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| WWE > SEC Filings for WWE > Form 10-K/A on 23-Apr-2004 | All Recent SEC Filings |
23-Apr-2004
Annual Report
You should read the following discussion in conjunction with the restated audited consolidated financial statements and related notes included elsewhere in this Form 10-K/A.
We have restated our consolidated financial statements for the periods ended April 30, 2003, 2002 and 2001. The accompanying Management's Discussion and Analysis of Financial Condition and Results of Operations gives effect to the restatement. Refer to Note 2 of the Notes to Consolidated Financial Statements in this Form 10-K/A for further discussion regarding the impact of this restatement.
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. Revenues consist principally of attendance at live events, sale of television advertising time and sponsorships, domestic and international television rights fees and pay-per-view buys.
• Branded merchandise, which consists of licensing and direct sale of merchandise. Revenues include the marketing and sale of merchandise, magazines and home videos, and revenues from consumer products sold through third party licensees.
Fiscal Year Ended April 30, 2003 compared to Fiscal Year Ended April 30, 2002 ($ in millions)
better
Net revenues 2003 2002 (worse)
------------------- ------- ------- ---------
Live & Televised $ 295.4 $ 323.5 (9 )%
Branded Merchandise 78.9 86.1 (8 )%
- ----- - -----
Total $ 374.3 $ 409.6 (9 )%
- ----- - -----
The following chart reflects comparative revenues and key drivers for each of the businesses within our live and televised segment:
better Live & Televised Revenues 2003 2002 (worse) ------------------------------------------------ ----------- ----------- ---------- Live Events $ 72.2 $ 74.1 (3 )% Number of Events 327 237 38 % Average Attendance 5,551 8,562 (35 )% Average Ticket Price (dollars) $ 38.82 $ 35.69 9 % Pay-Per-View $ 91.1 $ 112.0 (19 )% Number of buys from domestic pay-per-view events 5,378,100 7,135,464 (25 )% Retail Price, excluding WrestleMania $ 29.95 $ 24.95 20 % Advertising $ 72.9 $ 83.6 (13 )% Average weekly household ratings for RAW 3.7 4.6 (20 )% Average weekly household ratings for SmackDown! 3.4 4.0 (15 )% Sponsorship revenues $ 8.7 $ 13.2 (34 )% Television Rights Fees: Domestic $ 38.8 $ 35.0 11 % International $ 19.7 $ 18.3 8 %
Of the $3.8 million increase in domestic television rights fees revenues, $1.6 million was due to an executive producer fee received related to a feature film and approximately $1.1 million was due to the production of two additional television specials in the period.
The following chart reflects comparative revenues and certain drivers for selected business within our branded merchandise segment:
better
Branded Merchandise Revenues 2003 2002 (worse)
----------------------------- ----------- ----------- ---------
Licensing $ 21.8 $ 24.4 (11 )%
Merchandise $ 22.4 $ 26.2 (14 )%
Per Capita Spending (dollars) $ 9.15 $ 8.48 8 %
Publishing $ 15.2 $ 16.3 (7 )%
Net Units sold 6,427,500 6,867,700 (6 )%
Home Video $ 13.8 $ 13.6 1 %
Net Units sold:
DVD 916,200 625,900 46 %
VHS 466,800 1,041,200 (55 )%
Internet Advertising $ 4.9 $ 4.4 11 %
The decrease in licensing revenues was due to a decrease of $3.3 million in toy royalties and $0.7 million in apparel royalties offset partially by a $1.6 million increase in video game royalties.
Of the $3.8 million decrease in merchandise revenues, $2.9 million was due to a reduction in our website and catalog sales. In addition, $0.8 million was due to a decrease in sales at our live events resulting primarily from lower attendance in the current year as compared to the prior year.
better
Cost of Revenues 2003 2002 (worse)
--------------------------------- ------- ------- ---------
Live & Televised $ 190.6 $ 194.2 2 %
Branded Merchandise 46.7 56.9 18 %
- ----- - -----
Total $ 237.3 $ 251.1 6 %
- ----- - -----
Profit Contribution Margin 37 % 39 %
better
Cost of Revenues-Live & Televised 2003 2002 (worse)
--------------------------------- ------- ------- ---------
Live Events $ 56.1 $ 52.2 (7 )%
Pay-Per-View $ 36.7 $ 42.5 14 %
Advertising $ 35.2 $ 36.9 5 %
Television $ 50.2 $ 49.6 (1 )%
Other $ 12.4 $ 13.0 5 %
Profit Contribution Margin 35 % 40 %
The decrease in the profit contribution margin was due primarily to the $3.5 million impact of the William Morris Agency, Inc. settlement, which was included in advertising cost of revenues. Excluding the impact of this charge, the profit contribution margin for fiscal 2003 was approximately 37%.
Cost of Revenues-Branded better
Merchandise 2003 2002 (worse)
-------------------------- ------ ------ ---------
Licensing $ 6.6 $ 9.8 33 %
Merchandise $ 20.4 $ 22.6 10 %
Publishing $ 9.4 $ 10.0 6 %
Home Video $ 6.5 $ 9.4 31 %
Digital Media $ 3.3 $ 5.0 34 %
Profit Contribution Margin 41 % 34 %
The increase in the profit contribution margin was due in part to the absence of promotional costs in fiscal 2003 related to a motor racing team sponsorship. Such costs totaled approximately $2.4 million in fiscal 2002 and were
included in licensing cost of revenues. The profit contribution margin increase also was favorably impacted by a decrease of $1.7 million in digital media costs primarily associated with maintaining our website and by a $0.6 million decrease in home video inventory write-offs.
The following chart reflects the amounts and percent change of certain significant overhead items:
Selling, General & Administrative better
Expenses 2003 2002 (worse)
------------------------------------ ------ ------- ---------
Staff related $ 36.6 $ 37.4 2 %
Legal and litigation 18.4 14.6 (26 )%
Consulting and accounting 8.9 8.9 —
Advertising and promotion 8.6 9.4 9 %
Bad debt 3.8 1.0 (280 )%
License and contract termination — 4.9 100 %
All other 23.0 27.0 15 %
------ -------
Total SG&A $ 99.3 $ 103.2 4 %
- ---- - -----
SG&A as a percentage of net revenues 27 % 25 %
The increase in bad debt expense was related to delinquent pay-per-view payments from a service provider and from a cable system operating under the bankruptcy code. Included in legal and litigation in fiscal 2003 was a $3.8 million offer to settle a legal dispute partially offset by $1.0 million of net favorable settlements. License and contract termination costs arose from the termination of certain WCW license and related agreements assumed in the WCW asset acquisition.
better
2003 2002 (worse)
------ ------ ---------
Depreciation and amortization $ 11.0 $ 10.6 (4 )%
better
2003 2002 (worse)
------ ------ ---------
Interest income $ 2.0 $ 10.6 (811 )%
better
2003 2002 (worse)
------ ------ ---------
Interest expense $ 0.8 $ 0.8 —
The decrease in interest income is due to lower average interest rates earned on our investments as well as a loss of approximately $1.6 million from an investment in mortgage-backed securities.
2003 2002
------ -----
Other (loss) income, net $ (0.9 ) $ 5.2
During fiscal 2003, we recorded a $0.6 million write down of investments deemed other-than-temporarily impaired.
During fiscal 2002, we exercised certain warrants and sold the related common stock resulting in a $6.8 million gain. In addition, prior to the sale of this common stock, we recorded an increase of $1.4 million from the revaluation of the warrants, based upon our valuation using the Black-Scholes model, using the current market assumptions.
Also in fiscal 2002, we wrote-down $2.9 million related to certain warrants that we previously received from a television programming distribution partner. As a result of the continued decline in the market value of this company's partner's common stock coupled with our shortened window to exercise, management determined that this asset was other-than-temporarily impaired.
Provision for Income Taxes 2003 2002
-------------------------- ------ ------
Provision $ 10.8 $ 22.0
Effective Tax Rate 40 % 37 %
The increase in the effective tax rate was due to capital losses generated in the current year which may not be deductible for tax purposes. We have determined that it is more likely than not that these losses will not be fully utilized and as such, we have recorded a valuation allowance against these benefits.
Discontinued Operations – XFL. Income from discontinued operations was $4.6 million for the fiscal year ended April 30, 2002. The results from fiscal 2002 reflected the reversal of shutdown reserves that were no longer required and the recognition of certain tax benefits.
Discontinued Operations - The World. During fiscal 2003, as a result of continued losses, we closed the restaurant and retail operations of The World. As a result, we recorded a charge of approximately $12.1 million ($8.9 million, net of income taxes), the majority of which represented the present value of our obligations under the facility's lease, less estimated sub-lease rental income over the lease term. As of April 30, 2003, we had a remaining accrual balance of approximately $10.3 million relating to the shut-down. Included in the $10.3 million accrual was approximately $9.9 million of accrued rent and other related costs and approximately $0.4 million for severance related costs. The accrual for rent and other related costs assumed no sub-rental income for fiscal 2004 and assumed 75% sub-rental income for fiscal years 2005 through the end of the lease term, which is October 31, 2017.
Loss from discontinued operations of The World was $26.7 million, net of income taxes, for the fiscal year ended April 30, 2003 as compared to a loss from discontinued operations of $4.9 million, net of income taxes, for the fiscal year ended April 30, 2002. Included in fiscal 2003 was an impairment charge of $32.9 million ($20.4 million, net of income taxes) as a result of impairment tests conducted on goodwill and other long-lived assets related to The World.
Fiscal Year Ended April 30, 2002 compared to Fiscal Year Ended April 30, 2001
($, in millions)
better
Revenues 2002 2001 (worse)
------------------- ------- ------- ---------
Live & Televised $ 323.5 $ 335.7 (4 )%
Branded Merchandise 86.1 102.5 (16 )%
- ----- - -----
Total $ 409.6 $ 438.2 (7 )%
- ----- - -----
The following chart reflects comparative revenues and key drivers for each of the businesses within our live and televised segment:
better Live & Televised Revenues 2002 2001 (worse) ------------------------------------------------ ----------- ----------- ---------- Live Events $ 74.1 $ 81.9 (10 )% Number of Events 237 212 12 % Average Attendance 8,562 11,556 (26 )% Average Ticket Price (dollars) $ 35.69 $ 32.63 9 % Pay-Per-View $ 112.0 $ 128.2 (13 )% Number of buys for our domestic pay-per-view events 7,135,464 8,010,400 (11 )% Advertising $ 83.6 $ 90.3 (7 )% Ratings for Raw-Spike TV 4.6 5.0 (8 )% Ratings for Raw-USA — 6.3 — Ratings for SmackDown! 4.0 4.6 (13 )% Sponsorship revenues $ 13.2 $ 12.5 6 % Television Rights Fees: Domestic $ 35.0 $ 20.9 68 % International $ 18.3 $ 14.3 28 %
Of the $14.1 million increase in our domestic television rights fees, approximately $10.0 million was due to a domestic television distribution agreement, which commenced in September 2000.
The following chart reflects comparative revenues and certain drivers for selected businesses within our branded merchandise segment:
better
Branded Merchandise Revenues 2002 2001 (worse)
----------------------------- ----------- ----------- ---------
Licensing $ 24.4 $ 35.6 (31 )%
Merchandise $ 26.2 $ 28.9 (9 )%
Per capita spending (dollars) $ 8.48 $ 8.29 2 %
Publishing $ 16.3 $ 17.0 (4 )%
Net units sold 6,867,700 7,594,400 (10 )%
Home Video $ 13.6 $ 12.2 11 %
Net units sold:
DVD 625,900 167,900 273 %
VHS 1,041,200 1,285,700 (19 )%
Internet Advertising $ 4.4 $ 5.6 (21 )%
better
Cost of Revenues 2002 2001 (worse)
----------------------------- ----------- ----------- ---------
Live & Televised $ 194.2 $ 188.5 (3 )%
Branded Merchandise 56.9 60.8 6 %
- --------- - ---------
Total $ 251.1 $ 249.3 (1 )%
- --------- - ---------
Profit Contribution Margin 39 % 43 %
The following chart represents comparative cost of revenues and key drivers for each of the businesses within our live and televised segment:
better
Cost of Revenues-Live & Televised 2002 2001 (worse)
--------------------------------- ------ ------ ---------
Live Events $ 52.2 $ 60.9 14 %
Pay-Per-View $ 42.5 $ 41.6 (2 )%
Advertising $ 36.9 $ 39.7 7 %
Television $ 49.6 $ 38.6 (28 )%
Other $ 13.0 $ 7.7 (69 )%
Profit Contribution Margin 40 % 44 %
The decrease in pay-per-view revenues substantially accounted for the margin decline in this segment.
The following chart reflects comparative cost of revenues and certain drivers for selected businesses within our branded merchandise segment:
Cost of Revenues-Branded better
Merchandise 2002 2001 (worse)
-------------------------- ------ ------ ---------
Licensing $ 9.8 $ 13.8 29 %
Merchandise $ 22.6 $ 23.9 5 %
Publishing $ 10.0 $ 9.7 (3 )%
Home Video $ 9.4 $ 6.2 (52 )%
Digital Media $ 5.0 $ 4.9 (2 )%
Profit Contribution Margin 34 % 41 %
The decrease in profit contribution margin was due to the change in the mix of our revenues, coupled with an increase of $1.0 million in home video inventory reserves and a $0.8 million increase in our website costs.
The following chart reflects the amounts and percent change of certain significant overhead items:
Selling, General & Administrative better
Expenses 2002 2001 (worse)
------------------------------------- ------- ------ ---------
Staff related $ 37.4 $ 37.8 1 %
Legal and litigation 14.6 16.1 9 %
Consulting and accounting 8.9 9.1 2 %
Advertising and promotion 9.4 5.4 (74 )%
License and contract termination 4.9 1.7 (188 )%
All other 28.0 28.0 —
- ----- - ---- -- ------
Total SG&A $ 103.2 $ 98.1 (5 )%
- ----- - ---- -- ------
SG&A as a percentage of net revenues 25 % 22 %
The increase in advertising and promotion expenses was due primarily to our contractual agreement to purchase $7.0 million of advertising time from a media company. This agreement was entered into in connection with our acquisition of certain assets of WCW in March 2001 and is in effect through June 2004. License and contract termination costs arose from the termination of certain WCW license and related agreements assumed in the WCW asset acquisition. Such amounts totaled $4.9 million in fiscal 2002 and $1.7 million in fiscal 2001.
better
2002 2001 (worse)
------ ----- ---------
Depreciation and amortization $ 10.6 $ 4.8 (121 )%
The increase in depreciation and amortization was due in part to the accelerated write-off of approximately $2.1 million of architectural costs in 2002 related to our cancelled project in Las Vegas, as well as higher depreciation and amortization related to increased capital spending in fiscal 2002 and 2001.
better
2002 2001 (worse)
------ ------ ---------
Interest income $ 10.6 $ 15.3 (31 )%
better
2002 2001 (worse)
------ ------ ---------
Interest expense $ 0.8 $ 0.9 11 %
The decrease in interest income was a result of lower average interest rates in fiscal 2002.
2002 2001
----- ------
Other income (loss), net $ 5.2 $ (0.6 )
During fiscal 2002, we exercised certain warrants and sold the related common stock resulting in a $6.8 million gain. In addition, prior to the sale of this common stock, we recorded an increase of $1.4 million from the revaluation of the warrants, based upon our valuation using the Black-Scholes model, using the current market assumptions.
Also in fiscal 2002, we wrote-down $2.9 million related to certain warrants that we previously received from a television programming distribution partner. As a result of the continued decline in the market value of this company's common stock coupled with our shortened window to exercise, management determined that this asset was other-than-temporarily impaired.
Provision for Income Taxes 2002 2001
-------------------------- ------ ------
Provision $ 22.0 $ 37.5
Effective Tax Rate 37 % 37 %
Discontinued Operations - XFL. Income from discontinued operations of the XFL, net of minority interest and income taxes, was $4.6 million for the fiscal year ended April 30, 2002 as compared to a loss from discontinued operations of $46.9 million for the fiscal year ended April 30, 2001. The results from fiscal 2002 reflected the reversal of shutdown reserves that were no longer required and the recognition of certain tax benefits. Included in the net loss for fiscal 2001 was a loss from operations of $31.3 million and a loss on the shutdown of $15.6 million. The estimated shutdown costs consisted primarily of staff, lease and labor obligations, write-offs of certain fixed assets and accounts receivable and inventory write downs.
On June 12, 2000, we sold approximately 2.3 million newly-issued shares of our Class A common stock at $13 per share to NBC, for a total investment of $30.0 million. As a result of this stock sale, which was at a below-market price, we recorded a deferred cost of $10.7 million, which was being amortized over the 30 month term of the XFL broadcast agreement. Amortization of $3.7 million during fiscal 2001 was reflected in discontinued operations. As a result of our decision to discontinue operations of the XFL, we wrote off the remaining deferred cost of $7.0 million in fiscal 2001. In May 2002, we repurchased 2.3 million shares of our Class A common stock from NBC for $27.7 million, which was a discount to the then market value of our common stock. We made this repurchase because we believed that it was an appropriate use of excess cash and was beneficial to our company and stockholders.
Discontinued Operations - The World. Loss from discontinued operations of The World, net of income taxes, was $4.9 million for the fiscal year ended April 30, 2002 as compared to $1.6 million for the fiscal year ended April 30, 2001.
Liquidity and Capital Resources
Cash flows from operating activities for the fiscal years ended April 30, 2003 and 2002 were $21.1 million and $53.0 million, respectively, and cash flows used in operating activities were $25.0 million for fiscal 2001. Cash flows provided by operating activities from continuing operations were $28.0 million in fiscal 2003 as compared to $71.6 million in fiscal 2002 and $60.4 million in fiscal 2001. Working capital, consisting of current assets less current liabilities, was $275.1 million as of April 30, 2003 and $322.4 million as of April 30, 2002.
Cash flows provided by investing activities were $49.7 million in fiscal 2003 and cash flows used in investing activities for the fiscal years ended April 30, 2002 and 2001 were $17.8 million and $139.8 million, respectively. As of April 30, 2003, we had approximately $102.4 million invested primarily in short-term municipal securities and corporate paper which consisted primarily of AA or AAA rated instruments. The maturities of these instruments are generally for a term of three months or shorter. In addition, we had approximately $40.2 million invested in mutual funds, which primarily held AAA and AA rated instruments. Our investment policy is designed to assume a minimum of credit, interest rate and market risk.
In fiscal 2003, we had capital expenditures of approximately $10.6 million, consisting primarily of digital media equipment for our website, television equipment and building improvements. Capital expenditures for fiscal 2004 are expected to be between $7.5 million to $10.0 million, which includes a conversion of our critical business and financial systems, television equipment and building improvements.
In March 2003, we acquired a film library and certain other assets for $3.0 million from an unaffiliated professional wrestling organization. In March 2001, we acquired certain assets of WCW, including trademarks, trade names, their film library and other intangible assets for approximately $2.5 million.
Cash flows used in financing activities for the fiscal year ended April 30, 2003 was $28.8 million and cash flows provided by financing activities were $6.8 million and $107.5 million for the fiscal years ended April 30, 2002 and 2001, respectively.
In June 2003, our board of directors approved the payment of a quarterly dividend of $0.04 per share on all Class A and Class B common shares.
In June 2003, we repurchased approximately 2.0 million shares of our common stock from Viacom, Inc. for approximately $19.2 million, which was a slight discount to the then market value of our common stock. This transaction did not affect other aspects of our business relationship with Viacom. We made this repurchase because we believed that it was an appropriate use of excess cash and was beneficial to our company and stockholders.
Contractual Obligations
In 2000 we entered into a lease agreement for a 1998 Canadair Challenger 604 airplane. The term of this aircraft lease is for twelve years ending on October 30, 2012. The monthly lease payment is determined by a floating rate, which is based upon the 30-day US Commercial Paper Rate as stated by the Federal Reserve plus 1.95%. The current monthly payment is approximately $120,000. At the end of the term of the lease agreement, we have guaranteed the lessor up to $2.5 million if the jet is sold for less than $9.0 million.
In 1997, we entered into a mortgage loan agreement under which we borrowed $12.0 million at an annual interest rate of 7.6% to be repaid in monthly installments over 15 years. This term loan is collateralized by our executive offices and television production studio, both of which are located in Stamford, Connecticut. The term loan may not be prepaid in whole or in part prior to and through January 1, 2006. Thereafter, the term loan may be prepaid in whole with the payment of a premium. As of April 30, 2003, the outstanding principal amount of the term loan was $9.3 million.
We have entered into various other contracts under which we are required to make guaranteed payments, including:
• Performer contracts providing for future minimum guaranteed payments.• Television distribution agreements with Viacom affiliates UPN and Spike TV that provide for the payment of the greater of a fixed percentage of the revenues from the sale of television advertising time or an annual minimum
payment. Our current agreement for UPN programming covers two hours of
programming every week and expires in September 2003. Under the terms of
our new agreement with UPN, which is effective October 2003, we will receive
a weekly rights fee for our SmackDown! program and UPN would sell all of the
advertising time. The impact of this change on our Consolidated Financial
Statements will be a reduction in advertising revenues which will be offset
by an increase in domestic television rights fees and the elimination of the
participation costs to UPN. The balance of our Viacom agreement covers five
hours of programming every week and expires in September 2005.
• Advertising commitments to a media company over a three year period,
ending June 2004.
• Various operating leases for our offices.• Employment contract with Vincent K. McMahon, which is for a seven-year term commencing in October 1999 and in addition, a talent contract which is
co-terminous with his employment contract.• Employment contract with Linda E. McMahon, which is for a four-year term
commencing in October 1999. Pursuant to its terms, this contract was
renewed for an additional year.
• Employment contracts with certain of our employees, which are generally
for one to three year terms.• Service contracts with certain of our independent contractors, which are
generally for one to four year terms.
Our aggregate minimum payment obligations under these contracts as of April 30, 2003 was as follows:
Payments due by period
----------------------------------------------------
($ in millions)
Less
than 1–3 4–5 After
1 year years years 5 years Total
-------- -------- -------- -------- --------
Long-term debt $ 0.8 $ 1.7 $ 1.9 $ 5.5 $ 9.9
Operating leases 3.0 4.6 4.2 6.6 18.4
Television programming agreements 12.8 5.8 2.4 2.7 23.7
Other commitments 34.4 18.6 7.8 — 60.8
- ------ - ------ - ------ - ------ - ------
Total Commitments from Continuing
Operations $ 51.0 $ 30.7 $ 16.3 $ 14.8 $ 112.8
Operating lease — The World (1) 2.5 5.4 5.7 32.7 46.3
- ------ - ------ - ------ - ------ - ------
Total $ 53.5 $ 36.1 $ 22.0 $ 47.5 $ 159.1
- ------ - ------ - ------ - ------ - ------
(1) Excludes any estimated sub-rental income.
We believe that cash generated from operations and from existing cash and short-term investments will be sufficient to meet our cash needs over the next twelve months for working capital, quarterly dividends, capital expenditures and strategic investments as well as costs related to the shut down of The World.
Our twelve year aircraft lease is recorded as a synthetic lease. As a result, the lease is accounted for as an operating lease. For tax purposes, the lease is considered a capital lease. We have the option to purchase the aircraft at any time after the passage of 36 months from the basic term commencement date based upon contractual rates specified in the agreement.
Seasonality
Our operating results are not materially affected by seasonal factors; however, because we operate on a fiscal calendar, the number of pay-per-view events recorded in a given quarter may vary. In addition, revenues from our licensing and direct sale of consumer products, including through our catalogs, magazines and Internet sites, may vary from period to period depending on the volume and extent of licensing agreements and marketing and promotion programs entered into during any particular period of time, as well as the commercial success of the media exposure of our characters and brand. The timing of these events as well as the continued introduction of new product offerings and revenue generating outlets can and will cause fluctuation in quarterly revenues and earnings.
Inflation
During the past three fiscal years, inflation has not had a material effect on our business.
Application of Critical Accounting Policies
Critical Accounting Policies
We believe the following are the critical accounting policies used in the preparation of our financial statements, as well as the significant judgments and estimates affecting the application of these policies.
• Revenue Recognition
Pay-per-view programming:
Revenues from our pay-per-view programming are recorded when the event is
aired and are based upon our initial estimate of the number of buys
achieved. This initial estimate is based on preliminary buy information
received from our pay-per-view distributors. Final reconciliation of the
pay-per-view buys occurs within one year and any subsequent adjustments to
the buys are recognized on a cash basis. As of April 30, 2003, our
pay-per-view Accounts Receivable was $24.3 million. If our initial estimate
is incorrect, it can result in significant adjustments to revenues in
subsequent years.
Television advertising:
Revenues from the sale of television advertising are recorded when the
commercial airs within our programming and are based upon contractual
amounts previously established with our advertisers. These contractual
amounts are typically based on the advertisement reaching a desired number
of viewers. If an ad does not reach the desired number of viewers, we
record an estimated reserve to reflect rebates or future free advertising
due to advertisers, based on the difference between the intended delivery
(as contracted) and actual delivery of audiences. As of April 30, 2003, our
estimated reserve was $6.9 million. If our estimated reserves are incorrect,
revenues in subsequent periods would have to be adjusted.
Home Video:
Revenues from the sales of home video titles are recorded when shipped by
our distributor to wholesalers/ retailers, net of an allowance for estimated
returns. The allowance for estimated returns is based on historical
information and current industry trends. As of April 30, 2003, our home
video returns allowance was $1.5 million. If we do not accurately predict
returns, we may have to adjust revenues in future periods.
Magazine publishing:Publishing newsstand revenues are recorded when shipped by our distributor
to wholesalers/retailers, net of an allowance for estimated returns. We
estimate the allowance for newsstand returns based upon our review of
historical return rates and the expected performance of our current titles
in relation to prior issue return rates. As
of April 30, 2003, our newsstand returns allowance was $5.0 million. If we do not accurately predict returns, we may have to adjust revenues in future
periods.• Allowance for Doubtful Accounts
Our receivables represent a significant portion of our current assets. We
are required to estimate the collectibility of our receivables and to
establish allowances for the amount of receivables that we estimate to be
uncollectible. We base these allowances on our historical collection
experience, the length of time our receivables are outstanding and the
financial condition of individual customers. Changes in the financial
condition of significant customers, either adverse or positive, could impact
the amount and timing of any additional allowances that may be required.
As of April 30, 2003, our allowance for doubtful accounts was $5.3 million.
The $2.4 million increase in the allowance for doubtful accounts as compared
to April 30, 2002 was due to an increase in the estimated required reserve
based on information that was received during fiscal 2003 related to the
financial condition of two customers. Specifically, one customer declared
bankruptcy in fiscal 2003, and as a result, we recorded a $1.7 million
provision to increase the reserve against the related outstanding receivable
balance. Additionally, another customer continued to experience financial
cash flow difficulties during fiscal 2003 and became significantly past due
on its payments to us. As a result, we recorded a $1.8 million provision to
increase the reserve against the related outstanding receivable for this
customer.
• Income Taxes
We account for income taxes in accordance with the provisions of SFAS No.
109, "Accounting for Income Taxes". As such, we recognize the future impact
of the difference between the financial statement and tax basis of assets
and liabilities. As of April 30, 2003, we have $16.0 million of net
deferred tax assets on our balance sheet. In addition, as of April 30,
2003, we have $14.4 million of deferred tax assets included in assets of
discontinued operations related primarily to the tangible and intangible
assets of our discontinued operations. We record valuation allowances
against deferred tax assets that management does not believe the future tax
benefits are more likely than not to be realized.
Impact of Recent Pronouncements
In August 2001, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standard ("SFAS") No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." During 2003, the economic conditions surrounding our entertainment complex in New York City and its continued weak operating results indicated potential impairment. The impairment test prescribed by SFAS No. 144 was performed and ultimately resulted in a non-cash pre-tax impairment charge of $30.4 million that was recorded in the current year. In conjunction with the impairment test above, it was determined that goodwill related to the purchase of The World was also impaired and as a result, we recorded an additional non-cash pre-tax charge of $2.5 million in accordance with SFAS No. 142, "Goodwill and Other Intangible Assets".
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities". In February 2003, we closed the restaurant operations at The World and in April 2003, we closed the retail operations at the facility. Total costs related to the shut down of these operations are estimated to be $8.9 million, net of applicable tax benefits of $3.3 million and were recorded as discontinued operations in our consolidated financial statements in the current year, in accordance with SFAS No. 146.
Recent Pronouncements
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections." This Statement amends existing authoritative pronouncements to make various technical corrections, clarify meanings, or describe their applicability under changed conditions. This statement became effective for us on May 1, 2003 and does not have a material impact on our operating results or financial position.
In November 2002, the FASB issued FASB Interpretation No. ("FIN") 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others." The disclosure
requirements of FIN 45 were effective for financial statements of interim or annual periods ending after December 15, 2002, and did not have a material impact on our consolidated financial statements.
In January 2003, the FASB issued FIN 46, "Consolidation of Variable Interest Entities." FIN 46 requires us to consolidate a variable interest entity if we are subjected to a majority of the risk of loss from the variable interest entity's activities or entitled to receive a majority of the entity's residual returns, or both. We currently lease a corporate jet which is not held in a variable interest entity, and, accordingly is accounted for as an operating lease. We do not currently have any interests in variable interest entities and, accordingly do not expect the adoption of FIN 46 to have a material impact on our consolidated financial statements.
In November 2002, the Emerging Issues Task Force ("EITF") reached a consensus on Issue No. 00-21, "Revenue Arrangements with Multiple Deliverables." EITF Issue No. 00-21 provides guidance on how to account for arrangements that involve the delivery or performance of multiple products, services and/or rights to use assets. The provisions of EITF Issue No. 00-21 will apply to revenue arrangements entered into in fiscal periods beginning after June 15, 2003. The adoption of this consensus is not expected to have a material impact on our consolidated financial statements.
In November 2001, the EITF reached a consensus on Issue No. 01-09, "Accounting for Consideration Given by a Vendor to a Customer (Including a Reseller of the Vendor's Products)". This consensus addresses income statement characterization issues and recognition and measurement issues relating to consideration given by a vendor to a customer. As a result of this pronouncement, we reclassified $1.7 million in fiscal 2003 and $1.3 million in fiscal 2002 and 2001 of discounts previously classified as expenses to the prescribed accounting as a reduction of revenue.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity." SFAS No. 150 establishes standards for how an issuer classifies and measures in its balance sheet certain financial instruments with characteristics of both liabilities and equity. It is effective for us in the second quarter of 2004, but, because we have no instruments falling under the provisions of SFAS No. 150, it will not have an impact on our consolidated 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 Annual 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 Annual Report, in press releases and in oral statements made by our authorized officers: (i) 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; (ii) 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; (iii) the loss of the creative services of Vincent K. McMahon could adversely affect our ability to create popular characters and creative storylines; (iv) 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 primary distribution agreement with Viacom runs until Fall 2006 for its UPN network and Fall 2005 for its Spike TV network. Our primary television distribution agreement in the U.K. expires on December 31, 2004, and we are currently in negotiations to renew that contract. We cannot give any assurance as to the result of these negotiations; (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 if we expand into new and complementary businesses; (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 Annual Report and undue reliance should not be placed on these statements.
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