<PAGE>
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended January 28, 2000
or
( ) 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 FEDERATION ENTERTAINMENT, INC.
(Exact name of registrant as specified in its charter)
Delaware 04-2693383
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) 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)
Indicate by the 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_____
-----
At March 7, 2000, there were 68,167,000 outstanding shares of the registrant's
common stock, of which 11,500,000 shares were Class A common stock and
56,667,000 shares were Class B common stock.
<PAGE>
World Wrestling Federation Entertainment, Inc.
Table of Contents
<TABLE>
<CAPTION>
Page #
<S> <C>
Part I -- Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets as of January 28, 2000 (Unaudited)
and April 30, 1999 2
Consolidated Statements of Income (Unaudited) for the three months
and nine months ended January 28, 2000 and January 29, 1999 3
Consolidated Statement of Changes in Stockholders' Equity
(Unaudited) for the nine months ended January 28, 2000 4
Consolidated Statements of Cash Flows (Unaudited) for the nine months
ended January 28, 2000 and January 29, 1999 5
Notes to Consolidated Financial Statements (Unaudited) 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 13
Item 3. Quantitative and Qualitative Disclosures about Market Risk 21
Part II -- Other Information
Item 1. Legal Proceedings 21
Item 6. Exhibits and Reports on Form 8-K 23
Signature 24
</TABLE>
1
<PAGE>
World Wrestling Federation Entertainment, Inc.
Consolidated Balance Sheets
(dollars in thousands)
<TABLE>
<CAPTION>
As of As of
January 28, April 30,
2000 1999
-------------- ------------
ASSETS (Unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents ................................................................ $ 242,586 $ 45,727
Accounts receivable (less allowance for doubtful accounts of
$1,023 at January 28, 2000 (Unaudited) and $920 at April 30, 1999) .................. 46,868 37,509
Inventory, net............................................................................ 2,147 2,939
Prepaid expenses and other current assets ................................................ 5,534 2,340
Deferred income taxes (Note 3)............................................................ 2,150 547
Assets held for sale...................................................................... 9,600 10,183
---------- ----------
Total current assets................................................................. 308,885 99,245
PROPERTY AND EQUIPMENT, NET.................................................................... 36,089 28,377
OTHER ASSETS................................................................................... 4,090 2,674
---------- ----------
TOTAL ASSETS .................................................................................. $ 349,064 $ 130,296
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt ........................................................ $ 1,187 $ 1,388
Accounts payable.......................................................................... 11,758 12,946
Accrued expenses and other current liabilities ........................................... 32,955 18,816
Accrued income taxes (Note 3)............................................................. 5,030 2,291
Deferred income........................................................................... 11,766 11,084
Due to stockholder (Note 3)............................................................... 4,000 --
Note payable to stockholder (Note 3) ..................................................... 26,348 --
---------- ----------
Total current liabilities............................................................ 93,044 46,525
LONG-TERM DEBT................................................................................. 10,748 11,403
DEFERRED INCOME TAXES (Note 3)................................................................. -- 108
COMMITMENTS AND CONTINGENCIES (Note 8)
STOCKHOLDERS' EQUITY:
Common stock.............................................................................. 682 567
Additional paid in capital (Note 2)....................................................... 210,394 1
Accumulated other comprehensive loss...................................................... (60) (87)
Retained earnings......................................................................... 34,256 71,779
---------- ----------
Total stockholders' equity........................................................... 245,272 72,260
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY .................................................... $ 349,064 $ 130,296
========== ==========
</TABLE>
See Notes to Consolidated Financial Statements
2
<PAGE>
World Wrestling Federation Entertainment, Inc.
Consolidated Statements of Income
(dollars in thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
January 28, January 29, January 28, January 29,
2000 1999 2000 1999
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Net revenues...................................... $ 98,374 $ 65,199 $ 262,864 $ 157,653
Cost of revenues.................................. 56,663 37,329 149,836 93,287
Performer stock options........................... - - 6,020 -
Selling, general and administrative expenses...... 17,652 10,186 46,301 27,821
Depreciation and amortization..................... 665 477 1,803 1,381
------------- ------------- ------------- -------------
Operating Income.................................. 23,394 17,207 58,904 35,164
Interest expense.................................. 688 306 1,759 842
Interest income and other income, net............. 3,151 725 4,854 1,205
------------- ------------- ------------- -------------
Income before income taxes........................ 25,857 17,626 61,999 35,527
Provision for income taxes........................ 5,688 595 13,704 1,201
------------- ------------- ------------- -------------
Net income........................................ $ 20,169 $ 17,031 $ 48,295 $ 34,326
============= ============= ============= =============
Earnings per share - basic (Note 5)............... $ 0.30 $ 0.30 $ 0.79 $ 0.61
============= ============= ============= =============
Earnings per share - diluted (Note 5)............. $ 0.29 $ 0.30 $ 0.79 $ 0.61
============= ============= ============= =============
UNAUDITED PRO FORMA INFORMATION (Note 4)
Historical income before income taxes.......... $ 25,857 $ 17,626 $ 61,999 $ 35,527
Pro forma adjustment other than income taxes... - 629 427 1,886
------------- ------------- ------------- -------------
Pro forma income before income taxes........... 25,857 16,997 61,572 33,641
Pro forma provision for income taxes........... 10,136 6,799 26,496 13,456
------------- ------------- ------------- -------------
Pro forma net income........................... $ 15,721 $ 10,198 $ 35,076 $ 20,185
============= ============= ============= =============
Pro forma earnings per share - basic.............. $ 0.23 $ 0.18 $ 0.58 $ 0.36
============= ============= ============= =============
Pro forma earnings per share - diluted............ $ 0.23 $ 0.18 $ 0.57 $ 0.36
============= ============= ============= =============
</TABLE>
See Notes to Consolidated Financial Statements
3
<PAGE>
World Wrestling Federation Entertainment, Inc.
Consolidated Statement of Changes in Stockholders' Equity
(dollars in thousands)
<TABLE>
<CAPTION>
Accumulated
Additional Other
Common Paid-in Comprehensive Retained
Stock Capital Income(Loss) Earnings Total
---------- ------------ --------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Balance, April 30, 1999.................................... $ 567 $ 1 $ (87) $ 71,779 $ 72,260
Comprehensive income:
Translation adjustment (Unaudited)....................... - - 27 - 27
Net income (Unaudited)................................... - - - 48,295 48,295
------------
Total Comprehensive income (Unaudited)..................... 48,322
------------
Performer stock options (Unaudited)........................ - 6,020 - - 6,020
Income tax benefit on performer stock options (Unaudited).. - 2,360 - - 2,360
Net proceeds from initial public offering (Unaudited)...... 115 179,259 - - 179,374
S Corporation distributions (Unaudited).................... - - - (63,064) (63,064)
S Corporation earnings retained (Unaudited)................ - 22,754 - (22,754) -
---------- ------------ --------------- ------------ ------------
Balance, January 28, 2000 (Unaudited)...................... $ 682 $ 210,394 $ (60) $ 34,256 $ 245,272
========== ============ =============== ============ ============
</TABLE>
See Notes to Consolidated Financial Statements
4
<PAGE>
World Wrestling Federation Entertainment, Inc.
Consolidated Statements of Cash Flows
(dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
January 28, January 29,
2000 1999
------------- -------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income.................................................... $ 48,295 $ 34,326
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization............................ 1,803 1,381
Provision for doubtful accounts.......................... 103 -
Performer stock options.................................. 6,020 -
Deferred income taxes.................................... (631) -
Changes in assets and liabilities:
Accounts receivable................................. (9,462) (8,438)
Inventory........................................... 792 (1,603)
Prepaid expenses and other assets................... (3,323) (3,553)
Accounts payable.................................... (1,188) (6,638)
Accrued expenses and other current liabilities...... 14,166 10,041
Accrued income taxes................................ 2,739 500
Deferred income..................................... 675 4,922
------------- -------------
Net cash provided by operating activities...... 59,989 30,938
------------- -------------
INVESTING ACTIVITIES:
Capital expenditures.......................................... (8,932) (2,854)
Purchase of Las Vegas property................................ - (10,743)
------------- -------------
Net cash used in investing activities.......... (8,932) (13,597)
------------- -------------
FINANCING ACTIVITIES:
Borrowings of long term debt.................................. - 1,564
Repayments of long term debt.................................. (856) (820)
S Corporation distributions................................... (27,064) (2,753)
Net proceeds from initial public offering..................... 181,815 -
Stock issuance costs.......................................... (2,441) -
Amounts paid to stockholder (Note 3).......................... (5,652) -
Other financing activities.................................... - 4,279
------------- -------------
Net cash provided by financing activities...... 145,802 2,270
------------- -------------
NET INCREASE IN CASH AND CASH EQUIVALENTS..................... 196,859 19,611
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD................ 45,727 8,797
------------- -------------
CASH AND CASH EQUIVALENTS, END OF PERIOD...................... $ 242,586 $ 28,408
============= =============
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the period for income taxes............. $ 5,416 $ 714
Cash paid during the period for interest................. 773 743
SUPPLEMENTAL NONCASH INFORMATION:
Issuance of note payable to stockholder.................. $ 32,000 $ -
Due to stockholder....................................... 4,000 -
</TABLE>
See Notes to Consolidated Financial Statements
5
<PAGE>
World Wrestling Federation Entertainment, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(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 Federation Entertainment, Inc., formerly known as Titan Sports Inc.,
its wholly-owned subsidiaries, TSI Realty Company, WWF Hotel & Casino Ventures
LLC, World Wrestling Federation Entertainment Canada, Inc., formerly known as
Titan Promotions (Canada), Inc., and Stephanie Music Publishing, Inc. and its
majority-owned subsidiary Titan/Shane Partnership, (collectively the "Company").
All significant inter-company transactions and balances have been eliminated. In
the opinion of management, all adjustments (consisting of normal recurring
adjustments) considered necessary for a fair presentation have been included.
Certain prior year amounts have been reclassified to conform with current year
presentation. The results of operations of any interim period are not
necessarily indicative of the results of operations for the full year.
The Company is an integrated media and entertainment company, principally
engaged in the development, production and marketing of television programming,
pay-per-view programming, live events, and the licensing and sale of branded
consumer products featuring its World Wrestling Federation brand of
entertainment. The Company's operations are organized around two principal
activities:
. Live and televised entertainment, which consists of live events,
television programming and pay-per-view programming. Revenues consist
principally of attendance at live events, sale of television
advertising time, 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.
2. Initial Public Offering and Other Events
On October 19, 1999 the Company offered 10,000,000 shares of Class A common
stock to the public at an initial offering price of $17.00 per share. On October
20, 1999 the underwriters exercised their over-allotment option of 1,500,000
shares. The net proceeds to the Company after deducting underwriter commissions
and other offering fees and expenses were $179,374. The holders of Class A
common stock have rights identical to holders of Class B common stock, except
that holders of Class A common stock are entitled to one vote per share and
holders of Class B common stock are entitled to ten votes per share.
On October 15, 1999, the Company effected a 566,670 for one stock split. As a
result there are 56,667,000 shares of Class B common stock outstanding. The
Class B common stock is fully convertible into Class A common stock, on a
one-for-one basis, at any time at the option of the holder or automatically upon
the transfer of the Class B common stock to any person or entity not affiliated
with Vincent McMahon, Linda McMahon or their family. The holders of the Class B
common stock hold 98.0% of the voting power of the Company's outstanding common
stock.
In connection with the initial public offering, two affiliated companies were
contributed to the Company, World Wrestling Federation Entertainment Canada,
Inc. and Stephanie Music Publishing, Inc.
Additionally, on October 19, 1999 the Company granted options to acquire
5,400,500 shares of Class A common stock at an exercise price of $17.00 per
share under the Company's long-term incentive plan.
6
<PAGE>
World Wrestling Federation Entertainment, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share and per share data)
(Unaudited)
Of those options, 623,700 will become exercisable on April 19, 2000; 1,399,288
will become exercisable on October 19, 2000 and the remaining portion will
become exercisable in periods thereafter. The Company has 4,599,550 additional
shares of Class A common stock reserved for future issuances under the Company's
long-term incentive plan.
Included in the option grants discussed above, 987,000 options were granted to
independent contractors, consisting primarily of the Company's performers. The
Company accounted for such grants in accordance with the provisions set forth in
the Statement of Financial Accounting Standard No. 123, "Accounting for
Stock-Based Compensation" and Emerging Issues Task Force Issue No. 96-18,
"Accounting for Equity Instruments That Are Issued to Other Than Employees for
Acquiring, or in Conjunction with Selling, Goods or Services." Based upon the
terms of such option grants, the Company recorded a second quarter fiscal 2000
non-cash charge of $6,020.
3. Income Taxes
As a result of the initial public offering of the Company's common stock on
October 19, 1999, the Company's status as a Subchapter S Corporation for income
tax purposes was terminated. For the fiscal year ending April 30, 2000, the
Company will be taxed on income allocated to the Subchapter C Corporation based
upon the number of days during the fiscal year that it was a Subchapter C
Corporation. Consequently, the Company recorded an income tax provision of
$13,704 for the nine months ended January 28, 2000, which represented an
effective rate of 22.1%
On June 29, 1999 the Company made a Subchapter S Corporation distribution to the
Company's then sole stockholder, in the form of an unsecured, 5% interest-
bearing note in the amount of $32,000. This note represents estimated federal
and state income taxes payable by the Company's then sole stockholder
attributable to taxable S Corporation earnings generated during the fiscal year
ended April 30, 1999 and for the allocated portion of the Company's taxable S
Corporation earnings for fiscal year 2000 based on its estimate of those
earnings as of the date of the issuance of this note. To the extent the
allocated portion of the Company's fiscal year 2000 taxable earnings exceeds
those earnings used in the calculation of estimated income taxes payable by its
then sole stockholder, the Company has agreed to make an additional distribution
to the stockholders of record as of October 18, 1999, payable no later than
August 15, 2000. This distribution will represent any additional taxes payable
by its then sole stockholder in excess of the original $32,000 estimate due to
increased taxable earnings. As of January 28, 2000 the Company estimates such
distribution to be $4,000 and has included this amount as a due to stockholder
in the consolidated balance sheet. This amount may vary depending upon the
Company's actual taxable income for the fiscal year ending April 30, 2000.
Through January 28, 2000 the Company paid $5,652 against the note payable to
stockholder which represented the prescribed estimated income tax payments
required by the Internal Revenue Service.
7
<PAGE>
World Wrestling Federation Entertainment, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share and per share data)
(Unaudited)
4. Unaudited Pro Forma Information
The unaudited pro forma consolidated income statement information presents the
pro forma effects on the historical consolidated income statement for the three
months ended January 29, 1999 of $629 and the nine months ended January 28, 2000
and January 29, 1999 of $427, and $1,886, respectively for additional
compensation to the Chairman of the Board of Directors and to the Chief
Executive Officer pursuant to employment agreements that became effective prior
to the closing of the offering. Additionally, it presents income taxes of
$10,136 and $6,799 for the three months ended January 28, 2000 and January 29,
1999, respectively and $26,496 and $13,456 for the nine months ended January 28,
2000 and January 29, 1999, respectively to give pro forma effect due to the
change in the Company's tax status from a Subchapter S Corporation to a
Subchapter C Corporation, representing a tax rate of 39.2% (before giving effect
to the impact of the performer stock option charge which is not currently
deductible) for the fiscal 2000 periods and 40% for the fiscal 1999 periods.
5. Earnings Per Share
For the three months ended January 28, 2000, for the purpose of calculating
earnings per share - basic, the weighted average number of common shares
outstanding was 68,167,000 and for the purpose of calculating earnings per share
- - diluted, the weighted average number of common shares outstanding, including
dilutive securities, was 68,398,870 which includes 231,870 shares representing
the dilutive effect of outstanding stock options.
For the nine months ended January 28, 2000, for the purpose of calculating
earnings per share - basic, the weighted average number of common shares
outstanding was 60,958,209 and for the purpose of calculating earnings per share
- - diluted, the weighted average number of common shares outstanding, including
dilutive securities, was 61,009,613 which includes 51,404 shares representing
the dilutive effect of outstanding stock options.
For the purpose of calculating earnings per share - basic and earnings per share
- - diluted, for the three months and nine months ended January 29, 1999, the
weighted average number of common shares outstanding was 56,667,000.
6. Property and Equipment
Property and equipment consists of the following as of:
<TABLE>
<CAPTION>
January 28 April 30
2000 1999
------- -------
(Unaudited)
<S> <C> <C>
Land, buildings and improvements.................... $36,989 $31,010
Equipment........................................... 23,621 20,170
Vehicles............................................ 629 544
------- -------
61,239 51,724
Less accumulated depreciation and amortization...... 25,150 23,347
------- -------
Total........................................ $36,089 $28,377
======= =======
</TABLE>
8
<PAGE>
World Wrestling Federation Entertainment, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share and per share data)
(Unaudited)
Depreciation and amortization expense was $665 and $477 for the three months
ended January 28, 2000 and January 29, 1999, respectively and $1,803 and $1,381
for the nine months ended January 28, 2000 and January 29, 1999, respectively.
7. Segment Information
The Company's operations are conducted within two reportable segments, live and
televised entertainment and branded merchandise. The live and televised
entertainment segment consists of live events, television programming and pay
per view programming. The branded merchandise segment includes consumer products
sold through third party licensees and the marketing and sale of merchandise,
magazines and home videos. The Company does not allocate corporate overhead to
each of the segments and as a result, corporate overhead is a reconciling item
in the table below. Included in corporate overhead for the nine months ended
January 28, 2000 is a non-cash charge of $6,020 for stock options granted to
certain of the Company's performers, all of whom are independent contractors.
There are no intersegment revenues. Results of operations and assets from
non-U.S. sources are approximately 5% of the respective consolidated financial
statement amounts. The table presents information about the financial results of
each segment for the three months ended January 28, 2000 and January 29, 1999
and the nine months ended January 28, 2000 and January 29, 1999.
<TABLE>
<CAPTION>
Three Months Nine Months
Ended Ended
January 28 January 29 January 28 January 29
---------- ---------- ---------- ----------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues:
Live and televised entertainment....... $ 65,919 $ 46,265 $178,148 $109,468
Branded merchandise.................... 32,455 18,934 84,716 48,185
-------- -------- -------- --------
Total revenues......................... $ 98,374 $ 65,199 $262,864 $157,653
======== ======== ======== ========
Depreciation and Amortization:
Live and televised entertainment....... $ 201 $ 237 $ 926 $ 661
Branded merchandise.................... -- -- -- --
Corporate.............................. 464 240 877 720
-------- -------- -------- --------
Total depreciation and amortization.... $ 665 $ 477 $ 1,803 $ 1,381
======== ======== ======== ========
Operating Income:
Live and televised entertainment....... $ 23,657 $ 17,520 $ 63,988 $ 38,885
Branded merchandise.................... 12,484 6,126 33,026 15,101
Corporate (including a $6,020 second
quarter non-cash charge)......... (12,747) (6,439) (38,110) (18,822)
-------- -------- -------- --------
Total operating income................. $ 23,394 $ 17,207 $ 58,904 $ 35,164
======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
As of
January 28 April 30
---------- --------
Assets: 2000 1999
---- ----
<S> <C> <C>
Live and televised entertainment.... $ 54,636 $ 39,096
Branded merchandise................. 23,559 24,118
Unallocated......................... 270,869 67,082
-------- --------
Total assets........................ $349,064 $130,296
======== ========
</TABLE>
9
<PAGE>
World Wrestling Federation Entertainment, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share and per share data)
(Unaudited)
8. Commitments and Contingencies
On May 13, 1991, William R. Eadie, a former professional wrestler who had been
one of the Company's performers, filed a lawsuit in state court in Wisconsin
against the Company and Mr. McMahon. The case was removed to the United States
District Court for the District of Connecticut on August 7, 1991. The suit
alleges that the Company breached an oral agreement to compensate Eadie for the
use of his ideas in connection with a wrestling tag team called "Demolition" and
to employ him for life. Plaintiff is seeking $6,500 in compensatory damages and
unspecified punitive damages. The Company has denied any liability and is
vigorously defending this action. In a similar action filed against the Company
on April 10, 1992 in the United States District Court for the District of
Connecticut, Randy Colley, a former professional wrestler who had been one of
the Company's performers, also alleges that the Company breached an oral
agreement to compensate him for disclosing his idea for a wrestling tag team
called "Demolition." He is seeking unspecified compensatory and punitive
damages. The Company has denied any liability and is vigorously defending this
action. Colley's claims were consolidated for trial with those of Eadie in the
action described above. The Company believes that both plaintiffs' claims are
without merit. On May 20, 1998, a magistrate judge ruled that the plaintiffs'
expert on damages could not testify at trial. Thereafter, the plaintiffs engaged
a second expert on damages, whose report was filed on August 31, 1999. Given the
substance of the second expert's opinion, as well as continuing developments in
the law regarding the relevance and reliability of expert opinions, it is not
possible to predict whether this second expert's opinion will be admitted into
evidence at trial. Expert discovery has not been completed, and no trial date
has been scheduled. The Company believes that an unfavorable outcome in these
actions may have a material adverse effect on the Company's financial condition,
results of operations or prospects.
On August 28, 1996, James Hellwig, a former professional wrestler who had
been one of the Company's performers, filed a suit against the Company in state
court in Arizona alleging breach of two separate service contracts, defamation
and unauthorized use of servicemarks and trademarks allegedly owned by him. The
Company has denied all liability and has vigorously defended this action. The
Company believes that Hellwig's claims are without merit. The Company asserted
counterclaims against him for breach of his service contracts and sought
rescission of an agreement by which the Company transferred ownership of the
servicemarks to him. In addition, the Company filed a separate action in federal
district court in Connecticut on March 11, 1998, seeking a declaration that the
Company owns the characters, Warrior and Ultimate Warrior, under both contract
and copyright law. During a settlement conference with the Arizona State Court
on March 3, 2000 the parties reached an agreement in principal to settle all
outstanding claims in both the Arizona and Connecticut lawsuits. The parties are
in the process of memorializing the settlement agreement. The terms of the
settlement agreement are confidential. However, the amount of the settlement
will not have a material adverse effect on the Company's financial condition or
results of operations or prospects.
On June 21, 1996, the Company filed an action against World Championship
Wrestling ("WCW") and Turner Broadcasting Systems, Inc. ("TBS") in the United
States District Court for the District of Connecticut, alleging unfair
competition and infringement of the Company's copyrights, servicemarks and
trademarks with respect to two characters owned by the Company. The Company
claims that WCW, which contracted with two professional wrestlers who previously
had performed under contract for the Company in the character roles of Razor
Ramon and Diesel, misappropriated those characters in WCW's programming and
misrepresented the reason that these former World Wrestling Federation
professional wrestlers were appearing on WCW programming. During discovery
proceedings, which were completed on October 16, 1998, WCW was twice sanctioned
by the court for failure to comply with the court's discovery
10
<PAGE>
World Wrestling Federation Entertainment, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share and per share data)
(Unaudited)
orders. The Company is seeking damages in the form of revenue disgorgement from
WCW and has submitted expert reports supporting our claim for substantial money
damages. WCW and TBS have denied any liability.
On May 18, 1998, WCW filed an action against the Company in the United
States District Court for the District of Connecticut and immediately moved to
consolidate this action with the Company's pending action against WCW and TBS
described above. WCW alleges that the Company has diluted various marks owned by
and/or licensed to WCW by disparaging those marks and also claims that the
Company engaged in unfair competition when the Company aired a "Flashback"
series of past World Wrestling Federation performances on USA Network without
disclosing that some of the performers, at the time the series was subsequently
broadcast, were then affiliated with WCW. The Company has denied any liability
and is vigorously defending against this action. The Company has filed a
counterclaim for abuse of process, which WCW moved to dismiss. In January 2000
the Court granted WCW's motion. Discovery is ongoing, and the Company intends to
move for summary judgment when discovery is concluded. The Company believes that
WCW's claims are without merit. WCW has yet to state a claim for damages. The
Company believes that the ultimate liability resulting from such proceeding, if
any, will not have a material adverse effect on its financial condition, results
of operations or prospects.
On June 15, 1999, members of the family of Owen Hart, a professional
wrestler performing under contract with the Company, filed suit in state court
in Missouri against the Company, Vincent and Linda McMahon and nine other
defendants, including the manufacturer of the rigging equipment involved,
individual equipment riggers and the arena operator, as a result of the death of
Owen Hart during a pay-per-view event at Kemper Arena in Kansas City, Missouri
on May 23, 1999. The specific allegations against the Company include the
failure to use ordinary care to provide proper equipment and personnel for the
safety of Owen Hart, the failure to take special precautions when conducting an
inherently dangerous activity, endangerment and the failure to warn, vicarious
liability for the negligence of the named individual defendants, the failure to
properly train and supervise, and the provision of dangerous and unsafe
equipment. Plaintiffs seek compensatory and punitive damages in unspecified
amounts. On September 1, 1999, the Company filed its answer, affirmative
defenses and cross-claims, denying any liability for negligence and other claims
asserted against the Company. The Company believes that it has meritorious
defenses and intends to defend vigorously against the suit. On October 1, 1999,
the Company filed a complaint in the United States District Court for the
District of Connecticut, principally seeking a declaratory judgment with respect
to the enforceability of contractual defenses, forum selection clauses, and
other provisions of Owen Hart's contract with the Company. The defendants have
filed a motion to dismiss the Company's complaint for want of jurisdiction,
which is currently pending before the court. On February 22, 2000, the Company
filed an Emergency Motion for Specific Enforcement of and for Summary Judgement
on Forum Selection Clause seeking a legal ruling that any claims belonging to
Owen Hart arising out of his relationship with the Company be adjudicated in
Connecticut. The Company's motion is currently pending. The Company believes
that an unfavorable outcome of this suit may have a material adverse effect on
the Company's financial condition, results of operations or prospects.
On September 20, 1999, the Company was formally served with a complaint
regarding an action that Nicole Bass, a professional wrestler previously
affiliated with the Company, filed in the United States District Court for the
Eastern District of New York in which she alleges sexual harassment under New
York law, civil assault and intentional infliction of emotional distress. Bass's
complaint sought $20,000 in compensatory damages and $100,000 in punitive
damages. On or about November 9, 1999, the Company
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World Wrestling Federation Entertainment, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share and per share data)
(Unaudited)
received a Notice of Charge of Discrimination from the Equal Employment
Opportunity Commission (EEOC) filed by Nicole Bass. On or about November 30,
1999, the Company's outside counsel confirmed that no action regarding the EEOC
claim is required by the Company at this time. The Company filed a Motion to
Dismiss the Bass complaint. Plaintiff filed an amended complaint on February 28,
2000 withdrawing her stated demand of $100,000 in punitive damages as well as
her claims of civil assault and intentional infliction of emotional distress.
The amended complaint now seeks relief under Title VII for Sexual Harassment,
Title 42 ss.1981(a) for gender bias, and for violations of the New York Human
Rights law. The Company believes that the claims are without merit and intends
to vigorously defend against this action. Based on the Company's preliminary
review of the allegations and the underlying facts, as it understands them, the
Company does not believe that an unfavorable outcome in this action will have a
material adverse effect on its financial condition or results of operations or
prospects.
The Company is not currently a party to any other material legal
proceedings. However, the Company is involved in several other suits and claims
in the ordinary course of business, and it may from time to time become a party
to other legal proceedings arising in the ordinary course of doing business.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
General
We are an integrated media and entertainment company principally engaged in
the development, production and marketing of television programming, pay-per-
view programming, live events and the licensing and sale of branded consumer
products featuring our highly successful World Wrestling Federation brand of
entertainment.
We have experienced significant growth in many aspects of our business. We
believe this growth has been driven by a series of management decisions to
reposition our business. Since late 1997, we have intensified our focus on the
development and marketing of our television and pay-per-view programming,
incorporated some operations in house, expanded our branded merchandising
strategy, negotiated more favorable advertising agreements and established a
presence on the Internet.
These new business initiatives, combined with our growing audience appeal,
have led to increasingly higher television ratings and greater pay-per-view
buys, which have heightened demand for our product offerings, including licensed
products, home videos and other branded merchandise.
Our operations are organized around two principal activities:
. The creation, marketing and distribution of our live and
televised entertainment and pay-per-view programming. Revenues
are derived principally from ticket sales to our live events,
purchases of our pay-per-view programs, the sale of television
advertising time and the receipt of television rights fees.
. The marketing and promotion of our branded merchandise. Revenues
are generated from both royalties from the sale by third-party
licensees of merchandise and the direct sale by us of
merchandise, magazines and home videos.
The consolidated financial statements include the financial statements of
our Company, formerly known as Titan Sports Inc., and its four wholly owned
subsidiaries and its majority owned subsidiary. Prior to the initial public
offering, except for our Canadian operations, we were taxed as a Subchapter S
Corporation and we were not subject to federal taxes at the corporate level. As
a result of the initial public offering, our Subchapter S Corporation status was
terminated, and we are now a Subchapter C Corporation and accordingly, we are
subject to federal, state and foreign income taxes.
Recent Developments
XFL
We have recently announced our intention to launch a professional football
league, to be known as the XFL, which is scheduled to begin its first season in
February 2001. We are in the process of negotiating television deals with
broadcast and cable companies. We are currently building the infrastructure to
support this league. Based on current assumptions we expect the full
capitalization of the venture to be between $75.0 million and $100.0 million.
USA Network Television Distribution Agreements
On March 1, 2000 we provided notice of cancellation of our contract with USA
Network with respect to four hours of our programming effective September 2000.
Our agreement with USA Network with respect to our remaining hour of programming
expires in September 2000. We are currently in discussions with USA Network as
well as other networks to secure a new distribution agreement for this
programming.
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Results of Operations
Three Months Ended January 28, 2000 Compared to Three Months Ended January 29,
1999
Net Revenues. Net revenues were $98.4 million in the third quarter of
fiscal 2000 as compared to $65.2 million in the third quarter of fiscal 1999, an
increase of $33.2 million, or 51%. Of this increase, $19.6 million was
attributable to live and televised entertainment and $13.6 million was
attributable to branded merchandise.
Live and Televised Entertainment. Net revenues were $65.9 million in
the third quarter of fiscal 2000 as compared to $46.3 million in the third
quarter of fiscal 1999, an increase of $19.6 million, or 42%. This increase was
partially attributable to an increase in our sale of advertising time and
sponsorships which increased by $12.1 million in the third quarter of fiscal
2000 as a result of consistently high ratings for our shows and a new contract
with the United Paramount Network ("UPN"). This contract provides us with the
right to sell a substantial majority of the advertising time in our program, WWF
Smackdown!. Revenue from attendance at our live events increased by $5.8
million, of which $3.3 million was due to an increase in attendance and $2.5
million was due to an increase in average ticket prices. Pay-per-view revenues
increased by $1.9 million due to an increase in buys from approximately 1.5
million buys in the three months ended January 29, 1999 to approximately 1.6
million buys in the three months ended January 28, 2000.
Branded Merchandise. Net revenues were $32.5 million in the third
quarter of fiscal 2000 as compared to $18.9 million in the third quarter of
fiscal 1999, an increase of $13.6 million, or 72%. This increase was due
primarily to an increase in licensing of $10.2 million, new media of $2.5
million, publishing of $1.0 million and merchandise of $0.7 million. This
increase was offset partially by a decrease in home video revenues of $1.0
million. The increase in licensing resulted from the continued success of WWF
branded toys by JAKKS Pacific, Inc., the launch of Wrestlemania 2000 for
Nintendo 64 by JAKKS Pacific, Inc. and THQ, Inc., and the debut of WWF The Music
Volume IV. The increase in new media merchandise and advertising revenues
reflects the increased traffic on our Internet web sites. The increase in
publishing revenues was due to the increased circulation of our two monthly
magazines from approximately 1.3 million units in the third quarter of fiscal
1999 to approximately 1.8 million units in the third quarter of fiscal 2000. The
increase in merchandise revenues was due to increased attendance at our live
events. The decrease in home video was due to a decrease of 0.2 million units
sold.
Cost of Revenues. Cost of revenues was $56.7 million in the third
quarter of fiscal 2000 as compared to $37.3 million in the third quarter of
fiscal 1999, an increase of $19.4 million, or 52%. Gross profit as a percentage
of revenues decreased to 42% in the third quarter of fiscal 2000 from 43% in the
third quarter of fiscal 1999.
Live and Televised Entertainment. The cost of revenues to create and
distribute our live and televised entertainment was $38.9 million in the third
quarter of fiscal 2000 as compared to $26.1 million in the third quarter of
fiscal 1999, an increase of $12.8 million, or 49%. Of the $12.8 million increase
in cost of revenues, $7.7 million was related to the minimum guarantees
associated with our new contract with UPN, fees paid to our performers which are
directly related to our increased revenues and scheduled increases in the
minimum guarantees associated with our USA contract. Of the remaining increase
of $4.1 million, $2.2 million was due to an increase in television production
costs, due in part to our new UPN program, WWF SmackDown!, and $1.8 million was
due to an increase in arena rental charges which are directly related to the
increased revenues. Gross profit as a percentage of net revenues decreased to
41% in the third quarter of fiscal 2000 from 44% in the third quarter of fiscal
1999. The decrease in gross profit as a percentage of net revenues was due
primarily to increased television and pay-per-view production costs, which
includes fees paid to our performers.
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Branded Merchandise. The cost of revenues of our branded merchandise
was $17.8 million in the third quarter of fiscal 2000 as compared to $11.2
million in the third quarter of fiscal 1999, an increase of $6.6 million, or
58%. Of the $6.6 million increase, $4.8 million was related to our licensing
activities, $0.8 million was related to our merchandise activities and $0.7
million was related to our publishing activities, substantially all of which
were related to increased revenues in these areas. The increase in licensing
cost of revenues also includes $1.1 million related to our investment in the
National Hot Rod Association. Gross profit as a percentage of net revenues
increased to 45% in the third quarter of fiscal 2000 from 41% in the third
quarter of fiscal 1999. Licensing revenues increased by $10.2 million, which
favorably impacted our overall gross profit percentage of our branded
merchandise activities.
Selling, General, and Administrative Expenses. Selling, general and
administrative expenses, which include corporate overhead expenses, were $17.7
million in the third quarter of fiscal 2000 as compared to $10.2 million in the
third quarter of fiscal 1999, an increase of $7.5 million, or 74%. Of this
increase, $2.7 million was due to an increase in staff related expenses. The
number of full-time personnel as of January 28, 2000 was 322 as compared to 255
as of January 29, 1999, an increase of 67 employees. The increase in personnel
was related to the expansion of our business. In addition, the Chairman and the
Chief Executive Officer were paid in accordance with the terms of their
employment contracts, which became effective prior to the closing of the initial
public offering. Of the remaining $4.8 million increase, $1.6 million related to
increased advertising and promotion costs and $0.9 million related to increased
professional and consulting fees. Selling, general and administrative expenses
as a percentage of net revenues was 18% in the third quarter of fiscal 2000 as
compared to 16% in the third quarter of fiscal 1999 due to our planned
investment in management and staffing.
Depreciation and Amortization. Depreciation and amortization expense
was $0.7 million in the third quarter of fiscal 2000 as compared to $0.5 million
in the third quarter of fiscal 1999, an increase of $0.2 million. The increase
of $0.2 million reflects the increased spending on capital projects.
Interest Expense. Interest expense was $0.7 million in the third
quarter of fiscal 2000 as compared to $0.3 million in the third quarter of
fiscal 1999. The increase of $0.4 million was due to interest related to the
$32.0 million note issued to our then sole stockholder on June 29, 1999 for
estimated federal and state income taxes payable by our then sole stockholder.
The note is unsecured, bears interest at 5%, and is payable by April 10, 2000.
As of January 28, 2000, we paid approximately $5.7 million against this note,
which represented the prescribed estimated income tax payments required by the
Internal Revenue Service. See the Provision for Income Taxes below for further
information.
Interest Income and Other Income, Net. Interest income and other
income, net was $3.2 million in the third quarter of fiscal 2000 as compared to
$0.7 million in the third quarter of fiscal 1999. This increase of $2.5 million
represents interest earned on our significantly higher cash balances.
Provision for Income Taxes. Prior to the initial public offering, we
were taxed as a Subchapter S Corporation and therefore, we had to provide for
only certain state and foreign income taxes. The liability for federal and the
remaining state income taxes was the responsibility of our then sole
stockholder. Concurrent with our initial public offering, our tax status was
changed from a Subchapter S Corporation to a Subchapter C Corporation. As a
Subchapter C Corporation, we are directly responsible for all federal and state
income taxes. As a result of the change in our tax status, for the year ending
April 30, 2000, we will be taxed on our income at an effective rate of
approximately 22% based upon the number of days during the fiscal year that we
were a Subchapter S Corporation and the number of days we were a Subchapter C
Corporation. As a consequence to this change, our provision for income taxes
substantially increased to $5.7 million in the third quarter of fiscal 2000 as
compared to $0.6 million in the third quarter of fiscal 1999.
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Nine months Ended January 28, 2000 Compared to Nine months Ended January 29,
1999
Net Revenues. Net revenues were $262.9 million in the nine months ended
January 28, 2000 as compared to $157.7 million in the nine months ended January
29, 1999, an increase of $105.2 million, or 67%. Of this increase, $68.7 million
was attributable to live and televised entertainment, and $36.5 million was
attributable to branded merchandise.
Live and Televised Entertainment. Net revenues were $178.2 million in
the nine months ended January 28, 2000 as compared to $109.5 million in the nine
months ended January 29, 1999, an increase of $68.7 million, or 63%. This
increase was partially attributable to an increase of $34.9 million in our sale
of advertising time and sponsorships in the first nine months of fiscal 2000 as
a result of consistently high ratings for our shows and new contracts with the
USA Network and UPN. These contracts provide us with the right to sell a
substantial majority of the advertising time in our programs. Pay-per-view
revenues increased by $14.6 million, which resulted primarily from an increase
in pay-per-view buys from approximately 3.6 million in the nine months of fiscal
1999 to approximately 4.3 million in the nine months of fiscal 2000, or 19%. As
it regularly takes our distributor one year to completely finalize the number of
buys for each pay-per-view program, included in the 4.3 million buys for the
nine months of fiscal 2000 were 0.6 million buys related to pay-per-view events
in fiscal 1999. Revenue from attendance at our live events increased by $17.0
million, of which $10.0 million resulted from an increase in average ticket
prices and $7.0 million resulted from an increase in attendance for the nine
months ended January 28, 2000 as compared to the corresponding period in the
prior fiscal year.
Branded Merchandise. Net revenues were $84.7 million in the nine months
ended January 28, 2000 as compared to $48.2 million in the nine months ended
January 29, 1999, an increase of $36.5 million, or 76%. This increase was
primarily due to an increase in licensing revenues of $22.4 million, new media
revenues of $5.3 million, home video revenues of $4.4 million and publishing
revenues of $4.0 million. The increase in licensing resulted from the continued
success of WWF branded toys by JAKKS Pacific, Inc., the launch of Wrestlemania
2000 for Nintendo 64 by JAKKS Pacific Inc. and THQ, Inc. and the debut of WWF
The Music Volume IV. Additionally, we increased the number of licensees in an
effort to broaden our product offerings. The increase in new media revenues of
$5.3 million reflects the increased traffic on our Internet web sites. The
increase in home video revenues resulted from the expansion of our video catalog
and a significant increase in our customer base during the first quarter of
fiscal 2000. The increase in publishing revenues was due to the increased
circulation of our two monthly magazines from approximately 3.9 million in the
nine months of fiscal 1999 to approximately 5.2 million in the nine months of
fiscal 2000.
Cost of Revenues. Cost of revenues was $149.8 million in the nine
months ended January 28, 2000 as compared to $93.3 million in the nine months
ended January 29, 1999, an increase of $56.5 million, or 61%. Gross profit as a
percentage of revenues increased to 43% in the nine months ended January 28,
2000 from 41% in the nine months ended January 29, 1999.
Live and Televised Entertainment. The cost of revenues to create and
distribute our live and televised entertainment was $104.7 million in the nine
months ended January 28, 2000 as compared to $64.1 million in the nine months
ended January 29, 1999, an increase of $40.6 million, or 63%. Of the $40.6
million increase in cost of revenues, $22.8 million related to the minimum
guarantees associated with our new contracts with the USA Network and UPN, fees
paid to guest celebrities and fees paid to our performers which are directly
related to our increased revenues. Of the remaining increase of $17.8 million,
$5.2 million was due to an increase in television production costs, due in part
to our new UPN program, WWF SmackDown!, $4.3 million was due to an increase in
arena rental charges, which are directly related to the increased revenues, and
$1.8 million was due to an increase in pay per view and live event advertising
costs. Gross profit as a percentage of net revenues was 41% for both nine month
periods.
Branded Merchandise. The cost of revenues of our branded merchandise
was $45.1 million in the nine months ended January 28, 2000 as compared to $29.2
million in the nine months ended January 29,
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1999, an increase of $15.9 million, or 54%. Of the $15.9 million increase, $10.2
million was related to licensing, $2.4 million related to home video, $2.0
million related to publishing, and $1.6 million related to new media,
substantially all of which was related to increased revenues in these areas. The
increase in licensing costs of revenues also includes $1.9 million related to
our investment in the National Hot Rod Association. Gross profit as a percentage
of net revenues increased to 47% for the nine months of fiscal 2000 from 39% in
the nine months of fiscal 1999. Licensing revenues increased by $22.4 million,
which favorably impacted our overall gross profit percentage of our branded
merchandise activities.
Selling, General, and Administrative Expenses. Selling, general and
administrative expenses, which include corporate overhead expenses, were $46.3
million in the nine months ended January 28, 2000 as compared to $27.8 million
in the nine months ended January 29, 1999 an increase of $18.5 million, or 67%.
Of this increase, $8.8 million was due to an increase in staff related expenses.
The number of full-time personnel as of January 28, 2000 was 322 as compared to
255 as of January 29, 1999, an increase of 67 employees. The increase in
personnel was related to the expansion of our business. In addition, the
Chairman and the Chief Executive Officer were paid in accordance with the terms
of their employment contracts, which became effective prior to the closing of
the initial public offering. Of the remaining $9.7 million increase, $2.4
million related to increased advertising and promotion costs and $1.9 million
related to increased professional and consulting fees. Selling, general and
administrative expenses as a percentage of net revenues was 18% in both the nine
months ended January 28, 2000 and January 29, 1999.
Depreciation and Amortization. Depreciation and amortization expense
was $1.8 million in the nine months ended January 28, 2000 as compared to $1.4
million in the nine months ended January 29, 1999 an increase of $0.4 million.
The increase of $0.4 million reflects the increased spending on capital
projects.
Performer Stock Options. In accordance with the provisions set forth in
the Statement of Financial Accounting Standard No. 123, "Accounting for
Stock-Based Compensation" and Emerging Issues Task Force Issue No. 96-18,
"Accounting for Equity Instruments That Are Issued to Other Than Employees for
Acquiring, or in Conjunction with Selling, Goods or Services," we recorded a
second quarter fiscal 2000 non-cash charge of approximately $6.0 million
relating to the granting of stock options to certain performers who are
independent contractors. The options, which vest over three years, were granted
in conjunction with our October 19, 1999 initial public offering.
Interest Expense. Interest expense was $1.8 million in the nine months
ended January 28, 2000 as compared to $0.8 million in the nine months ended
January 29, 1999. The increase of $1.0 million was due to interest related to
the $32.0 million note issued to our then sole stockholder on June 29, 1999 for
estimated federal and state income taxes payable by our then sole stockholder.
The note is unsecured, bears interest at 5% and is payable by April 10, 2000. As
of January 28, 2000, we paid $5.6 million against this note, which represented
the prescribed estimated income tax payments required by the Internal Revenue
Service. See Provision for Income Taxes below for further information.
Interest Income and Other Income, Net. Interest income and other
income, net was $4.9 million in the nine months ended January 28, 2000 as
compared to $1.2 million in the nine months ended January 29, 1999. The increase
of $3.7 million was due primarily to interest earned on our significantly higher
cash balances.
Provision for Income Taxes. Prior to the initial public offering, we
were taxed as a Subchapter S Corporation and therefore, we had to provide for
only certain state and foreign income taxes. The liability for federal and the
remaining state income taxes was the responsibility of our then sole
stockholder. Concurrent with our initial public offering, our tax status was
changed from a Subchapter S Corporation to a Subchapter C Corporation. As a
Subchapter C Corporation, we are directly responsible for all federal and state
income taxes. As a consequence to our tax status change, the provision for
income taxes substantially increased to $13.7 million in the first nine months
of fiscal 2000 as compared to $1.2 million in the first nine months of fiscal
1999. The $13.7 million represents an effective tax rate of 22% for the nine
months
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ended January 28, 2000 which includes all adjustments necessary to reflect the
conversion of a Subchapter S Corporation status to a Subchapter C Corporation
status upon the initial public offering. We expect our effective tax rate to be
approximately 22% for fiscal 2000.
Liquidity and Capital Resources
Cash flows from operating activities increased during the nine months ended
January 28, 2000 to $60.0 million as compared to $30.9 million during the nine
months ended January 29, 1999. This improvement was primarily due to an increase
in operating income. Working capital, consisting of current assets less current
liabilities, was $215.8 million as of January 28, 2000 as compared to $52.7
million as of April 30, 1999.
Cash flows used in investing activities were primarily for capital expenditures,
which were $8.9 million in the nine months ended January 28, 2000 as compared to
$13.6 million during the nine months ended January 29, 1999. In August 1998, we
acquired a 193-room hotel and casino facility in Las Vegas, Nevada in a joint
venture partnership totaling $10.8 million. The joint venture partner's
ownership in this property is reflected in the cash flow statement as a source
of cash under other financing activities. Management has made a decision to sell
the property and is currently soliciting offers. This property is classified on
the consolidated balance sheet as an asset held for sale. Capital expenditures
for the year are expected to be $16.4 million, and include the expansion and
renovation of our television and production facility. Our cash balance as of
February 29, 2000 was $242.8 million of which, $169.5 million is invested in
various corporate commercial papers with a 7-14 day average maturity ranging
from 4.76% to 5.76% and $50.8 million is invested in a prime money market fund
currently earning interest of 5.26%.
Cash flows provided by financing activities were $145.8 million in the nine
months ended January 28, 2000 as compared to $2.3 million during the nine months
ended January 29, 1999. In connection with the initial public offering, we
received net proceeds after deducting commissions and fees and expenses, of
$179.3 million for the sale of 11,500,000 shares of Class A common stock at an
offering price of $17.00 per share. We made Subchapter S Corporation
distributions to our then sole stockholder totaling $27.1 million in the nine
months of fiscal 2000 as compared to $2.8 million in the nine months of fiscal
1999. The increase in S distributions was due to the distribution made to our
then sole stockholder on June 29, 1999, of cash in the amount of $25.5 million
out of our earned and undistributed earnings, which have been fully taxed at the
stockholder level. In addition, we issued an unsecured, 5% interest-bearing note
due by April 10, 2000 in an amount equal to the estimated income taxes payable
by our then sole stockholder in respect of income taxes for the fiscal year
ended April 30, 1999 estimated to be $22.0 million and for the allocated portion
of our taxable S Corporation earnings for fiscal 2000 that will be taxed as a
Subchapter S Corporation which at the time of the issuance of this note was
estimated to be $10.0 million. To the extent the allocated portion of our fiscal
2000 taxable earnings exceeds those earnings used in the calculation of
estimated income taxes payable by our then sole stockholder, we have agreed to
make an additional distribution to the stockholders of record as of October 18,
1999 payable no later than August 15, 2000. This distribution will represent any
additional taxes payable by our then sole stockholder in excess of the original
$32.0 million estimate due to increased taxable earnings. As of January 28,
2000, we have estimated such distribution to be $4.0 million and have included
this amount as a due to stockholder in the consolidated balance sheet. This
amount may vary depending upon our actual taxable income for the fiscal year
ending April 30, 2000. As of February 29, 2000 we paid $5.6 million against this
note, which represented the prescribed estimated income tax payments required by
the Internal Revenue Service.
We have recently announced our intention to launch a professional football
league, to be known as the XFL, which is scheduled to begin its first season in
February 2001. We are in the process of negotiating television deals with
broadcast and cable companies. We are currently building the infrastructure to
support this league. Based on current assumptions we expect the full
capitalization to be between $75.0 million and $100.0 million. We believe that
the capitalization of this venture will come from existing cash balances on
hand.
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On December 12, 1997, we entered into a mortgage loan agreement with GMAC
Commercial Mortgage Corp., which was subsequently assigned to Citicorp Real
Estate, Inc., under which we borrowed $12.0 million at an annual interest rate
of 7.6% to be repaid in monthly installments over 15 years. This term loan is
collateralized by our executive offices and production studio, both of which are
located in Stamford, Connecticut. Additional collateral includes leases,
agreements and other items relating to our mortgaged property and its
operations. The term loan may not be prepaid in whole or in part prior to and
through December 31, 2005. Thereafter, the term loan may be prepaid in whole
with the payment of a premium. As of February 29, 2000, the outstanding
principal amount of the term loan was $11.1 million.
On December 22, 1997, we entered into a $10.0 million revolving credit agreement
with IBJ Schroder Business Credit Corporation that expires on December 21, 2000.
Interest on outstanding amounts are calculated at the alternate base rate plus
0.5%, or at the Eurodollar rate plus 2.5%, based upon the availability of
qualifying receivables which collateralize the loan. In addition to qualifying
receivables, this revolving credit agreement is collateralized by our general
intangible property, excluding intellectual property. As of February 29, 2000,
no amounts were outstanding under the revolving portion of this credit
agreement.
We have entered into various contracts under the terms of which we are
required to make guaranteed payments, including:
. Performance contracts with all of our performers, some of which provide for
future minimum guaranteed payments.
. Television distribution agreements with the USA Network that provide for
the payment of the greater of a fixed percentage of the revenues from the
sale of television advertising time or an annual minimum payment. An
agreement with respect to one hour of programming expires in September
2000, and the other agreement with this network, which covers four hours of
programming, expires in September 2001 but may be terminated earlier by
either party. In addition, we entered into a one year agreement with the
UPN expiring in September 2000, which covers two hours of programming every
week and which also provides for a minimum performance payment by us.
. Various operating leases related to our sales offices and warehouse space.
. Employment contracts with Vincent K. McMahon and Linda E. McMahon, the
terms of which are for a period of seven and four years, respectively.
. Employment contracts with some of our employees, the terms of which are
generally for a period of two to three years.
For fiscal 2000, our aggregate minimum payment obligations under these
contracts are expected to be $44.0 million. We anticipate that all of these
obligations will be satisfied out of cash flows from operating activities.
We believe that our existing cash balance on hand, together with cash generated
from operations, and amounts available under the revolving credit agreement are
sufficient to meet our working capital, capital expenditure and cash needs for
our strategic investments, including the XFL, over the next twelve months.
However, during such period or thereafter, depending on the size and number of
the projects and investments related to our growth strategy, we may require the
issuance of debt and/or additional equity securities.
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Year 2000 Readiness Disclosure
We are year 2000 compliant. The year 2000 did not pose any operational problems
for our computer and television production systems.
As of February 29, 2000 we had spent less than $100,000 on our year 2000
compliance. Such amounts included normal system upgrades and replacements. Costs
specifically associated with modifying our systems for year 2000 compliance have
been expensed as incurred.
Cautionary Statement for Purposes of the "Safe Harbor" Provisions of the Private
Securities Litigation Reform Act of 1995
The Private Securities Litigation Reform Act of 1995 provides a "safe harbor"
for certain statements that are forward-looking and are not based on historical
facts. When used in this Quarterly report on Form 10-Q, 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 expensed or implied by such forward-looking statements.
The factors discussed under "Management's Discussion and Analysis of Financial
Condition and Results of Operations" could cause actual results to differ
materially from those contained in forward-looking statements made in this
Quarterly Report on Form 10-Q and in oral statements made by our authorized
officers. In addition the following factors, among others, could cause our
financial performance to differ materially from that expressed in any
forward-looking statements made by us, or on our behalf: (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 entertainment, (ii) our failure
to retain or continue to recruit key performers could lead to a decline in the
appeal of our story lines and the popularity of our brand of entertainment,
(iii) the loss of the creative services of Vincent McMahon could adversely
affect our ability to create popular characters and story lines, (iv) our
failure to maintain or renew key agreements could adversely affect our ability
to distribute our television and pay-per-view programming, (v) we may not be
able to compete effectively, especially against competitors with greater
financial resources or marketplace presence, (vi) our ability to protect the
intellectual property rights in which we depend upon could negatively impact our
ability to compete in the sports entertainment market, (vii) a decline in the
general economic conditions or in the popularity of our brand of sports
entertainment could adversely impact our business, (viii) our insurance may not
be adequate to cover liabilities resulting from accidents or injuries, (ix) we
may be prohibited from promoting and conducting our live events if we do not
comply with applicable regulations, (x) we could incur substantial liabilities
if pending material litigation is resolved unfavorably, (xi) the failure of our
new complimentary businesses, including the professional football league to be
known as the XFL, could adversely effect our existing businesses, (xii) our
management has broad discretion over the use of proceeds from the offering , and
therefore investors will not have the opportunity to evaluate information
concerning the application of proceeds, (xiii) through his beneficial ownership
of a substantial majority of our Class B common stock, our controlling
stockholder can exercise significant influence over our affairs, and his
interests may conflict with the holders of our Class A common stock, (xiv) a
substantial number of shares will be eligible for future sale by our current
stockholder, and the sale of those shares could lower our stock price, and (xv)
there has been no prior market for our Class A common stock, and the market
price of the shares will fluctuate, (xvi) our operations may suffer temporary
disruptions from year 2000 computer problems resulting in increased expenses,
decreased revenues or earnings. The forward-looking statements speak only as of
the date of this Quarterly Report on Form 10-Q and undue reliance should not be
placed on these statements.
20
<PAGE>
Item 3. Quantitative and Qualitative Disclosures about Market Risk
We have not included the information required related to market risk
because it is not material to us.
Part II. Other Information.
Item 1. Legal Proceedings
On May 13, 1991, William R. Eadie, a former professional wrestler who had
been one of our performers, filed a lawsuit in state court in Wisconsin against
us and Mr. McMahon. The case was removed to the United States District Court for
the District of Connecticut on August 7, 1991. The suit alleges that we breached
an oral agreement to compensate Eadie for the use of his ideas in connection
with a wrestling tag team called "Demolition" and to employ him for life.
Plaintiff is seeking $6.5 million in compensatory damages and unspecified
punitive damages. We have denied any liability and are vigorously contesting
this action. In a similar action filed against us on April 10, 1992 in the
United States District Court for the District of Connecticut, Randy Colley, a
former professional wrestler who had been one of our performers, also alleges
that we breached an oral agreement to compensate him for disclosing his idea for
a wrestling tag team called "Demolition." He is seeking unspecified compensatory
and punitive damages. We have denied any liability and are vigorously defending
this action. Colley's claims were consolidated for trial with those of Eadie in
the action described above. We believe that both plaintiffs' claims are without
merit. On May 20, 1998, a magistrate judge ruled that the plaintiffs' expert on
damages could not testify at trial. Thereafter, the plaintiffs engaged a second
expert on damages, whose report was filed on August 31, 1999. Given the
substance of the second expert's opinion, as well as continuing developments in
the law regarding the relevance and reliability of expert opinions, it is not
possible to predict whether this second expert's opinion will be admitted into
evidence at trial. Expert discovery has not been completed, and no trial date
has been scheduled. We believe that an unfavorable outcome in these actions may
have a material adverse effect on our financial condition, results of operations
or prospects.
On August 28, 1996, James Hellwig, a former professional wrestler who had
been one of our performers, filed a suit against us in state court in Arizona
alleging breach of two separate service contracts, defamation and unauthorized
use of servicemarks and trademarks allegedly owned by him. We have denied all
liability and have vigorously defended this action. We believe that Hellwig's
claims are without merit. We have asserted counterclaims against him for breach
of his service contracts and seek rescission of an agreement by which we
transferred ownership of the servicemarks to him. In addition, we filed a
separate action in federal district court in Connecticut on March 11, 1998,
seeking a declaration that we own the characters, Warrior and Ultimate Warrior,
under both contract and copyright law. During a settlement conference with the
Arizona State Court on March 3, 2000 the parties reached an agreement in
principal to settle all outstanding claims in both the Arizona and Connecticut
lawsuits. The parties are in the process of memorializing the settlement
agreement. The terms of the settlement agreement are confidential. However, the
amount of the settlement will not have a material adverse effect on our
financial condition or results of operations or prospects.
On June 21, 1996, we filed an action against WCW and Turner Broadcasting
Systems, Inc. in the United States District Court for the District of
Connecticut, alleging unfair competition and infringement of our copyrights,
servicemarks and trademarks with respect to two characters owned by us. We claim
that WCW, which contracted with two professional wrestlers who previously had
performed under contract for us in the character roles of Razor Ramon and
Diesel, misappropriated those characters in WCW's programming and misrepresented
the reason that these former World Wrestling Federation professional wrestlers
were appearing on WCW programming. During discovery proceedings, which were
completed on October 16, 1998, WCW was twice sanctioned by the court for failure
to comply with the court's discovery orders. We are seeking damages in the form
of revenue disgorgement from WCW and have submitted expert reports supporting
our claim for substantial money damages. WCW and TBS have denied any liability.
21
<PAGE>
On May 18, 1998, WCW filed an action against us in the United States
District Court for the District of Connecticut and immediately moved to
consolidate this action with our pending action against WCW and TBS described
above. WCW alleges that we diluted various marks owned by and/or licensed to WCW
by disparaging those marks and also claims that we engaged in unfair competition
when we aired a "Flashback" series of past World Wrestling Federation
performances on USA Network without disclosing that some of the performers, at
the time the series was subsequently broadcast, were then affiliated with WCW.
We have denied any liability and are vigorously defending against this action.
We have filed a counterclaim for abuse of process, which WCW moved to dismiss.
In January, 2000 the Court granted WCW's motion. Discovery is ongoing, and we
intend to move for summary judgment when discovery is concluded. We believe that
WCW's claims are without merit. WCW has yet to state a claim for damages. We
believe that the ultimate liability resulting from such proceeding, if any, will
not have a material adverse effect on our financial condition, results of
operations or prospects.
On June 15, 1999, members of the family of Owen Hart, a professional
wrestler performing under contract with us, filed suit in state court in
Missouri against us, Vincent and Linda McMahon and nine other defendants,
including the manufacturer of the rigging equipment involved, individual
equipment riggers and the arena operator, as a result of the death of Owen Hart
during a pay-per-view event at Kemper Arena in Kansas City, Missouri on May 23,
1999. The specific allegations against us include the failure to use ordinary
care to provide proper equipment and personnel for the safety of Owen Hart, the
failure to take special precautions when conducting an inherently dangerous
activity, endangerment and the failure to warn, vicarious liability for the
negligence of the named individual defendants, the failure to properly train and
supervise, and the provision of dangerous and unsafe equipment. Plaintiffs seek
compensatory and punitive damages in unspecified amounts. On September 1, 1999,
we filed our answer, affirmative defenses and cross-claims, denying any
liability for negligence and other claims asserted against us. We believe that
we have meritorious defenses and intend to defend vigorously against the suit.
On October 1, 1999, we filed a complaint in the United States District Court for
the District of Connecticut, principally seeking a declaratory judgment with
respect to the enforceability of contractual defenses, forum selection clauses,
and other provisions of Owen Hart's contract with us. The defendants have filed
a motion to dismiss our complaint for want of jurisdiction which is currently
pending before the court. On February 22, 2000, we filed an Emergency Motion for
Specific Enforcement of and for Summary Judgement on Forum Selection Clause
seeking a legal ruling that any claims belonging to Owen Hart arising out of his
relationship with us be adjudicated in Connecticut. Our motion is currently
pending. We believe that an unfavorable outcome of this suit may have a material
adverse effect on our financial condition, results of operations or prospects.
On September 20, 1999, we were formally served with a complaint regarding
an action that Nicole Bass, a professional wrestler previously affiliated with
us, filed in the United States District Court for the Eastern District of New
York in which she alleges sexual harassment under New York law, civil assault
and intentional infliction of emotional distress. Bass's complaint sought $20.0
million in compensatory damages and $100.0 million in punitive damages. On or
about November 9, we received a Notice of Charge of Discrimination from the
Equal Employment Opportunity Commission (EEOC) filed by Nicole Bass. On or about
November 30, 1999, our outside counsel confirmed that no action regarding the
EEOC claim is required by us at this time. We filed a Motion to Dismiss the Bass
complaint. Plaintiff filed an amended complaint on February 28, 2000 withdrawing
her stated demand of $0.1 million in punitive damages as well as her claims of
civil assault and intentional infliction of emotional distress. The amended
complaint now seeks relief under Title VII for Sexual Harassment, Title 42
ss.1981 (a) for gender bias, and for violations of the New York Human Rights
law. We believe that the claims are without merit and intend to vigorously
defend against this action. Based on our preliminary review of the allegations
and the underlying facts, as we understand them, we do not believe that an
unfavorable outcome in this action will have a material adverse effect on our
financial condition or results of operations or prospects.
We are not currently a party to any other material legal proceedings.
However, we are involved in several other suits and claims in the ordinary
course of business, and we may from time to time become a party to other legal
proceedings arising in the ordinary course of doing business.
22
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
(a.) Exhibits
*27. Financial Data Schedule
- --------------------------
*Filed herewith
(b.) Reports on Form 8-K
On November 22, 1999 the Company filed a Report on Form 8-K dated October 19,
1999 under Item 5 Other Events.
23
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereto duly authorized.
World Wrestling Federation Entertainment, Inc.
(Registrant)
Dated: March 8, 2000 By: /s/ August J. Liguori
-------------------------
August J. Liguori
Executive Vice President and
Chief Financial Officer
24
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