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| WWE > SEC Filings for WWE > Form 10-Q/A on 23-Apr-2004 | All Recent SEC Filings |
23-Apr-2004
Quarterly Report
Third Quarter Ended January 23, 2004 compared to Third Quarter Ended January 24, (Dollars in millions, except as noted)
January 23, January 24, better
Net Revenues 2004 2003 (worse)
------------------- --- --------- --- --------- -- ------
Live and televised $ 55.6 $ 71.0 (22 )%
Branded merchandise 23.5 21.6 9 %
--- --------- --- ---------
Total $ 79.1 $ 92.6 (15 )%
--- --------- --- ---------
The following chart reflects comparative revenues and key drivers for each of the businesses within our live and televised segment:
January 23, January 24, better Live and Televised Revenues 2004 2003 (worse) --------------------------------------------------- - ------------- - --------- -- ------ Live events $ 11.7 $ 16.0 (27 )% Number of events 74 79 (6 )% Average attendance 4,140 4,730 (12 )% Average ticket price (dollars) $ 37.91 $ 41.71 (9 )%
Pay-per-view $ 13.2 $ 21.2 (38 )% Number of buys from domestic pay-per-view events 783,100 1,303,400 (40 )%
Advertising $ 11.7 $ 17.5 (33 )% Average weekly household ratings for RAW 3.6 3.5 3 % Average weekly household ratings for SmackDown! 3.4 3.4 — Sponsorship revenues $ 1.9 $ 2.2 (14 )%
January 23, January 24, better
2004 2003 (worse)
--- --------- --- --------- --- -----
Television rights fees:
Domestic $ 13.4 $ 11.2 20 %
International $ 5.6 $ 5.0 12 %
The decline in live events revenue of $4.3 million was due to a decrease in total attendance coupled with a lower average ticket price. The decrease in total attendance accounted for $2.8 million of the decrease in event revenues and was a result of a decreased number of events held in the current quarter and a decline in the average attendance. The lower average ticket price at these events accounted for approximately $1.2 million of the decline in event revenues. There were only three international events this period as compared to seven in the prior year period. The average ticket price at international events is typically almost double the average ticket price at our domestic events. We anticipate holding twelve international events for the fourth quarter of fiscal 2004 as compared to the five international events held in the fourth quarter of fiscal 2003.
Of the $8.0 million decrease in pay-per-view revenues, approximately $6.8 million of the variance was due to the fact that during the current fiscal quarter we aired only two pay-per-view events as compared to three in the year-ago quarter. Revenues for our January 25, 2004 pay-per-view event, Royal Rumble, will be recorded in our fiscal fourth quarter. We will produce 12 pay-per-view events in fiscal 2004, consistent with recent years.
The decline in advertising revenues was due to our new agreement with UPN which began in October 2003. On that date, UPN began to sell all advertising inventory and pay us a rights fee.
The increase in domestic television rights fees was due to the rights fees related to our new agreement with UPN. This increase was offset partially by amounts included in the prior year quarter related to rights fees for our former Tough Enough series that aired on MTV which accounted for approximately $0.6 million, executive producer fees for a motion picture which accounted for approximately $0.9 million and rights fees related to one additional special which accounted for approximately $0.5 million.
The following chart reflects comparative revenues and certain drivers for each of the businesses within our branded merchandise segment:
January 23, January 24, better
Branded Merchandise Revenues 2004 2003 (worse)
----------------------------- -- --------- -- --------- -- ------
Licensing $ 10.9 $ 8.4 30 %
Merchandise $ 4.3 $ 5.0 (14 )%
Per capita spending (dollars) $ 8.56 $ 7.92 8 %
Publishing $ 3.0 $ 4.0 (25 )%
Net units sold 1,113,700 1,753,100 (36 )%
Home video $ 3.7 $ 2.7 37 %
Net units sold:
DVD 361,100 227,500 59 %
VHS 32,900 76,800 (57 )%
-- --------- -- ---------
Total 394,000 304,300 29 %
-- --------- -- ---------
Internet Advertising $ 1.2 $ 1.3 (8 )%
Other $ 0.4 $ 0.2 (100 )%
The increase in licensing revenues was due primarily to book publishing revenues.
The decrease in merchandise revenues was due to lower revenues of $0.7 million attributable to the change that occurred in fiscal 2004 from the direct sale of merchandise to a licensing arrangement for merchandise sold at our Canadian and International live events.
The decrease in publishing revenues was due to a $0.7 million decrease in newsstand units sold and a $0.3 million decrease in subscription units sold for our RAW and SmackDown! branded magazines.
Home video revenues increased by $1.0 million primarily due to a 30% increase in units sold coupled with a 19% increase in the average price for these units. The increase in units sold and average price is due to the success of a recent three DVD set titled The Ultimate Ric Flair Collection, which sold approximately 89,000 units during the quarter, as well as from the continued shift in platform from VHS to DVD, which sells for a higher price per unit.
January 23, January 24, better
Cost of Revenues 2004 2003 (worse)
-------------------------- --- --------- --- --------- --- -----
Live and televised $ 33.3 $ 44.9 26 %
Branded merchandise 10.8 11.8 8 %
--- --------- --- ---------
Total $ 44.1 $ 56.7 22 %
--- --------- --- ---------
Profit contribution margin 44 % 39 %
The following chart reflects comparative cost of revenues for each of the businesses within our live and televised segment:
January 23, January 24, better
Cost of Revenues-Live and Televised 2004 2003 (worse)
----------------------------------- --- --------- --- --------- -- ------
Live events $ 9.7 $ 13.5 28 %
Pay-per-view $ 4.9 $ 8.3 41 %
Advertising $ 3.7 $ 7.4 50 %
Television production costs $ 12.6 $ 12.6 —
Other $ 2.4 $ 3.1 23 %
Profit contribution margin was approximately 40% for the quarter ended January 23, 2004 and 37% for the quarter ended January 24, 2003. The profit margin for the current period was favorably impacted by the change in our UPN agreement, which was renewed in October 2003 with modified terms. Under the provisions of this new contract, we do not sell the advertising inventory, but rather receive a fixed rights fee for the program and a share of all advertising revenue sold by UPN in excess of a certain contractual amount. Under our former agreement with UPN, we sold almost the entire advertising inventory related to our SmackDown! programming. UPN participated in this revenue to the extent of the greater of a contractual percentage or a minimum guaranteed amount. The impact of this change on our consolidated financial statements is a reduction in advertising revenues which was offset by an increase in television rights fees and the elimination of the participation costs to UPN. Although there should be no material effect on our net income relative to this change in terms, it should result in a favorable impact to our profit margins in future periods.
The following chart reflects comparative cost of revenues for each of the businesses within our branded merchandise segment:
January 23, January 24, better Cost of Revenues — Branded Merchandise 2004 2003 (worse) -------------------------------------- --- --------- --- --------- -- ------ Licensing $ 2.7 $ 2.8 4 % Merchandise $ 3.3 $ 4.3 23 % Publishing $ 2.1 $ 2.3 9 % Home video $ 1.9 $ 1.5 (27 )% Digital media $ 0.7 $ 0.8 13 % Other $ 0.1 $ 0.1 —
Profit contribution margin was approximately 54% for the quarter ended January 23, 2004 and 45% for the quarter ended January 24, 2003, the increase due to higher licensing margins. The increase in our licensing margin was due to the mix of products sold during the quarter that resulted in a higher percentage of non-royalty bearing revenues in the current quarter as compared to the prior year quarter.
January 23, January 24, better
2004 2003 (worse)
--- ----------- --- ----------- --- ------
Selling, general and administrative expenses $ 18.9 $ 24.4 23 %
The following chart reflects the amounts and percent change of certain significant overhead items:
January 23, January 24, better
2004 2003 (worse)
--- --------- --- --------- -- ------
Staff related $ 10.9 $ 8.8 (24 )%
Legal and other 3.4 5.8 41 %
Offer to settle litigation — 1.5 100 %
Advertising and promotion 0.8 1.2 33 %
All other 3.8 7.1 46 %
--- --------- --- ---------
Total SG&A $ 18.9 $ 24.4 23 %
--- --------- --- ---------
SG&A as a percentage of net revenues 24 % 26 %
The increase in staff related expenses primarily reflects an accrual related to incentive compensation. No accrual was made in the prior year as incentive compensation is tied to the Company's performance as compared to the budget. Included in all other in fiscal 2003 was $0.7 million for the termination of a lease for office space and $0.8 million related to reserves recorded for certain pay-per-view providers. SG&A expenses were down across all areas reflecting the continued benefits of our cost-cutting measures.
January 23 January 24,
2004 2003
--- -------- --- ---------
Stock compensation costs $ 1.0 $ —
Stock compensation costs were $1.0 million for the current quarter. During the third quarter, we completed an exchange offer that gave all active employees and independent contractors who held options with a grant price of $17 or higher the ability to exchange options, at a 6 to 1 ratio, for restricted stock units, or, for holders with fewer than 25,000 options, for cash at 75% of the average price of $13.28 per share, during the offering period. Overall, 4.2 million options were eligible for the offer, of which 4.1 million were exchanged for either cash or restricted stock units. In exchange for the options tendered, we granted an aggregate of 591,416 restricted stock units and made cash payments in the aggregate amount of approximately $0.9 million, which will result in a total compensation charge of approximately $6.7 million, of which the cash payment of $0.8 million to employees was recorded in our third fiscal quarter ended January 23, 2004, and the portion related to the grant of the restricted stock units to employees will be recorded over the 24 month vesting period. As a result, the compensation charge related to the grant of restricted stock units will be recorded as follows: $0.1 million was recorded in the third quarter ended January 23, 2004, approximately $1.9 million in our fourth quarter of fiscal 2004, approximately $3.6 million in fiscal 2005 and approximately $1.1 million in fiscal 2006.
In June 2003, we granted 792,500 options at an exercise price of $9.60 per share and granted 178,000 restricted stock units at an average price per share of $9.60. Such issuances were granted to officers and employees under our 1999 Long-Term Incentive Plan (the "Plan"). Total compensation costs related to the grant of restricted stock units, based on the estimated value of the units on the grant date, is $1.7 million and will be amortized over the vesting period, which is seven years, unless EBITDA of $65.0 million is met for any fiscal year during the vesting period. In that event, the unvested restricted stock units immediately vest and accordingly, the unamortized balance at that date would be expensed. EBITDA is a measure of our operating performance, and is defined in the Plan as earnings from continuing operations before interest, taxes, depreciation and amortization.
January 23, January 24, better
2004 2003 (worse)
--- --------- --- --------- -- ------
Depreciation and amortization $ 3.0 $ 2.7 (11 )%
The increase primarily reflects amortization related to our recently acquired film libraries. In January 2004, we paid $20.1 million to pay off a lease on our corporate aircraft from cash on hand. The purchase price of the aircraft, net of a $9.5 million estimated residual value, will be depreciated on a straight-line basis over a 10 year period commencing in February 2004. As a result of this purchase, quarterly depreciation expense will increase by $0.3 million. We believe this transaction will result in a reduction in our net financing costs.
January 23, January 24, better
2004 2003 (worse)
--- --------- --- --------- -- ------
Interest income $ 1.6 $ 0.8 100 %
The increase reflects a higher overall rate of return on our investments in the current quarter, and to a lesser extent, a $0.4 million unrealized holding gain resulting from the revaluation of warrants received from two of our licensees using the Black-Scholes model, taking into account the most current market assumptions.
January 23, January 24,
2004 2003
--- --------- --- ---------
Other income (loss), net $ 0.7 $ —
Included in the three months ended January 23, 2004 was a $0.4 million unrealized holding gain resulting from the revaluation of warrants received from two of our licensees using the Black Scholes model taking into account the most current market assumptions.
January 23, January 24,
2004 2003
------------- -------------
Provision for income taxes $ 5.3 $ 3.4
Effective tax rate 38 % 37 %
Discontinued operations — The World. In fiscal 2003, we closed the operations of our entertainment complex, The World. As a result, the operations of The World have been reflected in discontinued operations. Loss from discontinued operations of The World, net of taxes, was $0.1 million for the three months ended January 23, 2004, as compared to a loss from discontinued operations, net of taxes, of $22.0 million for the three months ended January 24, 2003. The shutdown charge of $8.9 million recorded in our fiscal year ended April 30, 2003 in accordance with SFAS No. 146 assumed no sub-let 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. Although we are actively seeking to sub-let the property, we have not found a tenant. Our assumptions relating to the sub-rental income and the related rent accrual will continue to be monitored and adjusted accordingly. Rental payments for fiscal 2005, assuming no sub-let rental income, would be approximately $2.5 million.
Nine Months Ended January 23, 2004 compared to Nine Months Ended January 24, (Dollars in millions, except as noted)
January 23, January 24, better
Net Revenues 2004 2003 (worse)
------------------- -- ---------- -- ---------- -- ------
Live and televised $ 195.1 $ 209.4 (7% )
Branded merchandise 53.1 58.9 (10% )
-- ---------- -- ----------
Total $ 248.2 $ 268.3 (7% )
-- ---------- -- ----------
The following chart reflects comparative revenues and key drivers for each of the businesses within our live and televised segment:
January 23, January 24, better Live and Televised Revenues 2004 2003 (worse) --------------------------------------------------- ----------- ----------- --------- Live events $ 47.4 $ 53.2 (11 )% Number of events 242 253 (4 )% Average attendance 4,830 5,230 (8 )% Average ticket price (dollars) $ 39.87 $ 39.35 1 % Pay-per-view $ 51.7 $ 59.3 (13 )% Number of buys from domestic pay-per-view events 3,202,100 3,559,300 (10 )% Advertising $ 45.9 $ 53.9 (15 )% Average weekly household ratings for RAW 3.7 3.7 — Average weekly household ratings for SmackDown! 3.4 3.4 — Sponsorship revenues $ 4.8 $ 6.6 (27 )% Television rights fees: Domestic $ 33.3 $ 28.9 15 % International $ 16.8 $ 14.0 20 %
Of the $7.6 million decrease in pay-per-view revenues, approximately $6.8 million of the variance was due to the fact that the current fiscal year to date period reflects eight pay-per-view events as compared to nine pay-per-view events in the prior year. Revenues for our January 25, 2004 pay-per-view event, Royal Rumble, will be recorded in our fiscal fourth quarter. We will produce 12 pay-per-view events in fiscal 2004, consistent with recent years.
The decline in advertising revenues was due to our new agreement with UPN which began in October 2003. On that date, UPN began to sell all advertising inventory and pay us a rights fee.
The increase in domestic television rights fees was primarily due to rights fees received in connection with our new agreement with UPN. This increase was offset partially by $1.0 million for rights fees related to our former Tough Enough series that aired on MTV during the prior year period and by $1.0 million related to two additional specials that aired in the prior year period.
The following chart reflects comparative revenues and certain drivers for each of the businesses within our branded merchandise segment:
January 23, January 24, better
Branded Merchandise Revenues 2004 2003 (worse)
----------------------------- ------------ ------------ ---------
Licensing $ 18.1 $ 16.8 8 %
Merchandise $ 12.8 $ 16.6 (23 )%
Per capita spending (dollars) $ 8.37 $ 8.52 (2 )%
Publishing $ 7.6 $ 10.9 (30 )%
Net units sold 3,194,500 4,827,200 (34 )%
Home video $ 10.3 $ 10.7 (4 )%
Net units sold:
DVD 831,700 765,000 9 %
VHS 159,100 400,300 (60 )%
-- --------- -- ---------
Total 990,800 1,165,300 (15 )%
-- --------- -- ---------
Internet Advertising $ 3.8 $ 3.4 12 %
Other $ 0.5 $ 0.5 —
Of the $3.8 million decrease in merchandise revenues, $1.7 million was due to the change that occurred in fiscal 2004 from the direct sale of merchandise to a licensing arrangement for merchandise sold at our Canadian and International live events. In addition, $1.3 million was due to lower domestic event sales resulting from lower average attendance at our live events and the lower number of events held to date.
Of the $3.3 million decrease in publishing revenues, $1.3 million was due to a decrease in the number of special magazines published in the current year as compared to the prior year period, $1.1 million was from a decrease in newsstand units sold and $0.8 million was from a decrease in subscription units sold for our RAW and SmackDown! branded magazines.
Although the total units sold of our home videos has decreased from the prior year primarily due to a court ordered injunction prohibiting the sale of such titles containing our former logo, the resulting revenue decrease was partially offset by the continued shift in platform from VHS to DVD, which sells for a higher price per unit, as well as the success of a recent three DVD set titled The Ultimate Ric Flair Collection, which sold approximately 89,000 units during the third fiscal quarter.
January 23, January 24, better
Cost of Revenues 2004 2003 (worse)
-------------------------- ------------- ------------- ---------
Live and televised $ 117.4 $ 139.5 16 %
Branded merchandise 28.1 36.0 22 %
-- ---------- -- ----------
Total $ 145.5 $ 175.5 17 %
-- ---------- -- ----------
Profit contribution margin 41 % 35 %
The following chart reflects comparative cost of revenues for each of the businesses within our live and televised segment:
January 23, January 24, better
Cost of Revenues-Live and Televised 2004 2003 (worse)
----------------------------------- ------------- ------------- ---------
Live events $ 36.7 $ 42.9 14 %
Pay-per-view $ 18.8 $ 23.4 20 %
Advertising $ 17.9 $ 27.4 35 %
Television production costs $ 36.4 $ 36.9 1 %
Other $ 7.6 $ 8.9 15 %
Profit contribution margin was approximately 40% for the nine months ended January 23, 2004 as compared to 33% for the nine months ended January 23, 2003. The profit margin for the current period was favorably impacted by the change in our UPN agreement, which was renewed in October 2003 with modified terms. Under the provisions of this new contract, we do not sell the advertising inventory, but rather receive a fixed rights fee for the program and a share of all advertising revenue sold by UPN in excess of a certain contractual amount. Under our former agreement with UPN, we sold almost the entire advertising inventory related to our SmackDown! programming. UPN participated in this revenue to the extent of the greater of a contractual percentage or a minimum guaranteed amount. The impact of this change on our consolidated financial statements is a reduction in advertising revenues which was offset by an increase in television rights fees and the elimination of the participation costs to UPN. Although there should be no material effect on our net income relative to this change in terms, it should result in a favorable impact to our profit margins in future periods. Included in the prior year advertising cost of revenues was a $3.5 million charge related to the William Morris Agency, Inc. settlement. Absent this $3.5 million charge, the prior year margin was 35%.
The following chart reflects comparative cost of revenues for certain of the businesses within our branded merchandise segment:
January 23, January 24, better Cost of Revenues — Branded Merchandise 2004 2003 (worse) -------------------------------------- ------------- ------------- --------- Licensing $ 4.9 $ 5.6 13 % Merchandise $ 10.3 $ 15.3 33 % Publishing $ 5.3 $ 6.8 22 % Home video $ 4.9 $ 5.5 11 % Digital media $ 2.3 $ 2.5 8 % Other $ 0.4 $ 0.3 (33 )%
Profit contribution margin was approximately 47% for the nine months ended January 23, 2004 as compared to 39% for the nine months ended January 23, 2003, the increase due to higher licensing margins. The increase in our licensing margin was due to the mix of products sold during the quarter that resulted in a higher percentage of non-royalty bearing revenues in the current period as compared to the prior year period. In addition, licensing revenues have high margins relative to our other branded merchandise businesses and during the current quarter accounted for a higher percentage of branded merchandise revenues as compared to the prior year period.
January 23, January 24, better
2004 2003 (worse)
--------------- --------------- ----------
Selling, general and administrative expenses $ 51.6 $ 70.8 27 %
The following chart reflects the amounts and percent change of certain significant overhead items:
January 23, January 24, better
2004 2003 (worse)
------------- ------------- ---------
Staff related $ 31.6 $ 26.9 (17 )%
Legal and other professional 11.7 18.8 38 %
Settlement of litigation, net (5.9 ) (1.1 ) 436 %
Advertising and promotion 2.8 7.1 61 %
Bad debt (2.0 ) 1.4 243 %
All other 13.4 17.7 24 %
--- --------- --- ---------
Total SG&A $ 51.6 $ 70.8 27 %
--- --------- --- ---------
SG&A as a percentage of net revenues 21 % 26 %
The increase in staff related expenses primarily reflects an accrual related to incentive compensation. No accrual was made in the prior year as the incentive compensation is tied to the Company's performance as compared to the budget. The current period reflects a $5.9 million favorable settlement of litigation and the prior year period reflects the net impact of a $3.5 million favorable settlement of litigation offset partially by a $2.4 million unfavorable settlement of litigation. The decrease in advertising and promotion expenses was primarily a result of costs incurred in the prior
year period related to our advertising campaign associated with our new company name and logo. The decrease in bad debt expense was a result of a payment received from a pay-per-view service in the current year that was fully reserved for in the prior year.
January 23 January 24,
Stock compensation costs 2004 2003
----------------------------------------------------------- ------------- -------------
Option exchange program $ 0.9 $ —
Amortization of costs for restricted stock units granted
June 2003 0.4 —
----- ------- ----- -------
Total stock compensation costs $ 1.3 $ —
----- ------- ----- -------
Stock compensation costs were $1.3 million for the first nine months of fiscal 2004. During the third quarter, we completed an exchange offer that gave all active employees and independent contractors who held options with a grant price of $17 or higher the ability to exchange options, at a 6 to 1 ratio, for restricted stock units, or, for holders with fewer than 25,000 options, for cash at a 75% of the average price of $13.28 per share, during the offering period. Overall, 4.2 million options were eligible for the offer, of which 4.1 million were exchanged for either cash or restricted stock units. In exchange for the options tendered, we granted an aggregate of 591,416 restricted stock units and made cash payments in the aggregate amount of approximately $0.9 million, which will result in a total compensation charge of approximately $6.7 million, of which the cash payment of $0.8 million to employees was recorded in our third fiscal quarter ended January 23, 2004, and the portion related to the grant of the restricted stock units to employees will be recorded over the 24 month vesting period. As a result, the compensation charge related to the grant of restricted stock units will be recorded as follows: $0.1 million was recorded in the third quarter ended January 23, 2004, approximately $1.9 million in our fourth quarter of fiscal 2004, approximately $3.6 million in fiscal 2005, and approximately $1.1 million in fiscal 2006.
In June 2003, we granted 792,500 options at an exercise price of $9.60 per share and granted 178,000 restricted stock units at an average price per share of $9.60. Such issuances were granted to officers and employees under our 1999 Long-Term Incentive Plan (the "Plan"). Total compensation costs related to the grant of restricted stock units, based on the estimated value of the units on the grant date, is $1.7 million and will be amortized over the vesting period, which is seven years, unless EBITDA of $65.0 million is met for any fiscal year during the vesting period. In that event, the unvested restricted stock units immediately vest and accordingly, the unamortized balance at that date would be expensed. EBITDA is a measure of our operating performance, and is defined in the Plan as earnings from continuing operations before interest, taxes, depreciation and amortization.
January 23 January 24, better
2004 2003 (worse)
------------ ------------- ---------
Depreciation and amortization $ 8.9 $ 7.0 (27 )%
The increase reflects amortization related to our recently acquired film libraries and depreciation associated with our new WWEshopzone.com commerce engine. In January 2004, we paid $20.1 million to pay off a lease on our corporate aircraft from cash on hand. The purchase price of the aircraft, net of a $9.5 million estimated residual value, will be depreciated on a straight-line basis over a 10 year period. As a result of this purchase, annual depreciation expense will increase by $1.1 million. This transaction should result in a reduction in our net financing costs.
January 23, January 24, better
2004 2003 (worse)
------------- ------------- ---------
Interest income $ 4.5 $ 1.3 246 %
The increase reflects a higher overall rate of return on our investments in the current quarter, and to a lesser extent, a $0.4 million unrealized holding gain resulting from the revaluation of warrants received from two of our licensees using the Black-Scholes model, taking into account the most current market assumptions.
January 23, January 24,
2004 2003
------------- -------------
Other income (loss), net $ 1.0 $ —
Included in the nine months ended January 23, 2004 was a $0.4 million unrealized holding gain resulting from the revaluation of warrants received from two of our licensees using the Black-Scholes model taking into account the most current market assumptions.
January 23, January 24,
2004 2003
------------- -------------
Provision for income taxes $ 17.3 $ 5.7
Effective tax rate 38 % 37 %
Discontinued operations — The World. In fiscal 2003, we closed the operations of our entertainment complex, The World. As a result, the operations of The World have been reflected in discontinued operations. Income from discontinued operations of The World, net of taxes, was approximately $0.1 million for the nine months ended January 23, 2004, as compared to a loss from discontinued operations, net of taxes, of $25.2 million for the nine months ended January 24, 2003. Included in income from discontinued operations for the nine months ended January 23, 2004 was $0.7 million of expense recoveries. Included in the loss from discontinued operations for the nine months ended January 24, 2003 was an impairment charge of $32.9 ($20.4 million, net of tax). The shutdown charge of $8.9 million recorded in our fiscal year ended April 30, 2003 in accordance with SFAS No. 146 assumed no sub-let 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. Although we are actively seeking to sub-let the property, we have not found a tenant. Our assumptions relating to the sub-rental income and the related rent accrual will continue to be monitored and adjusted accordingly. Rental payments for fiscal 2005, assuming no sub-let rental income, would be approximately $2.5 million.
Liquidity and Capital Resources
Cash flows from operating activities for the nine months ended January 23, 2004 and January 24, 2003 were $49.3 million and $16.2 million, respectively. Cash flows provided by operating activities from continuing operations were $51.7 million and $24.0 million for the nine months ended January 23, 2004 and January 24, 2003, respectively. The increase was due primarily to increased operating results in the current period as well as higher interest income earned. Working capital, consisting of current assets less current liabilities, was $259.5 million as of January 23, 2004 and $275.1 million as of April 30, 2003.
Cash flows used for investing activities were $85.7 million cash flows provided by investing activities were $81.9 million for the nine months ended January 23, 2004 and January 24, 2003, respectively. Capital expenditures for the nine months ended January 23, 2004 were $3.5 million, as compared to $8.9 million for the nine months ended January 24, 2003. For fiscal 2004, we estimate capital expenditures to be approximately $6.0 million, which includes a conversion of our critical business and financial systems, television equipment and building improvements. During the nine months ended January 23, 2004, we acquired film libraries and certain other assets for approximately $1.6 million. In January 2004, the Company paid $20.1 million to pay off a lease on our corporate aircraft from cash on hand. The jet was acquired under an operating lease in 2000. The transaction will be accounted for as a capital acquisition in the current period. As of February 18, 2004, we had approximately $218.7 million invested in fixed-income mutual funds, which primarily held AAA and AA debt rated instruments and $46.2 million in United States Treasury Notes. Our investment policy is designed to assume a minimum of credit, interest rate and market risk.
Cash flows used in financing activities for the nine months ended January 23, 2004 were $27.9 million as compared to $29.2 million for the nine months ended January 24, 2003. In June 2003, we purchased, using our available cash on hand, 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 as we believed that it was an appropriate use of excess cash and was beneficial to our company and our stockholders. In addition, we began paying quarterly dividends during fiscal 2004, which totaled $8.2 million through the third quarter.
We have not entered into any contracts that would require us to make significant guaranteed payments other than those that previously were disclosed in the Liquidity and Capital Resource section of our Annual Report on Form 10-K/A for our fiscal year ended April 30, 2003.
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, capital expenditures and the payment of dividends.
Application of Critical Accounting Policies
There have been no changes to our accounting policies that previously were disclosed in our Annual Report on Form 10-K/A for our fiscal year ended April 30, 2003 or in the methodology used in formulating the significant judgments and estimates that affect the application of these policies. Amounts included in our consolidated balance sheet in accounts that we have identified as being subject to significant judgments and estimates were as follows:
As of
-------------------------
January 23, April 30,
2004 2003
----------- -----------
9.8 24.3
Pay-per-view accounts receivable $ million $ million
5.0 6.9
Advertising reserve for underdelivery $ million $ million
3.5 1.5
Home video reserve for returns $ million $ million
4.2 5.0
Publishing newsstand reserve for returns $ million $ million
2.9 5.3
Allowance for doubtful accounts $ million $ million
Accrued commissions that may be reversed pending the
outcome of litigation – see Note 9 of Notes to 7.8 6.4
Consolidated Financial Statements $ million $ million
The decrease in our pay-per-view accounts receivable balance was due to the timing of certain of our pay-per-view events. As of April 30, 2003, the accounts receivable balance included approximately $10.0 million related to our premier event, Wrestlemania, which took place in March 2003. In addition, the accounts receivable balance included approximately $5.0 million related to our April 2003 pay-per-view event. In the current period, our January pay-per-event event did not air during this period and our most recent event in the current period was our December 2003 pay-per-view event.
The decrease in our allowance for doubtful accounts reflects the payment during fiscal 2004 of a previously fully reserved balance from a pay-per-view service.
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 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 Quarterly Report and undue reliance should not be placed on these statements.
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