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| WWE > SEC Filings for WWE > Form 10-K on 13-Jul-2004 | All Recent SEC Filings |
13-Jul-2004
Annual Report
You should read the following discussion in conjunction with the audited consolidated financial statements and related notes included elsewhere in this Form 10-K.
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 ticket sales to live events, sale of television advertising and sponsorships, television rights fees and pay-per-view buys.
• Branded merchandise, which consists of licensing and direct sale of merchandise. Revenues consist principally of sale of merchandise at live events (such as T-shirts and caps), magazines and home videos, and royalties from products sold by licensees (such as video games, toys and books).
Fiscal Year Ended April 30, 2004 compared to Fiscal Year Ended April 30, 2003 (dollars in millions)
better
Net Revenues 2004 2003 (worse)
------------------- - ----- - ----- -- ------
Live and televised $ 296.1 $ 295.4 0.2 %
Branded merchandise 78.8 78.9 —
- ----- - -----
Total $ 374.9 $ 374.3 0.2 %
- ----- - -----
better
Operating Income: 2004 2003 (worse)
--------------------------------- - ----- - ----- -- ------
Live and televised entertainment $ 108.9 $ 88.2 23 %
Branded merchandise 33.8 23.4 44 %
Corporate (69.1 ) (85.0 ) 19 %
- ----- - -----
Total operating income $ 73.6 $ 26.6 177 %
- ----- - -----
Income from continuing operations $ 49.6 $ 16.1 208 %
In fiscal 2004, net revenues increased slightly reflecting higher pay-per-view revenue, which benefited from the success of WrestleMania XX and strong performance of new home video releases, offset by a decline in average attendance at our live events, which impacts both live events and our branded merchandise revenues. Revenue from sources outside of North America represented 17% of total net revenue in 2004 as compared to 14% in 2003.
Operating income increased substantially due to the cost reduction initiatives taken in fiscal 2003 that impact both business segments as well as selling, general and administrative expenses. Income from continuing operations primarily reflects the impact of items noted above and improved returns on short term investments.
Additional details regarding these summary results follow below.
The following chart provides revenues and key drivers for our live and televised segment:
better Live and Televised Revenues 2004 2003 (worse) ------------------------------------------------- - --------- - --------- -- ------ Live events $ 69.7 $ 72.2 (3 )% Number of events 329 327 1 % Average attendance 5,006 5,551 (10 )% Average ticket price (dollars) $ 41.32 $ 38.82 6 % Pay-per-view $ 95.3 $ 91.1 5 % Number of buys from domestic pay-per-view events 5,604,000 5,378,100 4 % Domestic retail price, excluding WrestleMania (dollars) $ 34.95 $ 29.95 17 % Advertising $ 59.5 $ 72.9 (18 )% Average weekly household ratings for RAW 3.8 3.7 3 % Average weekly household ratings for SmackDown! 3.3 3.4 (3 )% Sponsorship revenues $ 6.8 $ 8.7 (22 )% Television rights fees: Domestic $ 48.3 $ 38.8 24 % International $ 22.8 $ 19.7 16 %
Live events revenue decreased due to lower attendance at our events offset in part by an increase in the average price of tickets sold. Pay-per-view revenues increased approximately 5% due to the success of our premier event,
WrestleMania XX, which was held in March 2004. WrestleMania XX achieved approximately 885,000 buys as compared to approximately 560,000 buys for WrestleMania XIX in fiscal 2003.
Advertising revenues decreased due to a modification of our television distribution agreement with UPN. Since October 2003, UPN has been selling all advertising inventory for our SmackDown! broadcasts and paying us a rights fee. This arrangement accounts for a decrease of approximately $17.8 million in advertising revenue. This decrease was partially offset by the airing of make-good spots which reduced our allowance for underdelivery by approximately $5.7 million. The increase in the domestic rights fees for the current year is derived from rights fee paid to us under our modified arrangement with UPN as discussed above.
The following chart provides revenues and key drivers for our branded merchandise segment:
better
Branded Merchandise Revenues 2004 2003 (worse)
-------------------------------------- -- --------- -- --------- -- ------
Licensing $ 21.8 $ 21.8 —
Merchandise $ 18.6 $ 22.4 (17 )%
Domestic per capita spending (dollars) $ 8.96 $ 8.95 —
Publishing $ 10.7 $ 15.2 (30 )%
Net units sold 4,312,200 6,427,500 (33 )%
Home video $ 21.4 $ 13.8 55 %
Net units sold:
DVD 1,520,200 916,200 66 %
VHS 283,600 466,800 (39 )%
Internet advertising $ 5.6 $ 4.9 14 %
The decrease in merchandise revenue is primarily due to a $3.5 million decrease in the merchandise sold in arenas at our live events. This decrease reflects lower attendance at these events and a change that occurred in fiscal 2004 from the direct sale of merchandise to a licensing arrangement for merchandise sold at our Canadian and international events.
Publishing revenues declined due to reductions in both newsstand copies and subscription copies sold for our two monthly magazines. Additionally, we produced two fewer special editions in fiscal 2004 as compared to the prior year.
The increase of approximately 0.6 million units of DVD sales, which carry a higher price point, drove the increase in home video revenues for the current year. Several successful titles released in the current year included The Ultimate Ric Flair Collection, which chronicles over three decades of Ric Flair's illustrious career, The Monday Night War, an account of the rivalry between WWE and WCW in the late 1990's and WrestleMania XX. These three titles sold a total of approximately 335,000 units in fiscal 2004. In addition, we gained distribution in one large retailer in 2004, thereby increasing sales.
better
Cost of Revenues 2004 2003 (worse)
-------------------------- - ----- - ----- --- -----
Live and televised $ 170.9 $ 190.6 10 %
Branded merchandise 36.2 46.7 22 %
- ----- - -----
Total $ 207.1 $ 237.3 13 %
- ----- - -----
Profit contribution margin 45 % 37 %
better
Cost of Revenues-Live and Televised 2004 2003 (worse)
----------------------------------- - ----- - ----- --- -----
Live events $ 51.9 $ 56.1 7 %
Pay-per-view 36.0 36.7 2 %
Advertising 22.5 35.2 36 %
Television 50.6 50.2 (1 )%
Other 9.9 12.4 20 %
- ----- - -----
Total $ 170.9 $ 190.6 10 %
- ----- - -----
Profit contribution margin 42 % 35 %
The decrease in advertising cost of revenues results primarily from the modification of our UPN distribution agreement. The impact of this change 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.
better
Cost of Revenues-Branded Merchandise 2004 2003 (worse)
------------------------------------ - ---- - ---- -- ------
Licensing $ (2.2 ) $ 6.7 133 %
Merchandise 17.6 20.4 14 %
Publishing 7.3 9.4 22 %
Home video 9.5 6.5 (46 )%
Digital media 3.2 3.3 3 %
Other 0.8 0.4 (100 )%
- ---- - ----
Total $ 36.2 $ 46.7 22 %
- ---- - ----
Profit contribution margin 54 % 41 %
Net negative licensing costs in fiscal 2004 is due to the reversal of $7.9 million of previously accrued licensing agent commissions. These costs had been accrued over the period from fiscal 2001 through fiscal 2004 and have been reversed because payment is no longer considered probable as a result of favorable litigation developments. Excluding this reversal, licensing cost of revenues decreased by approximately $0.9 million primarily due to lower costs associated with our music business and a greater mix of non-royalty bearing revenue in the current fiscal year.
During fiscal 2004 we recorded a pre-tax charge of $2.9 million in merchandise cost of revenues for the impairment of certain long-lived assets of our e-commerce business. These assets were primarily composed of capitalized software development costs incurred during the set up of the e-commerce section of our website.
Merchandise and publishing costs of revenues decreased in conjunction with fewer units sold for both businesses. In addition, merchandise cost of revenues decreased due to the change from the direct sale of merchandise to a licensing arrangement for merchandise sold at our Canadian and international events.
Home video costs increased in correlation with the increase in units sold for the year, particularly distribution and duplication related fees.
The following chart reflects the amounts and percent change of certain significant overhead items:
Selling, General & Administrative Expenses 2004 2003 better (worse)
------------------------------------------ - ---- - ---- ---- -----------
Staff related $ 46.2 $ 36.6 (26 )%
Legal, accounting and other professional 15.3 24.5 38 %
Settlement of litigation, net (5.9 ) 2.8 311 %
Advertising and promotion 6.8 8.6 21 %
Bad debt (2.3 ) 3.8 161 %
All other 18.1 23.0 21 %
- ---- - ----
Total SG&A $ 78.2 $ 99.3 21 %
- ---- - ----
SG&A as a percentage of net revenues 21 % 27 %
The increase in staff related costs is primarily attributable to approximately $7.4 million of payments under the Company's management incentive programs, made as a result of our improved financial results. Legal expenses incurred in fiscal 2004 declined by approximately $5.5 million in the current year in conjunction with lower litigation activity in 2004. In fiscal 2004, we received a favorable settlement of approximately $5.9 million. Included in settlement of litigation in fiscal 2003 was a $3.8 million settlement of a legal dispute partially offset by $1.0 million of other net favorable settlements.
The $2.3 million negative amount of bad debt expense in fiscal 2004 is due to a payment received from a pay-per-view service provider that had been fully reserved in the prior year.
Stock Compensation Costs 2004 2003
-------------------------------------- - --- - ---
Option exchange offer $ 2.0 —
Other grants of restricted stock units $ 1.7 —
- --- - ---
Total stock compensation costs $ 3.7 —
- --- - ---
Stock compensation expense relates to our restricted stock programs. These programs were 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, 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 units' 24 month vesting period. As a result, $2.0 million of the compensation charge related to the option exchange program was recorded in fiscal 2004 and the remaining will be recorded as follows: approximately $3.6 million in fiscal 2005 and approximately $1.1 million in fiscal 2006.
Also in 2004, we granted 178,000 restricted stock units at $9.60 per share. Such issuances were granted to officers and employees under our 1999 Long-Term Incentive Plan (the "Plan"). Although originally scheduled to amortize over the seven year vesting period, a provision of the grants stipulated if EBITDA of $65.0 million was achieved in any fiscal year during the vesting period, the unvested restricted stock units would immediately vest and, accordingly, the unamortized balance at that date would be expensed. Because our EBITDA exceeded $65.0 million in fiscal 2004, we recorded a $1.7 million charge in the fourth quarter for the immediate vesting of the remaining restricted stock units. 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.
better
2004 2003 (worse)
- ---- - ---- -- ------
Depreciation and amortization $ 12.3 $ 11.0 (12 )%
The increase is primarily attributable to the amortization of the acquired film libraries and the depreciation of the corporate jet. In January 2004, we paid $20.1 million to pay off a lease on our corporate aircraft. The purchase price of the aircraft, net of a $9.5 million estimated residual value, is being 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. We believe this transaction will result in lower net financing costs.
better
2004 2003 (worse)
- --- - --- -- ------
Interest income $ 5.9 $ 2.0 195 %
The increase in interest income is a result of the switch of our liquid assets from primarily cash to other forms of short term investments in the current year.
better
2004 2003 (worse)
- --- - --- -- ------
Interest expense $ 0.8 $ 0.8 —
better
2004 2003 (worse)
- --- - ---- -- ------
Other income (loss), net $ 1.3 $ (0.9 ) 244 %
During fiscal 2003, we recorded a $0.6 million write down of investments deemed other-than-temporarily impaired.
Provision for Income Taxes 2004 2003
-------------------------- - ---- - ----
Provision $ 30.4 $ 10.8
Effective tax rate 38 % 40 %
The decrease in the effective tax rate was primarily due to the absence of capital losses in fiscal 2004 for which no tax benefit can be recorded.
Discontinued Operations – XFL. Income from discontinued operations was $0.3 million for fiscal year 2004 with no income or loss recorded in fiscal year 2003. The results from fiscal 2004 reflected our final settlement of substantially all remaining liabilities at less than the originally projected amount.
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, 2004, we had a remaining accrual balance of approximately $9.3 million relating to the shutdown. The $9.3 million accrual included accrued rent and other related costs which assumed no sub-rental income for fiscal 2004 and assumed 75% sub-rental income through the end of the lease term, which is October 31, 2017.
Loss from discontinued operations of The World was $1.7 million, net of income taxes, for the fiscal year ended April 30, 2004 as compared to a loss from discontinued operations of $35.6 million, net of income taxes, for the fiscal year ended April 30, 2003. 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, as well as the $12.1 million ($8.9 million, net of income taxes) shutdown accrual discussed above.
Fiscal Year Ended April 30, 2003 compared to Fiscal Year Ended April 30, 2002 (dollars in millions)
better
Net Revenues 2003 2002 (worse)
------------------- - ----- - ----- --- -----
Live and televised $ 295.4 $ 323.5 (9 )%
Branded merchandise 78.9 86.1 (8 )%
- ----- - -----
Total $ 374.3 $ 409.6 (9 )%
- ----- - -----
better
Operating Income: 2003 2002 (worse)
-------------------------------- - ----- - ----- -- ------
Live and televised entertainment $ 88.3 $ 113.9 (22 )%
Branded merchandise 23.3 20.8 (12 )%
Corporate (85.0 ) (90.0 ) (6 )%
- ----- - -----
Total operating income $ 26.6 $ 44.7 (41 )%
- ----- - -----
better
2003 2002 (worse)
- ---- - ---- -- ------
Income from continuing operations $ 16.1 $ 37.7 (57 )%
In fiscal 2003 net revenues declined in both segments principally reflecting lower average attendance at live events, fewer pay-per-view buys and a decline in television ratings. Revenue from sources outside of North America represented 14% of total net revenue in 2003 compared to 10% in 2002.
Operating income declined primarily due to the lower revenue partly offset by savings due to lower costs that are variable compared to revenue. Income from continuing operations primarily reflects the items noted above and lower returns on short term investments.
Additional details regarding these summary results follow below.
The following chart provides revenues and key drivers for our live and televised segment:
better Live and 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 )% Domestic retail price, excluding WrestleMania (dollars) $ 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 provides revenues and key drivers for our branded merchandise segment:
better
Branded Merchandise Revenues 2003 2002 (worse)
-------------------------------------- - --------- - --------- -- ------
Licensing $ 21.8 $ 24.4 (11 )%
Merchandise $ 22.4 $ 26.2 (15 )%
Domestic per capita spending (dollars) $ 8.95 $ 8.48 6 %
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 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 and 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 %
- ----- - -----
Total $ 190.6 $ 194.2 2 %
- ----- - -----
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%.
better
Cost of Revenues-Branded Merchandise 2003 2002 (worse)
------------------------------------ - ---- - ---- -- ------
Licensing $ 6.7 $ 9.8 32 %
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 %
Other 0.4 0.1 300 %
- ---- - ----
Total $ 46.7 $ 56.9 18 %
- ---- - ----
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:
better
Selling, General & Administrative Expenses 2003 2002 (worse)
--------------------------------------------------- - ---- - ----- -- ------
Staff related $ 36.6 $ 37.4 2 %
Legal, accounting and other professional litigation 18.4 14.6 (26 )%
Settlement of litigation 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 reserves for 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 in 2002 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 (81 )%
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.
better
2003 2002 (worse)
- --- - --- -- ------
Interest expense $ 0.8 $ 0.8 —
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 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 fiscal 2003 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 of the XFL, net of minority interest and income taxes, was $4.6 million for the fiscal year ended April 30, 2002, with no income or loss recorded in fiscal year 2003. 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. Loss from discontinued operations of The World, net of income taxes, was $35.6 million for the fiscal year 2003 as compared to $4.9 million for the fiscal year 2002. Included in fiscal 2003 was an impairment charge of $32.9 million ($20.4 million, net of taxes) as a result of impairment tests conducted on goodwill and other long-lived assets related to The World, as well as a charge of $12.1 million ($8.9 million, net of taxes) related to the shutdown accrual.
Liquidity and Capital Resources
Cash flows from operating activities for the fiscal years ended April 30, 2004 and 2003 and 2002 were $61.9, $21.1 million and $53.0 million, respectively. Cash flows provided by operating activities from continuing operations were $65.4 million in fiscal 2004 as compared to $28.0 million in fiscal 2003 and $71.6 million in fiscal 2002. Working capital, consisting of current assets less current liabilities, was $265.6 million as of April 30, 2004 and $275.2 million as of April 30, 2003.
Cash flows used in investing activities for the fiscal year ended April 30, 2004 were $111.0 million and cash flows provided by investing activities were $49.7 million in fiscal 2003. Cash flows used in investing activities for the fiscal year ended April 30, 2002 were $17.8 million. As of June 25, 2004, we had approximately $224.8 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. Nevertheless, the Company foresees a rising interest rate environment and we may incur some capital loss, which we anticipate will be offset by the opportunity to earn higher interest rates on short-term securities and mutual funds.
In fiscal 2004, we had capital expenditures of approximately $5.3 million, excluding the purchase of the corporate jet, consisting primarily of digital media equipment for our website, television equipment and conversion of our critical business and financial systems. In January 2004, we paid $20.1 million to pay off a lease on our corporate aircraft. The jet was originally acquired under an operating lease in 2000. The transaction has been accounted for as a capital acquisition in 2004. Capital expenditures for fiscal 2005 are expected to be between $10.0 million and $12.0 million, which include projects related to television equipment and building improvements.
Cash flows used in financing activities for the fiscal year ended April 30, 2004 and 2003 were $30.9 and $28.8 million, respectively, and cash flows provided by financing activities was $6.8 million for the fiscal year ended April 30, 2002.
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.
We have declared and paid quarterly cash dividends of $0.04 per share on both the Class A common stock and Class B common stock in each fiscal quarter since June 2003. The Class A common stock and Class B common stock are entitled to equal per share dividends. On April 27, 2004, our Board of Directors declared a dividend of $0.06 per share of Class A and Class B common stock that was paid on July 8, 2004 to shareholders of record on June 28, 2004.
We believe that cash generated from operations and from existing cash and short-term investments will be sufficient to meet our cash needs over the next twelve months for working capital, quarterly dividends, capital expenditures and strategic investments as well as costs related to the shutdown of The World.
Contractual Obligations
In addition to long-term debt, we have entered into various other contracts under which we are required to make guaranteed payments, including:
• Television distribution agreement with Viacom affiliate SpikeTV through
September 2005 that provides for the payment of the greater of a fixed
percentage of the revenues from the sale of television advertising time
or an annual minimum guaranteed amount.
• Various operating leases.• Employment contract with Vincent K. McMahon, which runs through October
2006, with annual renewals thereafter if not terminated by us or Mr.
McMahon, as well as a talent contract with Mr. McMahon that is
coterminous with his employment contract.
• Employment contract with Linda E. McMahon, which runs through October
2005, with annual renewals thereafter if not terminated by us or Mrs.
McMahon.
• Other employment contracts which are generally for one-to three-year
terms.
• Service contracts with certain of our independent contractors, including
our talent, which are generally for one-to four-year terms.
Our aggregate minimum payment obligations under these contracts as of April 30, 2004 were as follows:
Payments due by period
------------------------------------------------------
($ in millions)
Less
than 1–3 After
1 year years 4–5 years 5 years Total
- ------ - ------ --- ------ - ------ - ------
Long-term debt $ 0.7 $ 2.5 $ 2.0 $ 3.5 $ 8.7
Operating leases 1.3 2.5 0.1 — 3.9
Television programming agreements 5.8 2.4 — — 8.2
Talent, employment agreements and
other commitments 17.2 11.7 — — 28.9
- ------ - ------ --- ------ - ------ - ------
Total commitments from continuing
operations $ 25.0 $ 19.1 $ 2.1 $ 3.5 $ 49.7
Operating lease — The World (1) 2.7 8.4 6.1 26.6 43.8
- ------ - ------ --- ------ - ------ - ------
Total $ 27.7 $ 27.5 $ 8.2 $ 30.1 $ 93.5
- ------ - ------ --- ------ - ------ - ------
(1)Excludes any potential sub-rental income. We are actively seeking a tenant to assume this lease or enter into a sub-lease 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
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, 2004, our pay-per-view Accounts Receivable was $28.3 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 additional ad placements
due to advertisers, based on the difference between the intended delivery (as contracted) and actual delivery of audiences. As of April 30, 2004, our estimated reserve was $4.4 million. If our estimated reserves are incorrect, revenues in subsequent periods would be impacted.
Additionally, through our sponsorship packages, we offer advertisers a full range of our promotional vehicles, including television, Internet and print advertising, arena signage, on-air announcements and special appearances by our Superstars. We follow the guidance of Emerging Issues Task Force (EITF) Issue 00-21 "Revenue Arrangements with Multiple Deliverables," and assign the total sponsorship revenues to the various elements contained within a sponsorship package based on their relative fair value. Our relative fair values for the sponsorship elements are based upon a combination of historical prices and current advertising market conditions. Revenue from these packages is recognized as each element is delivered. Sponsorship revenues totaled $6.8 million in fiscal 2004.
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, 2004, our home video returns allowance was $2.6 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, 2004, our newsstand returns allowance was $4.5 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, 2004 our allowance for doubtful accounts was $2.6 million.
• 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, 2004, we have $10.9 million of net deferred tax assets on our balance sheet. In addition, as of April 30, 2004, we have $13.7 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.
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 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; (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; (xvii) our Class A common stock has a relatively small public "float"; and (xviii) we may face risks relating to our recent restatement of our financial statements. 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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