 | )% |
Stock compensation expense relates to the amortization of the fair value of restricted stock grants issued to employees under our 1999 Long-Term Incentive Plan (“LTIP”).
| | January 27, 2006 | | January 28, 2005 | | better
(worse) | |
| |
|
| |
|
| |
|
| |
Depreciation and amortization | | $ | 2.6 | | $ | 3.0 | | | 13 | % |
Investment income, net | | $ | 2.2 | | $ | 1.3 | | | 69 | % |
Interest expense | | $ | 0.1 | | $ | 0.1 | | | 0 | % |
| | January 27,
2006 | | January 28,
2005 | |
| |
|
| |
|
| |
Provision for income taxes | | $ | 10.2 | | $ | 4.2 | |
Effective tax rate | | | 43 | % | | 28 | % |
The rise in the effective tax rate for the current quarter was primarily due to the vesting of equity compensation and an increase in state and local taxes. In addition, the effective tax rate in fiscal 2005 was lower primarily due to the release of a valuation allowance no longer necessary upon the assignment of the lease of our entertainment complex, The World, to a third party.
Nine Months Ended January 27, 2006 compared to Nine Months Ended January 28, 2005
(dollars in millions)
Net Revenues | | January 27,
2006 | | January 28,
2005 | | better
(worse) | |
| |
|
| |
|
| |
|
| |
Live and televised | | $ | 189.1 | | $ | 189.1 | | | 0 | % |
Branded merchandise | | | 96.7 | | | 59.0 | | | 64 | % |
| |
|
| |
|
| | | | |
Total | | $ | 285.8 | | $ | 248.1 | | | 15 | % |
| |
|
| |
|
| | | | |
Operating Income | | January 27,
2006 | | January 28,
2005 | | Better
(worse) | |
| |
|
| |
|
| |
|
| |
Live and televised | | $ | 63.2 | | $ | 57.9 | | | 9 | % |
Branded merchandise | | | 45.7 | | | 23.6 | | | 94 | % |
Corporate | | | (53.5 | ) | | (53.7 | ) | | 1 | % |
| |
|
| |
|
| | | | |
Total operating income | | $ | 55.4 | | $ | 27.8 | | | 99 | % |
| |
|
| |
|
| | | | |
Income from continuing operations | | $ | 36.4 | | $ | 21.8 | | | 67 | % |
| |
|
| |
|
| | | | |
Branded merchandise revenues increased across all business lines as compared to the prior year. Home video revenues have more than doubled the amounts recorded in the prior year, based on the success of several popular titles released in the current year. The increased number of orders placed on our WWE Shop website has driven a 64% increase in Merchandise revenues. Licensing revenues also exceeded the prior year results, primarily in the multimedia games and toy categories.
17
The following chart reflects comparative revenues and key drivers for each of the businesses within our live and televised segment:
Live and Televised Revenues | | January 27,
2006 | | January 28,
2005 | | better
(worse) | |
| |
|
| |
|
| |
|
| |
Live events | | $ | 47.7 | | $ | 49.3 | | | (3 | )% |
Number of North American events | | | 192 | | | 223 | | | (14 | )% |
Average North American attendance | | | 4,600 | | | 3,900 | | | 18 | % |
Average North American ticket price (dollars) | | $ | 36.34 | | $ | 37.49 | | | (3 | )% |
Number of international events | | | 28 | | | 26 | | | 8 | % |
Average international attendance | | | 9,200 | | | 9,400 | | | (2 | )% |
Average international ticket price (dollars) | | $ | 67.84 | | $ | 70.05 | | | (3 | )% |
Pay-per-view | | $ | 59.4 | | $ | 50.9 | | | 17 | % |
Number of pay-per-view events | | | 12 | | | 11 | | | 9 | % |
Number of buys from pay-per-view events | | | 4,097,700 | | | 3,297,100 | | | 24 | % |
Average revenue per buy (dollars) | | $ | 14.21 | | $ | 15.02 | | | (5 | )% |
Domestic retail price (dollars) | | $ | 34.95 | | $ | 34.95 | | | — | |
Advertising | | $ | 20.4 | | $ | 31.2 | | | (35 | )% |
Sponsorship revenues | | $ | 2.0 | | $ | 3.0 | | | (33 | )% |
Television rights fees: | | | | | | | | | | |
Domestic | | $ | 39.8 | | $ | 39.9 | | | 0 | % |
International | | $ | 21.0 | | $ | 17.8 | | | 18 | % |
Ratings: | | | | | | | | | | |
Average weekly household ratings for RAW | | | 3.8 | | | 3.6 | | | 6 | % |
Average weekly household ratings for SmackDown | | | 2.9 | | | 3.2 | | | (9 | )% |
Live events revenue decrease is due to a decrease in the number of events held during the current fiscal year. We had 220 events during the current fiscal period compared to 249 events over the nine months ended January 28, 2005. The decrease in revenue was partially offset by an increase in the average attendance at our North American live events.
Pay-per-view revenues increased due to the 24% increase in pay-per-view buys, as we aired twelve pay-per-view events in the current period as compared to eleven events in the year ago period. The additional event in the current year, Backlash, generated approximately 308,000 buys. Also, our SummerSlam and Vengeance events together produced an additional 370,000 buys in the current period as compared to the same two events in the prior year period. We anticipate airing 16 pay-per-view events in fiscal 2006 as compared to 14 events in fiscal 2005.
As previously mentioned, we have entered into a new distribution agreement whereby our RAW program and a one-hour weekend RAW branded program airs on USA Network. Under the terms of this agreement, we no longer sell or participate in any advertising revenue generated by these programs. The impact of this change in revenue for the nine months was a reduction of approximately $7.7 million as compared to the prior year. The remaining impact of this change for fiscal 2006, for the period of February through April 2006, is estimated to be a reduction in revenues of approximately $9.8 million as compared to the aggregate fiscal 2005 revenue. Under the terms on the agreement, we receive rights fees from USA Network similar to those received from SpikeTV, which aired RAW until October 2005.
18
The increase in international television rights fees was primarily due to additional fees received from India and South Korea.
The following chart reflects comparative revenues and certain drivers for selected businesses within our branded merchandise segment:
Branded Merchandise Revenues | | January 27,
2006 | | January 28,
2005 | | better
(worse) | |
| |
|
| |
|
| |
|
| |
Licensing | | $ | 26.2 | | $ | 17.2 | | | 52 | % |
Merchandise | | $ | 19.7 | | $ | 12.0 | | | 64 | % |
Domestic venue per capita spending (dollars) | | $ | 9.90 | | $ | 8.84 | | | 12 | % |
WWE Shop per order spending (dollars) | | $ | 54.10 | | $ | 48.54 | | | 11 | % |
Magazine publishing | | $ | 8.3 | | $ | 8.6 | | | (3 | )% |
Net units sold | | | 2,959,300 | | | 2,873,200 | | | 3 | % |
Home video | | $ | 35.5 | | $ | 15.0 | | | 136 | % |
Gross units sold | | | 2,376,600 | | | 1,571,400 | | | 51 | % |
Digital Media | | $ | 6.7 | | $ | 5.7 | | | 17 | % |
Other | | $ | 0.3 | | $ | 0.5 | | | (40 | )% |
Licensing revenues increased primarily due to a $3.8 million increase in the toy category and a $3.2 million increase in the multimedia games category. Approximately $11.1 million of the $26.2 million of licensing revenues were derived from international sales.
Home video revenues increased due to an increase of approximately 0.8 million gross DVD units sold and an approximate increase of $3.00 per unit in the average sales price of our DVDs due to the release of several higher priced multi-disc titles in the current period. These higher price titles included WrestleMania 21, Tombstone: The History of the Undertaker, Greatest Wrestling Stars of the 80’s and Bret “Hitman” Hart: The Best There Is, The Best There Was, The Best There Ever Will Be, all of which were included in the top selling titles released in the current period. Our home video business continues to benefit from the investment in our original programming and third-party libraries as well as increased distribution with key retailers and the ongoing shift in consumer media buying and viewing behavior.
Cost of Revenues | | January 27,
2006 | | January 28,
2005 | | Better
(worse) | |
| |
|
| |
|
| |
|
| |
Live and televised | | $ | 112.0 | | $ | 116.6 | | | 4 | % |
Branded merchandise | | | 44.0 | | | 28.7 | | | (53 | )% |
| |
|
| |
|
| | | | |
Total | | $ | 156.0 | | $ | 145.3 | | | (7 | )% |
| |
|
| |
|
| | | | |
Profit contribution margin | | | 45 | % | | 41 | % | | | |
The following chart reflects comparative cost of revenues for each of the businesses within our live and televised segment:
Cost of Revenues-Live and Televised | | January 27,
2006 | | January 28,
2005 | | Better
(worse) | |
| |
|
| |
|
| |
|
| |
Live events | | $ | 37.8 | | $ | 38.7 | | | 2 | % |
Pay-per-view | | $ | 21.8 | | $ | 20.4 | | | (7 | )% |
Advertising | | $ | 6.5 | | $ | 10.6 | | | 39 | % |
Television production costs | | $ | 39.3 | | $ | 40.1 | | | 2 | % |
Other | | $ | 6.6 | | $ | 6.8 | | | 3 | % |
19
Live event cost of revenues decreased due to the production of 29 fewer events in the current year period.
Pay-per-view cost of revenues increased due to the production of one additional event during the current period.
Advertising cost of revenues decreased primarily due to the absence of the television advertising participation costs under our new agreement with USA Network.
The following chart reflects comparative cost of revenues for certain of the businesses within our branded merchandise segment:
Cost of Revenues — Branded Merchandise | | January 27,
2006 | | January 28,
2005 | | better
(worse) | |
| |
|
| |
|
| |
|
| |
Licensing | | $ | 7.1 | | $ | 5.1 | | | (39 | )% |
Merchandise | | $ | 12.9 | | $ | 8.8 | | | (47 | )% |
Publishing | | $ | 4.8 | | $ | 5.0 | | | 4 | % |
Home video | | $ | 15.4 | | $ | 6.8 | | | (126 | )% |
Digital media | | $ | 3.6 | | $ | 2.6 | | | (38 | )% |
Other | | $ | 0.2 | | $ | 0.4 | | | 50 | % |
The increase in the cost of revenues for branded merchandise is directly related to increased revenues generated during the current period. The profit contribution margin for branded merchandise was 54% for the current period as compared to 51% in the prior period.
Licensing cost of revenues increased due to the additional talent royalties and commissions related to the higher revenues generated during the current period.
Home video cost of revenues increased due to costs associated with the additional units sold in the current quarter.
| | January 27,
2006 | | January 28,
2005 | | better
(worse) | |
| |
|
| |
|
| |
|
| |
Selling, General and Administrative Expenses | | $ | 62.9 | | $ | 62.4 | | | (1 | )% |
The following chart reflects the amounts and percent change of certain significant overhead items:
| | January 27,
2006 | | January 28,
2005 | | better
(worse) | |
| |
|
| |
|
| |
|
| |
Staff related | | $ | 34.1 | | $ | 29.8 | | | (14 | )% |
Legal | | | 3.1 | | | 8.5 | | | 64 | % |
Consulting and accounting | | | 3.8 | | | 4.1 | | | 7 | % |
Advertising and promotion | | | 3.2 | | | 3.8 | | | 16 | % |
Bad debt | | | 0.6 | | | 0.0 | | | 0 | % |
All other | | | 18.1 | | | 16.2 | | | (12 | )% |
| |
|
| |
|
| | | | |
Total SG&A | | $ | 62.9 | | $ | 62.4 | | | (1 | )% |
| |
|
| |
|
| | | | |
SG&A as a percentage of net revenues | | | 22 | % | | 25 | % | | | |
The increase in staff related expenses is primarily due to additional accrued bonus payments that are linked to the Company’s achievement of certain performance thresholds. Legal costs were reduced by approximately $3.4 million related to favorable settlements of litigation. In addition, included in the prior year period in the all other category was a $2.1 million reduction of sales tax expense due to a tax refund.
20
| | January 27,
2006 | | January 28,
2005 | | better
(worse) | |
| |
|
| |
|
| |
|
| |
Stock compensation costs | | $ | 3.3 | | $ | 3.6 | | | 8 | % |
Stock compensation expense relates to our restricted stock program which was initiated in fiscal 2004. During 2004, we completed an exchange offer that gave all active employees and independent contractors who held stock options with a grant price of $17.00 or higher the ability to exchange their options, at a 6 to 1 ratio, for restricted stock units. Approximately $1.1 million was recorded in the current period related to this exchange offer. The remaining charge of approximately $2.2 million in the current period reflects the amortization of the fair value of restricted stock grants issued to employees under our 1999 LTIP.
| | January 27,
2006 | | January 28,
2005 | | better
(worse) | |
| |
|
| |
|
| |
|
| |
Depreciation and amortization | | $ | 8.1 | | $ | 9.0 | | | 10 | % |
Investment income | | $ | 5.5 | | $ | 3.6 | | | 53 | % |
Interest expense | | $ | 0.4 | | $ | 0.5 | | | 20 | % |
| | January 27, 2006 | | January 28, 2005 | |
| |
| |
| |
Provision for income taxes | | $ | 24.8 | | $ | 10.7 | |
Effective tax rate | | | 41 | % | | 33 | % |
The rise in the effective tax rate for the current quarter was primarily due to the vesting of equity compensation and an increase in state and local taxes. In addition, the effective tax rate in fiscal 2005 was lower primarily due to the release of a valuation allowance no longer necessary upon the assignment of the lease of The World to a third party.
Liquidity and Capital Resources
Cash flows from operating activities for the nine months ended January 27, 2006 and January 28, 2005 were $52.2 million and $9.0 million, respectively. Cash flows provided by operating activities from continuing operations were $52.0 million and $16.0 million for the nine months ended January 27, 2006 and January 28, 2005, respectively. Working capital, consisting of current assets less current liabilities, was $284.1 million as of January 27, 2006 and $278.1 million as of April 30, 2005.
Cash flows provided by investing activities were $38.3 million and $30.3 million for nine months ended January 27, 2006 and the nine months ended January 28, 2005, respectively. As of February 24, 2006, we had approximately $141.6 million invested primarily in fixed-income mutual funds and short-term U.S. Treasury Notes. Our investment policy is designed to preserve capital and minimize interest rate, credit and market risk. Capital expenditures for the nine months ended January 27, 2006 were $6.7 million as compared to $3.9 million for the nine months ended January 28, 2005. Capital expenditures in the current period include approximately $4.6 million for the purchase of land adjacent to our television studio.
Cash flows used in financing activities for the nine months ended January 27, 2006 were $25.1 million and were $16.3 million for the nine months ended January 28, 2005. Total dividend payments in the current nine month period ended January 27, 2006 are approximately $33.2 million compared to $16.5 million in the previous nine month period ended January 28, 2005. During the nine months ended January 27, 2006, we paid two quarterly dividends of $0.12 per share, or approximately $16.6 million, on all Class A and Class B common shares. On December 1, 2005, the Company’s board of directors authorized the increase of quarterly dividends to $0.24 on all Class A and Class B common shares. This dividend was paid out in January 2006 for approximately $16.6 million, for an aggregate of $33.2 million paid in fiscal 2006.
21
We are producing feature films in order to further capitalize on our intellectual property and fan base. We have two film projects that are currently in post-production. As of January 27, 2006 we have approximately $34.2 million in capitalized film development costs. These two film projects represent the first steps for our film entertainment initiative, and subsequent films are expected to be developed.
Contractual Obligations
In addition to long-term debt, we have entered into various other contracts under which we are required to make guaranteed payments, including:
| • | Various operating leases for office space and equipment. |
| | |
| • | Employment contract with Vincent K. McMahon, which runs through October 2007, with annual renewals thereafter if not terminated by us or Mr. McMahon, as well as a talent contract with Mr. McMahon that is coterminous with his employment contract. Mr. McMahon is currently waiving all of his compensation under these agreements. |
| | |
| • | Employment contract with Linda E. McMahon, which runs through October 2007, with annual renewals thereafter if not terminated by us or Mrs. McMahon. Mrs. McMahon is currently waiving all of her compensation under this agreement. |
| | |
| • | Other employment contracts which are generally for one-to three-year terms. |
| | |
| • | Service contracts with certain of our independent contractors, including our talent, which are generally for one-to four-year terms. |
Our aggregate minimum payment obligations under these contracts as of January 27, 2006, assuming the continued waiver of compensation by Mr. and Mrs. McMahon, were as follows:
| | Payments due by period
($ in millions) | |
| |
| |
| | Through
FY 2006 | | FY 2007 –
FY 2009 | | FY 2010 –
FY 2011 | | After
FY 2012 | | Total | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Long-term debt (including interest expense) | | $ | 0.3 | | $ | 4.0 | | $ | 2.7 | | $ | 2.6 | | $ | 9.6 | |
Operating leases | | | 0.2 | | | 1.2 | | | 0.7 | | | 1.7 | | | 3.8 | |
Talent, employment agreements and other commitments | | | 5.9 | | | 19.8 | | | 5.3 | | | 24.0 | | | 55.0 | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Total commitments | | $ | 6.4 | | $ | 25.0 | | $ | 8.7 | | $ | 28.3 | | $ | 68.4 | |
We believe that cash generated from operations and our existing cash and short-term investments will be sufficient to meet our cash needs over the next twelve months for working capital, capital expenditures and payment of quarterly dividends.
Application of Critical Accounting Policies
There have been no changes to our accounting policies that were previously disclosed in our Annual Report on Form 10-K for our fiscal year ended April 30, 2005 or in the methodology used in formulating these significant judgments and estimates that affect the application of these policies. Amounts included in our consolidated balance sheets in accounts that we have identified as being subject to significant judgments and estimates were as follows:
22
| | As of | |
| |
| |
| | January 27, 2006 | | April 30, 2005 | |
| |
|
| |
|
| |
Pay-per-view accounts receivable | | $ | 16.1 million | | $ | 26.8 million | |
Advertising reserve for underdelivery | | $ | 0.5 million | | $ | 2.6 million | |
Home video reserve for returns | | $ | 4.1 million | | $ | 2.9 million | |
Publishing newsstand reserve for returns | | $ | 3.9 million | | $ | 4.6 million | |
Allowance for doubtful accounts | | $ | 3.7 million | | $ | 3.3 million | |
Recent Accounting Pronouncements
There are no accounting standards or interpretations that have been issued, but which we have not yet adopted, that we believe will have a material impact on our financial statements.
Cautionary Statement for Purposes of the “Safe Harbor” Provisions of the Private Securities Litigation Reform Act of 1995
The Private Securities Litigation Reform Act of 1995 provides a “safe harbor” for certain statements that are forward-looking and are not based on historical facts. When used in this Quarterly Report, the words “may,” “will,” “could,” “anticipate,” “plan,” “continue,” “project,” “intend”, “estimate”, “believe”, “expect” and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain such words. These statements relate to our future plans, objectives, expectations and intentions and are not historical facts and accordingly involve known and unknown risks and uncertainties and other factors that may cause the actual results or the performance by us to be materially different from future results or performance expressed or implied by such forward-looking statements. The following factors, among others, could cause actual results to differ materially from those contained in forward-looking statements made in this Quarterly Report, in press releases and in oral statements made by our authorized officers: (i) our failure to maintain or renew key agreements could adversely affect our ability to distribute our television and pay-per-view programming and, in this regard, our agreement with UPN for the broadcast of our television show SmackDown runs until September 2006, and while we are finalizing a new agreement with UPN, no assurances can be given in this regard; (ii) our failure to continue to develop creative and entertaining programs and events would likely lead to a decline in the popularity of our brand of entertainment; (iii) our failure to retain or continue to recruit key performers could lead to a decline in the appeal of our storylines and the popularity of our brand of entertainment; (iv) the loss of the creative services of Vincent K. McMahon could adversely affect our ability to create popular characters and creative storylines; (v) a decline in general economic conditions could adversely affect our business; (vi) a decline in the popularity of our brand of sports entertainment, including as a result of changes in the social and political climate, could adversely affect our business; (vii) changes in the regulatory atmosphere and related private sector initiatives could adversely affect our business; (viii) the markets in which we operate are highly competitive, rapidly changing and increasingly fragmented, and we may not be able to compete effectively, especially against competitors with greater financial resources or marketplace presence; (ix) we face uncertainties associated with international markets; (x) we may be prohibited from promoting and conducting our live events if we do not comply with applicable regulations; (xi) because we depend upon our intellectual property rights, our inability to protect those rights, or our infringement of others’ intellectual property rights, could adversely affect our business; (xii) we could incur substantial liabilities if pending material litigation is resolved unfavorably; (xiii) our insurance may not be adequate to cover liabilities resulting from accidents or injuries that occur during our physically demanding events; (xiv) we will face a variety of risks as we expand into new and complementary businesses such as subscription video-on-demand and feature films; (xv) through his beneficial ownership of a substantial majority of our Class B common stock, our controlling stockholder, Vincent K. McMahon, can exercise control over our affairs, and his interests may conflict with the holders of our Class A common stock; (xvi) a substantial number of shares will be eligible for future sale by Mr. McMahon, and the sale of those shares could lower our stock price; and (xvii) our Class A common stock has a relatively small public “float”. The forward-looking statements speak only as of the date of this Quarterly Report and undue reliance should not be placed on these statements.
23
Item 3. Quantitative and Qualitative Disclosures about Market Risk
In the normal course of business, we are exposed to foreign currency exchange rate, interest rate and equity price risks that could impact our results of operations. Our foreign currency exchange rate risk is minimized by maintaining minimal net assets and liabilities in currencies other than our functional currency.
Interest Rate Risk
We are exposed to interest rate risk related to our debt and investment portfolio. Our debt primarily consists of the mortgage related to our corporate headquarters, which has an annual interest rate of 7.6%. Due to the decrease in mortgage rates, this debt is now at a rate in excess of market, however due to the terms of our agreement we have been prohibited from refinancing. The impact of the decrease in mortgage rates is considered immaterial to our consolidated financial statements.
Our investment portfolio currently consists primarily of fixed-income mutual funds and treasury notes, with a strong emphasis placed on preservation of capital. In an effort to minimize our exposure to interest rate risk, our investment portfolio’s dollar weighted duration is less than one year.
Item 4. Controls and Procedures
Under the direction of our Chairman and Chief Executive Officer, as co-principal executive officers, and our Chief Financial Officer, we evaluated our disclosure controls and procedures and internal control over financial reporting and concluded that our disclosure controls and procedures were effective as of January 27, 2006. No change in internal control over financial reporting occurred during the quarter ended January 27, 2006, that materially affected, or is reasonably likely to materially affect, such internal control over financial reporting.
24
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
See Note 9 to Notes to Consolidated Financial Statements, which is incorporated herein by reference.
Item 6. Exhibits
(a.) Exhibits
31.1 Certification by Vincent K. McMahon pursuant to Section 302 of Sarbanes-Oxley Act of 2002 (filed herewith).
31.2 Certification by Linda E. McMahon pursuant to Section 302 of Sarbanes-Oxley Act of 2002 (filed herewith).
31.3 Certification by Michael Sileck pursuant to Section 302 of Sarbanes-Oxley Act of 2002 (filed herewith).
31.4 Certification by Frank G. Serpe pursuant to Section 302 of Sarbanes-Oxley Act of 2002 (filed herewith).
32.1 Certification by Vincent K. McMahon, Linda E. McMahon, Michael Sileck and Frank G. Serpe pursuant to Section 906 of Sarbanes-Oxley Act of 2002 (filed herewith).
25
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereto duly authorized.
| World Wrestling Entertainment, Inc. |
| (Registrant) |
| | |
| | |
Dated: March 6, 2006 | By: | /s/ Michael Sileck |
| |
|
| | Michael Sileck |
| | Chief Financial Officer |
26
