<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 October 27, 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 December 1, 2000, the number of shares outstanding of the Registrant's Class
A common stock, par value $.01 per share, was 16,194,134 and the number of
shares outstanding of the Registrant's Class B common stock, par value $.01 per
share, was 56,667,000.
<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 October 27, 2000 (Unaudited) and April 30, 2000 2
Consolidated Statements of Income for the three and six months ended October 27, 2000
(Unaudited) and October 29, 1999 (Unaudited) 3
Consolidated Statement of Changes in Stockholders' Equity for the
six months ended October 27, 2000 (Unaudited) 4
Consolidated Statements of Cash Flows for the six months ended
October 27, 2000 (Unaudited) and October 29, 1999 (Unaudited) 5
Notes to Consolidated Financial Statements (Unaudited) 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 12
Item 3. Quantitative and Qualitative Disclosures about Market Risk 20
Part II - Other Information
Item 1. Legal Proceedings 20
Item 4. Submission of Matters to a Vote of Security Holders 20
Item 6. Exhibits and Reports on Form 8-K 21
Signature 22
</TABLE>
1
<PAGE>
World Wrestling Federation Entertainment, Inc.
Consolidated Balance Sheets
(dollars in thousands)
<TABLE>
<CAPTION>
As of As of
October 27, April 30,
2000 2000
------------- ------------
ASSETS (Unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 66,324 $ 101,779
Short-term investments 185,467 107,213
Accounts receivable (less allowance for doubtful accounts of
$768 at October 27, 2000 and $1,033 at April 30, 2000) 56,188 60,424
Inventory, net 5,683 2,752
Prepaid expenses and other current assets 11,051 6,084
Assets held for sale 9,586 9,600
------------- ------------
Total current assets 334,299 287,852
PROPERTY AND EQUIPMENT, NET 73,404 41,484
OTHER ASSETS 23,319 7,696
------------- ------------
TOTAL ASSETS $ 431,022 $ 337,032
============= ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt 701 1,017
Accounts payable 14,843 17,690
Accrued expenses and other current liabilities 37,853 37,168
Deferred income 9,687 12,220
------------- ------------
Total current liabilities 63,084 68,095
LONG-TERM DEBT 10,142 10,400
MINORITY INTEREST 2,767 -
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Class A common stock: ($.01 par value; 180,000,000 shares
authorized; 16,194,134 shares issued at October 27, 2000 and
11,500,000 shares issued at April 30, 2000) 162 115
Class B common stock: ($.01 par value; 60,000,000 shares
authorized; 56,667,000 shares issued at October 27, 2000 and
at April 30, 2000) 567 567
Additional paid in capital 294,136 222,535
Accumulated other comprehensive income 237 105
Retained earnings 59,927 35,215
------------- ------------
Total stockholders' equity 355,029 258,537
------------- ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 431,022 $ 337,032
============= ============
</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 Six Months Ended
October 27, Ocober 29, October 27, Ocober 29,
2000 1999 2000 1999
------------- ---------- ----------- ------------
<S> <C> <C> <C> <C>
Net revenues $ 111,880 $ 88,267 $ 213,741 $ 164,490
Cost of revenues (excluding $6,020 of Performer stock option charges
for the three and six months ended October 29, 1999) 61,596 52,128 116,665 93,173
Performer stock options -- 6,020 -- 6,020
Selling, general and administrative expenses (Note 9) 32,211 14,680 53,632 28,649
XFL start-up costs 6,523 -- 7,995 --
Depreciation and amortization 2,331 479 4,195 1,138
------------- ---------- ----------- ------------
Operating Income 9,219 14,960 31,254 35,510
Interest expense 209 662 469 1,071
Interest income and other income 3,578 852 6,173 1,703
------------- ---------- ----------- ------------
Income before income taxes and minority interest 12,588 15,150 36,958 36,142
Provision for income taxes 6,557 7,302 16,424 8,016
------------- ---------- ----------- ------------
Income before minority interest 6,031 7,848 20,534 28,126
Minority interest 3,442 -- 4,178 --
------------- ---------- ----------- ------------
Net income $ 9,473 $ 7,848 $ 24,712 $ 28,126
============= ========== =========== ============
Earnings per share - basic $ 0.13 $ 0.14 $ 0.35 $ 0.49
============= ========== =========== ============
Earnings per share - diluted $ 0.13 $ 0.14 $ 0.34 $ 0.49
============= ========== =========== ============
UNAUDITED PRO FORMA INFORMATION (Note 3):
Historical income before income taxes and minority interest $ 15,150 $ 36,142
Pro forma adjustment other than income taxes -- 427
---------- -------------
Pro forma income before income taxes and minority interest 15,150 35,715
Pro forma provision for income taxes 8,299 16,360
---------- -------------
Pro forma net income 6,851 19,355
========== =============
Pro forma earnings per share - basic $ 0.12 $ 0.34
========== =============
Pro forma earnings per share - diluted $ 0.12 $ 0.34
========== =============
</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, May 1, 2000 $ 682 $ 222,535 $ 105 $ 35,215 $ 258,537
--------- ---------- ------------ --------- ---------
Comprehensive income:
Translation adjustment (Unaudited) -- -- (56) -- (56)
Unrealized holding gain, net of tax (Unaudited) -- -- 188 -- 188
Net income (Unaudited) -- -- -- 24,712 24,712
--------- ---------- ------------ --------- ---------
Total comprehensive income (Unaudited) -- -- 132 24,712 24,844
--------- ---------- ------------ --------- ---------
Issuance of common stock (Note 1) (Unaudited) 46 59,954 -- -- 60,000
Exercise of stock options (Unaudited) 1 831 -- -- 832
Tax benefit from stock options (Unaudited) -- 143 -- -- 143
Non-cash stock issuance charge (Note 1) (Unaudited) -- 10,673 -- -- 10,673
--------- ---------- ------------ --------- ---------
Balance, October 27, 2000 (Unaudited) $ 729 $ 294,136 $ 237 $ 59,927 $ 355,029
========= ========== ============ ========= =========
</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>
Six Months Ended
October 27, October 29,
2000 1999
----------- -----------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 24,712 $ 28,126
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 4,195 1,138
Provision for doubtful accounts (219) 30
Performer stock options - 6,020
Deferred income taxes - (2,466)
Minority interest (4,178) -
Changes in assets and liabilities (net of effects of acquisition
of WWF New York):
Accounts receivable 4,631 (4,346)
Inventory (2,447) 29
Prepaid expenses and other current assets (7,153) (2,059)
Accounts payable (3,873) (2,216)
Accrued expenses and other current liabilities 127 9,795
Deferred income (2,756) 512
----------- -----------
Net cash provided by operating activities 13,039 34,563
----------- -----------
INVESTING ACTIVITIES:
Purchase of property and equipment (10,593) (4,988)
Purchase of property and equipment-XFL (2,647) -
Purchase of short-term investments (77,877) -
Purchase of WWF New York (24,500) -
----------- -----------
Net cash used in investing activities (115,617) (4,988)
----------- -----------
FINANCING ACTIVITIES:
Repayments of long-term debt (575) (631)
Net proceeds from initial public offering - 181,815
Stock issuance costs (506) (2,318)
Proceeds from issuance of Class A common stock 60,000 -
Net proceeds from exercise of stock options 1,339 -
Amounts payable to stockholder - (800)
NBC capital contribution to XFL 6,865 -
S Corporation distributions - (27,064)
----------- -----------
Net cash provided by financing activities 67,123 151,002
----------- -----------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (35,455) 180,577
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 101,779 45,727
----------- -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 66,324 $ 226,304
=========== ===========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the period for income taxes $ 25,098 $ 3,916
Cash paid during the period for interest 468 535
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
(dollars in thousands, except share and per share data)
(Unaudited)
1. Basis of Presentation and Business Description
The accompanying consolidated financial statements include the accounts of World
Wrestling Federation Entertainment, Inc., TSI Realty Company, WWF Hotel & Casino
Ventures, LLC, World Wrestling Federation Entertainment Canada, Inc., Stephanie
Music Publishing, Inc., WWFE Sports, Inc., Event Services, Inc., WWF New York
Inc. and the Company's majority-owned subsidiary Titan/Shane Partnership
(collectively the "Company"). WWFE Sports, Inc. owns 50% and currently has
operating control of XFL, LLC, which is a new venture with NBC. In the opinion
of management, all adjustments (consisting of normal recurring adjustments)
considered necessary for a fair presentation have been included. All significant
intercompany balances have been eliminated. Certain prior year amounts have been
reclassified to conform with the 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 and 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 three 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, cable
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. Revenues also include those generated from the Company's
WWF New York entertainment complex located in New York City.
. The Company's professional football league, the XFL, which currently
consists of costs related to its development and start-up.
On June 12, 2000, National Broadcasting Company ("NBC") purchased approximately
2.3 million newly issued shares of the Company's Class A common stock at $13 per
share for a total investment of $30,000. As a result of the stock purchase, the
Company recorded a non-cash charge of $10,673 that will be amortized over 30
months. Included in depreciation and amortization expense related to this non-
cash charge for the three and six months ended October 27, 2000 was $1,044 and
$1,605, respectively.
On July 28, 2000 Viacom Inc. ("Viacom") purchased approximately 2.3 million
newly issued shares of the Company's Class A common stock at $13 per share for a
total investment of $30,000.
2. Income Taxes
Concurrent with the Company's initial public offering on October 19, 1999, its
tax status was changed from a Subchapter S Corporation to a Subchapter C
Corporation. The Company is directly responsible for all federal, state and
foreign income taxes. As a result of the change in its tax status, the Company's
effective tax rate, which otherwise would have been approximately 38%, was
approximately 52.1% and 44.4% for the three and six months ended October 27,
2000, respectively. The Company's effective tax rate was negatively impacted by
the amortization of non-cash stock charges which are non-deductible for income
tax purposes. In addition, the Company's effective tax rate was negatively
impacted by the fact that the Company does not record a tax benefit for NBC's
portion of the XFL's losses (see Note 6).
6
<PAGE>
World Wrestling Federation Entertainment, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share and per share data)
(Unaudited)
For the fiscal year ended April 30, 2000, the Company was 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 $8,016 for the six months ended
October 29, 1999, which represented an effective rate of 22.2%. The income tax
provision of $7,302 as a percentage of pre-tax earnings generated during the
three months ended October 29, 1999 exceeded 22.2%, as the Company was required
to cumulatively adjust for the impact of the conversion from Subchapter S
Corporation status to Subchapter C Corporation status.
3. Unaudited Pro Forma Information
The unaudited pro forma consolidated statements of income information presents
the pro forma effects on the historical consolidated statement of income for the
six months ended October 29, 1999 of $427 for additional compensation to the
chairman of the board of directors and to the chief executive officer pursuant
to employment agreements that became effective July 1, 1999. Additionally, it
presents income taxes of $8,299 for the three months ended October 29, 1999 and
$16,360 for the six months ended October 29, 1999 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.
4. Earnings Per Share
For the three months ended October 27, 2000, for the purpose of calculating
earnings per share - basic, the weighted average number of common shares
outstanding was 72,851,107 and for the purpose of calculating earnings per
share-diluted, the weighted average number of common shares outstanding was
73,105,823, which includes 254,716 shares representing the dilutive effect of
outstanding stock options.
For the six months ended October 27, 2000, for the purpose of calculating
earnings per share - basic, the weighted average number of common shares
outstanding was 71,129,708 and for the purpose of calculating earnings per
share-diluted, the weighted average number of common shares outstanding was
71,767,516, which includes 637,808 shares representing the dilutive effect of
common stock equivalents, principally options to acquire common stock.
For the three months ended October 29, 1999, for the purpose of calculating
earnings per share - basic, the weighted average number of common shares
outstanding was 58,040,626 and for the purpose of calculating earnings per
share-diluted, the weighted average number of common shares outstanding was
58,062,105, which includes 21,479 shares representing the dilutive effect of
outstanding stock options.
For the six months ended October 29, 1999, for the purpose of calculating
earnings per share - basic, the weighted average number of common shares
outstanding was 57,353,813 and for the purpose of calculating earnings per
share-diluted, the weighted average number of common shares outstanding was
57,359,332 which includes 5,519 shares representing the dilutive effect of
outstanding stock options.
7
<PAGE>
World Wrestling Federation Entertainment, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share and per share data)
(Unaudited)
5. Purchase of WWF New York Entertainment Complex
On May 3, 2000, the Company acquired the net assets of the WWF New York
entertainment complex from its licensee for $24,500. The Company accounted for
this transaction as a purchase. The allocation of the purchase price included
approximately $21,100 in fixed assets, $1,500 in current assets and $1,800 in
liabilities. Preliminary goodwill arising as a result of this transaction
amounted to approximately $3,700 which will be amortized over 10 years. Included
in depreciation and amortization expense for the three and six months ended
October 27, 2000 was $93 and $186, respectively, of goodwill amortization.
6. NBC Agreement
On June 12, 2000, the Company entered into a venture with NBC to own and fund a
professional football league, the XFL. Both the Company and NBC own 50% of the
league, which owns all eight football teams. In accordance with the terms of the
agreement, until NBC converts its non-voting equity into voting equity, the
Company will control the operations of the venture. NBC will, however, fund a
50% share of the venture's cash needs from the inception of the agreement. For
income tax purposes, both NBC and the Company will allocate the operations
equally in accordance with federal tax law.
7. Property and Equipment
Property and equipment consists of the following as of:
October 27, April 30,
2000 2000
---- ----
(Unaudited)
Land, buildings and improvements $65,464 $41,960
Equipment 36,223 25,414
------- -------
101,687 67,374
Less accumulated depreciation and amortization 28,283 25,890
------- -------
Total $73,404 $41,484
======= =======
Depreciation and amortization expense for property and equipment was $1,194 and
$479 for the three months ended October 27, 2000 and October 29, 1999,
respectively, and $2,404 and $1,138 for the six months ended October 27, 2000
and October 29, 1999, respectively.
8
<PAGE>
World Wrestling Federation Entertainment, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share and per share data)
(Unaudited)
8. Segment Information
The Company's operations are currently conducted within three reportable
segments, live and televised entertainment, branded merchandise and XFL
activities. 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.
Included in the branded merchandise segment is the operations of the Company's
WWF New York entertainment complex located in New York City. The XFL segment
currently consists of costs related to the development and start-up of the
Company's professional football league. 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. There are no intersegment revenues. Results
of operations and assets from non-U.S. sources are less than 10% of the
respective consolidated financial statement amounts. Unallocated assets include
primarily cash and cash equivalents and short-term investments. The table
presents information about the financial results of each segment for the three
and six months ended October 27, 2000 and October 29, 1999 and assets as of
October 27, 2000 and April 30, 2000.
<TABLE>
<CAPTION>
Three Months Six Months
Ended Ended
October 27, October 29, October 27, October 29,
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues:
Live and televised entertainment $ 81,694 $ 60,888 $ 156,873 $ 112,229
Branded merchandise 30,186 27,379 56,868 52,261
XFL -- -- -- --
---------- ---------- ---------- ---------
Total revenues $ 111,880 $ 88,267 $ 213,741 $ 164,490
========== ========== ========== =========
Depreciation and Amortization:
Live and televised entertainment $ 364 $ 310 $ 727 $ 725
Branded merchandise 573 -- 1,142 --
XFL 1,044 -- 1,605 --
Corporate 350 169 721 413
---------- ---------- ---------- ---------
Total depreciation and amortization $ 2,331 $ 479 $ 4,195 $ 1,138
========== ========== ========== =========
Operating Income:
Live and televised entertainment $ 32,510 $ 20,617 $ 61,780 $ 40, 331
Branded merchandise 7,380 11,401 15,315 21,435
XFL (7,567) -- (9,600) --
Corporate* (23,104) (17,058) (36,241) (26,256)
----------- ----------- ----------- ---------
Total operating income $ 9,219 $ 14,960 $ 31,254 $ 35,510
=========== =========== =========== =========
</TABLE>
*Included in corporate is a $7,000 charge related to the settlement of an
outstanding lawsuit for the three and six months ended October 27, 2000 and a
$6,020, non-cash charge related to the granting of stock options to certain
performers in the three and six months ended October 29, 1999.
As of
October 27, April 30,
Assets: 2000 2000
---- ----
Live and televised entertainment $ 68,514 $ 72,042
Branded merchandise 55,901 23,320
XFL 15,997 --
Unallocated 290,610 241,670
--------- ---------
Total assets $ 431,022 $ 337,032
========= =========
9
<PAGE>
World Wrestling Federation Entertainment, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share and per share data)
(Unaudited)
9. Commitments and Contingencies
Legal Proceedings
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 contesting 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. 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. At a hearing held on July 12, 2000 the Court allowed Plaintiffs to
amend their complaint and allowed the Company to file a motion to dismiss. The
Company believes that an unfavorable outcome in these actions may 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 parties have agreed in principle to a settlement agreement
that would dismiss all claims against the Company and the McMahons and allow the
Company the right to pursue contribution and indemnity from the companies which
manufactured and sold the equipment involved in the accident. As a result of the
settlement, the Company recorded a charge of $7,000 which was included in
selling, general and administrative expenses for the three and six months ended
October 27, 2000. The parties are awaiting final approval of the settlement by
the Canadian court on behalf of the minor children who are plaintiffs.
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 received a Notice of Charge
of Discrimination from the Equal Employment Opportunity Commission (EEOC) filed
by Nicole Bass. On January 27, 2000, the EEOC closed its file on her claim. The
Company filed a Motion to Dismiss the complaint on or about January 10, 2000.
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
10
<PAGE>
World Wrestling Federation Entertainment, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share and per share data)
(Unaudited
relief under Title VII for Sexual Harassment, Title 42 (S)1981 (a) for gender
bias, and for violations of the New York Human Rights law. The Company has filed
a Motion to Dismiss, Motion to Strike and Motion for a More Definite Statement
to the Amended Complaint. 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 the Company
understands them, the Company does not believe that an unfavorable outcome in
this action will have a material adverse effect on its financial condition,
results of operations or prospects.
On April 17, 2000, the WWF - World Wide Fund for Nature (the "Fund")
instituted legal proceedings against the Company in the English High Court
seeking injunctive relief and unspecified damages for alleged breaches of an
agreement between the Fund and the Company. The Fund alleges that the Company's
use of the initials "WWF" in various contexts, including (i) the wwf.com and
wwfshopzone.com internet domain names and in contents of various of the
Company's web sites; (ii) the Company's "scratch" logo; and (iii) certain oral
uses in the contexts of foreign broadcasts of its programming, violate the
agreement between the Fund and the Company. The Company believes that it has
meritorious defenses and intends to defend the action vigorously. On August 29,
2000, the Company filed its defense and counterclaim. The Company believes that
an unfavorable outcome of this suit may have a material adverse effect on its
financial condition, results of operations or prospects.
Pursuant to the Company's contract with USA Network, the Company tendered
to USA an offer made by Viacom for a strategic alliance agreement, which
included certain transmission rights for its programming. USA Network purported
to match the offer and simultaneously filed an action in the Delaware Court of
Chancery seeking (i) injunctive relief enjoining the contract between Viacom and
the Company, and (ii) an award of specific performance requiring the Company to
enter into a contract with USA Network. After expedited discovery proceedings
and a trial on the merits, the Court ruled in the Company's favor that USA
Network had failed to match Viacom's offer, which ruling was affirmed by the
Delaware Supreme Court on October 4, 2000, thus allowing the move of such
programming to Viacom.
The Company is not currently a party to any other material legal proceedings.
However, it 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.
11
<PAGE>
Item 2.
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 and live events; the licensing and sale of branded
consumer products featuring our highly successful World Wrestling Federation
brand; and the development and start-up of a professional football league, the
XFL.
Our operations have been organized around three 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 royalties from the sale by third-party licensees of
merchandise, the direct sale by us, including from our internet
operations, of merchandise, magazines and home videos, and from our
operations at WWF New York entertainment complex.
. The Company's professional football league, the XFL, which currently
consists of costs related to its development and start-up.
Recent Developments
At the end of September our programming began to air on cable networks owned by
Viacom. We successfully transitioned Raw is War, Livewire and Superstars from
the USA Network to TNN, while at the same time we successfully transferred
Sunday Night Heat from USA Network to MTV. Our television agreement with USA
Network expired in September 2000.
Our WWF SmackDown! program, which began in August 1999, has continued to show
steady growth in its ratings and is currently the number one program on the UPN
network. Our contract with UPN was recently extended for a period of three years
through September 2003. In August 2000, it was reported that News Corp.'s FOX
network agreed to acquire Chris-Craft Industries and its affiliates, who own ten
television stations in major markets throughout the United States, subject to
Federal Communications Committee approval. These ten television stations,
together with certain television stations owned by Viacom, form the UPN network.
While we believe that this development will not cause any significant
interruption in the airing of WWF SmackDown!, there can be no assurance that the
program will not suffer any interruption in its airing.
We have continued to experience growth in other aspects of our business as well.
We have increased our presence in the international marketplace. Our second
quarter results reflect revenues from our new programming distribution
agreements in the UK, Germany, and Japan. In May 2000, we acquired the WWF New
York entertainment complex located in New York City, which continues to
establish itself and now airs our television shows weekly and recently opened a
night club.
These new business initiatives, combined with our growing audience appeal, have
led to consistently high television ratings and pay-per-view buys, which have
continued to create demand for our product offerings.
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Results of Operations
Three months ended October 27, 2000 compared to the three months ended October
29, 1999
Net Revenues. Net revenues were $111.9 million for the three months ended
October 27, 2000 as compared to $88.3 million for the three months ended October
29, 1999, an increase of $23.6 million, or 27%. Live and televised entertainment
activities accounted for $20.8 million and branded merchandise activities
accounted for $2.8 million of the increase.
Live and Televised Entertainment. Net revenues were $81.7 million for the
three months ended October 27, 2000 as compared to $60.9 million for the three
months ended October 29, 1999, an increase of $20.8 million, or 34%.
Pay-per-view revenues increased by $8.0 million for the three months ended
October 27, 2000, which resulted from an increase of 0.5 million in pay-per-view
buys to approximately 2.1 million for the three months ended October 27, 2000
from approximately 1.6 million in the year ago quarter. Included in the buys for
the three months ended October 27, 2000 were 0.4 million out of period buys as
compared to 0.2 million in the year ago quarter. Revenues from our television
rights fees increased by $4.7 million, which resulted primarily from our new
agreement with Viacom and new and renewals of existing international television
agreements in the UK, Germany, Japan and various other countries. Revenues from
live events increased by $4.5 million, of which $3.3 million reflects increased
average ticket prices and $1.2 million reflects increased attendance. Revenues
from the sale of advertising time and sponsorships increased by $3.6 million in
the three months ended October 27, 2000 as a result of the full quarterly impact
of WWF SmackDown! on UPN and a higher rate per spot on our cable programming.
Branded Merchandise. Net revenues were $30.2 million for the three months
ended October 27, 2000 as compared to $27.4 million for the three months ended
October 29, 1999, an increase of $2.8 million, or 10%. Of the $2.8 million
increase, $4.2 million was from WWF New York, $1.1 million was from new media,
$0.7 million was from publishing, $0.6 million was from merchandise and $0.5
million was from home video. These increases were partially offset by a decline
in licensing of $4.6 million. In May 2000, we purchased the WWF New York
entertainment complex in New York City which generated revenues of $4.2 million
for the three months ended October 27, 2000. The increase in new media revenues
reflects improved sales from WWFShopzone.com, which is attributable to increased
traffic on our website and a shift in consumer spending from our catalog to
WWFShopzone.com. Publishing revenues increased by $0.6 million due primarily to
the sales of a special edition magazine featuring The Rock. Merchandise revenues
increased by $0.6 million due to increased venue sales offset partially by lower
catalog sales. Licensing revenues decreased by $4.6 million due to reduced
royalties generated in the toy and apparel categories. Several of our more
significant licensees were affected by a large build up of inventory at retail.
Recently we instituted a consumer products marketing strategy which incorporates
as some of its features, programs to assist our licensees in the management of
retail inventory, cross-marketing techniques and other promotional campaigns.
Cost of Revenues. Cost of revenues was $61.6 million for the three months
ended October 27, 2000 as compared to $52.1 million for the three months ended
October 29, 1999, an increase of $9.5 million, or 18%. Live and televised
entertainment activities accounted for $8.3 million and branded merchandise
activities accounted for $1.2 million of the increase. Gross profit as a
percentage of net revenues was 45% in the three months ended October 27, 2000 as
compared to 41% in the prior year quarter.
Live and Televised Entertainment. The cost of revenues to create and
distribute our live and televised entertainment was $45.6 million for the three
months ended October 27, 2000 as compared to $37.3 million for the three months
ended October 29, 1999, an increase of $8.3 million, or 22%. Of the $8.3 million
increase, $3.1 million related to increased minimum advertising guarantees due
substantially to our new contract with UPN. Of the remaining $5.2 million
increase, $2.5 million was due to an increase in television production costs and
costs associated with stage hands and freelance crews, coupled with three
additional television shows. Additionally, sponsorship expense increased by $1.6
million and arena rental charges increased by $1.0 million, which was directly
related to our increased live event revenues. Gross profit as a percentage of
net revenues was 44% in the three months ended October 27, 2000 as compared to
39% in the year ago quarter. The gross margin increase of 5% was due primarily
to the additional number
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of prior year buys for which the costs have been substantially absorbed in the
prior year and guest talent costs which were incurred only in the three months
ended October 29, 1999.
Branded Merchandise. The cost of revenues to market and promote our branded
merchandise was $16.0 million for the three months ended October 27, 2000 as
compared to $14.8 million for the three months ended October 29, 1999, an
increase of $1.2 million, or 8%. The increase in cost of revenues was due
primarily to the cost of revenues associated with WWF New York of $1.3 million,
which was acquired in May 2000 and an increase of $0.6 million related to new
media partially offset by a decrease of $1.4 million in licensing cost of
revenues. The increase of $0.6 million in new media cost of revenues was due to
costs associated with WWFShopzone.com, which is directly related to increased
revenues. Licensing cost of revenues decreased due to lower talent royalties and
commissions, both of which are directly related to the reduction of revenues.
Gross profit as a percentage of net revenues was 47% for the three months ended
October 27, 2000 as compared to 46% in the year ago quarter.
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.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses were $32.2 million for the three months ended October
27, 2000 as compared to $14.7 million for the three months ended October 29,
1999, an increase of $17.5 million. Of this increase, $7.0 million was due to
the settlement of an outstanding lawsuit, which was net of insurance recoveries.
As part of the settlement, we have the right to pursue contribution and
indemnity from the companies which manufactured and sold the equipment involved
in the accident. Additionally, $2.5 million was due to an increase in staff
related expenses, which reflects the expansion of our business. The increase
also includes $2.8 million of overhead associated with the WWF New York
entertainment complex located in New York City, $1.5 million associated with our
corporate communications efforts and consulting fees, and $1.3 million related
to increased advertising and promotion costs, due in part to the transition of
five hours of our programming to networks owned by Viacom. The number of
personnel as of October 27, 2000 and October 29, 1999 was 720 and 336,
respectively. Included in the 720 employees were 304 full and part time
employees of WWF New York. Selling, general and administrative expenses as a
percentage of net revenues, exclusive of the $7.0 million settlement was 23% for
the three months ended October 27, 2000 as compared to 17% in the year ago
quarter.
XFL Start-up Costs. XFL start-up costs were $6.5 million for the three
months ended October 27, 2000, which we share equally with NBC. These costs were
related to the development and start-up of our professional football league and
consist primarily of staff related expenses, consulting fees and advertising and
promotion expenses. The XFL costs are expected to increase significantly as we
near the start of the season. As of December 1, 2000, we had 248 full-time XFL
employees, including the individual team business offices and coaching staff. To
complete the XFL's staffing requirement, we anticipate hiring approximately 100
employees over the next one to two months which will include primarily football
and team administrative personnel. The draft was completed and 560 players were
selected out of approximately 25,000 applicants. The requirement for the start
of the season is 360 players for the eight teams. These players will be selected
out of the 560 that were initially drafted.
Depreciation and Amortization. Depreciation and amortization expense was
$2.3 million in the three months ended October 27, 2000 as compared to $0.5
million in the three months ended October 29, 1999. The increase of $1.8 million
reflects $1.0 million associated with stock purchased by NBC, $0.7 million from
increased spending on capital projects and $0.1 million of goodwill amortization
related to WWF New York.
Interest Expense. Interest expense was $0.2 million for the three months
ended October 27, 2000 as compared to $0.7 million for the three months ended
October 29, 1999. The decrease of $0.5 million was
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due to lower debt balances in fiscal 2001. On June 30, 1999, we issued a $32.0
million, note payable to our former sole stockholder. This note was unsecured,
accrued interest at 5% and was paid in full as of April 30, 2000.
Interest and Other Income. Interest and other income was $3.6 million for
the three months ended October 27, 2000 as compared to $0.9 million for the
three months ended October 29, 1999. The increase of $2.7 million was primarily
due to increased interest income resulting from significantly higher cash and
short-term investment balances in fiscal 2001. Our average cash and short-term
investment balance for the three months ended October 27, 2000 was approximately
$250.0 million as compared to approximately $110.0 million for the three months
ended October 29, 1999.
Provision for Income Taxes. 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, state and foreign income taxes. Our effective tax rate, which otherwise
would have been approximately 38%, was approximately 52.1% for the three months
ended October 27, 2000. Our provision for income taxes was $6.6 million in the
three months ended October 27, 2000 as compared to $7.3 million in the three
months ended October 29, 1999. Included in our pre-tax income for the three
months ended October 27, 2000 was $1.0 million of amortization of non-cash stock
charges, which are non-deductible for income tax purposes. Additionally, in
connection with our venture agreement with NBC, we do not record a tax benefit
for NBC's portion of the XFL's losses. As a result of the change in our tax
status, for the three months ended October 29, 1999, we were 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. The primary reason for this high tax
provision of $7.3 million was due to the cumulative adjustment recorded in the
second quarter of approximately $4.4 million relating to first quarter earnings
taxed at an effective annual federal and state rate of 22% caused by the
conversion from a Subchapter S Corporation to a Subchapter C Corporation.
Minority Interest. Minority interest was $3.4 million for the three months
ended October 27, 2000, which reflects NBC's interest in the XFL.
Six months ended October 27, 2000 compared to the six months ended October 29,
1999
Net Revenues. Net revenues were $213.7 million for six months ended October
27, 2000 as compared to $164.5 million for the six months ended October 29,
1999, an increase of $49.2 million, or 30%. Live and televised entertainment
activities accounted for $44.7 million and branded merchandise activities
accounted for $4.5 million of the increase.
Live and Televised Entertainment. Net revenues were $156.9 million for the
six months ended October 27, 2000 as compared to $112.2 million for the six
months ended October 29, 1999, an increase of $44.7 million, or 40%. Pay-per-
view revenues increased by $17.4 million in the six months ended October 27,
2000, which resulted from pay-per-view buys increasing to approximately 4.0
million in the six months ended October 27, 2000 from approximately 3.0 million
in the prior year, an increase of 1.0 million. Included in these buys were 0.8
million and 0.3 million of prior year buys for the six months ended October 27,
2000 and the year ago quarter, respectively. Revenues from the sale of
advertising time and sponsorships increased by $14.3 million for the six months
ended October 27, 2000 as a result of the year to date impact of WWF SmackDown!
on UPN and a higher rate per spot on our cable programming. Revenues from live
events increased by $7.1 million due primarily to increased average ticket
prices. Revenues from our television rights fees increased by $5.8 million,
which resulted from our new agreement with Viacom and new and renewals of our
existing international television agreements in the UK, Germany, Japan and
various other countries.
Branded Merchandise. Net revenues were $56.8 million for the six months
ended October 27, 2000 as compared to $52.3 million for the six months ended
October 29, 1999, an increase of $4.5 million, or 9%. Of the $4.5 million
increase, $7.5 million related to the WWF New York, which we acquired in May
2000, $2.4 million was from new media and $0.6 million was from merchandise.
These increases were partially offset by a decline in home video of $2.8 million
and licensing of $3.7 million. The increase in new media
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revenues reflects improved sales at WWFShopzone.com which was attributable to
increased traffic on our website and a shift in consumer spending from our
catalog to WWFShopzone.com. Home Video revenues decreased by $2.8 million due to
a decrease in sell-thru and rental sales. Licensing revenues decreased by $3.7
million due to reduced royalties generated in the toy and apparel categories.
Several of our more significant licensees were affected by a large build up of
inventory at retail. Recently we instituted a consumer products marketing
strategy which incorporates as some of its features, programs to assist our
licensees in the management of retail inventory, cross-marketing techniques and
other promotional campaigns.
Cost of Revenues. Cost of revenues was $116.7 million for the six months
ended October 27, 2000 as compared to $93.2 million for the six months ended
October 29, 1999, an increase of $23.5 million, or 25%. Live and televised
entertainment activities accounted for $22.1 million and branded merchandise
activities accounted for $1.4 million of the increase. Gross profit as a
percentage of net revenues was 45% for the six months ended October 27, 2000 as
compared to 43% in the prior year.
Live and Televised Entertainment. The cost of revenues to create and
distribute our live and televised entertainment was $87.9 million for the six
months ended October 27, 2000 as compared to $65.8 million for the six months
ended October 29, 1999, an increase of $22.1 million, or 34%. Of the $22.1
million increase, $8.0 million related to increased minimum advertising
guarantees due substantially to our new contract with UPN. Of the remaining
$14.1 million increase, $6.0 million was due to an increase in television
production costs and costs associated with stage hands and freelance crews
coupled with eleven additional shows. In addition, $1.9 million was due to an
increase in fees paid to our performers offset partially by guest talent, which
we did not have in the current fiscal year. Additionally, $1.8 million was due
to an increase in arena rental charges, which was directly related to our
increased live event revenues and sponsorship expense increased by $1.7 million.
Gross profit as a percentage of net revenues was 44% for the six months ended
October 27, 2000 as compared to 41% for the six months ended October 29, 1999.
The gross margin increase of 3% was due to the additional number of prior year
buys which the costs have been substantially absorbed in the prior year and
guest talent costs which were incurred only in the six months ended October 29,
1999.
Branded Merchandise. The cost of revenues to market and promote our branded
merchandise was $28.8 million for the six months ended October 27, 2000 as
compared to $27.4 million for the six months ended October 29, 1999, an increase
of $1.4 million, or 5%. Of this increase in cost of revenues, $2.3 million was
due primarily to the cost of revenues associated with the WWF New York, which we
acquired in May 2000, and $1.1 million related to new media. These increases
were partially offset by a decrease of $1.7 million in home video and $2.2
million in licensing cost of revenues. The increase of $1.1 million in new media
cost of revenues was primarily due to costs associated with WWFShopzone.com,
which were directly related to increased revenues. The decrease in home video
cost of revenues was due to lower unit sales in fiscal 2001. Licensing cost of
revenues decreased due to lower talent royalties and commissions, both of which
were directly related to a reduction in licensing revenues. Gross profit as a
percentage of net revenues was 49% for the six months ended October 27, 2000 as
compared to 48% in the prior year.
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.
Selling, General and Administrative Expenses . Selling, general and
administrative expenses were $53.6 million for the six months ended October 27,
2000 as compared to $28.6 million for the six months ended October 29, 1999 an
increase of $25.0 million, or 87%. Of this increase, $7.0 million was due to the
settlement of an outstanding lawsuit, which was net of insurance recoveries. As
part of the settlement, we have the right to pursue contribution and indemnity
from the companies which manufactured and sold the equipment involved in the
accident. Of the remaining $18.0 million increase, $6.9 million was due to an
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increase in staff related expenses, which reflects the expansion of our
business. The increase also reflects the full six month effect of new employment
contracts with the chairman and the chief executive officer, which became
effective July 1, 1999. In addition, the increase also relates to $4.9 million
of overhead associated with the WWF New York entertainment complex, $1.5 million
associated with our corporate communications efforts and $2.4 million related to
increased advertising and promotion costs, primarily due to the transition of
five hours of our programming to networks owned by Viacom. The number of
personnel as of October 27, 2000 and October 29, 1999 was 720 and 336,
respectively. Included in the 720 employees were 304 full and part time
employees of WWF New York. Selling, general and administrative expenses as a
percentage of net revenues, exclusive of the $7.0 million settlement was 22% for
the six months ended October 27, 2000 as compared to 17% for the six months
ended October 29, 1999.
XFL Start-up Costs. XFL start-up costs were $8.0 million in the six months
ended October 27, 2000. These costs were related to the development and start-up
of our professional football league and consist primarily of staff related
expenses, consulting fees and advertising and promotion expenses. Of the $8.0
million in start-up costs, $1.5 million was in the first quarter of fiscal 2001
and $6.5 million was incurred in the second quarter of fiscal 2001. The XFL
costs are expected to increase significantly as we near the start of the season.
As of December 1, 2000, we had 248 full-time XFL employees, including the
individual team business offices and coaching staff. To complete the XFL's
staffing requirement, we anticipate hiring approximately 100 employees over the
next one to two months which will include primarily football and team
administrative personnel. The draft was completed and 560 players were selected
out of approximately 25,000 applicants. The requirement for the start of the
season is 360 players for the eight teams. These players will be selected out of
the 560 that were initially drafted.
Depreciation and Amortization. Depreciation and amortization expense was
$4.2 million for the six months ended October 27, 2000 as compared to $1.1
million for the six months ended October 29, 1999. The increase of $3.1 million
reflects $1.6 million associated with stock purchased by NBC, $1.3 million from
increased spending on capital projects and $0.2 million of goodwill amortization
related to WWF New York.
Interest Expense. Interest expense was $0.5 million for the six months
ended October 27, 2000 as compared to $1.1 million for the six months ended
October 29, 1999. The decrease of $0.6 million was due to lower debt balances in
fiscal 2001. On June 30, 1999, we issued a $32.0 million note payable to our
former sole stockholder. This note was unsecured, accrued interest at 5% and was
paid in full as of April 30, 2000.
Interest and Other Income. Interest and other income was $6.2 million for
the six months ended October 27, 2000 as compared to $1.7 million for the six
months ended October 29, 1999. The increase of $4.5 million was primarily due to
increased interest income resulting from significantly higher cash and short
term investment balances in fiscal 2001. Our average cash balance and short-term
investment for the six months ended October 27, 2000 was approximately $235.0
million as compared to approximately $80.0 million for the six months ended
October 29, 1999.
Provision for Income Taxes. 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, state and foreign income taxes. Our effective tax rate, which otherwise
would have been approximately 38%, was approximately 44.4% for the six months
ended October 27, 2000. As a consequence to this tax change, our provision for
income taxes substantially increased to $16.4 million in the six months ended
October 27, 2000 as compared to $8.0 million in the six months ended October 29,
1999. Included in our pre-tax income for the six months ended October 27, 2000
was $1.6 million of amortization of non-cash stock charges, which are
non-deductible for income tax purposes. Additionally, in connection with our
venture agreement with NBC, we do not record a tax benefit for NBC's portion of
the XFL's losses. As a result of the change in our tax status, for the six
months ended October 29, 1999, we were taxed on our income at an effective rate
of approximately 22.2% 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 Subchapter S Corporation, we had to provide only for some
state and foreign income taxes, as our stockholder was responsible for the
payment of federal and certain other
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state income taxes. On a pro forma basis, as a subchapter C Corporation,
federal, state, and foreign income taxes would have been $16.4 million for the
six months ended October 29, 1999.
Minority Interest. Minority interest was $4.2 million for the six months
ended October 27, 2000, which reflects NBC's interest in the XFL.
Liquidity and Capital Resources
Cash flows from operating activities for the six months ended October 27,
2000 and October 29, 1999 were $13.0 million and $34.6 million, respectively.
The decrease in cash flows from operations was due primarily to the start-up
costs related to the XFL and the payments of estimated taxes. In connection with
the initial public offering our tax status changed to a C Corporation. Prior to
the initial public offering, we were an S Corporation and accordingly taxes were
paid by the sole shareholder. Working capital, consisting of current assets less
current liabilities was $271.2 million as of October 27, 2000 and $219.8 million
as of April 30, 2000.
Cash flows used in investing activities for the six months ended October
27, 2000 and October 29, 1999 were $115.6 million and $5.0 million,
respectively. Included in the $115.6 million was $77.9 million invested in
short-term investments. As of October 27, 2000 we had approximately $185.5
million invested in short term corporate and government obligations. The
purchase of property and equipment of $13.2 million during the six months ended
October 27, 2000 was related to the purchase of equipment for our television and
post-production facility, and modifications to our corporate headquarters in
Stamford, Connecticut in order to accommodate the increase in personnel,
including those hired for the XFL. Capital expenditures for the next twelve to
eighteen months , excluding the XFL and WWF New York, are estimated to be
approximately $35.0 million, which includes the renovation of our television
facility and the expansion of our new media business. On May 3, 2000, we
purchased the WWF New York entertainment complex in Times Square from our
licensee for approximately $24.5 million. We expect to make $5.0 million to $7.0
million in capital expenditures in fiscal 2001 relating to this facility.
Cash flows provided by financing activities for the six months ended
October 27, 2000 and for October 29, 1999 were $67.1 million and $151.0 million,
respectively. On June 12, 2000, NBC purchased approximately 2.3 million newly
issued shares of our Class A common stock at $13 per share for a total
investment of $30.0 million. As a result of this stock purchase, we recorded a
non-cash charge of $10.7 million, which is being amortized over thirty months
and commenced in the first quarter of fiscal 2001. On July 28, 2000, Viacom
purchased approximately 2.3 million shares of our Class A common stock at $13
per share for a total investment of $30.0 million. During the six months ended
October 27, 2000 both NBC and we made cash capital contributions of $6.9 million
to fund the XFL. In fiscal 2001, we expect to invest $15.0 million to $20.0
million for our share of the XFL's start-up costs, its first season of
operations and its capital expenditures. Based on current assumptions we expect
the full capitalization to be approximately $100.0 million through December 31,
2002. In accordance with the terms of our agreement with NBC, until NBC converts
its non-voting equity into voting equity, we will control and manage the
operations of the venture.
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 December 1,
2000, no amounts were outstanding under the revolving portion of this credit
agreement. We intend to seek modifications to our existing credit agreement or
enter into new arrangements with other lenders. As a result of our current cash
and short-term investment balances, we do not anticipate the need for this
working capital line in the short-term.
We have entered into various contracts under the terms of which we are
required to make guaranteed payments, including:
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. Performance contracts with all of our performers, some of which provide for
future minimum guaranteed payments.
. Television distribution agreements with UPN and Viacom that provide for the
payment of the greater of a fixed percentage of the revenues from the sale
of television advertising time or an annual minimum payment. Our agreement
with UPN covers two hours of programming every week and expires in
September 2003. Our agreement with Viacom covers five hours of programming
every week and expires in September 2005.
. Various operating leases related to our sales offices, warehouse space and
corporate jet.
. Employment contract with Vincent K. McMahon, which is for a seven-year term
and employment contract with Linda E. McMahon which is for a four-year
term.
. Employment contracts with some of our employees, including certain
employees of the XFL, the terms of which are generally for a period of two
to three years.
Our aggregate minimum payment obligations under these contracts is $56.3
million, $48.6 million, and $42.4 million for fiscal 2001, 2002 and 2003,
respectively. We anticipate that all of these obligations will be satisfied out
of cash flows from operating activities.
We believe that cash generated from operations and from existing cash and
short-term investments, will be sufficient to meet our cash needs over the next
twelve months for working capital, capital expenditures and strategic
investments, including our share of the funding for the XFL. 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.
Recent Pronouncements
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, as amended by SFAS No. 137 "Accounting
for Derivative Instruments and Hedging Activities." The statement requires the
recognition of all derivatives as either assets or liabilities in the balance
sheet and the measurement of those instruments at fair value, and based on the
amendment, effective for all fiscal quarters of all fiscal years beginning after
June 15, 2000, which, therefore, would require us to adopt such statement on May
1, 2001. Although our involvement in derivative type instruments is limited, the
adoption of this statement would require us to reflect on our balance sheet the
estimated fair value of warrants that we received in connection with some
license agreements.
In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin No.101 ("SAB 101"), Revenue Recognition in Financial
Statements". SAB 101 summarizes certain of the SEC's views in applying generally
accepted accounting principles to revenue recognition in financial statements.
On June 26, 2000, the SEC issued SAB 101B to defer the effective date of
implementation of SAB 101 until no later than the fourth fiscal quarter of
fiscal years beginning after December 15, 1999. We are required to adopt SAB 101
by the quarter ending April 30, 2001. We are evaluating whether SAB 101 will
cause any change in our revenue recognition policies and procedures.
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 expressed or implied by such forward-
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looking statements. The following factors, among others, could cause actual
results to differ materially from those contained in forward-looking statements
made in this Quarterly Report on Form 10-Q and in oral statements made by our
authorized officers: (i) our failure to continue to develop creative and
entertaining programs and events, (ii) our failure to retain or continue to
recruit key performers (iii) the loss of the creative services of Vincent
McMahon; (iv) our failure to maintain or renew key agreements (v) we may not be
able to compete effectively, especially against competitors with greater
financial resources or marketplace presence, (vi) we may not be able to protect
our intellectual property rights; (vii) a decline in the general economic
conditions or in the popularity of our brand of sports entertainment; (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, or be required to conduct certain aspects of our
business differently, if pending or future material litigation is resolved
unfavorably; (xi) the failure of our new complementary businesses, including our
professional football league, the XFL, and our entertainment complex, WWF New
York and other new or complementary businesses into which we may expand in the
future could adversely affect our existing businesses; (xii) our controlling
stockholder can exercise significant influence over our affairs, and his
interests could conflict with the holders of our Class A common stock; and
(xiii) a substantial number of shares will be eligible for future sale by the
controlling stockholder, and the sale of those shares could lower our stock
price. 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.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
No information with respect to market risk has been included as it has not
been material to our financial condition or results of operations.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
See Note 9 to Notes to Consolidated Financial Statements, which is
incorporated herein by reference.
Item 4. Submission of Matters to a Vote of Security Holders
The Annual Meeting of Stockholders was held on September 22, 2000.
Proposal 1 - Election of Directors:
Shares Voted
------------
Directors Shares For Shares Withheld
--------- ---------- ---------------
Vincent K. McMahon 581,717,420 74,959
Linda E. McMahon 581,717,466 74,913
Lowell P. Weicker, Jr. 581,717,492 74,887
David Kenin 581,717,533 74,846
Joseph Perkins 581,717,529 74,850
Stuart C. Snyder 581,717,513 74,866
August J. Liguori 581,717,508 74,871
Proposal 2 - Ratification of Selection of Independent Auditors:
Stockholders ratified the appointment of Deloitte & Touche LLP to
conduct the annual audit of the consolidated financial statements
of the Company for the fiscal year ending April 30, 2001. The vote
was 581,772,661 shares for; 12,420 shares against; and 7,298
shares abstained.
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Item 6. Exhibits and Reports on Form 8-K
(a.) Exhibits
11.1 Computation of Net Income Per Common Share
27. Financial Data Schedule
(b.) Reports on Form 8-K
On September 20, 2000, the Company filed a Report on Form 8-K dated
September 18, 2000 under Item 5 Other Events.
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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: December 11, 2000 By: /s/ August J. Liguori
---------------------
August J. Liguori
Executive Vice President,
Chief Financial Officer and Treasurer
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