WORLD WRESTLING ENTERTAINMENTINC - 10-Q Quarterly Report

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

FORM 10-Q

ý	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended October 25, 2002
or
o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to

Commission file number 0-27639

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

Delaware
(State or other jurisdiction of
incorporation or organization)

04-2693383
(I.R.S. Employer
Identification No.)

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

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

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

At December 2, 2002, the number of shares outstanding of the Registrant's Class A common stock, par value $.01 per share, was 15,625,935 and the number of shares outstanding of the Registrant's Class B common stock, par value $.01 per share, was 54,780,207.

World Wrestling Entertainment, Inc.

Table of Contents

			Page #
Part I—FINANCIAL INFORMATION
	Item 1.	Financial Statements
		Consolidated Balance Sheets as of October 25, 2002 (Unaudited) and April 30, 2002	2
		Consolidated Statements of Operations for the three and six months ended October 25, 2002 (Unaudited) and October 26, 2001 (Unaudited)	3
		Consolidated Statements of Stockholders' Equity and Comprehensive Income for the six months ended October 25, 2002 (Unaudited)	4
		Consolidated Statements of Cash Flows for the six months ended October 25, 2002 (Unaudited) and October 26, 2001 (Unaudited)	5
		Notes to Consolidated Financial Statements (Unaudited)	6
	Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	14
	Item 3.	Quantitative and Qualitative Disclosures about Market Risk	21
	Item 4.	Controls and Procedures	21
Part II—OTHER INFORMATION
	Item 1.	Legal Proceedings	22
	Item 4.	Submission of Matters to a Vote of Security Holders	22
	Item 6.	Exhibits and Reports on Form 8-K	22
Signature and Certifications			23

World Wrestling Entertainment, Inc.

Consolidated Balance Sheets

(dollars in thousands, except share and per share data)

			As of October 25, 2002			As of April 30, 2002
			(Unaudited)
ASSETS
CURRENT ASSETS:
	Cash and cash equivalents		$	56,701		$	86,659
	Short-term investments			207,167			207,407
	Accounts receivable (less allowance for doubtful accounts of $2,662 as of October 25, 2002 and $2,890 as of April 30, 2002)			48,632			63,835
	Inventory, net			1,517			1,851
	Prepaid expenses and other current assets			18,309			15,935

		Total current assets		332,326			375,687
PROPERTY AND EQUIPMENT — NET				92,670			91,759
GOODWILL—NET				2,533			2,533
INTANGIBLE ASSETS				9,055			9,055
OTHER ASSETS				9,122			8,407

TOTAL ASSETS			$	445,706		$	487,441

LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
	Current portion of long-term debt		$	624		$	601
	Accounts payable			15,201			21,565
	Accrued expenses and other liabilities			36,044			42,511
	Deferred income			23,465			23,414
	Net liabilities of discontinued operations			288			610

		Total current liabilities		75,622			88,701
LONG-TERM DEBT				8,985			9,302
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
	Class A common stock: ($.01 par value; 180,000,000 shares authorized; 18,215,427 shares issued as of October 25, 2002 and 18,184,177 shares issued as of April 30, 2002)			182			181
	Class B common stock: ($.01 par value; 60,000,000 shares authorized; 54,780,207 shares issued as of October 25, 2002 and April 30, 2002)			548			548
	Treasury Stock (2,589,492 shares repurchased as of October 25, 2002 and 100,000 shares repurchased as of April 30, 2002)			(30,693	)		(1,139	)
	Additional paid-in capital			297,362			296,938
	Accumulated other comprehensive loss			(659	)		(525	)
	Retained earnings			94,359			93,435

		Total stockholders' equity		361,099			389,438

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY			$	445,706		$	487,441

See Notes to Consolidated Financial Statements

World Wrestling Entertainment, Inc.

Consolidated Statements of Operations

(dollars in thousands, except per share data)

(Unaudited)

	Three Months Ended					Six Months Ended
	October 25, 2002			October 26, 2001		October 25, 2002		October 26, 2001
Net revenues	$	92,768		$	98,208	$	180,915	$	188,877
Cost of revenues		64,189			62,835		122,708		121,101
Selling, general and administrative expenses		27,252			27,017		51,155		52,273
Depreciation and amortization		2,915			2,645		5,729		4,885

Operating (loss) income		(1,588	)		5,711		1,323		10,618
Interest expense		188			169		379		400
Interest income and other (loss) income, net		(730	)		2,274		390		17,045

(Loss) income before income taxes		(2,506	)		7,816		1,334		27,263
(Benefit) provision for income taxes		(902	)		2,975		410		10,430

Net (loss) income	$	(1,604	)	$	4,841	$	924	$	16,833

(Loss) earnings per common share — basic and diluted	$	(0.02	)	$	0.07	$	0.01	$	0.23

See Notes to Consolidated Financial Statements

World Wrestling Entertainment, Inc.

Consolidated Statements of Stockholders' Equity and Comprehensive Income

(dollars and shares in thousands)

(Unaudited)

											Accumulated Other Comprehensive Loss
		Common Stock				Treasury Stock			Additional Paid-in Capital					Retained Earnings
		Shares		Amount		Treasury Stock			Additional Paid-in Capital					Retained Earnings		Total
Balance, May 1, 2002		72,864		$	729	$	(1,139	)	$	296,938	$	(525	)	$	93,435	$	389,438
Comprehensive income:
	Translation adjustment				—		—			—		(55	)		—		(55	)
	Unrealized holding loss, net of tax				—		—			—		(79	)		—		(79	)
	Net income				—		—			—		—			924		924

Total comprehensive income																	790

	Exercise of stock options	31			1		—			404		—			—		405
	Tax benefit from exercise of stock options									20		—			—		20
	Repurchase of common stock	(2,489	)		—		(29,554	)		—		—			—		(29,554	)

Balance, October 25, 2002		70,406		$	730	$	(30,693	)	$	297,362	$	(659	)	$	94,359	$	361,099

See Notes to Consolidated Financial Statements

World Wrestling Entertainment, Inc.

Consolidated Statements of Cash Flows

(dollars in thousands)

(Unaudited)

					Six Months Ended
					October 25, 2002			October 26, 2001
OPERATING ACTIVITIES:
Net income					$	924		$	16,833
	Adjustments to reconcile net income to net cash provided by (used in) operating activities:
		Gain on sale of stock				—			(7,138	)
		Effect of change in accounting principle, net of tax				—			(1,487	)
		Revaluation of warrants				—			(401	)
		Depreciation and amortization				5,729			4,885
		Amortization of deferred income				635			872
		Provision for doubtful accounts				603			(378	)
		Provision for inventory obsolescence				513			1,403
		Changes in assets and liabilities:
			Accounts receivable			14,859			28,573
			Inventory			(179	)		(567	)
			Prepaid expenses and other assets			(3,252	)		2,782
			Accounts payable			(6,363	)		(1,864	)
			Accrued expenses and other liabilities			(6,311	)		(6,509	)
			Deferred income			(585	)		(3,002	)

				Net cash provided by continuing operations		6,573			34,002
				Net cash used in discontinued operations		(645	)		(13,042	)

				Net cash provided by operating activities		5,928			20,960

INVESTING ACTIVITIES:
Purchase of property and equipment						(6,880	)		(11,724	)
Sale of short-term investments, net						116			1,840
Net proceeds from exercise and sale of warrants						—			10,903

				Net cash (used in) provided by continuing operations		(6,764	)		1,019
				Net cash provided by discontinued operations		—			1,439

				Net cash (used in) provided by investing activities		(6,764	)		2,458

FINANCING ACTIVITIES:
Repayments of long-term debt						(295	)		(273	)
Repurchase of common stock						(29,554	)		(1,139	)
Net proceeds from exercise of stock options						405			—

				Net cash used in continuing operations		(29,444	)		(1,412	)
				Net cash provided by discontinued operations		322			5,100

				Net cash (used in) provided by financing activities		(29,122	)		3,688

NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS						(29,958	)		27,106
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD						86,659			45,040

CASH AND CASH EQUIVALENTS, END OF PERIOD					$	56,701		$	72,146

SUPPLEMENTAL CASH FLOW INFORMATION:
		Cash paid during the period for income taxes, net of refunds			$	2,628		$	5,087
		Cash paid during the period for interest			$	379		$	400

See Notes to Consolidated Financial Statements

World Wrestling 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 Entertainment, Inc., and its wholly owned subsidiaries, TSI Realty Company, World Wrestling Entertainment Canada, Inc., World Wrestling Entertainment (International) Limited, Stephanie Music Publishing, Inc., WCW, Inc., Event Services, Inc., The World Entertainment, Inc., WWE Hotel & Casino Ventures, LLC, WWE Sports, Inc. and the Company's majority-owned subsidiary Titan/Shane Partnership (collectively the "Company"). WWE Sports, Inc. owns 50% and had operating control of XFL, LLC, a professional football league, which was a venture with National Broadcasting Company ("NBC"). In early May 2001, the Company formalized its decision to discontinue operations of the XFL and, accordingly, reported XFL operating results and estimated shutdown costs as Discontinued Operations as of April 30, 2001. For the three and six months ended October 25, 2002 and October 26, 2001, there were no results from discontinued operations.

All significant intercompany transactions and balances have been eliminated. Certain prior year amounts have been reclassified to conform with the current year presentation. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation of financial position, results of operations and cash flows at the dates and for the periods presented have been included. 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 Entertainment 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 and sponsorships, domestic and international television rights fees and pay-per-view buys.
•: Branded merchandise, which consists of licensing and direct sale of merchandise. Revenues include sales of consumer products through third party licensees and direct marketing and sales of merchandise, magazines and home videos. Revenues also include those generated from its entertainment complex located in New York City.

2. Earnings Per Share

For the three months ended October 25, 2002, for the purpose of calculating earnings per share—basic and diluted, the weighted average number of common shares outstanding was 70,407,229.

For the six months ended October 25, 2002, for the purpose of calculating earnings per share—basic and diluted, the weighted average number of common shares outstanding was 70,749,703.

For the three months ended October 26, 2001, for the purpose of calculating earnings per share—basic and diluted, the weighted average number of common shares outstanding was 72,837,879.

For the six months ended October 26, 2001, for the purpose of calculating earnings per share—basic, the weighted average number of common shares outstanding was 72,884,339 and for the purpose of calculating earnings per share—diluted, the weighted average number of common shares outstanding was 72,884,588, which includes 249 shares representing the dilutive effect of common stock equivalents.

Excluded from the calculation of weighted average common shares outstanding for dilutive earnings per share purposes were outstanding options to purchase 7,248,925 common shares for the three and six months ended October 25, 2002 and 6,544,000 and 6,534,000 for the three and six months ended October 26, 2001, respectively, because the impact would have been anti-dilutive.

3. Segment Information

The Company's continuing 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 and the operations of the Company's entertainment complex. 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. Revenues derived from sales outside of North America were approximately $13,575 and $23,500 for the three and six months ended October 25, 2002, respectively, and approximately $6,975 and $14,950 for the three and six months ended October 26, 2001, respectively. The table presents information about the financial results of each segment for the three and six months ended October 25,

2002 and October 26, 2001 and assets as of October 25, 2002 and April 30, 2002. Unallocated assets consist primarily of cash, short-term investments and real property.

		Three Months Ended						Six Months Ended
		October 25, 2002			October 26, 2001			October 25, 2002			October 26, 2001
Net Revenues:
	Live and televised entertainment	$	70,652		$	72,676		$	138,468		$	145,069
	Branded merchandise		22,116			25,532			42,447			43,808

	Total net revenues	$	92,768		$	98,208		$	180,915		$	188,877

Depreciation and Amortization:
	Live and televised entertainment	$	861		$	743		$	1,668		$	1,475
	Branded merchandise		1,190			628			2,387			1,202
	Corporate		864			1,274			1,674			2,208

	Total depreciation and amortization	$	2,915		$	2,645		$	5,729		$	4,885

Operating Income:
	Live and televised entertainment	$	16,951		$	22,439		$	35,890		$	46,117
	Branded merchandise		2,027			3,434			3,518			2,475
	Corporate		(20,566	)		(20,162	)		(38,085	)		(37,974	)

	Total operating (loss) income	($	1,588	)	$	5,711		$	1,323		$	10,618

		As of
		October 25, 2002		April 30, 2002
Assets:
	Live and televised entertainment	$	64,611	$	78,799
	Branded merchandise		50,454		51,540
	Unallocated		330,641		357,102

	Total assets	$	445,706	$	487,441

4. Property and Equipment

Property and equipment consisted of the following as of:

		October 25, 2002		April 30, 2002
Land, buildings and improvements		$	85,296	$	83,047
Equipment			42,325		43,747
Vehicles			740		769

			128,361		127,563
Less accumulated depreciation and amortization			35,691		35,804

	Total	$	92,670	$	91,759

Depreciation and amortization expense for property and equipment was $2,915 and $5,729 for the three and six months ended October 25, 2002, respectively, and $2,645 and $4,885 for the three and six months ended October 26, 2001, respectively.

5. Investments

Short-term investments consisted of the following as of October 25, 2002 and April 30, 2002:

		October 25, 2002
		Cost		Unrealized Holding Loss			Fair Value
Government obligations		$	40,100	$	—		$	40,100
Corporate obligations and other			117,265		(125	)		117,140
Mortgage backed securities			49,927		—			49,927

	Total	$	207,292	$	(125	)	$	207,167

		April 30, 2002
		Cost		Unrealized Holding Loss			Fair Value
Government obligations		$	26,725	$	—		$	26,725
Corporate obligations and other			129,763		(518	)		129,245
Mortgage backed securities			51,437		—			51,437

	Total