10-K 1 wwe906039.htm FORM 10-K

UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549


FORM 10-K


x

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

 

 

For the fiscal year ended April 30, 2004

 

 

 

or

 

 

o

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

 

 

For the transition period from _________ to ________

 

 

 

Commission file number 0-27639

WORLD WRESTLING ENTERTAINMENT, INC.
(Exact name of Registrant as specified in its charter)

Delaware

 

04-2693383

(State or other jurisdiction of incorporation or organization)

 

(I.R.S. Employer Identification No.)

1241 East Main Street
Stamford, CT 06902
(203) 352-8600
(Address, including zip code, and telephone number, including area code,
of Registrant’s principal executive offices)

SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT

Class A Common Stock, $.01 par value per share

 

New York Stock Exchange

(Title of each class)

 

(Name of each exchange on which registered)

SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT

None

          Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.  Yes  x   No  o

          Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x

          Indicate by check mark whether the registrant is an accelerated filer (as defined in the Exchange Act Rule 12b-2).  Yes  x   No  o

          Aggregate market value of the common stock held by non-affiliates of the Registrant at July 7, 2004, using our closing price October 23, 2003 was approximately $219,536,844.

          As of July 7, 2004, the number of shares outstanding of the Registrant’s Class A common stock, par value $.01 per share, was 20,810,993 and the number of shares outstanding of the Registrant’s Class B common stock, par value $.01 per share, was 47,713,563 shares.

          Portions of the Registrant’s definitive proxy statement for the 2004 Annual Meeting of Stockholders are incorporated by reference in Part III of this Form 10-K



TABLE OF CONTENTS

 

 

Page

 

 


 

PART I

 

 

 

 

Item 1.

Business

1

 

 

 

Item 2.

Properties

11

 

 

 

Item 3.

Legal Proceedings

11

 

 

 

Item 4.

Submission of Matters to a Vote of Security Holders

11

 

 

 

 

PART II

 

 

 

 

Item 5.

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

12

 

 

 

Item 6.

Selected Financial Data

13

 

 

 

Item 7.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

13

 

 

 

Item 7A.

Quantitative and Qualitative Disclosures about Market Risk

25

 

 

 

Item 8.

Consolidated Financial Statements and Schedule

25

 

 

 

Item 9.

Changes in and Disagreements with Accountants on Accounting and Financial Disclosures

25

 

 

 

Item 9A.

Controls and Procedures

26

 

 

 

 

PART III

 

 

 

 

Item 10.

Directors and Executive Officers

*

 

 

 

Item 11.

Executive Compensation

*

 

 

 

Item 12.

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

*

 

 

 

Item 13.

Certain Relationships and Related Party Transactions

*

 

 

 

Item 14.

Principal Accountant Fees and Services

*

 

 

 

 

PART IV

 

 

 

 

Item 15.

Exhibits, Financial Statement Schedules and Reports on Form 8-K

27

 

 

 

          * Incorporated by reference from the Registrant’s Proxy Statement for the 2004 Annual Meeting of Stockholders (the “Proxy Statement”).


PART I

Item 1.  Business

          We are an integrated media and entertainment company engaged in the development, production and marketing of television and pay-per-view programming and live events and the licensing and sale of branded consumer products. We have been involved in the sports entertainment business for approximately 25 years, and we have developed World Wrestling Entertainment into a widely-recognized and enduring brand.

          We develop unique and creative content centered around our talent and presented at our live and televised events. At the heart of our success are the athletic and entertainment skills and appeal of our WWE Superstars and our consistently innovative and multi-faceted storylines across our two brands, RAW and SmackDown!. Anchored by our successful brands, we are able to leverage our content and talent across virtually all media outlets. Our television programs, live events, pay-per-view events and branded merchandise provide significant cross-promotion and marketing opportunities that reinforce our brands. This integrated model enables us to more effectively reach our fans, including the highly-coveted 12-34 year old male demographic.

          In this Annual Report on Form 10-K, “WWE” refers to World Wrestling Entertainment, Inc. and its subsidiaries and its predecessors, unless the context otherwise requires. References to “we,” “us,” “our” and the “Company” refer to WWE and its subsidiaries. World Wrestling Entertainment and the stylized and highly distinctive World Wrestling Entertainment scratch logo are two of our trademarks. This Annual Report on Form 10-K also contains other WWE trademarks and trade names as well as those of other companies. All trademarks and trade names appearing in this report are the property of their respective holders.

Business Strategy

          We develop compelling storylines anchored by our Superstars. This content drives television ratings, which, in turn, drive pay-per-view buys, live event attendance and branded merchandise sales. Our strategy is to capitalize on the significant operating leverage of our business model through the distribution of this intellectual property across existing platforms as well as new and emerging distribution platforms.

          Our success in 2004 reflects a focused effort on brand-building, commencing with the strategic separation of our brands and culminating in the record-setting results of WrestleMania XX. Building on this success, we intend to pursue the following initiatives:

 

Continue to strengthen our brands. In spring 2002, we made the strategic decision to separate our content into two brands, Raw and SmackDown!. By having two brands, we are able to more effectively expand our fan base and establish stronger brand loyalty. The creation of dual brands with distinct storylines, tours and talent has allowed us to expand our touring schedule. The evolution of two strong brands has also supported greater international expansion and provides significant opportunity for the development of new talent.

 

 

 

 

Continue to expand internationally. International expansion represents an important part of our growth. The broad appeal of our content has yielded high international demand for our television programs and live events. To further nurture this demand, we plan to continue to expand our international television distribution. Increasing our television penetration around the world will likely increase the demand for live events abroad, which, in turn, should increase sales of our branded merchandise. Our dual brands enable us to execute this strategy by freeing up schedules for talent to perform at more events in more countries.

 

 

 

 

Effectively utilize our valuable library of wrestling content. Over the past three years, we have expanded our library by strategically acquiring the libraries of World Championship Wrestling ("WCW"), Extreme Championship Wrestling ("ECW"), American Wrestling Association ("AWA") and Smokey Mountain Wrestling ("SMW"). The result is an archive of more than 75,000 hours of programming content, 25,000 hours of which was previously aired or released as finished product. This library has been converted to a digital format, and is being catalogued to support future programming and other monetization opportunities, such as video-on-demand, subscription video on demand and digital channels. We currently plan to capitalize on this asset and new technologies in an effort to attract new and recapture past viewers. In this regard, we recently announced the launch of WWE 24/7, a subscription video-on-demand service that will feature the content of our library.

 

 

 

 

Explore options in filmed entertainment. In 2002, we established WWE Films to explore options in filmed entertainment in order to promote our Superstars and capitalize on our intellectual property and fan base. We have acted as executive producer on several films, including Scorpion King, The Rundown and Walking Tall, all featuring WWE Superstar The Rock. We currently have several film projects in development featuring other Superstars.

1


          In summary, we seek to be a preeminent global provider of entertainment that evokes a uniquely passionate emotion from our fans. We will continue to leverage our content and talent across all media platforms to drive revenue and strengthen our brand.

Creative Development and Production

          Headed by our Chairman Vincent K. McMahon, our creative team develops compelling and complex characters and weaves them into dynamic storylines that combine physical and emotional elements. Storylines are usually played out in the wrestling ring and unfold on our weekly television shows, and culminate or change direction in our monthly pay-per-view events.

          Our success is due primarily to the continuing popularity of our Superstars. We currently have exclusive contracts with approximately 140 Superstars, ranging from developmental contracts to multi-year guaranteed contracts with established Superstars. Our Superstars are highly trained and motivated independent contractors whose compensation is tied to the revenue that they help us generate. Popular Superstars include Triple H, Shawn Michaels, Randy Orton, Ric Flair, Undertaker, Kurt Angle, John Cena, Big Show, Kane, Chris Jericho, Chris Benoit and Eddie Guerrero. We own the rights to substantially all of our characters, and we exclusively license the rights we do not own through agreements with our Superstars. We continually seek to identify, recruit and develop additional talent for our business.

Live and Televised Entertainment

          Live events and television programming are our principal creative and production activities.  The following chart presents revenues from these activities for each of our five fiscal years ended April 30, 2004:

Worldwide Live & Televised Entertainment Revenue
($ in millions)

Message

Live Events

          In fiscal 2004, we held 297 live events throughout North America, as well as 32 international events, entertaining over 1.6 million fans at an average ticket price of $41.32. We hold many of our live events at major arenas, including Madison Square Garden in New York City, the Staples Center in Los Angeles, the Evening News Arena in Manchester, England, the SuperDome in Sydney, Australia, and the Super Arena in Saitama, Japan. In addition to providing the content for our television and pay-per-view programming, these events provide us with a real-time assessment of the popularity of storylines and characters. Live events generate revenue through ticket and merchandise sales.

2


          Our two brands, RAW and SmackDown!, tour independently, each typically producing three or four events per week. This allows us to play numerous domestic markets, as well as to take advantage of the strong international demand for our events. In fiscal 2004, we had a number of successful international tours, including our Ruthless Aggression tour in Australia, our Passport to Pain tour in the UK, Germany and Finland and our Road to WrestleMania tour in Japan.

          The following chart presents worldwide revenues from live events for each of our five fiscal years ended April 30, 2004:

Worldwide Live Events Revenue
($ in millions)

Message

          The following chart reflects worldwide attendance from live events for each of our five fiscal years ended April 30, 2004:

Worldwide Live Events Attendance
(in thousands)

Message

   - 206 Events in 2000            - 327 Events in 2003
   - 212 Events in 2001            - 329 Events in 2004
   - 237 Events in 2002

 

3


Television Programming

          Relying on our in-house production capabilities at our technologically advanced production facility, we produce seven television shows, consisting of nine hours of original programming, 52 weeks per year. Live events provide the majority of the content for our television and pay-per-view programming and consequently result in low incremental television programming costs. We generate revenue from our programming through television rights fees and advertising sales.  The popularity of our television programming, our primary promotional vehicle, drives the success of our other businesses. Increased viewership for our television shows translates into increased pay-per-view buys, live event attendance and merchandise sales.

          Our flagship television shows are RAW and SmackDown!. RAW is a two-hour primetime program that is broadcast live on SpikeTV and has consistently been among the top-rated regularly scheduled programs on cable television. SmackDown! is a taped two-hour program that airs on UPN in primetime and is consistently one of the highest rated programs on UPN. We support our RAW brand with Sunday Night Heat, which airs on SpikeTV, and our syndicated show, Bottom Line. We support our SmackDown! brand with Velocity, which airs on SpikeTV, and our syndicated show, After Burn. The WWE Experience, our new Sunday morning magazine style show, airs on SpikeTV and features the Superstars and storylines from both of our brands.  Our domestic cable distribution agreement, which is with Viacom for its SpikeTV network and covers RAW, Sunday Night Heat, Velocity and The WWE Experience, runs until September 2005.  Under this agreement we receive a rights fee totaling approximately $0.6 million per week.  We are currently in negotiation to renew this agreement, and cannot give any assurance as to the outcome of these negotiations.  Our domestic broadcast distribution agreement, which is with UPN and covers Smackdown!, expires in September 2006.  Under this agreement we receive a rights fee of approximately $0.3 million per week.

          The following chart presents revenues from North America television rights fees for each of our five fiscal years ended April 30, 2004:

North America Television Rights Fees Revenue
($ in millions)

Message

          Internationally, our programming is distributed in more than 100 countries and 12 different languages. We have expanded our distribution throughout Asia, Europe, Latin America, Australia and Africa and have secured new television distribution agreements on terrestrial, cable and satellite platforms throughout those locations.  Our distributors include, among many others, Sky Sports in the UK, J Sports in Japan and Taj TV in India.  Our distribution agreement with Sky Sports expires on December 31, 2004.  We are currently in negotiations to renew this agreement, and we cannot give any assurance as to the outcome of these negotiations.

4


          The following chart presents television rights fees revenues outside of North America for each of our five fiscal years ended April 30, 2004:

Television Rights Fees Revenues outside of North America
($ in millions)

Message

          In addition to rights fees, we generate revenues through the sale of a substantial portion of the advertising time on our SpikeTV programming and Canadian television programs.  The strong ratings of our television programs attract advertisers and sponsors from some of the leading companies in the food and beverage, apparel, video game, toy, telecommunications and movie industries.  In addition to the sale of our advertising time, we also package sponsorships to meet the needs of our advertisers.  Through these sponsorships, 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.

          Our arrangement with SpikeTV provides that we pay them a portion of our advertising revenues. With respect to SmackDown!, since October, 2003, UPN has been selling substantially all advertising inventory and sponsorship elements and pays us a rights fee.

5


          The following chart reflects worldwide advertising revenues for each of our five fiscal years ended April 30, 2004:

Worldwide Advertising Revenues
($ in millions)

Message

Pay-Per-View Programming

          We have been pioneers in both the production and promotion of pay-per-view events since our first pay-per-view event, WrestleMania I, in 1985. At each monthly pay-per-view event, our storylines either culminate or change direction. We intensively market and promote the storylines that are associated with upcoming pay-per-view events through our television shows, Internet sites and magazines. We produced 12 domestic pay-per-view programs in fiscal 2004 and 2003, and have planned two more programs during fiscal 2005, one for each brand. Our events consistently rank among the highest selling event pay-per-view programs.  These programs are distributed by our international partners including Premiere in Germany and J Sports in Japan, among others.

          In fiscal 2004, our premier event, WrestleMania XX, achieved an estimated 885,000 pay-per-view buys at a suggested domestic retail price of $49.95. Our other monthly pay-per-view events, including Royal Rumble, Summer Slam and Survivor Series, averaged 360,000 buys at a suggested domestic retail price of $34.95. Consistent with industry practices, we share the revenues with cable systems and satellite providers and pay service fees to iNDEMAND and TVN.

6


          The following chart presents worldwide revenues from our pay-per-view programming for each of our five fiscal years ended April 30, 2004:

Worldwide Pay-Per-View Revenues
($ in millions)

Message

Branded Merchandise

          We offer a wide variety of branded merchandise through a licensing program and an integrated direct sales effort.

          The following chart presents worldwide revenues from the sale of our branded merchandise for each of our five fiscal years ended April 30, 2004:

Worldwide Branded Merchandise Revenues
($ in millions)

Message

Licensing

          We have an established worldwide licensing program using our World Wrestling Entertainment marks and logos, copyrighted works and characters on a large variety of retail products, including toys, video games, apparel

7


and books. In all of our licensing agreements, we retain creative approval over the design, packaging, advertising and promotional material associated with licensed products to maintain the distinctive style and quality of our intellectual property and brand. Currently, we maintain licenses with approximately 75 licensees worldwide. Video games represent an important component of this licensing program, generating substantial revenues through our license with THQ/Jakks Pacific, LLC, a joint venture between THQ Inc. and Jakks Pacific, Inc. Our video games cover current console platforms, including PlayStation 2, Xbox and GameCube. Some of our more recent titles include SmackDown! Here Comes the Pain, which sold approximately 1.8 million units in fiscal 2004, RAW 2 and WrestleMania XIX .

          Under our publishing licensing agreement with Simon and Schuster, we have our own book publishing imprint. This agreement has provided us the opportunity to broaden into literary genres beyond autobiographies, including historical anthologies and trivia books. Fifteen of the first 21 titles we published have appeared on The New York Times Best Seller List. Recent titles include The Stone Cold Truth, an autobiographical account of the life of Stone Cold Steve Austin, and Unscripted, a pictorial look into the personal lives of WWE Superstars.

Merchandise

          Our direct merchandise operations consist of the design, sourcing, marketing and distribution of various WWE-branded products, such as T-shirts, caps and other novelty items, all of which feature our Superstars and/or our logo. All of these products are designed by our in-house creative staff and manufactured by third parties. The merchandise is sold at our live events, through our wweshopzone.com web site and through our catalogs. During fiscal 2004, fans attending our domestic live events spent an average of approximately $8.96 each on WWE merchandise, which amount was essentially unchanged as compared fiscal 2003.

Home Video

          We own the world’s largest library dedicated to wrestling and sports entertainment. It contains footage from our historical televised events, as well as the acquired libraries of WCW, ECW, AWA and SMW. In fiscal 2004, from this library, we have created such titles as The Ultimate Ric Flair Collection, which chronicles over three decades of Ric Flair’s colorful career, and The Monday Night War, an account of the rivalry between WWE and WCW in the late 1990s. We also produce home video versions of each of our monthly pay-per-view events. Outside the United States, our home videos are distributed by a variety of licensees. In fiscal 2004, we sold approximately 1.8 million units across all titles in our catalog, including 27 new titles, a 30% increase over fiscal 2003. Sony Music Video markets and distributes our home videos to major retailers nationwide.

Music

          Music is an integral part of the entertainment experience at our live events and on our television programs. We compose and record most of our music, including theme songs tailored to our characters, in our recording studio. Sony Music markets and distributes our music to major retailers nationwide.

Publishing

          Our publishing operations consist primarily of two magazines, RAW and SmackDown!. Our magazines help shape and complement storylines in our television programs and at our live events. We include a direct marketing catalog in our magazines on a quarterly basis. Our in-house publishing and editorial departments prepare all editorial content, and we use outside contractors to print and distribute the magazines, which are sold both at newsstands and via subscription. The combined cumulative annual circulation of our two magazines was approximately 3.8 million for fiscal 2004, a decrease of 29% from fiscal 2003. Additionally, in fiscal 2004 we published four special issues.

Digital Media

          We utilize the Internet to promote our brands, to create a community experience among our fans and to market and distribute our products. Through our Internet sites, our fans can purchase and view our monthly pay-per-view events and purchase our branded merchandise. We promote many of our Internet sites on our televised programming, at our live events, in our magazines and in substantially all of our marketing and promotional materials. According to comScore Media Metrix, in March 2004, our Internet sites generated approximately 340 million page views, and we had approximately 7.0 million unique visitors.

8


Sales outside North America

          The following chart presents revenues derived from sales outside of North America from all activities within our live and televised and branded merchandise segments for each of our three fiscal years ended April 30, 2004:

Total Revenues from Sales outside of North America
($ in millions)

Message

Competition

          While we believe that we have a loyal fan base, the entertainment industry is highly competitive and subject to fluctuations in popularity, which are not easy to predict. For our live, television and pay-per-view audiences we face competition from professional and college sports as well as from other forms of live, film and televised entertainment and other leisure activities.

          We compete for advertising dollars with other media companies. We compete with entertainment companies, professional and college sports leagues and other makers of branded apparel and merchandise for the sale of our branded merchandise. Many companies with whom we compete have greater financial resources than we do.

Trademarks and Copyrights

          Intellectual property is material to all aspects of our operations, and we expend substantial cost and effort in an attempt to maintain and protect our intellectual property and to maintain compliance vis-à-vis other parties’ intellectual property.  We have a large portfolio of registered and unregistered trademarks and service marks worldwide and maintain a large catalog of copyrighted works, including copyrights on our television programming, music, photographs, books, magazines, and apparel art.  A principal focus of our efforts is to protect the intellectual property relating to our originally created characters portrayed by our performers, which encompasses images, likenesses, names and other identifying indicia of these characters.  We also own a large number of Internet website domain names and operate a network of developed, content-based sites, which facilitate and contribute to the exploitation of our intellectual property worldwide.

          We vigorously seek to enforce our intellectual property rights by, among other things, searching the Internet to ascertain unauthorized use of our intellectual property, seizing at our live events goods that feature unauthorized use of our intellectual property and seeking restraining orders and/or damages in court against individuals or entities infringing our intellectual property rights.  Our failure to curtail piracy, infringement or other unauthorized use of our intellectual property rights effectively, or our infringement of others’ intellectual property rights, could adversely affect our operating results.

9


Employees

          The following chart reflects worldwide head count as of June 2004, 2003 and 2002. The headcount excludes employees of our discontinued operations, The World and the XFL, and our talent who are independent contractors.

Worldwide Headcount

Message

          Our in-house production staff is supplemented with contract personnel for our television production. We believe that our relationships with our employees are generally satisfactory. None of our employees are represented by a union.

Regulation

Live Events

          In various states in the United States and some foreign jurisdictions, athletic commissions and other applicable regulatory agencies require us to obtain licenses for promoters, medical clearances and/or  other permits or licenses for performers and/or permits for events in order for us to promote and conduct our live events.  In the event that we fail to comply with the regulations of a particular jurisdiction, we may be prohibited from promoting and conducting our live events in that jurisdiction.  The inability to present our live events over an extended period of time or in a number of jurisdictions could lead to a decline in the various revenue streams generated from our live events, which could adversely affect our operating results.

Television Programming

          The production and distribution of television programming by independent producers is not directly regulated by the federal or state governments, but the marketplace for television programming in the United States is substantially affected by government regulations applicable to, as well as social and political influences on, television stations, television networks and cable and satellite television systems and channels. We voluntarily designate the suitability of each of our television shows using standard industry ratings, such as PG (L,V) or TV14.

Discontinued Operations

          In February 2003, we closed the restaurant operations and in April 2003, we closed the retail store of our entertainment complex in New York City, The World.  As a result, we recorded an after-tax charge of approximately $8.9 million in our fourth quarter ended April 30, 2003.  The lease for The World property expires on October 31, 2017 and the aggregate rental payments through the end of the term are approximately $43.8 million.  Included in

10


fiscal 2004 loss from discontinued operations was $1.7 million related to the rental payments and maintenance costs for the facility.  We are actively seeking a tenant to assume this lease or enter into a sub-lease agreement.

          The World generated net revenue of $8.1 million and $14.1 million in fiscal 2003 and 2002, respectively, and incurred operating losses of $43.1 million and $7.9 million in fiscal 2003 and 2002, respectively.

Available Information

          Copies of our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, current reports on Form 8-K, and any amendments to those reports, are available free of charge on our website at http://corporate.wwe.com/invest/index.html as soon as reasonably practicable after such reports are filed with the Securities and Exchange Commission.  In addition, our Corporate Governance Guidelines, Code of Business Conduct and charters of our Audit Committee and Compensation Committee are also available on our website.  A copy of any of these documents will be mailed to any stockholder upon request to us at World Wrestling Entertainment, Inc., 1241 East Main Street, Stamford, CT  06902, Attn: Investor Relations Department.

Item 2.  Properties

          We have executive offices, television and music recording studios, post-production operations and warehouses at locations in or near Stamford, Connecticut, and have offices in New York, London, Toronto and Los Angeles. We own the buildings in which our executive and administrative offices, our television and music recording studios and our post-production operations are located. We lease space for our sales offices, WWE Films office, and our warehouse facilities.

          Our principal properties consist of the following:

Facility

 

 

Location

 

 

Square Feet

 

 

 

Owned/Leased

 

 

Expiration Date
of Lease

 


 



 



 

 



 



 

Executive offices

 

 

Stamford, CT

 

 

114,300

 

 

 

Owned

 

 

 

Production studio

 

 

Stamford, CT

 

 

39,000

(1)

 

 

Owned

 

 

 

Ring/Photo studio

 

 

Stamford, CT

 

 

5,600

 

 

 

Leased

 

 

May 11, 2006

 

Sales office

 

 

New York, NY

 

 

10,075

 

 

 

Leased

 

 

July 15, 2008

 

Sales office

 

 

Toronto, Canada

 

 

7,069

 

 

 

Leased

 

 

February 28, 2006

 

Sales office

 

 

London, England

 

 

2,215

 

 

 

Leased

 

 

May 31, 2006

 

Executive office

 

 

Los Angeles, CA

 

 

2,100

 

 

 

Leased

 

 

July 15, 2007

 

Warehouse

 

 

Trumbull, CT

 

 

30,000

 

 

 

Leased

 

 

August 9, 2004 (2)

 


(1)

Excludes 4,000 square feet of temporary space and 138,000 square feet of parking space adjacent to the production facilities.

 

 

(2)

The Company plans to move this operation to a different facility at the end of the lease.  This facility and a portion of our executive offices are used in connection with our branded merchandise segment; all other properties are used in connection with our live and televised entertainment segment.

          In addition, we own a daycare facility in Stamford, Connecticut on property adjacent to our production facilities, which originally offered child care services only to our employees, but is now also open to the public.  The licensing and operation of this facility is managed by a third-party contractor.  We have the responsibility to obtain the required licenses and to ensure that the facility meets health, safety, fire and building codes.

          We are currently in the process of seeking a subtenant or assignee for our 46,500 square foot rental space in New York City, which was used for our entertainment complex, The World.  The lease expires in October 2017, and aggregate rental payments through the end of the term are approximately $43.8 million.

Item 3.  Legal Proceedings

          See Note 10 to Notes to Consolidated Financial Statements, which is incorporated herein by reference.

Item 4.  Submission of matters to a vote of Security Holders

          None.

11


PART II

Item 5.  Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Price Range of Class A Common Stock

          Our Class A common stock trades on the New York Stock Exchange under the symbol “WWE.”

          The following table sets forth the high and the low sale prices for the shares of Class A common stock as reported by the New York Stock Exchange for the periods indicated.

 

 

Class A common stock

 

 

 


 

Fiscal 2004

 

High

 

Low

 


 



 



 

First Quarter

 

$

11.07

 

$

8.85

 

Second Quarter

 

$

11.00

 

$

9.10

 

Third Quarter

 

$

14.15

 

$

10.55

 

Fourth Quarter

 

$

15.44

 

$

12.35

 

 

 

 

 

 

 

 

 

 

 

Class A common stock

 

 

 


 

Fiscal 2003

 

High

 

Low

 


 



 



 

First Quarter

 

$

15.30

 

$

8.49

 

Second Quarter

 

$

10.40

 

$

6.76

 

Third Quarter

 

$

9.02

 

$

7.53

 

Fourth Quarter

 

$

9.20

 

$

7.43

 

          There were 11,078 holders of record of Class A common stock and three holders of record of Class B common stock on July 7, 2004.

          We have declared and paid quarterly cash dividends 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 July 8, 2004 we paid to shareholders of record on June 28, 2004 a quarterly dividend in the amount of $0.06 per share.  Before that, our quarterly dividends were $0.04 per share.

Equity Compensation Plan Information

          The following table sets forth certain information with respect to securities authorized for issuance under equity compensation plans as of April 30, 2004.

Plan Category

 

Number of securities
to be issued upon
exercise of outstanding
options, warrants
and rights

 

Weighted-average
exercise price of
outstanding options,
warrants and rights

 

Number of securities remaining
available for future issuance
under equity compensation
plans (excluding securities
reflected in column (a))

 


 



 



 



 

 

 

(a)

 

(b)

 

(c)

 

Equity compensation plans approved by security holders:

 

 

 

 

 

 

 

 

 

 

Stock options

 

 

2,955,625

 

 

$   12.47

 

 

6,036,777

 

Restricted stock units

 

 

770,848

 

 

N/A

 

 

Same as above

 

Equity compensation plans not approved by security holders

 

 

None

 

 

N/A

 

 

None

 

 

 



 



 



 

Total

 

 

3,726,473

 

 

$   12.47

 

 

6,036,777

 

 

 



 



 



 

12


Item 6.  Selected Financial Data

          The following table sets forth our selected financial data for each of the five fiscal years in the period ended April 30, 2004. The selected financial data as of April 30, 2004 and 2003 and for the fiscal years ended April 30, 2004, 2003 and 2002 have been derived from the audited consolidated financial statements included elsewhere in this Annual Report. The selected historical consolidated financial data as of April 30, 2002, 2001 and 2000 and for the fiscal years ended April 30, 2001 and 2000 have been derived from our audited consolidated financial statements, which are not included in this Annual Report.  You should read the selected financial data in conjunction with our consolidated financial statements and related notes and the information set forth under “Management’s Discussion and Analysis of Financial Condition and Results of Operations” contained elsewhere in this Annual Report. 

 

 

Year Ended April 30
(dollars in millions, except per share data)

 

 

 


 

 

 

2004

 

2003

 

2002

 

2001

 

2000

 

 

 



 



 



 



 



 

Financial Highlights:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net revenues

 

$

374.9

 

$

374.3

 

$

409.6

 

$

438.1

 

$

377.9

 

Operating income

 

$

73.6

 

$

26.6

 

$

44.7

 

$

87.2

 

$

84.7

 

Income from continuing operations

 

$

49.6

 

$

16.1

 

$

37.7

 

$

63.5

 

$

59.6

 

Net income (loss) (1)

 

$

48.2

 

$

(19.5

)

$

38.9

 

$

14.9

 

$

58.9

 

Earnings per share from continuing operations, diluted

 

$

0.72

 

$

0.22

 

$

0.51

 

$

0.88

 

$

0.95

 

Earnings (loss) per share, diluted

 

$

0.70

 

$

(0.28

)

$

0.53

 

$

0.21

 

$

0.94

 

Dividends paid per share (2)

 

$

0.16

 

 

—  

 

 

—  

 

 

—  

 

 

—  

 

Cash and short-term investments

 

$

273.3

 

$

271.1

 

$

293.8

 

$

239.1

 

$

209.0

 

Total assets

 

$

454.3

 

$

432.2

 

$

491.0

 

$

464.1

 

$

337.0

 

Total debt

 

$

8.7

 

$

9.9

 

$

9.9

 

$

10.5

 

$

11.4

 

Total stockholders’ equity

 

$

353.1

 

$

337.4

 

$

385.1

 

$

346.8

 

$

258.5

 


(1)

Included in our net income (loss) was the operating results of our discontinued operations, The World and the XFL, and their respective estimated shutdown costs, which totaled $(1.4), $(35.6), $(0.3), $(48.5) and $(0.7) during fiscal 2004, 2003, 2002, 2001 and 2000, respectively.

 

 

(2)

Excludes the $0.06 per share dividend paid to stockholders of record as of June 28, 2004.

Item 7.  Management’s Discussion and Analysis of Financial Condition and Results of Operations

          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).

13


Fiscal Year Ended April 30, 2004 compared to Fiscal Year Ended April 30, 2003 (dollars in millions)

Net Revenues

 

2004

 

2003

 

better
(worse)

 


 



 



 



 

Live and televised

 

$

296.1

 

$

295.4

 

 

0.2

%

Branded merchandise

 

 

78.8

 

 

78.9

 

 

—  

 

 

 



 



 

 

 

 

Total

 

$

374.9

 

$

374.3

 

 

0.2

%

 

 



 



 

 

 

 


Operating Income:

 

2004

 

2003

 

better
(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:

Live and Televised Revenues

 

2004

 

2003

 

better
(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

 

 

%

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,

14


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:

Branded Merchandise Revenues

 

2004

 

2003

 

better
(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.

Cost of Revenues

 

2004

 

2003

 

better
(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

%

 

 

 


Cost of Revenues-Live and Televised

 

2004

 

2003

 

better
(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

%

 

 

 

15


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.

Cost of Revenues-Branded Merchandise

 

2004

 

2003

 

better
(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

 

 

—  

 

 

 



 



 

16


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.

 

 

2004

 

2003

 

better
(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.

 

 

2004

 

2003

 

better
(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.

 

 

2004

 

2003

 

better
(worse)

 

 

 



 



 



 

Interest expense

 

$

0.8

 

$

0.8

 

 

—  

 


 

 

2004

 

2003

 

better
(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.

17


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)

Net Revenues

 

2003

 

2002

 

better
(worse)

 


 



 



 



 

Live and televised

 

$

295.4

 

$

323.5

 

 

(9

)%

Branded merchandise

 

 

78.9

 

 

86.1

 

 

(8

)%

 

 



 



 

 

 

 

Total

 

$

374.3

 

$

409.6

 

 

(9

)%

 

 



 



 

 

 

 


Operating Income:

 

2003

 

2002

 

better
(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

)%

 

 



 



 

 

 

 


 

 

2003

 

2002

 

better
(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.

18


Additional details regarding these summary results follow below.

The following chart provides revenues and key drivers for our live and televised segment:

Live and Televised Revenues

 

2003

 

2002

 

better
(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:

Branded Merchandise Revenues

 

2003

 

2002

 

better
(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.

Cost of Revenues

 

2003

 

2002

 

better
(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

%

 

 

 

19


Cost of Revenues-Live and Televised

 

2003

 

2002

 

better
(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%. 

Cost of Revenues-Branded Merchandise

 

2003

 

2002

 

better
(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:

Selling, General & Administrative Expenses

 

2003

 

2002

 

better
(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.

 

 

2003

 

2002

 

better
(worse)

 

 

 



 



 



 

Depreciation and amortization

 

$

11.0

 

$

10.6

 

 

(4

)%

20


 

 

2003

 

2002

 

better
(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. 

 

 

2003

 

2002

 

better
(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

21


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.

22


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 year

 

1–3 years

 

4–5 years

 

After
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

23


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

24


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.

Item 7A.  Quantitative and Qualitative Disclosures about Market Risk

In the normal course of business, we are exposed to foreign currency exchange rate, interest rate and equity price risks that could impact our results of operations.  Our foreign currency exchange rate risk is minimized by maintaining minimal net assets and liabilities in currencies other than our functional currency.

Interest Rate Risk

We are exposed to interest rate risk related to our debt and investment portfolio. Our debt primarily consists of the mortgage related to our corporate headquarters, which has an annual interest rate of 7.6%.  Due to the recent decreases in mortgage rates, this debt is now at a rate in excess of market, however due to the terms of our agreement we are prohibited from refinancing for several years.  The impact of the decrease in mortgage rates is considered immaterial to our consolidated financial statements.

Our investment portfolio consists primarily of fixed income mutual funds and United States Treasury Notes, with a strong emphasis placed on preservation of capital. In an effort to minimize our exposure to interest rate risk, our investment portfolio’s dollar weighted duration is approximately one year. Due to the nature of our investments and our strategy to minimize market and interest rate risk, we believe that our portfolio would not be materially impacted by adverse fluctuations in interest rates.

Item 8.  Consolidated Financial Statements and Schedule

          The information required by this item is set forth in the Consolidated Financial Statements filed with this report.

Item 9.  Changes in and Disagreements with Accountants on Accounting and Financial Disclosures

                    None

25


Item 9A.  Controls and Procedures

                    Based on their most recent review, which was completed as of the end of the period covered by this report, our Chairman and Chief Executive Officer, as co-principal executive officers, and our Chief Financial Officer have concluded that our disclosure controls and procedures are effective to ensure that information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act of 1934, as amended, is accumulated and communicated to our management, including our Chairman and Chief Executive Officer, as co-principal executive officers, and our Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure and are effective to ensure that such information is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.  During the fiscal year ended April 30, 2004, there have been no changes in our internal control over financial reporting, identified in connection with the evaluation thereof, which have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART III

          The information required by Part III (Items 10-14) is incorporated herein by reference to the captions “Election of Directors”, “Security Ownership of Certain Beneficial Owners and Management” and “Ratification of Selection of Independent Auditors” in our definitive proxy statement for our 2004 Annual Meeting of Stockholders.

26


PART IV

Item 16.  Exhibits, Financial Statement Schedules, and Reports on Form 8-K

(a) The following documents are filed as a part of this report:

1.

Consolidated Financial Statements and Schedule: See index to Consolidated Financial Statements on page F-1 of this Report.

 

 

2.

Exhibits:


 

Exhibit
No.

 

Description of Exhibit

 


 


 

3.1

 

Amended and Restated Certificate of Incorporation (incorporated by reference to Exhibit 3.2 to our Registration Statement on Form S-1 (No. 333-84327)).

 

 

 

 

 

3.1A

 

Amendment to Amended and Restated Certificate of Incorporation (incorporated by reference to Exhibit 4.1(a) to our Registration Statement on Form S-8, filed July 15, 2002).

 

 

 

 

 

3.2

 

Amended and Restated By-laws (incorporated by reference to Exhibit 3.4 to our Registration Statement on Form S-1 (No. 333-84327)).

 

 

 

 

 

3.2A

 

Amendment to Amended and Restated By-Laws (incorporated by reference to Exhibit 4.2(a) to our Registration Statement on Form S-8, filed July 15, 2002).

 

 

 

 

 

10.1

 

1999 Long-Term Incentive Plan (incorporated by reference to Exhibit 10.1 to our Registration Statement on Form S-1 (No. 333-84327))(the “LTIP”).*

 

 

 

 

 

10.1A

 

Form of Option Agreement  under the LTIP (incorporated by reference to Exhibit 10.1A to our Annual Report on Form 10-K for the fiscal year ended April 30, 2003) *

 

 

 

 

 

10.1B

 

Form of Agreement for Restricted Performance Stock Units granted during 2003 under the LTIP (incorporated by reference to Exhibit 10.2B to our Annual Report on Form 10-K for the fiscal year ended April 30, 2003).*

 

 

 

 

 

10.2

 

Employment Agreement with Vincent K. McMahon, dated October 14, 1999 (incorporated by reference to Exhibit 10.2 to our Registration Statement on Form S-1 (No. 333-84327)).*

 

 

 

 

 

10.2A

 

Amendment, dated as of May 1, 2002, to Employment Agreement with Vincent K. McMahon (incorporated by reference to Exhibit 10.2A to our Annual Report on Form 10-K for the fiscal year ended April 30, 2002).*

 

 

 

 

 

10.2B

 

Second Amendment, dated February 23, 2004, to Employment Agreement with Vincent K. McMahon (incorporated by reference to Exhibit 10.2B to our Quarterly Report on Form 10-Q for the fiscal quarter ended January 23, 2004) *

 

 

 

 

 

10.3

 

Booking Contract with Vincent K. McMahon, dated February 15, 2000 (incorporated by reference to Exhibit 10.3 to our Annual Report on Form 10-K for the fiscal year ended April 30, 2000).*

 

 

 

 

 

10.3A

 

Amendment, dated July 3, 2001, to Booking Contract with Vincent K. McMahon (incorporated by reference to Exhibit 10.3A to our Annual Report on Form 10-K for the fiscal year ended April 30, 2001).*

 

 

 

 

 

10.4

 

Employment Agreement with Linda E. McMahon, dated October 14, 1999 (incorporated by reference to Exhibit 10.3 to our Registration Statement on Form S-1 (No. 333-84327)).*

 

 

 

 

 

10.4A

 

Amendment, dated February 23, 2004, to Employment Agreement with Linda E. McMahon (incorporated by reference to Exhibit 10.4A to our Quarterly Report on Form 10-Q for the fiscal quarter ended January 23, 2004).*

 

 

 

 

 

10.5

 

Booking Contract with Linda E. McMahon, dated February 15, 2000 (incorporated by reference to Exhibit 10.5 to our Annual Report on Form 10-K for the fiscal year ended April 30, 2000).*

 

 

 

 

 

10.6

 

World Wrestling Entertainment Employee Stock Purchase Plan (incorporated by reference to Exhibit 10.6 to our Annual Report on Form 10-K for the fiscal year ended April 30, 2002).*

 

 

 

 

 

10.7

 

License Agreement with inDemand, formerly known as Viewer’s Choice L.L.C., dated as of January 20, 1999 (incorporated by reference to Exhibit 10.7 to our Registration Statement on Form S-1 (No. 333-84327)). (1)

 

 

 

 

 

10.8

 

World Wrestling Entertainment, Inc. Management Bonus Plan (incorporated by reference to Appendix A to the Proxy Statement for the 2003 Annual Meeting of Stockholders, filed July 31, 2003).*

 

 

 

 

 

10.9

 

Independent Contractor Agreement, dated May 1, 2003, between the Registrant and Communications Consultants, Inc. (incorporated by reference to Exhibit 10.9 to our Annual Report on Form 10-K for the fiscal year ended April 30, 2003)*

27


 

10.10

 

Registration Rights Agreement, dated August 30, 2001, by and between Invemed Catalyst Fund, L.P. and World Wrestling Entertainment, Inc. (incorporated by reference to Exhibit 10.10 to our Annual Report on Form 10-K for the fiscal year ended April 30, 2002).

 

 

 

 

 

10.11

 

Open End Mortgage Deed, Assignment of Rents and Security Agreement between TSI Realty Company and GMAC Commercial Mortgage Corp. (assigned to Citicorp Real Estate, Inc.), dated as of December 12, 1997 (incorporated by reference to Exhibit 10.11 to our Registration Statement on Form S-1 (No. 333-84327)).

 

 

 

 

 

10.12

 

Promissory Note issued by TSI Realty Company to GMAC Commercial Mortgage Corp. (assigned to Citicorp Real Estate, Inc.), dated as of December 12, 1997 (incorporated by reference to Exhibit 10.12 to our Registration Statement on Form S-1 (No. 333-84327)).

 

 

 

 

 

10.13

 

Environmental Indemnity Agreement among TSI Realty Company, Titan Sports Inc. and GMAC Commercial Mortgage Corp. (assigned to Citicorp Real Estate, Inc.), dated as of December 12, 1997 (incorporated by reference to Exhibit 10.13 to our Registration Statement on Form S-1 (No. 333-84327)).

 

 

 

 

 

10.14

 

Assignment of Leases and Rents between TSI Realty Company and GMAC Commercial Mortgage Corp. (assigned to Citicorp Real Estate, Inc.), dated as of December 12, 1997 (incorporated by reference to Exhibit 10.14 to our Registration Statement on Form S-1 (No. 333-84327)).

 

 

 

 

 

10.15

 

Form of Tax Indemnification Agreement among the Registrant, Stephanie Music Publishing, Inc., Vincent K. McMahon and the Vincent K. McMahon Irrevocable Deed of Trust, dated as of June 30, 1999 (incorporated by reference to Exhibit 10.15 to our Registration Statement on Form S-1 (No. 333-84327)).

 

 

 

 

 

10.16

 

Agreement between WWF-World Wide Fund for Nature and Titan Sports, Inc. dated January 20, 1994 (incorporated by reference to Exhibit 10.16 to our Registration Statement on Form S-1 (No. 333-84327)).

 

 

 

 

 

10.17

 

Offer letter, dated January 13, 2003, between the Registrant and Kurt Schneider (incorporated by reference to Exhibit 10.17 to our Quarterly Report on Form 10-Q for the fiscal quarter ended July 25, 2003). *

 

 

 

 

 

10.18

 

Offer letter , dated February 24, 2003, between the Registrant and Philip B. Livingston (incorporated by reference to Exhibit 10.18 to our Quarterly Report on Form 10-Q for the fiscal quarter ended July 25, 2003). *

 

 

 

 

 

10.19

 

Booking Contract, dated as of January 1, 2000, between the Registrant and Shane B. McMahon (“McMahon Booking Contract”) (incorporated by reference to Exhibit 10.19 to our Quarterly Report on Form 10-Q for the fiscal quarter ended July 25, 2003). *

 

 

 

 

 

10.19A

 

First Amendment to McMahon Booking Contract, dated March 12, 2001 (incorporated by reference to Exhibit 10.19A to our Quarterly Report on Form 10-Q for the fiscal quarter ended July 25, 2003). *

 

 

 

 

 

10.20

 

Employment Agreement, dated as of October 29, 1996, between the Registrant and James W. Ross (“Ross Employment Agreement”) (incorporated by reference to Exhibit 10.20 to our Quarterly Report on Form 10-Q for the fiscal quarter ended July 25, 2003). *

 

 

 

 

 

10.20A

 

Amendment to Ross Employment Agreement, dated June 2, 2003 (incorporated by reference to Exhibit 10.20A to our Quarterly Report on Form 10-Q for the fiscal quarter ended July 25, 2003). *

 

 

 

 

 

10.20B

 

Second Amendment to Ross Employment Agreement, dated June 2, 2003 (incorporated by reference to Exhibit 10.20B to our Quarterly Report on Form 10-Q for the fiscal quarter ended July 25, 2003). *

 

 

 

 

 

10.20C

 

Third Amendment to Ross Employment Agreement, dated August 13, 2003 (incorporated by reference to Exhibit 10.20C to our Quarterly Report on Form 10-Q for the fiscal quarter ended July 25, 2003). *

 

 

 

 

 

21.1

 

List of Subsidiaries (incorporated by reference to Exhibit 21.1 to our Annual Report on Form 10-K for the fiscal year ended April 30, 2003).

 

 

 

 

 

23.1

 

Consent of Deloitte & Touche LLP (filed herewith).

 

 

 

 

 

31.1

 

Certification by Vincent K. McMahon pursuant to Section 302 of Sarbanes-Oxley Act of 2002 (filed herewith).

 

 

 

 

 

31.2

 

Certification by Linda E. McMahon pursuant to Section 302 of Sarbanes-Oxley Act of 2002 (filed herewith).

 

 

 

 

 

31.3

 

Certification by Philip B. Livingston pursuant to Section 302 of Sarbanes-Oxley Act of 2002 (filed herewith).

 

 

 

 

 

32.1

 

Certification by Vincent K. McMahon, Linda E. McMahon and Philip B. Livingston pursuant to Section 906 of Sarbanes-Oxley Act of 2002 (filed herewith).

 

 

 

* Indicates management contract or compensatory plan or arrangement.

 

 

 

(1) Certain portions of this exhibit have been omitted based upon a request for confidential treatment filed by the Company with the Secretary of the Commission on August 25, 1999, as amended on October 8, 1999. The omitted portion of this exhibit has been separately filed with the Commission.

(b) Reports on Form 8-K:

 

The Registrant filed the following Forms 8-K:

 

 

 

 

(i)   Filing Date March 8, 2004

Items 12 and 7

 

 

 

 

(ii)  Filing Date April 23, 2004

Items 12 and 7

 

 

 

 

(iii) Filing Date April 27, 2004

Items 5 and 7

28


SIGNATURES

          Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereto duly authorized.

 

 

WORLD WRESTLING ENTERTAINMENT, INC.

 

 

(Registrant)

 

 

 

Dated: July 12, 2004

By:

/s/ LINDA E. MCMAHON

 

 


 

 

Linda E. McMahon
Chief Executive Officer

 

 

 

Dated: July 12, 2004

By:

/s/ PHILIP B. LIVINGSTON

 

 


 

 

Philip B. Livingston
Chief Financial Officer

          Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

Signature

 

Title or Capacity

 

Date


 


 


By: /s/ VINCENT K. MCMAHON

 

Chairman of the Board of Directors,
(co-principal executive officer)

 

July 12, 2004


 

 

 

Vincent K. McMahon

 

 

 

 

 

 

 

 

 

By: /s/ LINDA E. MCMAHON

 

Chief Executive Officer and Director,
(co-principal executive officer)

 

July 12, 2004


 

 

 

Linda E. McMahon

 

 

 

 

 

 

 

 

 

By: /s/ LOWELL P. WEICKER Jr.

 

Director

 

July 12, 2004


 

 

 

 

Lowell P. Weicker Jr.

 

 

 

 

 

 

 

 

 

By: /s/ DAVID KENIN

 

Director

 

July 12, 2004


 

 

 

 

David Kenin

 

 

 

 

 

 

 

 

 

By: /s/ JOSEPH PERKINS

 

Director

 

July 12, 2004


 

 

 

 

Joseph Perkins

 

 

 

 

 

 

 

 

 

By: /s/ MICHAEL B. SOLOMON

 

Director

 

July 12, 2004


 

 

 

 

Michael B. Solomon

 

 

 

 

 

 

 

 

 

By: /s/ ROBERT A. BOWMAN

 

Director

 

July 12, 2004


 

 

 

 

Robert A. Bowman

 

 

 

 

 

 

 

 

 

By: /s/ PHILIP B. LIVINGSTON

 

Chief Financial Officer and Director,
(principal financial and accounting officer)

 

July 12, 2004


 

 

 

Philip B. Livingston

 

 

 

 

29


WORLD WRESTLING ENTERTAINMENT, INC.

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

 

Page

 


Report of Independent Registered Public Accounting Firm

F-2

 

 

Consolidated Statements of Operations for the years ended April 30, 2004, 2003 and 2002

F-3

 

 

Consolidated Balance Sheets as of April 30, 2004 and 2003

F-4

 

 

Consolidated Statements of Stockholders’ Equity and Comprehensive (Loss) Income for the years ended April 30, 2004, 2003 and 2002

F-5

 

 

Consolidated Statements of Cash Flows for the years ended April 30, 2004, 2003 and 2002

F-6

 

 

Notes to Consolidated Financial Statements

F-7

 

 

Schedule II – Valuation and Qualifying Accounts

F-25

F-1


REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of World Wrestling Entertainment, Inc.:

          We have audited the accompanying consolidated balance sheets of World Wrestling Entertainment, Inc. and subsidiaries (the “Company”) as of April 30, 2004 and 2003 and the related consolidated statements of operations, stockholders’ equity and comprehensive income (loss) and of cash flows for each of the three years in the period ended April 30, 2004. Our audits also included the financial statement schedule listed in the index at Item 16(a)1. These financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on the financial statements and financial statement schedule based on our audits.

          We conducted our audits in accordance with standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

          In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of the Company as of April 30, 2004 and 2003 and the results of its operations and its cash flows for each of the three years in the period ended April 30, 2004 in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly in all material respects the information set forth therein.

          As discussed in Note 3, the Company adopted Statement of Financial Accounting Standards No. 133 during the year ended April 30, 2002.

/s/ Deloitte and Touche LLP

Stamford, Connecticut

July 12, 2004

F-2


WORLD WRESTLING ENTERTAINMENT, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS
(dollars and shares in thousands, except per share data)

 

 

Year ended April 30

 

 

 


 

 

 

2004

 

2003

 

2002

 

 

 



 



 



 

Net revenues

 

$

374,909

 

$

374,264

 

$

409,622

 

Cost of revenues

 

 

207,121

 

 

237,343

 

 

251,124

 

Selling, general and administrative expenses

 

 

78,170

 

 

99,349

 

 

103,191

 

Depreciation and amortization

 

 

12,363

 

 

10,965

 

 

10,594

 

Stock compensation costs

 

 

3,675

 

 

—  

 

 

—  

 

 

 



 



 



 

Operating income

 

 

73,580

 

 

26,607

 

 

44,713

 

 

 



 



 



 

Interest income

 

 

5,906

 

 

2,011

 

 

10,591

 

Interest expense

 

 

767

 

 

783

 

 

784

 

Other income (loss), net

 

 

1,275

 

 

(897

)

 

5,213

 

 

 



 



 



 

Income from continuing operations before income taxes

 

 

79,994

 

 

26,938

 

 

59,733

 

Provision for income taxes

 

 

30,421

 

 

10,836

 

 

22,020

 

 

 



 



 



 

Income from continuing operations

 

 

49,573

 

 

16,102

 

 

37,713

 

 

 



 



 



 

Discontinued operations:

 

 

 

 

 

 

 

 

 

 

Income on shutdown of the XFL, net of taxes of $178 and $2,917 for  2004 and 2002, respectively and minority interest

 

 

290

 

 

—  

 

 

4,638

 

 

 



 



 



 

Loss from The World operations, net of taxes of $16,359 and $3,006, for 2003 and 2002, respectively

 

 

—  

 

 

(26,691

)

 

(4,903

)

Estimated loss on shutdown of The World, net of taxes of $900 and $3,257, for 2004 and 2003, respectively

 

 

(1,671

)

 

(8,866

)

 

—  

 

 

 



 



 



 

Loss from discontinued operations – The World

 

 

(1,671

)

 

(35,557

)

 

(4,903

)

 

 



 



 



 

Loss from discontinued operations

 

 

(1,381

)

 

(35,557

)

 

(265

)

 

 



 



 



 

Cumulative effect of change in accounting principle, net of taxes of $911

 

 

—  

 

 

—  

 

 

1,487

 

 

 



 



 



 

Net income (loss)

 

$

48,192

 

$

(19,455

)

$

38,935

 

 

 



 



 



 

Earnings (loss) per common share-basic and diluted:

 

 

 

 

 

 

 

 

 

 

Continuing operations

 

$

0.72

 

$

0.22

 

$

0.51

 

Discontinued operations

 

 

(0.02

)

 

(0.50

)

 

—  

 

Cumulative effect of change in accounting principle

 

 

—  

 

 

—  

 

 

0.02

 

 

 



 



 



 

Net income (loss)

 

$

0.70

 

$

(0.28

)

$

0.53

 

 

 



 



 



 

Shares used in per share calculations:

 

 

 

 

 

 

 

 

 

 

Basic

 

 

68,621

 

 

70,622

 

 

72,862

 

Diluted

 

 

69,036

 

 

70,623

 

 

72,866

 

See Notes to Consolidated Financial Statements.

F-3


WORLD WRESTLING ENTERTAINMENT, INC.

CONSOLIDATED BALANCE SHEETS
(dollars in thousands)

 

 

As of April 30

 

 

 


 

 

 

2004

 

2003

 

 

 



 



 

ASSETS

 

 

 

 

 

 

 

CURRENT ASSETS:

 

 

 

 

 

 

 

Cash and equivalents

 

$

48,467

 

$

128,473

 

Short-term investments

 

 

224,824

 

 

142,641

 

Accounts receivable, net

 

 

62,703

 

 

49,075

 

Inventory, net

 

 

856

 

 

839

 

Prepaid expenses and other current assets

 

 

14,027

 

 

18,681

 

Assets of discontinued operations

 

 

691

 

 

21,129

 

 

 



 



 

Total current assets

 

 

351,568

 

 

360,838

 

 

 



 



 

PROPERTY AND EQUIPMENT, NET

 

 

71,369

 

 

59,325

 

INTANGIBLE ASSETS, NET

 

 

4,492

 

 

4,625

 

OTHER ASSETS

 

 

6,212

 

 

7,375

 

ASSETS OF DISCONTINUED OPERATIONS

 

 

20,703

 

 

—  

 

 

 



 



 

TOTAL ASSETS

 

$

454,344

 

$

432,163

 

 

 



 



 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

CURRENT LIABILITIES:

 

 

 

 

 

 

 

Current portion of long-term debt

 

$

700

 

$

777

 

Accounts payable

 

 

13,118

 

 

14,188

 

Dividends payable

 

 

4,106

 

 

—  

 

Accrued expenses and other liabilities

 

 

42,131

 

 

34,503

 

Deferred income

 

 

23,512

 

 

24,662

 

Liabilities of discontinued operations

 

 

2,401

 

 

11,554

 

 

 



 



 

Total current liabilities

 

 

85,968

 

 

85,684

 

 

 



 



 

LONG-TERM DEBT

 

 

7,955

 

 

9,126

 

LIABILITIES OF DISCONTINUED OPERATIONS

 

 

7,316

 

 

—  

 

COMMITMENTS AND CONTINGENCIES

 

 

 

 

 

 

 

STOCKHOLDERS’ EQUITY:

 

 

 

 

 

 

 

Class A common stock: ($.01 par value; 180,000,000 shares authorized; 13,650,476 shares and 18,215,427 shares issued as of April 30, 2004 and 2003, respectively)

 

 

136

 

 

182

 

Class B common stock: ($.01 par value; 60,000,000 shares authorized; 54,780,207 shares issued as of April 30, 2004 and 2003)

 

 

548

 

 

548

 

Treasury stock (2,578,769 shares as of April 30, 2003)

 

 

—  

 

 

(30,569

)

Additional paid-in capital

 

 

250,775

 

 

297,315

 

Accumulated other comprehensive (loss) income

 

 

(1,120

)

 

243

 

Retained earnings

 

 

102,766

 

 

69,634

 

 

 



 



 

Total stockholders’ equity

 

 

353,105

 

 

337,353

 

 

 



 



 

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY

 

$

454,344

 

$

432,163

 

 

 



 



 

See Notes to Consolidated Financial Statements.

F-4


WORLD WRESTLING ENTERTAINMENT, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY AND
COMPREHENSIVE (LOSS) INCOME
(dollars and shares in thousands)

 

 

 

 

 

 

Additional
Paid - in
Capital

 

Accumulated
Other
Comprehensive
(Loss) Income

 

Retained
Earnings

 

Total

 

 

 

Common Stock

 

Treasury Stock

 

 

 

 

 

 

 


 


 

 

 

 

 

 

 

Shares

 

Amount

 

Shares

 

Amount

 

 

 

 

 

 

 



 



 



 



 



 



 



 



 

Balance, May 1, 2001

 

 

72,932

 

$

729

 

 

—  

 

 

—  

 

$

296,525

 

$

(597

)

$

50,154

 

$

346,811

 

Comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

—  

 

 

—  

 

 

—  

 

 

—  

 

 

—  

 

 

—  

 

 

38,935

 

 

38,935

 

Translation adjustment

 

 

—  

 

 

—  

 

 

—  

 

 

—  

 

 

—  

 

 

37

 

 

—  

 

 

37

 

Unrealized holding gain, net of tax

 

 

—  

 

 

—  

 

 

—  

 

 

—  

 

 

—  

 

 

35

 

 

—  

 

 

35

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

Total comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

39,007

 

Purchase of treasury stock

 

 

—  

 

 

—  

 

 

100

 

 

(1,139

)

 

—  

 

 

—  

 

 

—  

 

 

(1,139

)

Exercise of stock options

 

 

32

 

 

—  

 

 

—  

 

 

—  

 

 

413

 

 

—  

 

 

—  

 

 

413

 

 

 



 



 



 



 



 



 



 



 

Balance, April 30, 2002

 

 

72,964

 

 

729

 

 

100

 

 

(1,139

)

 

296,938

 

 

(525

)

 

89,089

 

 

385,092

 

Comprehensive loss:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

 

—  

 

 

—  

 

 

—  

 

 

—  

 

 

—  

 

 

—  

 

 

(19,455

)

 

(19,455

)

Translation adjustment

 

 

—  

 

 

—  

 

 

—  

 

 

—  

 

 

—  

 

 

322

 

 

—  

 

 

322

 

Unrealized holding gain, net of tax

 

 

—  

 

 

—  

 

 

—  

 

 

—  

 

 

—  

 

 

446

 

 

—  

 

 

446

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

Total comprehensive loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(18,687

)

Purchase of treasury stock

 

 

—  

 

 

—  

 

 

2,489

 

 

(29,554

)

 

—  

 

 

—  

 

 

—  

 

 

(29,554

)

Proceeds from sale of treasury stock

 

 

—  

 

 

—  

 

 

(11

)

 

124

 

 

(47

)

 

—  

 

 

—  

 

 

77

 

Exercise of stock options

 

 

32

 

 

1

 

 

—  

 

 

—  

 

 

404

 

 

—  

 

 

—  

 

 

405

 

Tax benefit from exercise of stock options

 

 

—  

 

 

—  

 

 

—  

 

 

—  

 

 

20

 

 

—  

 

 

—  

 

 

20

 

 

 



 



 



 



 



 



 



 



 

Balance, April 30, 2003

 

 

72,996

 

 

730

 

 

2,578

 

 

(30,569

)

 

297,315

 

 

243

 

 

69,634

 

 

337,353

 

Comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

—  

 

 

—  

 

 

—  

 

 

—  

 

 

—  

 

 

—  

 

 

48,192

 

 

48,192

 

Translation adjustment

 

 

—  

 

 

—  

 

 

—  

 

 

—  

 

 

—  

 

 

(203

)

 

—  

 

 

(203

)

Unrealized holding loss, net of tax

 

 

—  

 

 

—  

 

 

—  

 

 

—  

 

 

—  

 

 

(1,160

)

 

—  

 

 

(1,160

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

Total comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

46,829

 

Retirement of treasury stock

 

 

(4,616

)

 

(46

)

 

(4,616

)

 

49,712

 

 

(49,666

)

 

—  

 

 

—  

 

 

—  

 

Stock repurchase, net of issuance of new shares

 

 

27

 

 

—  

 

 

2,038

 

 

(19,143

)

 

5

 

 

—  

 

 

—  

 

 

(19,138

)

Exercise of stock options

 

 

24

 

 

—  

 

 

—  

 

 

—  

 

 

305

 

 

—  

 

 

—  

 

 

305

 

Tax benefit from exercise of stock options

 

 

—  

 

 

—  

 

 

—  

 

 

—  

 

 

2

 

 

—  

 

 

—  

 

 

2

 

Dividends paid

 

 

—  

 

 

—  

 

 

—  

 

 

—  

 

 

—  

 

 

—  

 

 

(10,954

)

 

(10,954

)

Dividends declared, not yet paid

 

 

—  

 

 

—  

 

 

—  

 

 

—  

 

 

—  

 

 

—  

 

 

(4,106

)

 

(4,106

)

Stock compensation costs

 

 

—  

 

 

—  

 

 

—  

 

 

—  

 

 

2,814

 

 

—  

 

 

—  

 

 

2,814

 

 

 



 



 



 



 



 



 



 



 

Balance, April 30, 2004

 

 

68,431

 

$

684

 

 

—  

 

 

—  

 

$

250,775

 

$

(1,120

)

$

102,766

 

$

353,105

 

 

 



 



 



 



 



 



 



 



 

See Notes to Consolidated Financial Statements.

F-5


WORLD WRESTLING ENTERTAINMENT, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)

 

 

Year Ended April 30

 

 

 


 

 

 

2004

 

2003

 

2002

 

 

 



 



 



 

OPERATING ACTIVITIES:

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

$

48,192

 

$

(19,455

)

$

38,935

 

Adjustments to reconcile net income (loss) to net cash provided by operating activities:

 

 

 

 

 

 

 

 

 

 

Loss from discontinued operations, net of tax

 

 

1,381

 

 

35,557

 

 

265

 

Gain on sale of stock and revaluation of warrants, net

 

 

(671

)

 

—  

 

 

(5,287

)

Cumulative effect of change in accounting principle, net of tax

 

 

—  

 

 

—  

 

 

(1,487

)

Depreciation and amortization

 

 

12,363

 

 

10,965

 

 

10,594

 

Amortization of deferred income

 

 

(1,052

)

 

(1,268

)

 

(1,270

)

Stock compensation costs

 

 

2,814

 

 

—  

 

 

—  

 

Provision for doubtful accounts

 

 

(2,295

)

 

3,697

 

 

900

 

Provision for inventory obsolescence

 

 

237

 

 

797

 

 

3,780

 

Provision (benefit) for deferred income taxes

 

 

5,087

 

 

1,490

 

 

(3,455

)

Impairment of long-lived asset

 

 

2,942

 

 

—  

 

 

—  

 

Changes in assets and liabilities:

 

 

 

 

 

 

 

 

 

 

Accounts receivable

 

 

(11,332

)

 

10,334

 

 

7,388

 

Inventory

 

 

(255

)

 

(185

)

 

(1,086

)

Prepaid expenses and other assets

 

 

2,870

 

 

(614

)

 

5,689

 

Accounts payable

 

 

(1,070

)

 

(5,302

)

 

25

 

Accrued expenses and other liabilities

 

 

7,917

 

 

(10,724

)

 

6,403

 

Deferred income

 

 

(1,737

)

 

2,740

 

 

10,179

 

 

 



 



 



 

Net cash provided by continuing operations

 

 

65,391

 

 

28,032

 

 

71,573

 

Net cash used in discontinued operations

 

 

(3,477

)

 

(6,894

)

 

(18,587

)

 

 



 



 



 

Net cash provided by operating activities

 

 

61,914

 

 

21,138

 

 

52,986

 

 

 



 



 



 

INVESTING ACTIVITIES:

 

 

 

 

 

 

 

 

 

 

Additions to property and equipment

 

 

(5,266

)

 

(10,593

)

 

(12,499

)

Purchase of corporate aircraft

 

 

(20,122

)

 

—  

 

 

—  

 

Purchase of other assets

 

 

(1,641

)

 

(3,000

)

 

—  

 

Sale (purchase) of short-term investments, net

 

 

(83,963

)

 

65,416

 

 

(13,070

)

Net proceeds from the sale of investments

 

 

—  

 

 

—  

 

 

12,914

 

 

 



 



 



 

Net cash provided by (used in) continuing operations

 

 

(110,992

)

 

51,823

 

 

(12,655

)

Net cash used in discontinued operations

 

 

—  

 

 

(2,134

)

 

(5,179

)

 

 



 



 



 

Net cash provided by (used in) investing operations

 

 

(110,992

)

 

49,689

 

 

(17,834

)

 

 



 



 



 

FINANCING ACTIVITIES:

 

 

 

 

 

 

 

 

 

 

Repayments of long-term debt

 

 

(647

)

 

(601

)

 

(556

)

Proceeds from (repayments of) capital lease agreement

 

 

(601

)

 

601

 

 

—  

 

Proceeds from sales of treasury stock

 

 

—  

 

 

77

 

 

—  

 

Purchase of treasury stock

 

 

(19,031

)

 

(29,554

)

 

(1,139

)

Dividends paid

 

 

(10,954

)

 

—  

 

 

—  

 

Proceeds from exercise of stock options

 

 

305

 

 

405

 

 

413

 

 

 



 



 



 

Net cash (used in) continuing operations

 

 

(30,928

)

 

(29,072

)

 

(1,282

)

Net cash provided by discontinued operations

 

 

—  

 

 

322

 

 

8,100

 

 

 



 



 



 

Net cash (used in) provided by financing activities

 

 

(30,928

)

 

(28,750

)

 

6,818

 

 

 



 



 



 

NET (DECREASE) INCREASE IN CASH AND EQUIVALENTS

 

 

(80,006

)

 

42,077

 

 

41,970

 

CASH AND EQUIVALENTS, BEGINNING OF PERIOD

 

 

128,473

 

 

86,396

 

 

44,426

 

 

 



 



 



 

CASH AND EQUIVALENTS, END OF PERIOD

 

$

48,467

 

$

128,473

 

$

86,396

 

 

 



 



 



 

SUPPLEMENTAL CASH FLOW INFORMATION:

 

 

 

 

 

 

 

 

 

 

Cash paid during the period for income taxes, net of refunds

 

$

14,016

 

$

6,398

 

$

7,741

 

Cash paid during the period for interest

 

$

773

 

$

783

 

$

783

 

See Notes to Consolidated Financial Statements.

F-6


WORLD WRESTLING ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share and per share data)

1.  Basis of Presentation and Business Description

The accompanying consolidated financial statements include the accounts of World Wrestling Entertainment, Inc., and our wholly owned subsidiaries.  We are an integrated media and entertainment company, principally engaged in the development, production and marketing of television and pay-per-view event programming and live events and the licensing and sale of branded consumer products featuring our World Wrestling Entertainment brands. Our continuing 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 sales of consumer products through third party licensees and direct marketing and sales of merchandise, magazines and home videos.

All significant intercompany transactions and balances have been eliminated. Certain prior year amounts have been reclassified to conform with the current year presentation.

In 2003, we closed the operations of our entertainment complex, The World. We recorded the results from operations of this business and the estimated shutdown cost as discontinued operations.  In early May 2001, we discontinued operations of the XFL and accordingly, reported XFL operating results and estimated shutdown costs as discontinued operations.

2.  Summary of Significant Accounting Policies

          Use of Estimates —   The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires our management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.

          Fiscal Period —   Our fiscal year ends on April 30 of each year. Unless otherwise noted, all references to years relate to fiscal years, not calendar years, and refer to the fiscal period by using the year in which the fiscal period ends. Our fiscal quarters are thirteen-week periods that end on the thirteenth Friday in the quarter, with the exception of our fourth quarter, which always ends on April 30.

         Cash and Equivalents —   Cash and equivalents include cash on deposit in overnight deposit accounts and investments in money market accounts.

          Short-term Investments —   We classify all of our short-term investments as available-for-sale securities. Such short-term investments consist primarily of United States government and federal agencies securities, corporate commercial paper, corporate bonds, mutual funds and mortgage-backed securities, all of which are stated at market value, with unrealized gains and losses on such securities reflected, net of tax, as other comprehensive income (loss) in stockholders’ equity. Realized gains and losses on short-term investments are included in earnings and are derived using the specific identification method for determining the cost of securities sold. As of April 30, 2004, the fair value of our short-term investments was approximately $1,627 less than cost and as of April 30, 2003, the fair value was $148 greater than cost. We recorded unrealized (losses) income, net of taxes, of $(1,160), $446 and $(163) for 2004, 2003 and 2002, respectively, which was included in accumulated other comprehensive income (loss). It is our intent to maintain a liquid portfolio to take advantage of investment opportunities; therefore, all securities are considered to be available-for-sale and are classified as current assets.

          Accounts Receivable —   Accounts receivable relate principally to amounts due to us from pay-per-view providers and television networks for pay-per-view presentations and television programming, respectively, and balances due from the sale of television advertising, home video and magazines. Our receivables represent a significant portion of our current assets. We are required to estimate the collectibility of our receivables and to

F-7


WORLD WRESTLING ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share and per share data)

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.  Activity in the allowance for doubtful accounts is as follows:

 

 

Balance at
beginning of period

 

Charged to costs
and expenses

 

Write-offs
and other

 

Balance at
end of period

 

 

 



 



 



 



 

2004

 

$

5,284

 

$

(2,295

)

$

(377

)

$

2,612

 

2003

 

$

2,840

 

$

3,697

 

$

(1,253

)

$

5,284

 

2002

 

$

1,868

 

$

900

 

$

72

 

$

2,840

 

Inventory —   Inventory consists of merchandise sold on a direct sales basis, and videotapes and DVDs, which are sold through wholesale distributors and retailers. Substantially all of our inventory is comprised of finished goods. Inventory is stated at the lower of cost (first-in, first-out basis) or market. The valuation of our inventories requires management to make market estimates assessing the quantities and the prices at which we believe the inventory can be sold.

Property and Equipment —   Property and equipment are stated at historical cost less accumulated depreciation and amortization. Depreciation and amortization is computed on a straight-line basis over the estimated useful lives of the assets or, when applicable, the life of the lease, whichever is shorter. Vehicles and equipment are depreciated based on estimated useful lives varying from three to five years. Buildings and related improvements are amortized over the lesser of the remaining useful life of the buildings or the anticipated life of improvements. Our corporate aircraft is depreciated over ten years on a straight-line basis less an estimated residual value of $9,500.

Leased Property Under Capital Leases —   Property under capital leases is amortized over the shorter of the lives of the respective leases or the estimated useful lives of the assets.

Valuation of Long-Lived Assets —   In May 2002, we adopted SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.”  In accordance with SFAS No. 144, we periodically evaluate the carrying value of long-lived assets when events and circumstances warrant such a review.  During fiscal 2004, management performed an analysis on our long-lived assets related to our e-commerce infrastructure.  These assets were primarily composed of capitalized software development costs incurred during the set up of the e-commerce section of our website.  Based upon the performance of our e-commerce business as compared to the costs incurred to operate the site, management determined that the asset was impaired and recorded a pre-tax charge of $2,942 in our fourth fiscal quarter.  During 2003, the economic conditions surrounding our entertainment complex in New York City, The World, and its continued weak operating results indicated potential impairment.  In accordance with the prescribed accounting, an impairment test was performed which ultimately resulted in a non-cash pre-tax impairment charge of $30,392 that was recorded in fiscal 2003 and reflected in discontinued operations.

Income Taxes —   We account for income taxes in accordance with the provisions of SFAS No. 109, “Accounting for Income Taxes.”  Our deferred provision was determined under the asset and liability method.  Under this method, deferred assets and liabilities are recognized based on differences between financial statement and income tax basis of assets and liabilities using presently enacted tax rates.  Valuation allowances are established to reduce deferred tax assets to amounts management believes are more likely than not to be realized.  We consider estimated future taxable income and ongoing tax planning strategies in assessing the need for valuation allowances.

Revenue Recognition —   Revenues are generally recognized when products are shipped or as services are performed. However, due to the nature of several of our business lines, there are additional steps in the revenue recognition process, as described below.

                    •     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 generally occurs within one year and any subsequent adjustments to the buys are recognized on a cash basis.

F-8


WORLD WRESTLING ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share and per share data)

                    •     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.

          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 values.  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.

                    •     Licensing:

Licensing revenues are recognized upon receipt of notice by the individual licensees as to license fees due.  If we receive licensing advances, such payments are deferred and recognized as income on an as earned basis.

                    •     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.

                    •     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 returns rates and the expected performance of our current titles in relation to prior issue return rates.

          Advertising Expense —   Advertising costs are expensed as incurred, except for costs related to the development of a major commercial or media campaign which are expensed in the period in which the commercial or campaign is first presented.

          Foreign Currency Translation —   For translation of the financial statements of our Canadian and United Kingdom subsidiaries, we have determined that the Canadian Dollar and the U.K. Pound, respectively, are the functional currencies. Assets and liabilities are translated at the year-end exchange rate, and income statement accounts are translated at average exchange rates for the year. The resulting translation adjustments are recorded in accumulated other comprehensive income, a component of stockholders’ equity. Foreign currency transactions are recorded at the exchange rate prevailing at the transaction date.

          Stock-Based Compensation —   We account for stock options issued to employees using the intrinsic value method as prescribed under Accounting Principles Board Opinion (“APB”) No 25, “Accounting for Stock Issued to Employees,” and related interpretations. Under this method, no compensation expense is recognized when the number of shares granted is known and the exercise price of the stock option is equal to or greater than the market price of our stock on the grant date.  Stock options issued to non-employees are accounted for at fair value at the issuance date.  We follow the disclosure-only provisions of SFAS No. 148, “Accounting for Stock-Based Compensation —   Transition and Disclosure”, and SFAS No. 123, “Accounting for Stock-Based Compensation.” SFAS Nos. 148 and 123 encourage, but do not require, companies to adopt a fair value based method for determining expense related to stock-based compensation (See Note 11).  Restricted stock unit grants are recorded at fair value as of the grant date, with the resulting compensation cost recorded over the vesting period, if any.

          The fair value of options granted to employees, which is amortized to expense over the option vesting period in determining the pro forma impact, is estimated on the date of the grant using the Black-Scholes option-pricing model with the following assumptions:

F-9


WORLD WRESTLING ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share and per share data)

 

 

2004

 

2003

 

2002

 

 

 



 



 



 

Expected life of option

 

 

3 years

 

 

3 years

 

 

3 years

 

Risk-free interest rate

 

 

1.8

%

 

2.5

%

 

3.4

%

Expected volatility of our common stock

 

 

38

%

 

38

%

 

67

%

Expected dividend yield

 

 

1.7

%

 

—  

 

 

—  

 


 

 

2004

 

2003

 

2002

 

 

 



 



 



 

Weighted average fair value per share of each option granted to employees

 

$

2.44

 

$

3.73

 

$

6.48

 

Total number of options granted to employees

 

 

852,500

 

 

1,219,000

 

 

5,000

 

Total fair value of all options granted to employees

 

$

2,082

 

$

4,548

 

$

32

 

          Had compensation expense for our stock options been recognized based on the fair value on the grant date under the methodology prescribed by SFAS No.123, our income from continuing operations and basic and diluted earnings from continuing operations per common share for 2004, 2003 and 2002 would have been impacted as shown in the following table:

 

 

2004

 

2003

 

2002

 

 

 



 



 



 

Reported income from continuing operations

 

$

49,573

 

$

16,102

 

$

37,713

 

Add: Stock-based employee compensation expense included in reported income from continuing operations, net of related tax effects

 

 

2,278

 

 

—  

 

 

—  

 

Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects

 

 

(4,392

)

 

(3,602

)

 

(5,393

)

 

 

 

 

 

 

 

 

 

 

 

Pro forma income from continuing operations

 

$

47,459

 

$

12,500

 

$

32,320

 

Reported basic and diluted earnings from continuing operations per common share operations per common share

 

$

0.72

 

$

0.22

 

$

0.51

 

Pro forma basic and diluted earnings from continuing

 

$

0.69

 

$

0.18

 

$

0.44

 

          Derivative Instruments – We hold warrants received from certain publicly traded companies with whom we have licensing or distribution agreements.  Warrants received from our licensees and a television programming distributor were initially recorded at their estimated fair value on the date of grant using the Black-Scholes option pricing model.  That corresponding amount is recorded as deferred revenue and is amortized into operating income over the life of the related agreements using straight-line amortization. For the fiscal years ended April 30, 2004, 2003 and 2002, we recorded revenues of $1,052, $1,268 and $1,270 respectively, related to the amortization of deferred revenue resulting from the receipt of such warrants.  Subsequent to receipt, warrants are adjusted to their estimated fair value each quarter, with changes in fair value included in other income.  We do not utilize derivative instruments for speculative purposes or to hedge our exposure to interest rate or foreign currency risks. Upon adoption of SFAS 133 “Accounting for Derivative Instruments and Hedging Activities” we recognized $1,487, net of tax, as a cumulative effect of change in accounting principle in fiscal 2002, as a result of adjusting warrants to their estimated fair value.

          Goodwill & Other Intangible Assets —   During 2003, the economic conditions surrounding The World, and its continued weak operating results indicated potential impairment of the site’s long-lived assets and goodwill. As a

F-10


WORLD WRESTLING ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share and per share data)

result of the indicated impairment, a valuation was performed on the site which ultimately resulted in the recording of a write-down of the long-lived assets and all goodwill related to The World.  The write-down of the goodwill resulted in a non-cash pre-tax impairment charge of $2,533 during the third quarter of fiscal 2003.  Our remaining intangible assets consist of acquired film libraries which are amortized over three years and acquired trademarks and trade names which are amortized over six years.  Our intangible assets are being amortized over their estimated useful lives based on the period the assets are expected to contribute to our cash flows.  We perform impairment tests annually and whenever events or circumstances indicate that intangible assets might be impaired.

          Discontinued Operations – SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities” requires companies to recognize costs associated with exit or disposal activities when they are incurred rather than at the date of a commitment to an exit or disposal plan.  In February 2003, we closed the restaurant operations at The World and in April 2003, we closed the retail operations at the facility.  Costs related to the shutdown of these operations were estimated at the shutdown date and were recorded, net of applicable tax benefits, as discontinued operations in fiscal 2003, in accordance with SFAS No. 146.

          Prior to the adoption of SFAS No. 146, we accounted for our discontinued XFL operations in accordance with Accounting Principles Board Opinion (“APB”) No. 30, “Reporting the Results of Operations—  Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions”.

          Recent Accounting Pronouncements -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 became effective for us in the second quarter of 2004, but, because we have no instruments falling under the provisions of SFAS No. 150, it did not have an impact on our consolidated financial statements.

3.  Earnings Per Share

          For purposes of calculating basic and diluted earnings per share, we used the following weighted average common shares outstanding:

 

 

2004

 

2003

 

2002

 

 

 



 



 



 

Basic

 

 

68,621,145

 

 

70,621,898

 

 

72,861,797

 

Diluted

 

 

69,035,634

 

 

70,623,129

 

 

72,865,624

 

Dilutive effect of outstanding options

 

 

86,218

 

 

1,231

 

 

3,827

 

Dilutive effect of restricted stock units

 

 

328,271

 

 

—  

 

 

—  

 

Anti-dilutive outstanding options, end of period

 

 

2,025,125

 

 

6,869,450

 

 

5,306,750

 

4.  Intangible Assets

          In fiscal 2004 we acquired certain film libraries for approximately $1,710.  In addition, in fiscal 2003, we acquired a film library and certain other assets for $3,000. We have classified these costs as intangible assets and amortized them over three years, which is the period of the expected revenues to be derived from the film libraries. In March 2001, we acquired substantially all of the intellectual property and certain other assets of WCW, another wrestling organization, including trademarks, trade names, their film library and other intangible assets, for $2,500.  The purchase price of these assets was assigned to the trademarks and trade names, and is being amortized over six years, which is the period of the expected revenues to be derived from these assets.

 

 

April 30, 2004

 

 

 


 

 

 

Gross
Carrying
Amount

 

Accumulated
Amortization

 

Net
Carrying
Amount

 

 

 



 



 



 

Film libraries

 

$

4,710

 

$

(1,423

)

$

3,287

 

Trademarks and trade names

 

 

2,500

 

 

(1,295

)

 

1,205

 

 

 



 



 



 

 

 

$

7,210

 

$

(2,718

)

$

4,492

 

 

 



 



 



 

F-11


WORLD WRESTLING ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share and per share data)

 

 

April 30, 2003

 

 

 


 

 

 

 

 

Accumulated
Amortization

 

Net
Carrying
Amount

 

 

 



 



 



 

Film libraries

 

$

3,000

 

$

—  

 

$

3,000

 

Trademarks and trade names

 

 

2,500

 

 

(875

)

 

1,625

 

 

 



 



 



 

 

 

$

5,500

 

$

(875

)

$

4,625

 

 

 



 



 



 

          Amortization expense recorded for the years ended April 30, 2004, 2003 and 2002 was $1,843, $420 and $420, respectively.

          The following table presents estimated future amortization expense:

For the year ending April 30, 2005

 

$

1,986

 

For the year ending April 30, 2006

 

 

1,986

 

For the year ending April 30, 2007

 

 

520

 

 

 



 

Total

 

$

4,492

 

 

 



 

5.  Investments

          Short-term investments consisted of the following:

 

 

April 30, 2004

 

 

 


 

 

 

Amortized
Cost

 

Unrealized
Holding Gain
(Loss)

 

Fair
Value

 

 

 



 



 



 

Fixed income mutual funds and other

 

$

180,259

 

$

(1,627

)

$

178,632

 

United States Treasury Notes

 

$

46,192

 

 

—  

 

 

46,192

 

 

 



 



 



 

Total

 

$

226,451

 

$

(1,627

)

$

224,824

 

 

 



 



 



 

The unrealized holding loss of $1,627 at April 30, 2004 consisted of gross losses of $1,894 and gains of $267.  The securities with unrealized losses consisted primarily of fixed income mutual funds, with a total fair value of approximately $151,515.  The unrealized loss is due to changes in interest rates after the purchase of the investment.  None of these securities have been in an unrealized loss position for more than one year.

 

 

April 30, 2003

 

 

 


 

 

 

Cost

 

Unrealized
Holding Gain

 

Fair
Value

 

 

 



 



 



 

Government obligations

 

$

63,755

 

$

—  

 

$

63,755

 

Fixed income mutual funds

 

 

40,027

 

 

148

 

 

40,175

 

Corporate obligations and other

 

 

38,711

 

 

—  

 

 

38,711

 

 

 



 



 



 

Total

 

$

142,493

 

$

148

 

$

142,641

 

 

 



 



 



 

F-12


WORLD WRESTLING ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share and per share data)

          In fiscal 2003, we recorded to other income, an impairment charge of approximately $613 related to certain stock we held.

          In addition to the short-term investments included above, during fiscal 2001 we received warrants from three publicly traded companies with whom we had licensing agreements. The estimated fair value of the warrants on the date of receipt aggregated approximately $5,237, and was included in other assets. In connection with the adoption of SFAS No. 133 in fiscal 2002, we recorded a cumulative effect adjustment of $1,487, net of taxes, as a result of adjusting these warrants to their fair values.  The warrants received from two of these publicly traded companies were then exercised and the related stock was sold in fiscal 2002, generating a net gain of $6,757.

          During fiscal 2004, we received additional warrants from two of these publicly traded companies.  These warrants were initially recorded in other assets at their fair market value of $1,638 on the date received using the Black-Scholes options pricing model with offsetting deferred revenues.  This deferred revenue is amortized into operating income over the life of the respective underlying licensing agreements using the straight line method.  We have recorded approximately $671 in mark to market adjustments using the Black-Scholes model, taking into account the most current market assumptions.  This amount was included in other income for the year ended April 30, 2004.

          We also received warrants during fiscal 2001 from another publicly traded company with whom we had a television programming distribution agreement.  The estimated fair value of these warrants on the date of receipt was approximately $2,884, and was included in other assets.  These warrants were treated in a different manner due to the volume of stock that we could acquire under the warrants, if exercised, as compared to the total shares of common stock outstanding of this company.  This prevented us from being able to readily convert the warrant to cash and accordingly the warrants were not considered derivatives.  Therefore, any fair value adjustments were recorded through equity as a component of other comprehensive income.  In fiscal 2002, it became clear that the continuing decline in the market value of the common stock of this company would not reverse.  This, coupled with the shortened window to exercise, caused management to make a determination that these warrants were other-than-temporarily impaired and, accordingly, we wrote the balance down to zero, resulting in a charge of $2,884, which was included in other (loss) income.  These warrants expired unexercised in February, 2003.

6.  Property and Equipment

          Property and equipment consisted of the following:

 

 

2004

 

2003

 

 

 



 



 

Land, buildings and improvements

 

$

50,941

 

$

51,051

 

Equipment

 

 

39,398

 

 

40,332

 

Corporate aircraft

 

 

20,710

 

 

—  

 

Vehicles

 

 

639

 

 

639

 

Property under capital lease

 

 

—  

 

 

1,515

 

 

 



 



 

 

 

$

111,688

 

$

93,537

 

Less accumulated depreciation and amortization

 

 

40,319

 

 

34,212

 

 

 



 



 

Total

 

$

71,369

 

$

59,325

 

 

 



 



 

In January 2004, we paid $20,100 to an unrelated, third party lessor to pay off a lease on our corporate aircraft.  The aircraft was acquired under an operating lease in 2000.   The transaction was accounted for as a capital acquisition in fiscal 2004.  The purchase price of the aircraft, net of a $9,500 estimated residual value, will be depreciated on a straight-line basis over a 10 year period.

F-13


WORLD WRESTLING ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share and per share data)

7.  Accrued Expenses and Other Liabilities

          Accrued expenses and other liabilities consisted of the following:

 

 

2004

 

2003

 

 

 



 



 

Accrued pay-per-view event costs

 

$

5,884

 

$

5,580

 

Accrued legal settlement offers

 

 

783

 

 

3,750

 

Accrued income taxes

 

 

16,204

 

 

5,173

 

Accrued talent royalties

 

 

302

 

 

759

 

Accrued payroll related costs

 

 

8,457

 

 

2,359

 

Accrued television costs

 

 

438

 

 

3,364

 

Accrued legal and professional fees

 

 

2,090

 

 

2,430

 

Accrued home video production and distribution

 

 

2,168

 

 

974

 

Accrued publishing print and distribution

 

 

520

 

 

1,140

 

Accrued other

 

 

5,285

 

 

8,974

 

 

 



 



 

Total

 

$

42,131

 

$

34,503

 

 

 



 



 

8.  Debt

          Debt as of April 30, 2004 and 2003 consisted of the following:

 

 

2004

 

2003

 

 

 



 



 

Mortgage loan agreement

 

$

8,655

 

$

9,302

 

Obligation under capital lease

 

 

—  

 

 

601

 

 

 



 



 

 

 

 

8,655

 

 

9,903

 

Less current portion

 

 

700

 

 

777

 

 

 



 



 

Long-term debt

 

$

7,955

 

$

9,126

 

 

 



 



 

          In 1997, we entered into a mortgage loan agreement under which we borrowed $12,000 at an annual interest rate of 7.6%. Principal and interest are to be paid in 180 monthly installments of approximately $112. The loan is collateralized by our executive offices and television studio in Stamford, Connecticut.  Interest expense for this loan was $767, $783 and $784 for 2004, 2003 and 2002, respectively.

          In July 2002, we entered into a capital lease arrangement related to certain computer equipment. In fiscal 2004, when the net carrying amount of the obligation was $495, we paid off the remaining balance from available cash.    

          As of April 30, 2004, the scheduled principal repayments under our debt obligations were as follows:

For the year ended April 30, 2005

 

$

700

 

For the year ended April 30, 2006

 

 

756

 

For the year ended April 30, 2007

 

 

817

 

For the year ended April 30, 2008

 

 

881

 

For the year ended April 30, 2009

 

 

952

 

Thereafter

 

 

4,549

 

 

 



 

Total

 

$

8,655

 

 

 



 

F-14


WORLD WRESTLING ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share and per share data)

9.  Income Taxes

          For fiscal 2004, 2003 and 2002, we were taxed on our income from continuing operations at an effective tax rate of 38.0%, 40.2% and 36.9%, respectively.  Our income tax provision related to our income from continuing operations for fiscal 2004, 2003 and 2002 was $30,421, $10,836 and $22,020, respectively, and included federal, state and foreign taxes.

          The components of our tax provision from continuing operations were as follows:

 

 

2004

 

2003

 

2002

 

 

 



 



 



 

Current:

 

 

 

 

 

 

 

 

 

 

Federal

 

$

19,541

 

$

5,990

 

$

21,456

 

State and local

 

 

3,133

 

 

1,057

 

 

3,129

 

Foreign

 

 

2,642

 

 

2,299

 

 

1,801

 

Deferred:

 

 

 

 

 

 

 

 

 

 

Federal

 

 

4,503

 

 

1,290

 

 

(3,802

)

State and local

 

 

620

 

 

182

 

 

(580

)

Foreign

 

 

(18

)

 

18

 

 

16

 

 

 



 



 



 

Total

 

$

30,421

 

$

10,836

 

$

22,020

 

 

 



 



 



 

          The income tax provision allocated to continuing operations, discontinued operations and cumulative effect of change in accounting principle were as follows:

 

 

2004

 

2003

 

2002

 

 

 



 



 



 

Provision for income taxes - continuing operations

 

$

30,421

 

$

10,836

 

$

22,020

 

Benefit for income taxes - discontinued operations

 

 

(722

)

 

(19,616

)

 

(5,923

)

Provision for income taxes - cumulative effect of change in accounting principle

 

 

—  

 

 

—  

 

 

911

 

 

 



 



 



 

Total allocated provision (benefit) for income taxes

 

$

29,699

 

$

(8,780

)

$

17,008

 

 

 



 



 



 

          The following sets forth the difference between the provision for income taxes from continuing operations computed at the U.S. federal statutory income tax rate of 35% and that reported for financial statement purposes:

F-15


WORLD WRESTLING ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share and per share data)

 

 

2004

 

2003

 

2002

 

 

 



 



 



 

Statutory U.S. federal tax at 35%

 

$

27,998

 

$

9,428

 

$

20,907

 

State and local taxes, net of federal benefit

 

 

2,439

 

 

(545

)

 

1,792

 

Foreign rate differential

 

 

261

 

 

112

 

 

136

 

Valuation allowance

 

 

(162

)

 

2,025

 

 

—  

 

Other

 

 

(115

)

 

(184

)

 

(815

)

 

 



 



 



 

Provision for income taxes

 

$

30,421

 

$

10,836

 

$

22,020

 

 

 



 



 



 

          The state tax benefit for 2003 is comprised of state and local taxes, net of federal benefits, reduced by the reversal of a tax reserve established in prior year.  The tax reserve is no longer necessary due to the conclusion of various state examinations.

          The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities of continuing operations consisted of the following:

 

 

2004

 

2003

 

 

 



 



 

Deferred tax assets:

 

 

 

 

 

 

 

Accounts receivable

 

$

1,100

 

$

2,759

 

Inventories

 

 

498

 

 

464

 

Prepaid royalties

 

 

3,935

 

 

3,479

 

Stock options/stock compensation

 

 

4,442

 

 

4,286

 

Investments

 

 

4,450

 

 

3,736

 

Intangible assets

 

 

3,112

 

 

3,609

 

Accrued liabilities and reserves

 

 

1,471

 

 

4,516

 

Foreign

 

 

65

 

 

47

 

 

 



 



 

Deferred tax assets, gross

 

 

19,073

 

 

22,896

 

Valuation allowance

 

 

(2,275

)

 

(2,437

)

 

 



 



 

Deferred tax assets, net

 

 

16,798

 

 

20,459

 

 

 

 

 

 

 

 

 

Deferred tax liabilities:

 

 

 

 

 

 

 

Fixed assets and depreciation

 

 

5,891

 

 

4,465

 

 

 



 



 

Deferred tax liabilities, net

 

 

5,891

 

 

4,465

 

 

 



 



 

Total deferred tax assets, net

 

$

10,907

 

$

15,994

 

 

 



 



 

          The temporary differences described above represent differences between the tax basis of assets or liabilities and amounts reported in the consolidated financial statements that will result in taxable or deductible amounts in future years when the reported amounts of the assets or liabilities are recovered or settled. As of April 30, 2004 and 2003, $7,003 and $11,194, respectively, of the net deferred tax assets are included in prepaid expenses and other current assets and the remaining $3,904 and $4,800, respectively, are included in other non-current assets in our consolidated balance sheets.

          As of April 30, 2004, and April 30, 2003 we had valuation allowances of $2,275 and $2,437, respectively to reduce our deferred tax assets to an amount more likely than not to be recovered. The valuation allowance is primarily related to the deferred tax asset arising from losses on investments which are capital in nature for which realization is uncertain. A majority of these capital loss carry forwards expire in 2008.

          We have approximately $30,362 in state and local net operating losses which begin to expire in 2023.  These net operating losses were incurred in discontinued operations and, as such, the deferred tax asset related to this net operating loss carryforward is included in the assets of discontinued operations on the consolidated balance sheets.  A full valuation allowance in the amount of $2,638 is recorded against these net operating loss carryforwards to reduce the asset to zero as management does not believe the tax benefit is more likely than not to be realized.

F-16


WORLD WRESTLING ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share and per share data)

          U.S. income taxes have not been provided on unremitted earnings of our foreign subsidiary, because our intent is to keep such earnings indefinitely reinvested in the foreign subsidiary’s operations.

10.  Commitments and Contingencies

          We have certain commitments, including various non-cancelable operating leases, performance contracts with various performers, employment agreements with certain executive officers, advertising commitments and an agreement with Viacom which guarantee a minimum payment for advertising during the term.

          Future minimum payments as of April 30, 2004 under the agreements described above were as follows:

 

 

Operating
Lease
Commitments

 

Other
Commitments

 

Total

 

 

 



 



 



 

For the year ending April 30, 2005

 

$

1,283

 

$

23,678

 

$

24,961

 

For the year ending April 30, 2006

 

 

1,168

 

 

10,947

 

 

12,115

 

For the year ending April 30, 2007

 

 

723

 

 

4,725

 

 

5,448

 

For the year ending April 30, 2008

 

 

632

 

 

882

 

 

1,514

 

For the year ending April 30, 2009

 

 

128

 

 

952

 

 

1,080

 

Thereafter

 

 

—  

 

 

4,549

 

 

4,549

 

 

 



 



 



 

Total

 

$

3,934

 

$

45,733

 

$

49,667

 

 

 



 



 



 

          Rent expense under operating leases from continuing operations was approximately $1,906, $2,402 and $2,228 for 2004, 2003 and 2002, respectively.

          In addition, we have an operating lease for space in New York City that is currently unoccupied which was related to our former entertainment complex, The World. We are currently seeking a sub-tenant. The total payments remaining on the lease are approximately $43,795 as of April 30, 2004, which were accrued as a liability at the shutdown date.  However, in accordance with SFAS No. 146, we have reduced this accrual by our current estimate for sub-tenant rental income of approximately 75% of the remaining payments on the lease (see Note 16).

Legal Proceedings

World Wide Fund for Nature

          In April 2000, the World Wide Fund for Nature and its American affiliate, the World Wildlife Fund (collectively, the “Fund”) instituted legal proceedings against us in the English High Court seeking injunctive relief and unspecified damages for alleged breaches of a 1994 agreement between the Fund and us regarding the use of the initials “wwf”. In August 2001, the trial judge granted the Fund’s motion for summary judgment, holding that we breached the agreement by using the initials “wwf” in connection with certain of our website addresses and our former scratch logo. The English Court of Appeals subsequently upheld that ruling. Since November 10, 2002, we have been subject to an injunction barring us, either on our own or through our officers, servants, agents, subsidiaries, licensees or sublicensees, our television or other affiliates or otherwise, from most uses of the initials “wwf,” including in connection with the “wwf” website addresses and the use of our former scratch logo.

          We have complied with the injunction and have taken a number of significant steps that go beyond the literal requirements of the injunction, including, among other things, changing our corporate name to World Wrestling Entertainment, Inc. and initials to “WWE.”  However, the elimination of certain historical uses of our former scratch logo, including, specifically, WWE’s archival video footage containing the scratch logo during the period 1998-May 2002 and the scratch logo embedded in programming code of WWE-licensed video games created during the period 1999-2001 is, as a practical matter, not possible. On an application for relief by our videogame licensee, THQ/Jakks Pacific LLC (“THQ/Jakks”), the English Court of Appeals ruled, overturning the lower court’s decision, that THQ/Jakks’ marketing and sale of games with embedded references to the initials “wwf” would not violate the injunction and would not constitute contempt of court by either THQ/Jakks or us.

          As part of its original complaint, the Fund included a damages claim associated with our use of the initials

F-17


WORLD WRESTLING ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share and per share data)

“wwf.”  Although the Fund has never initiated any proceedings or presented any evidence before the court in this regard, the Fund has claimed in correspondence that at least $360 million would be required to fund a multi-year media advertising campaign to remedy the Fund’s alleged loss of recognition/exclusivity as a result of our use of the initials “wwf.” In that correspondence, the Fund, through its Legal Advisor, demanded a payment of $90 million prior to the injunction compliance date to settle its alleged damages claims and resolve all remaining issues. We vigorously rejected the Fund’s demand and contend that the Fund’s tactics were a bad faith attempt to coerce us into an unwarranted cash payment.  We strongly dispute that the Fund has suffered any such damages and indeed despite repeated requests, the Fund has never provided us with any documentation or evidence in support of its alleged damages claim. No hearings have been scheduled on the Fund’s damages claim.  We cannot quantify the potential impact that an unfavorable outcome of the Fund’s damages claim, if such a claim ever were to be presented, could have on our financial condition, results of operations or liquidity; however based solely on the Fund’s unsubstantiated out-of-court assertions, it could be material.

Shenker & Associates

          On November 14, 2000, Stanley Shenker & Associates, Inc. (“SSAI”) filed a complaint against us in Superior Court, Judicial District of Stamford/Norwalk, Connecticut, relating to the termination of an agency agreement between us and plaintiff.  Plaintiff sought compensatory damages and punitive damages in an unspecified amount, attorneys’ fees, an accounting and a declaratory judgment.

          In May 2003, we filed a motion for sanctions asserting significant litigation misconduct by the plaintiff, including giving perjured testimony and fabricating evidence, and seeking, among other things, dismissal of all claims against us and a default judgment on our counterclaims for tortious interference with business relations, conversion, fraud and conspiracy in connection with the Plaintiff’s solicitation and receipt of improper payments from various of our licensees. In October 2003, the court issued a comprehensive opinion and order, dismissing plaintiff’s case against us with prejudice and entering a default judgment in our favor on all of our counterclaims.  In November 2003, the plaintiff filed a motion to reconsider the court’s order, which was denied.  SSAI filed a renewed motion for reconsideration which was also denied.  As a result of, among other things, these developments, in the fourth quarter of fiscal 2004 we reversed an expense accrued for commissions in the amount of approximately $7.9 million.  A damages hearing on our counterclaims has been scheduled for September 2004.  Pursuant to the court’s request, we have filed a report on the discovery we need to prove the damages associated with our counterclaims.

          On February 14, 2003, we filed a complaint against one of our former officers, and certain entities related to him, with respect to irregularities in the licensing program during his tenure with us, which came to light as a result of discovery in the Shenker litigation.  That lawsuit has been consolidated with the Shenker litigation. In March 2004, we filed a motion for summary judgment on all of our claims, which is pending before the court.  We also have filed a motion for sanctions based on the former officer’s discovery misconduct, seeking a default judgment on our claims.

          In December 2003, the parties entered into a stipulation regarding our application for prejudgment remedies, permitting us to attach assets up to $5.0 million against SSAI and up to $850,000 against the former officer and certain related entities (this latter amount was subsequently raised to $4.0 million).  In January 2004, we began attaching assets.  Based on the violation of the consent order regarding prejudgment remedies, we moved for contempt against the former officer and his associate.

          We believe that the decision against SSAI was correct and that this litigation will have no material adverse effect on our financial condition or results of operations. However, the decision is subject to appeal and as a result, no assurances can be given in this regard.

Marvel Enterprises

          In October 2001, we were served with a complaint by Marvel Enterprises, Inc. in the Superior Court of Fulton County, Georgia alleging that we breached the terms of a license agreement regarding the rights to manufacture and distribute toy action figures of various wrestling characters, assumed in the acquisition of certain assets of World Championship Wrestling, Inc. (“WCW”) by one of our subsidiary corporations. The plaintiff seeks damages and a declaration that the agreement is in force and effect. Universal Wrestling Corp. (“Universal”), the successor-in-interest to WCW, was sued in a separate lawsuit, which has been consolidated with the lawsuit against us for discovery and trial. We are defending Universal in connection with these claims. In May 2003, we filed a

F-18


WORLD WRESTLING ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share and per share data)

motion for s