10-Q 1 wwe-9302012x10q.htm 10-Q SEPTEMBER 30, 2012 WWE-9.30.2012-10Q

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 September 30, 2012
 
 
 
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 001-16131
WORLD WRESTLING 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 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  
        
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes  
X   
     
No  
        
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer 
o
 
 
Accelerated filer 
ý
  
Non-accelerated filer 
o
 
(Do not check if a smaller reporting company)
Smaller reporting company 
o
 
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes  
       
     
No  
X    
At November 2, 2012 the number of shares outstanding of the Registrant’s Class A common stock, par value $.01 per share, was 29,252,959 and the number of shares outstanding of the Registrant’s Class B common stock, par value $.01 per share, was 45,500,830.



World Wrestling Entertainment, Inc.
Table of Contents

      
      
 
Page #
Part I – FINANCIAL INFORMATION
 
 
 
 
 
 
Item 1. Consolidated Financial Statements (unaudited)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 



World Wrestling Entertainment, Inc.
Consolidated Income Statements
(In thousands, except per share data)
(Unaudited)

 
Three Months Ended
 
Nine Months Ended
 
September 30,
2012
 
September 30,
2011
 
September 30,
2012
 
September 30,
2011
Net revenues
$
104,197

 
$
108,518

 
$
368,913

 
$
370,979

 
 
 
 
 
 
 
 
Cost of revenues (including amortization and impairments of feature film production assets of $2,132 and $8,151, respectively, and $7,776 and $23,832, respectively)
61,406

 
64,455

 
215,287

 
226,531

Selling, general and administrative expenses
32,459

 
24,567

 
98,920

 
83,485

Depreciation and amortization
5,307

 
3,593

 
14,046

 
10,872

Operating income
5,025

 
15,903

 
40,660

 
50,091

 
 
 
 
 
 
 
 
Investment income, net
635

 
484

 
1,679

 
1,458

Interest expense
(457
)
 
(151
)
 
(1,354
)
 
(246
)
Other expense, net
(203
)
 
(661
)
 
(746
)
 
(1,082
)
 
 
 
 
 
 
 
 
Income before income taxes
5,000

 
15,575

 
40,239

 
50,221

Provision for income taxes
1,473

 
4,984

 
9,440

 
16,760

Net income
$
3,527

 
$
10,591

 
$
30,799

 
$
33,461

 
 
 
 
 
 
 
 
Earnings per share:
 
 
 
 
 
 
 
Basic and diluted
$
0.05

 
$
0.14

 
$
0.41

 
$
0.45

 
 
 
 
 
 
 
 
Weighted average common shares outstanding:
 
 
 
 
 
 
 
Basic
74,681

 
74,328

 
74,542

 
74,142

Diluted
74,845

 
74,707

 
74,864

 
74,740


See accompanying notes to consolidated financial statements.

2


World Wrestling Entertainment, Inc.
Consolidated Statements of Comprehensive Income
(In thousands)
(Unaudited)

 
Three Months Ended
 
Nine Months Ended
 
September 30,
2012
 
September 30,
2011
 
September 30,
2012
 
September 30,
2011
Net income
$
3,527

 
$
10,591

 
$
30,799

 
$
33,461

Other comprehensive income (loss):
 
 
 
 
 
 
 
Foreign currency translation adjustment
105

 
(313
)
 
180

 
(122
)
Unrealized holding gain (loss) (net of tax of $36 and ($70), respectively, and $516 and $63, respectively)
59

 
(114
)
 
841

 
102

Reclassification adjustment for gains realized in net income (net of tax of $66 and $0, respectively, and $75 and $12, respectively)
(107
)
 

 
(121
)
 
(20
)
Total other comprehensive income (loss)
57

 
(427
)
 
900

 
(40
)
Comprehensive income
$
3,584

 
$
10,164

 
$
31,699

 
$
33,421


See accompanying notes to consolidated financial statements.

3


World Wrestling Entertainment, Inc.
Consolidated Balance Sheets
(In thousands)
(Unaudited)
 
As of
 
September 30,
2012
 
December 31,
2011
ASSETS
 
 
 
CURRENT ASSETS:
 
 
 
Cash and cash equivalents
$
52,693

 
$
52,491

Short-term investments, net
94,406

 
103,270

Accounts receivable (net of allowances for doubtful accounts and returns
 
 
 
of $12,891 and $12,561, respectively)
58,959

 
56,741

Inventory
2,189

 
1,658

Deferred income tax assets
10,994

 
11,122

Prepaid expenses and other current assets
12,867

 
14,461

Total current assets
232,108

 
239,743

PROPERTY AND EQUIPMENT, NET
100,833

 
96,562

FEATURE FILM PRODUCTION ASSETS, NET
22,790

 
23,591

TELEVISION PRODUCTION ASSETS
5,759

 
251

INVESTMENT SECURITIES
5,000

 
10,156

OTHER ASSETS
10,797

 
8,321

TOTAL ASSETS
$
377,287

 
$
378,624

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
CURRENT LIABILITIES:
 
 
 
Current portion of long-term debt
$

 
$
1,262

Accounts payable and accrued expenses
42,261

 
46,283

Deferred income
22,895

 
21,709

Total current liabilities
65,156

 
69,254

LONG-TERM DEBT

 
359

NON-CURRENT INCOME TAX LIABILITIES
3,043

 
5,634

NON-CURRENT DEFERRED INCOME
6,999

 
8,234

COMMITMENTS AND CONTINGENCIES

 

STOCKHOLDERS’ EQUITY:
 
 
 
Class A common stock: ($.01 par value; 180,000,000 shares authorized;
 
 
 
29,244,199 and 28,254,874 shares issued and outstanding as of
 
 
 
September 30, 2012 and December 31, 2011, respectively)
293

 
283

Class B convertible common stock: ($.01 par value; 60,000,000 shares authorized;
 
 
 
45,500,830 and 46,163,899 shares issued and outstanding as of
 
 
 
September 30, 2012 and December 31, 2011, respectively)
455

 
462

Additional paid-in capital
340,652

 
338,414

Accumulated other comprehensive income
4,162

 
3,262

Accumulated deficit
(43,473
)
 
(47,278
)
Total stockholders’ equity
302,089

 
295,143

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
$
377,287

 
$
378,624

See accompanying notes to consolidated financial statements.

4


World Wrestling Entertainment, Inc.
Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
 
Nine Months Ended
 
September 30,
2012
 
September 30,
2011
OPERATING ACTIVITIES:
 
 
 
Net income
$
30,799

 
$
33,461

Adjustments to reconcile net income to net cash provided
 
 
 
by operating activities:
 
 
 
Amortization and impairments of feature film production assets
7,776

 
23,832

Depreciation and amortization
14,046

 
10,872

Realized gains on sale of investments
(196
)
 
(32
)
Amortization of bond premium
1,745

 
1,958

Amortization of debt issuance costs
461

 
51

Stock compensation costs
2,791

 
2,692

Provision for allowance for bad debts
1,204

 
17

Services provided in exchange for equity instruments
219

 

Loss on disposal of property and equipment
40

 

Provision for (benefit from) deferred income taxes
2,052

 
(4,348
)
Excess tax benefits from stock-based payment arrangements
(6
)
 
(138
)
Changes in assets and liabilities:
 
 
 
Accounts receivable
(2,820
)
 
2,866

Inventory
(531
)
 
(347
)
Prepaid expenses and other assets
(2,488
)
 
1,905

Feature film production assets
(6,975
)
 
(7,358
)
Television production assets
(5,507
)
 

Accounts payable and accrued expenses
(1,585
)
 
(5,762
)
Deferred income
(49
)
 
(11,864
)
Net cash provided by operating activities
40,976

 
47,805

INVESTING ACTIVITIES:
 
 
 
Purchases of property and equipment and other assets
(26,697
)
 
(10,466
)
Purchases of short-term investments
(18,639
)
 
(33,472
)
Proceeds from sales and maturities of investments
37,271

 
25,314

Purchase of cost method investment
(5,000
)
 

Net cash used in investing activities
(13,065
)
 
(18,624
)
FINANCING ACTIVITIES:
 
 
 
Repayments of debt
(1,621
)
 
(868
)
Debt issuance costs

 
(1,844
)
Dividends paid
(26,845
)
 
(38,879
)
Issuance of stock, net
751

 
833

Excess tax benefits from stock-based payment arrangements
6

 
138

Net cash used in financing activities
(27,709
)
 
(40,620
)
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
202

 
(11,439
)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD
52,491

 
69,823

CASH AND CASH EQUIVALENTS, END OF PERIOD
$
52,693

 
$
58,384

NON-CASH INVESTING AND FINANCING TRANSACTIONS:
 
 
 
Non-cash purchase of property and equipment and other assets
$
1,609

 
$

See accompanying notes to consolidated financial statements.

5


World Wrestling Entertainment, Inc.
Consolidated Statement of Stockholders' Equity
(In thousands)
(Unaudited)

 
Common Stock
 
Additional
 
Accumulated
Other
 
 
 
 
 
Class A
 
Class B
 
Paid - in
 
Comprehensive
 
Accumulated
 
 
 
Shares
 
Amount
 
Shares
 
Amount
 
Capital
 
Income
 
Deficit
 
Total
Balance, December 31, 2011
28,255

 
$
283

 
46,164

 
$
462

 
$
338,414

 
$
3,262

 
$
(47,278
)
 
$
295,143

Net income

 

 

 

 

 

 
30,799

 
30,799

Other comprehensive income

 

 

 

 

 
900

 

 
900

Stock issuances, net
326

 
3

 

 

 
(185
)
 

 

 
(182
)
Sale of Class B common stock
663

 
7

 
(663
)
 
(7
)
 

 

 

 

Tax effect from stock-based payment arrangements

 

 

 

 
(584
)
 

 

 
(584
)
Dividends paid

 

 

 

 
149

 

 
(26,994
)
 
(26,845
)
Stock compensation costs

 

 

 

 
2,858

 

 

 
2,858

Balance, September 30, 2012
29,244

 
$
293

 
45,501

 
$
455

 
$
340,652

 
$
4,162

 
$
(43,473
)
 
$
302,089



See accompanying notes to consolidated financial statements.


6


World Wrestling Entertainment, Inc.
Notes to Consolidated Financial Statements
(In thousands, except per share data)
(Unaudited)

1. Basis of Presentation and Business Description
The accompanying consolidated financial statements include the accounts of WWE. “WWE” refers to World Wrestling Entertainment, Inc. and its subsidiaries, unless the context requires otherwise. References to “we,” “us,” “our” and the “Company” refer to WWE and its subsidiaries. We are an integrated media and entertainment company, principally engaged in the development, production and marketing of television, pay-per-view event programming, live events, licensing of various WWE themed products and the sale of consumer products featuring our brands. Our operations are organized around four principal activities:
Live and Televised Entertainment
Revenues consist principally of ticket sales to live events, sales of merchandise at these live events, television rights fees, sponsorships, and fees for viewing our pay-per-view and video on demand programming.
Consumer Products
Revenues consist principally of the direct sales of WWE produced home videos, magazines and royalties or license fees related to various WWE themed products such as video games, toys and books.
Digital Media
Revenues consist principally of advertising sales on our websites, sale of merchandise on our website through our WWEShop internet storefront and sales of various broadband and mobile content.
WWE Studios
Revenues consist of receipts from the distribution of filmed entertainment.
     All intercompany balances are eliminated in consolidation. The accompanying consolidated financial statements are unaudited. 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 preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires our management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.
     Certain information and note disclosures normally included in annual financial statements have been condensed or omitted from these interim financial statements; these financial statements should be read in conjunction with the financial statements and notes thereto included in our Form 10-K for the year ended December 31, 2011.
Recent Accounting Pronouncements
In October 2012, the Financial Accounting Standards Board ("FASB") issued an accounting standards update to amend the requirements related to an impairment assessment of unamortized film costs and clarify when unamortized film costs should be assessed for impairment. The update revises the impairment assessment to remove the rebuttable presumption that the conditions leading to the write-off of unamortized film costs after the balance sheet date existed as of the balance sheet date. The update also eliminates the requirement that an entity incorporate into fair value measurements used in impairment tests the effects of any changes in estimates resulting from the consideration of subsequent evidence, if the information would not have been considered by market participants at the measurement date. This standard update is effective on or after December 15, 2012. Public companies are permitted to apply the guidance earlier, including for impairment assessment performance as of a date before October 24, 2012, if they have not yet issued financial statements for the most recent annual or interim periods. We are currently evaluating the impact of adopting this accounting standards update on our consolidated financial statements.

7

World Wrestling Entertainment, Inc.
Notes to Consolidated Financial Statements
(In thousands, except per share data)
(Unaudited)


In December 2011, the FASB issued an accounting standards update that expands the disclosure requirements for the offsetting of assets and liabilities related to certain financial instruments and derivative instruments. The update requires disclosures to present both gross information and net information for financial instruments and derivative instruments that are eligible for net presentation due to a right of offset, an enforceable master netting arrangement or similar agreement. This standard update is effective for our fiscal year beginning on January 1, 2013. We are currently evaluating the impact of adopting this accounting standards update on our consolidated financial statements.    
In May 2011, the FASB issued an accounting standard update to amend fair value measurements and related disclosures. This update relates to a major convergence project of the FASB and the International Accounting Standards Board to improve International Financial Reporting Standards ("IFRS") and U.S. GAAP. This update results in a consistent definition of fair value and common requirements for measurement of and disclosure about fair value between IFRS and U.S. GAAP. The update also changes some fair value measurement principles and enhances disclosure requirements related to activities in Level 3 of the fair value hierarchy. On January 1, 2012 we adopted this accounting standard update which did not have a material effect on our consolidated financial statements.
     In June 2011, the FASB issued an accounting standard update to amend the presentation of comprehensive income in financial statements. The FASB also issued an accounting standards update in December 2011 that indefinitely deferred certain financial statement presentation provisions contained in its original June 2011 guidance. The guidance, which became effective January 1, 2012, gives companies the option to present comprehensive income in either a single continuous statement or in two separate but consecutive statements. On January 1, 2012, we adopted the effective portions of this accounting standards update by presenting comprehensive income in two separate but consecutive statements.
2. Stock Based Compensation
     Stock compensation costs associated with our restricted stock units ("RSUs") are determined using the fair market value of the Company’s common stock on the date of the grant. These costs are recognized over the requisite service period using the graded vesting method, net of estimated forfeitures. RSUs typically have a three year service requirement and vest in equal annual installments.
     During the nine months ended September 30, 2012, we granted 131,500 RSUs under our 2007 Omnibus Incentive Plan (the "Plan") at a weighted average grant date fair value of $9.31 per share. The Company will recognize $1,122 in compensation costs, net of estimated forfeitures over the requisite service period. During the nine months ended September 30, 2011, we granted 39,500 RSUs under the Plan at a weighted average grant date fair value of $12.64 per share. The Company will recognize $459 in compensation costs, net of estimated forfeitures over the requisite service period. At September 30, 2012, 142,353 RSU’s were unvested with a weighted average grant date fair of $10.12 per share. At September 30, 2011, 69,649 RSUs were unvested with a weighted average grant date fair value of $12.84 per share.
     Stock compensation costs associated with our performance stock units ("PSUs") are initially determined using the fair market value of the Company’s common stock on the date the awards are approved by our Compensation Committee (service inception date). The vesting of these PSUs is subject to a service requirement of three years and certain performance conditions. Due to the subjectivity of the performance conditions, the stock compensation costs associated with these PSUs are re-measured each reporting period based upon the fair market value of the Company’s common stock and the probability of attainment on the reporting date. Stock compensation costs for our PSUs are recognized over the requisite service period using the graded vesting method, net of estimated forfeitures.
     During the nine months ended September 30, 2012, we awarded 622,700 PSUs under the Plan at a weighted average service inception date fair value of $9.14 per share. Stock compensation costs associated with these PSU's were re-measured at September 30, 2012 for the fair market value of the Company's stock and the increase in the anticipated attainment of the performance conditions. During the nine months ended September 30, 2011, we awarded 523,500 PSUs under the plan at a weighted average service inception date fair value of $12.35 per share. These awards were ultimately forfeited because the Company did not meet performance targets. At September 30, 2012, 684,550 PSUs were unvested with a weighted average fair value of $9.47. At September 30, 2011, 875,368 PSUs were unvested with a weighted average fair value of $13.32 per share.
     Stock compensation costs totaled $1,035 and $112 for the three months ended September 30, 2012 and 2011, respectively, and $2,791 and $2,650 for the nine months ended September 30, 2012 and 2011, respectively.


8

World Wrestling Entertainment, Inc.
Notes to Consolidated Financial Statements
(In thousands, except per share data)
(Unaudited)


3. Stockholders’ Equity
Dividends
     In April 2011, the Board of Directors adjusted the Company's quarterly dividend to $0.12 per share on all Class A and Class B shares.
     From February 2008 through the first quarter of 2011, the Board of Directors authorized quarterly cash dividends of $0.36 per share on Class A common shares. The quarterly dividend on all Class A and Class B shares held by members of the McMahon family and their respective trusts remained at $0.24 per share for a period of three years due to a waiver received from the McMahon family. This waiver expired after the declaration of the March 2011 dividend.
     We paid cash dividends of $8,970 and $8,928 for the three months ended September 30, 2012 and September 30, 2011, respectively. We paid cash dividends of $26,845 and $38,879 for the nine months ended September 30, 2012 and September 30, 2011, respectively.
4. Earnings Per Share
Net income per share of Class A and Class B common stock is computed in accordance with the two-class method of earnings allocation. As such, any undistributed earnings for each period are allocated to each class of common stock based on the proportionate share of cash dividends that each class is entitled to receive.
     The Company did not compute earnings per share using the two-class method for the three and nine months ended September 30, 2012, and for the three months ended September 30, 2011 as both classes of common stock received dividends at the same rate. The Company did not compute earnings per share using the two-class method for the nine months ended September 30, 2011, as there were no undistributed earnings during this period.
5. Segment Information
     As discussed in Note 1, the Company classifies its operations into four reportable segments: Live and Televised Entertainment, Consumer Products, Digital Media and WWE Studios.
     We measure the performance of our reportable segments based upon segment operating income. We do not allocate our corporate overhead to our reportable segments, which includes the majority of selling, general and administrative expenses, depreciation and amortization of property and equipment. Starting in the second quarter of 2012, we began allocating certain staff related expenses, specifically stock compensation costs, management incentive compensation and medical benefits in our management reporting and, as such, we have prospectively included these costs in the calculation of operating income for our reportable segments. This change did not have a material impact on our reportable segments' operating income. Revenues from transactions between our operating segments are not material.

9

World Wrestling Entertainment, Inc.
Notes to Consolidated Financial Statements
(In thousands, except per share data)
(Unaudited)


Operating results by segment were as follows:
 
Three Months Ended
 
Nine Months Ended
 
September 30,
2012
 
September 30,
2011
 
September 30,
2012
 
September 30,
2011
Net revenues:
 
 
 
 
 
 
 
Live and Televised Entertainment
$
79,049

 
$
78,139

 
$
271,804

 
$
259,077

Consumer Products
15,834

 
19,725

 
67,419

 
76,153

Digital Media
7,442

 
6,907

 
22,376

 
19,158

WWE Studios
1,872

 
3,747

 
7,314

 
16,591

Total net revenues
$
104,197

 
$
108,518

 
$
368,913

 
$
370,979

Operating income (loss):
 
 
 
 
 
 
 
Live and Televised Entertainment
$
28,338

 
$
30,843

 
$
93,314

 
$
94,337

Consumer Products
6,598

 
11,494

 
37,157

 
42,315

Digital Media
2,757

 
3,448

 
5,778

 
4,911

WWE Studios
(2,013
)
 
(6,768
)
 
(4,300
)
 
(15,139
)
Corporate
(30,655
)
 
(23,114
)
 
(91,289
)
 
(76,333
)
Total operating income
$
5,025

 
$
15,903

 
$
40,660

 
$
50,091

Geographic Information
Net revenues by major geographic region are based upon the geographic location of where our content is distributed. The information below summarizes net revenues to unaffiliated customers by geographic area:
 
Three Months Ended
 
Nine Months Ended
 
September 30,
2012
 
September 30,
2011
 
September 30,
2012
 
September 30,
2011
North America
$
79,972

 
$
79,670

 
$
278,343

 
$
272,296

Europe/Middle East/Africa
9,465

 
14,085

 
51,584

 
57,021

Asia Pacific
13,284

 
12,587

 
30,144

 
29,307

Latin America
1,476

 
2,176

 
8,842

 
12,355

Total net revenues
$
104,197

 
$
108,518

 
$
368,913

 
$
370,979

     Revenues generated from the United Kingdom, our largest international market, totaled $4,809 and $24,387 for the three and nine months ended September 30, 2012, respectively, and $4,782 and $22,819 for the corresponding periods in 2011, respectively. The Company’s property and equipment was almost entirely located in the United States at September 30, 2012 and 2011.


10

World Wrestling Entertainment, Inc.
Notes to Consolidated Financial Statements
(In thousands, except per share data)
(Unaudited)


6. Property and Equipment
Property and equipment consisted of the following:
 
As of
 
September 30,
2012
 
December 31,
2011
Land, buildings and improvements
$
92,784

 
$
83,284

Equipment
91,294

 
84,335

Corporate aircraft
20,858

 
20,858

Vehicles
1,474

 
1,474

 
206,410

 
189,951

Less accumulated depreciation
(105,577
)
 
(93,389
)
Total
$
100,833

 
$
96,562

     Depreciation expense for property and equipment totaled $5,045 and $13,559 for the three and nine months ended September 30, 2012, respectively, as compared to $3,480 and $10,522 for the corresponding periods in 2011, respectively.
7. Feature Film Production Assets
Feature film production assets consisted of the following:
 
As of
 
September 30,
2012
 
December 31,
2011
Feature film productions:
 
 
 
In release
$
14,228

 
$
16,686

Completed but not released
5,625

 
5,984

In production
2,183

 

In development
754

 
921

Total
$
22,790

 
$
23,591


Approximately 38% of “In release” film production assets are estimated to be amortized over the next 12 months and approximately 72% of “In release” film production assets are estimated to be amortized over the next three years. We anticipate amortizing 80% of our "In release" film production asset within four years as we receive revenues associated with international distribution of our licensed film.
     During the nine months ended September 30, 2012, we released two feature films under our self-distribution model, Bending the Rules and Barricade, which comprise $867 and $1,375, respectively, of our “In release” feature film assets, respectively, as of September 30, 2012. Under this distribution model, we control the distribution and marketing of these films. As a a result, we record revenues and expenses on a gross basis in our consolidated financial statements. We also record distribution expenses, including advertising and other exploitation costs, in our financial statements as incurred. During the nine months ended September 30, 2012, the Company entered into an agreement to co-distribute the feature film, The Day, domestically. The Company intends to recognize revenue generated by this film in a manner similar to how it recognizes revenue for its licensed films; on a net basis, after distribution fees and expenses have been recouped and expenses and results have been reported to us.
     During the nine months ended September 30, 2011, we released three feature films, The Chaperone, That's What I Am and Inside Out, which comprise $698, $397, and $1,233, respectively, of our “In release” feature film assets as of September 30, 2012. All of these films were released under our self-distribution model.
     Unamortized feature film production assets are evaluated for impairment each reporting period. We review and revise estimates of ultimate revenue and participation costs at each reporting period to reflect the most current information available. If estimates

11

World Wrestling Entertainment, Inc.
Notes to Consolidated Financial Statements
(In thousands, except per share data)
(Unaudited)


for a film’s ultimate revenue are revised and indicate a significant decline in a film’s profitability or if events or circumstances change that indicate we should assess whether the fair value of a film is less than its unamortized film costs, we calculate the films estimated fair value using a discounted cash flows model. If fair value is less than amortized cost, the film is written down.
   We recorded an impairment charge of $754 during the first quarter of fiscal 2012, related to our feature film Bending the Rules. There were no other film impairments recorded for the nine months ended September 30, 2012. During the three months ended September 30, 2011, we recorded an aggregate impairment charge of $5,123 related to our three self-distributed films. During the nine months ended September 30, 2011, we recorded impairment charges of $11,173 related to our five self-distributed films. These impairment charges represent the excess of the recorded net carrying value over the estimated fair value.
We currently have two theatrical films designated as “Completed but not released”. We also have capitalized certain script development costs for various other film projects designated as “In development”. Capitalized script development costs are evaluated at each reporting period for impairment and to determine if a project is deemed to be abandoned. During the three and nine months ended September 30, 2012, we expensed $448 and $1,045, respectively, and $315 and $395 for the corresponding periods in the prior year, respectively, of previously capitalized development costs related to abandoned projects.
8. Television Production Assets
     Television production assets consist primarily of episodic television series we have produced for distribution, either on a potential network or through other distribution platforms. Amounts capitalized include development costs, production costs, post-production costs and related production or post-production overhead. We have $5,759 capitalized as of September 30, 2012 related to this type of programming. Costs to produce live event programming are expensed when the event is first broadcast. Unamortized television production assets are evaluated for impairment each reporting period. If conditions indicate a potential impairment, and the estimated future cash flows are not sufficient to recover the unamortized asset, the asset is written down to fair value. In addition, if we determine that a program will not likely air, we expense the remaining unamortized asset. During the three and nine months ended September 30, 2012 and 2011, we did not expense any television production assets.
9. Investment Securities and Short-Term Investments
On June 25, 2012, the Company invested $5,000 in Tout Industries, Inc. ("Tout") Series B Preferred Stock. This investment was accounted for under the cost method. We evaluate our investment in Tout for impairment if factors indicate that a significant decrease in value has occurred. No such indicators were noted during the three and nine months ended September 30, 2012. This investment is included in Investment Securities in our Consolidated Balance Sheets as of September 30, 2012. In July 2012, the Company entered into a two-year strategic partnership whereby WWE will fully integrate and promote Tout's technology platform into WWE's TV broadcasts, digital properties and live events. WWE is eligible to receive up to 11,250 shares of Tout common stock per quarter over the life of the two year agreement. During the quarter ended September 30, 2012, the Company achieved the required performance targets and recorded revenue of $219. The Company will receive the shares associated with this revenue in the fourth quarter which will be recorded as an increase to its investment in Tout.
     Investment securities and short-term investments measured at fair value consisted of the following:
 
September 30, 2012
 
 
December 31, 2011
 
Amortized
Cost
 
Unrealized
Holding
Gain
(Loss)
 
Fair
Value
 
 
Amortized
Cost
 
Unrealized
Holding
Gain
(Loss)
 
Fair
Value
Municipal bonds
$
76,373

 
$
719

 
$
77,092

 
Municipal bonds
$
82,456

 
$
732

 
$
83,188

Corporate bonds
17,233

 
81

 
17,314

 
Corporate bonds
20,331

 
(249
)
 
20,082

Auction rate securities

 

 

 
Auction rate securities
11,000

 
(844
)
 
10,156

Total
$
93,606

 
$
800

 
$
94,406

 
Total
$
113,787

 
$
(361
)
 
$
113,426

     We classify the investments listed in the above table as available-for-sale securities. Such investments consist primarily of municipal bonds, including pre-refunded municipal bonds and corporate bonds. These investments are stated at fair value as required by the applicable accounting guidance. Unrealized gains and losses on such securities are reflected, net of tax, as other

12

World Wrestling Entertainment, Inc.
Notes to Consolidated Financial Statements
(In thousands, except per share data)
(Unaudited)


comprehensive income in the Consolidated Statements of Comprehensive Income. Our municipal and corporate bonds are included in Short-term investments, net on our Consolidated Balance Sheets. Realized gains and losses on investments are included in earnings and are derived using the specific identification method for determining the cost of securities sold. As of September 30, 2012, contractual maturities of these bonds are as follows:
 
Maturities
Municipal bonds
1 month-11 years
Corporate bonds
8 months-4 years
During the three and nine months ended September 30, 2012, available-for-sale securities were sold for total proceeds of $13,478 and $16,486, respectively. During the three months ended September 30, 2011, there were no sales of available-for sale securities. During the nine months ended September 30, 2011, available-for-sale securities were sold for total proceeds of $2,652. The gross realized gains on these sales totaled $173 and $196 and for the three and nine months ended September 30, 2012, respectively, and $0 and $33 for the corresponding periods in the prior year. During the three months ended September 30, 2012 and 2011, we had maturities and calls of available-for-sale securities of $4,175 and $3,155 respectively. During the nine months ended September 30, 2012 and 2011, we had maturities and calls of available for sale securities of $20,785 and $20,840 respectively. As of September 30, 2012, we had net unrealized holding gains on available-for-sale securities of $800 which are included in other comprehensive income. Of this amount we had gross unrealized holding gains of $844 and gross unrealized holding losses of $44. As of December 31, 2011, we had net unrealized holding losses on available-for-sale securities of $361 which are included in other comprehensive income. Of this amount, we had gross unrealized holding losses of $1,158 and gross unrealized holding gains of $797.           
10. Fair Value Measurement
     Fair value is determined based on the exchange price that would be received to sell an asset or paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date. Fair value is a market-based measurement based on assumptions that "market participants" would use to price the asset or liability. Accordingly, the framework considers markets or observable inputs as the preferred source of value followed by assumptions based on hypothetical transactions, in the absence of market inputs. The fair value should be calculated based on assumptions that market participants would use in pricing the asset or liability, not on assumptions specific to the entity. In addition, the fair value of assets and liabilities should include consideration of non-performance risk including the Company's own credit risk.
     Additionally, the guidance establishes a three-level hierarchy that ranks the quality and reliability of information used in developing fair value estimates. The hierarchy gives the highest priority to quoted prices in active markets and the lowest priority to unobservable data. In cases where two or more levels of inputs are used to determine fair value, a financial instrument's level is determined based on the lowest level input that is considered significant to the fair value measurement in its entirety. The three levels of the fair value hierarchy are summarized as follows:
Level 1 - quoted prices in active markets for identical assets or liabilities;
Level 2 - quoted prices in active markets for similar assets and liabilities and inputs that are observable for the asset or liability; or
Level 3 - unobservable inputs, such as discounted cash flow models or valuations

13

World Wrestling Entertainment, Inc.
Notes to Consolidated Financial Statements
(In thousands, except per share data)
(Unaudited)


The following assets are required to be measured at fair value on a recurring basis and the classification within the hierarchy was as follows:
 
Fair Value at September 30, 2012
 
 
Fair Value at December 31, 2011
 
Total
 
Level 1
 
Level 2
 
Level 3
 
 
Total
 
Level 1
 
Level 2
 
Level 3
Municipal bonds
$
77,092

 
$

 
$
77,092

 
$

 
Municipal bonds
$
83,188

 
$

 
$
83,188

 
$

Corporate bonds
17,314

 

 
17,314

 

 
Corporate bonds
20,082

 

 
20,082

 

Auction rate securities

 

 

 

 
Auction rate securities
10,156

 

 

 
10,156

Total
$
94,406

 
$

 
$
94,406

 
$

 
Total
$
113,426

 
$

 
$
103,270

 
$
10,156

Certain financial instruments are carried at cost on the Consolidated Balance Sheets, which approximates fair value due to their short-term, highly liquid nature. The carrying amounts of cash and cash equivalents, money market accounts, accounts receivable and accounts payable approximate fair value because of the short-term nature of such instruments.
We have classified our investment in municipal bonds and corporate bonds within Level 2 as their valuation requires quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active and/or model-based valuation techniques for which all significant inputs are observable in the market or can be corroborated by observable market data. The corporate and municipal bonds are valued based on model-driven valuations whereby market prices from a variety of industry standard data providers, security master files from large financial institutions and other third-party sources are used as inputs to an algorithm.
     We have historically classified our investment in auction rate securities ("ARS") within Level 3 as their valuation required substantial judgment and estimation of factors that are not currently observable in the market due to the lack of trading in the securities. During the second quarter of fiscal 2012, our remaining ARS were called by their issuer at par.
     The table below includes a roll forward of our investment securities classified as Level 3 (significant unobservable inputs):
 
Three Months Ended
 
Nine Months Ended
 
September 30,
2012
 
September 30, 2011
 
September 30,
2012
 
September 30,
2011
Fair value, Beginning
$

 
$
15,042

 
$
10,156

 
$
15,037

Unrealized gain (loss)

 
(231
)
 
844

 
(226
)
Proceeds from redemption of auction rate securities

 

 
(11,000
)
 

Fair value, Ending
$

 
$
14,811

 
$

 
$
14,811

     The Company also has assets that are required to be measured at fair value on a non-recurring basis if it is determined that indicators of impairment exist. These assets are recorded at fair value only when impairment is recognized. The Company recorded an impairment charge of $754 during the first quarter of fiscal 2012, on a feature film production asset based on a fair value measurement of $1,000. See Note 7, Feature Film Production Assets, for further discussion. During the three and nine months ended September 30, 2011, the Company recorded impairment charges of $5,123 and $11,173, respectively, on feature film production assets based on fair value measurements of $17,299. The Company classifies these assets as Level 3 within the fair value hierarchy due to significant unobservable inputs. The Company utilizes a discounted cash flows model to determine the fair value of these impaired films where indicators of impairment exist. The inputs to this model are the Company’s expected results for the film and a discount rate that market participants would seek for bearing the risk associated with such assets. The Company utilizes an independent third party specialist who assists us in gathering the necessary inputs used in our model.


14

World Wrestling Entertainment, Inc.
Notes to Consolidated Financial Statements
(In thousands, except per share data)
(Unaudited)


11. Accounts Payable and Accrued Expenses
Accounts payable and accrued expenses consisted of the following:
 
As of
 
September 30,
2012
 
December 31,
2011
Trade related
$
4,916

 
$
7,858

Payroll and related benefits
14,192

 
6,699

Talent related
8,756

 
11,872

Accrued event and television production
4,408

 
4,318

Accrued home video liability
1,500

 
2,710

Accrued legal and professional
1,691

 
1,937

Accrued purchases of property and equipment and other assets
1,609

 
5,302

Accrued film liability
531

 
1,047

Accrued other
4,658

 
4,540

Total
$
42,261

 
$
46,283

The increase in Payroll and related benefits is primarily due to the reset of management compensation in the current year. Accrued other includes accruals for our publishing and licensing business activities and other miscellaneous accruals, none of which exceeds 5% of current liabilities.
12. Senior Unsecured Revolving Credit Facility
     In 2011, the Company entered into a senior unsecured revolving credit facility with a syndicated group of banks, with JPMorgan Chase acting as administrative agent. The credit facility provides for a $200,000 line of credit that expires in September 2014, unless extended. Applicable interest rates for the borrowings under the revolving credit facility are at a LIBOR-based rate plus 200 basis points or an alternate base rate plus 100 basis points. As of September 30, 2012, the LIBOR-based rate plus margin was 2.36%. In the event the utilization percentage of the facility exceeds 50%, the applicable margin for the LIBOR-based and alternate base rate borrowings will increase by 25 basis points. As of September 30, 2012, there are no amounts outstanding under the credit facility. The Company is required to pay a commitment fee calculated at a rate per annum of 0.375% on the average daily unused portion of the credit facility. Borrowings under the credit facility are subject to certain financial covenants and certain restrictions. As of September 30, 2012, the Company is in compliance with the provisions of this credit facility.
13. Concentration of Credit Risk
     We continually monitor our position with, and the credit quality of, the financial institutions that are counterparties to our financial instruments. Our accounts receivable relate principally to a limited number of distributors, including our television, pay-per-view and home video distributors and licensees that produce consumer products containing our intellectual property. We closely monitor the status of receivables with customers and distributors and maintain allowances for anticipated losses as deemed appropriate. At September 30, 2012, we had one customer who represented 13% of our gross accounts receivable balance.
14. Income Taxes
     During the nine months ended September 30, 2012, we recognized $4,250 of previously unrecognized tax benefits. This primarily relates to the settlement of various audits, including the State of Connecticut, the IRS, and other state and local jurisdictions. Included in the amount recognized was $1,493 of potential interest related to uncertain tax positions. The recognition of these amounts during the nine months ended September 30, 2012 resulted in an effective tax rate of 24% for the nine months ended September 30, 2012 as compared to 33% for the nine months September 30, 2011.
At September 30, 2012, we have $2,233 of unrecognized tax benefits, which if recognized, would affect our effective tax rate. Of this amount, $2,223 is classified in Non-current income tax liabilities and the remaining $10 is classified in Accounts payable and accrued expense. At December 31, 2011, we had $10,733 of unrecognized tax benefits. Of this amount, $6,148 was classified in Accounts payable and accrued expenses and the remaining $4,585 was classified in Non-current income tax liabilities.

15

World Wrestling Entertainment, Inc.
Notes to Consolidated Financial Statements
(In thousands, except per share data)
(Unaudited)


     We recognize potential accrued interest and penalties related to uncertain tax positions in income tax expense. We have $840 of accrued interest and penalties related to uncertain tax positions as of September 30, 2012. Essentially all of this amount is classified in Non-current income tax liabilities. At December 31, 2011, we had $2,861 of accrued interest and penalties related to uncertain tax positions. Of this amount, $1,812 was classified in Accounts payable and accrued expenses and the remaining $1,049 was classified in Non-current income tax liabilities.
We file income tax returns in the United States and various state, local and foreign jurisdictions. During 2012, the IRS completed an examination for tax year 2009. We are still subject to examination by the IRS for tax year 2008 and tax years after 2009. The Company also settled an outstanding examination with the State of Connecticut. This examination included tax years through 2010. In other jurisdictions, with few exceptions, we are subject to income tax examinations by tax authorities for years ending on or after December 31, 2009.
     Based upon the expiration of statutes of limitations and possible settlements in several jurisdictions, we believe it is reasonably possible that the total amount of previously unrecognized tax benefits may decrease by $868 within 12 months of September 30, 2012.
15. Film and Television Production Incentives
     The Company has access to various governmental programs that are designed to promote film and television production within the United States and certain international jurisdictions. Incentives earned with respect to expenditures on qualifying film, television and other production activities, including qualifying capital projects, are included as an offset to the related asset or as an offset to production expenses when we have reasonable assurance regarding the realizable amount of the incentives. During the three months ended September 30, 2012 and 2011, we received $478 and $92, respectively, of incentives relating to feature film productions which reduced the related assets. During the nine months ended September 30, 2012 and 2011, we received $1,626 and $6,067, respectively, of incentives relating to feature film productions which reduced the related assets. During the three and nine months ended September 30, 2012, we received $6,373 and $7,959, respectively of incentives relating to television production activities that was recorded as an offset to production expenses. During the three and nine months ended September 30, 2011, we received $6,565 of incentives relating to television production activities that was recorded as an offset to production expenses.
16. Commitments and Contingencies
Legal Proceedings
World Wide Fund for Nature
In the third quarter of 2012, this litigation was settled.  We believe the settlement will not have a material adverse effect on the Company's financial condition, results of operations or liquidity.
Other Matters
We are involved in several suits and claims in the ordinary course of business, the outcome of which is not expected to have a material adverse effect on our financial condition, results of operations or liquidity. We may from time to time become a party to other legal proceedings.

16


Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Background
The following analysis outlines all material activities contained within each of our reportable segments.
Live and Televised Entertainment
Revenues consist principally of ticket sales to live events, sales of merchandise at these live events, television rights fees, sponsorships, and fees for viewing our pay-per-view and video on demand programming.
Consumer Products
Revenues consist principally of the direct sales of WWE produced home videos, magazine and royalties or license fees related to various WWE themed products such as video games, toys and books.
Digital Media
Revenues consist principally of advertising sales on our websites, sale of merchandise on our website through our WWEShop internet storefront and sales of various broadband and mobile content.
WWE Studios
Revenues consist of receipts from the distribution of filmed entertainment.

17


Results of Operations
Three Months Ended September 30, 2012 compared to Three Months Ended September 30, 2011
(Dollars in millions, except as noted)
Summary
 
Three Months Ended
 
 
 
September 30,
2012
 
September 30,
2011
 
better (worse)
Net Revenues:
 
 
 
 
 
Live and Televised Entertainment
$
79.0

 
$
78.1

 
1
 %
Consumer Products
15.8

 
19.8

 
(20
)%
Digital Media
7.5

 
6.9

 
9
 %
WWE Studios
1.9

 
3.7

 
(49
)%
Total
104.2

 
108.5

 
(4
)%
 
 
 
 
 
 
Profit Contribution:    
 
 
 
 

Live and Televised Entertainment
32.0

 
33.5

 
(4
)%
Consumer Products
8.5

 
12.8

 
(34
)%
Digital Media
3.8

 
3.8

 
 %
WWE Studios
(1.5
)
 
(6.1
)
 
75
 %
Total
42.8

 
44.0

 
(3
)%
Profit contribution margin
41
%
 
41
%
 

 
 
 
 
 
 
Selling, general and administrative expenses
32.5

 
24.5

 
(33
)%
Depreciation and amortization expense
5.3

 
3.6

 
(47
)%
Operating income
5.0

 
15.9

 
(69
)%
Investment income, net
0.6

 
0.5

 
20
 %
Interest expense
(0.4
)
 
(0.1
)
 
(300
)%
Other expense, net
(0.2
)
 
(0.7
)
 
71
 %
Income before income taxes
5.0

 
15.6

 
(68
)%
Provision for income taxes
1.5

 
5.0

 
70
 %
Net income
$
3.5

 
$
10.6

 
(67
)%
     The comparability of our results for the current year quarter was impacted by the inclusion of $2.1 million of operating expenses in the current year quarter associated with our emerging content and distribution efforts, including a potential network. In the prior year quarter, there were no such expenses. Further, in the prior year quarter, we recorded an impairment charge of $5.1 million relating to three of our self-distribution feature films; there were no such impairments in the current year quarter.
     Our Live and Televised Entertainment segment revenues increased 1% primarily due to a $0.9 million increase in revenues in our venue merchandise business and a $0.5 million increase in revenues in our pay-per-view business. Our Consumer Products segment experienced a 20% decrease in revenues driven by a $1.2 million decline in multimedia game licensing revenues partially due to one fewer video game release in the current year. Our Digital Media segment experienced a 9% increase in revenues, primarily due to increased rights fees associated with the licensing of original short-form content to YouTube. Our WWE Studios segment experienced a $1.8 million decrease in revenue primarily due to the timing of our film releases.

18


The following tables present the performance results and key drivers for our Live and Televised Entertainment segment:
 
 
Three Months Ended
 
 
Revenues- Live and Televised Entertainment (dollars in millions except where noted)
 
September 30,
2012
 
September 30,
2011
 
better (worse)
Live events
 
$
22.8

 
$
23.0

 
(1
)%
North America
 
$
17.0

 
$
14.2

 
20
 %
International
 
$
5.8

 
$
8.8

 
(34
)%
Total live event attendance
 
426,200

 
424,600

 
 %
Number of North American events
 
70

 
64

 
9
 %
Average North American attendance
 
5,200

 
4,900

 
6
 %
Average North American ticket price (dollars)
 
$
42.73

 
$
41.34

 
3
 %
Number of international events
 
7

 
15

 
(53
)%
Average international attendance
 
8,400

 
7,200

 
17
 %
Average international ticket price (dollars)
 
$
98.23

 
$
80.08

 
23
 %
Venue merchandise
 
$
4.5

 
$
3.6

 
25
 %
Domestic per capita spending (dollars)
 
$
10.28

 
$
10.18

 
1
 %
Pay-per-view
 
$
16.3

 
$
15.8

 
3
 %
Number of pay-per-view events
 
3

 
3

 
 %
Number of buys from pay-per-view events
 
789,000

 
758,000

 
4
 %
Average revenue per buy (dollars)
 
$
20.57

 
$
20.76

 
(1
)%
Domestic retail price WrestleMania (dollars)
 
$
54.95

 
$
54.95

 
 %
Domestic retail price excluding WrestleMania (dollars)
 
$
44.95

 
$
44.95

 
 %
Television rights fees
 
$
34.0

 
$
34.0

 
 %
Domestic
 
$
21.3

 
$
19.9

 
7
 %
International
 
$
12.7

 
$
14.1

 
(10
)%
Other
 
$
1.4

 
$
1.7

 
(18
)%
Total Live and Televised Entertainment
 
$
79.0

 
$
78.1

 
1
 %
Ratings
 

 

 

       Average weekly household ratings for RAW
 
3.4

 
3.4

 
 %
       Average weekly household ratings for SmackDown
 
2.2

 
2.1

 
5
 %

 
 
 
 
 


Three Months Ended
 

Profit Contribution-Live and Televised Entertainment (dollars in millions)

September 30,
2012

September 30,
2011
 
better (worse)
Live events

$
5.8

 
$
5.9

 
(2
)%
Venue merchandise

1.8

 
1.4

 
29
 %
Pay-per-view

10.0

 
10.2

 
(2
)%
Television rights fees

15.7

 
16.6

 
(5
)%
Other

(1.3
)
 
(0.6
)
 
(117
)%
Total

$
32.0

 
$
33.5

 
(4
)%
Profit contribution margin
 
41
%
 
43
%
 
 


19


     Overall live events revenues remained relatively flat in the current year quarter as compared to the prior year quarter. Revenues from our North America live events business increased $2.8 million or 20% reflecting increases in the number of events, average attendance and average ticket prices. Our international live events business decreased $3.0 million primarily the result of WWE holding half the number of events it did in the comparable prior year period. This impact however was mitigated by a 17% increase in average attendance and a 23% increase in average ticket prices. Cost of revenue for live events decreased by $0.1 million from the prior year quarter. The live events profit contribution margin was 25% in the current year quarter compared to 26% in the prior year quarter.
     Venue merchandise revenues increased by $0.9 million in the current year quarter as compared to the prior year quarter. This 25% increase was primarily due to a 26% increase in total domestic attendance and a 1% increase in domestic per capita merchandise sales to $10.28 in the current year quarter. Cost of revenue for venue merchandise increased by $0.5 million from the prior year quarter, driven by the increased sales. The venue merchandise profit contribution margin increased to 40% from 39% in the prior year quarter.
     Pay-per-view revenues increased by $0.5 million in the current year quarter as compared to the prior year quarter, as total buys increased 4%. The growth in buys for our current period events was predominantly due to our SummerSlam pay-per-view. Buys for that event increased 21% from the prior year quarter, demonstrating its creative strength and audience appeal. The prior year was positively impacted by buys for WrestleMania, a prior period event, coming in greater than our estimate. Cost of revenues for pay-per-view increased by $0.7 million from the prior year quarter, primarily driven by higher promotion and advertising related expenses. The pay-per-view profit contribution margin decreased to 61% from 65% in the prior year quarter.
     Television rights fees remained flat at $34.0 million in both the current and prior year comparable quarter. Domestically, television rights fees increased by $1.4 million, primarily due to incremental license fees from the production and distribution of new programs and contractual increases from our existing programs partially offset by the reduction in production service fees and due to the mix of integrated sponsorship asset utilization. Internationally, our television rights fees decreased by $1.4 million primarily due the expiration of a licensing agreement. Television rights cost of revenues increased by $0.9 million as compared to the prior year quarter due to higher production costs. The television rights fee profit contribution margin decreased to 46% from 49% in the prior year quarter.
     The following tables present the performance results and key drivers for our Consumer Products segment (dollars in millions):
 
 
Three Months Ended
 
 
Revenues-Consumer Products
 
September 30,
2012
 
September 30,
2011
 
better (worse)
Licensing
 
$
7.1

 
$
9.0

 
(21
)%
Magazine publishing
 
$
1.6

 
$
1.9

 
(16
)%
Net units sold
 
533,300

 
593,600

 
(10
)%
Home video
 
$
6.4

 
$
8.3

 
(23
)%
Gross units shipped
 
933,100

 
686,000

 
36
 %
Other
 
$
0.7

 
$
0.6

 
17
 %
Total
 
$
15.8

 
$
19.8

 
(20
)%


20


 
 
Three Months Ended
 
 
Profit Contribution-Consumer Products
 
September 30,
2012
 
September 30,
2011
 
better(worse)
Licensing
 
$
5.3

 
$
6.8

 
(22
)%
Magazine publishing
 
0.2

 
0.2

 
 %
Home video
 
2.8

 
5.7

 
(51
)%
Other
 
0.2

 
0.1

 
100
 %
Total
 
$
8.5

 
$
12.8

 
(34
)%
Profit contribution margin
 
54
%
 
65
%
 


     Licensing revenues decreased by $1.9 million in the current year quarter as compared to the prior year quarter, as a result of reduced sales of video games and novelty products. Royalties earned from the sale of video games declined by $1.2 million due primarily to one fewer release, WWE All Stars, in the current year period. WWE All Stars was released in March 2011 and was not refreshed in the current year. Shipments of our franchise video game, WWE'12, also declined 5% in the current year quarter to 127,000 units. Royalties from the sale of toys, however, increased 16%, or $0.5 million, reflecting the introduction of our Brawlin' Buddies toy by Mattel and strong domestic retail support. Licensing cost of revenues decreased by $0.4 million from the prior year quarter, primarily due to lower commission and talent participations driven by decreased revenues. The licensing profit contribution margin was 75% in the current year quarter compared to 76% in the prior year quarter.
     Magazine publishing revenues decreased by $0.3 million in the current year quarter as compared to the prior year quarter, driven by weaker newsstand demand as a result of the continued overall decline in the magazine publishing industry. We published three issues of WWE Magazine, three issues of WWE Kids magazine and one special issue both in the current year and prior year periods. Net units sold decreased by 10%. Magazine publishing cost of revenues decreased by $0.3 million, primarily as a result of a 23% decrease in unit production. Publishing profit contribution margin increased to 13% from 11% in the prior year quarter.
     Home video revenues decreased by $1.9 million in the current year quarter as compared to the prior year quarter. The 23% decline in revenue reflected a reduction in average unit price and lower sell-through rates that was partially offset by an increase in shipments. Although shipments increased 36% to 933,100 units, a majority of this growth was derived from lower priced new releases and catalog titles; the resulting change in product mix contributed to a 16% reduction in average price to $11.01. In the prior year quarter, we received a retroactive price adjustment of $1.1 million from one of our suppliers. The impact of this pricing adjustment was the primary reason for the deterioration in the home video profit contribution margin to 44% from 69%.
     The following tables present the performance results for our Digital Media segment (dollars in millions except where noted):

 
Three Months Ended
 
 
Revenues-Digital Media
 
September 30,
2012
 
September 30,
2011
 
better (worse)
WWE.com
 
$
4.8

 
$
3.7

 
30
 %
WWEShop
 
2.7

 
3.2

 
(16
)%
Total
 
$
7.5

 
$
6.9

 
9
 %
Average WWEShop revenues per order (dollars)
 
$
47.77

 
$
46.94

 
2
 %


21


 
 
Three Months Ended
 
 
Profit Contribution-Digital Media
 
September 30,
2012
 
September 30,
2011
 
better (worse)
WWE.com
 
$
3.4

 
$
2.9

 
17
 %
WWEShop
 
0.4

 
0.9

 
(56
)%
Total
 
$
3.8

 
$
3.8

 
 %
Profit contribution margin
 
51
%
 
55
%
 

     WWE.com revenues increased by $1.1 million in the current year quarter as compared to the prior year quarter, driven by increased rights fees associated with the licensing of original content to YouTube. WWE.com cost of revenues increased by $0.6 million in the current year quarter due to increased expenses related to the production and integration of new content. WWE.com profit contribution margin decreased to 71% in the current year quarter from 78% in the prior year quarter.
     WWEShop revenues decreased by $0.5 million in the current year quarter compared to the prior year quarter, driven by a 21% decline in the volume of on-line merchandise sales to approximately 54,000 orders. The decline reflected a comparison to strong sales and effective merchandising of certain talent-specific products in the prior year quarter. The average revenue per order increased 2% to $47.77. WWEShop costs of revenues were both $2.3 million in the current and prior year quarters. WWEShop profit contribution margin decreased to 15% in the current year quarter from 28% in the prior year quarter primarily due to integration costs from the change to a new fulfillment service provider in the current year quarter.

22


WWE Studios
     The following table presents detailed information for our WWE Studios segment (dollars in millions):





 
Feature
Film
Production
 

 

 

 

 

 






 
Assets-net as of
 

 

 
For the Three Months Ended September 30,





 
Sept 30,
 
Inception to-date
 
Revenue
 
Profit (Loss)
Title

Release Date

Production Costs*
 
2012
 
Revenue
 
Profit (Loss)
 
2012
 
2011
 
2012
 
2011
Self - Distributed Films


 

 

 

 

 

 

 

Barricade
 
Sept 2012
 
$
3.9

 
$
1.4

 
$
0.9

 
$
(2.7
)
 
$
0.9

 
$ N/A

 
$
(0.5
)
 
$ N/A

No Holds Barred
 
July 2012
 

 

 
0.5

 
0.2

 
0.5

 
    N/A

 
0.2

 
    N/A

Bending The Rules

Mar 2012

5.5

 
0.9

 
0.8

 
(4.7
)
 
(0.4
)
 
   N/A

 
(0.4
)
 
  N/A

The Reunion

Oct 2011

6.9

 
1.8

 
2.0

 
(4.8
)
 
(0.1
)
 
N/A

 
(0.1
)
 
N/A

Inside Out

Sept 2011

5.1

 
1.2

 
1.6

 
(3.8
)
 
(0.3
)
 
1.0

 
(0.4
)
 
(3.4
)
That's What I Am

April 2011

4.7

 
0.4

 
0.9

 
(4.9
)
 

 
(0.4
)
 

 
(0.6
)
The Chaperone

Mar 2011

5.8

 
0.7

 
4.2

 
(3.8
)
 

 
0.4

 

 
(1.2
)
Knucklehead

Oct 2010

6.4

 
0.7

 
4.3

 
(4.1
)
 

 

 

 
(1.3
)
Legendary

Sept 2010

5.3

 
1.5

 
6.5

 
(2.1
)
 

 
(0.1
)
 

 
(0.2
)




43.6

 
8.6

 
21.7

 
(30.7
)
 
0.6

 
0.9

 
(1.2
)
 
(6.7
)
Licensed Films



 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Marine 2

Dec 2009

2.3

 
0.7

 
2.5

 
0.9

 

 
0.2

 

 

12 Rounds

Mar 2009

19.7

 
4.3

 
12.6

 
(2.9
)
 
1.1

 
1.3

 

 
0.2

BELC 3

Jan 2009

2.5

 
0.2

 
2.5

 
0.2

 

 
0.2

 

 

The Condemned

May 2007

17.5

 

 
10.9

 
(6.5
)
 

 
0.2

 

 
0.2

The Marine

Oct 2006

20.2

 
0.1

 
38.0

 
15.3

 
0.2

 
0.8

 
0.2

 
0.6

See No Evil

May 2006

10.4

 
0.4

 
7.1

 
(2.9
)
 

 
0.1

 

 

Other
 
 
 

 

 
0.2

 
0.2

 

 

 

 
 




72.6

 
5.7

 
73.8

 
4.3

 
1.3

 
2.8

 
0.2

 
1.0

Completed but not released

10.3

 
5.6

 

 

 

 

 

 

In production




 
2.2

 

 

 

 

 

 

In development




 
0.7

 

 
(4.2
)
 

 

 
(0.5
)
 
(0.4
)
Total



$
126.5

 
$
22.8

 
$
95.5

 
$
(30.6
)
 
$
1.9

 
$
3.7

 
$
(1.5
)
 
$
(6.1
)
*     Production costs are presented net of the associated benefit of production incentives.
At September 30, 2012, the Company had $22.8 million (net of accumulated amortization and impairment charges) of feature film production assets capitalized on our Consolidated Balance Sheet. We review and revise estimates of ultimate revenue and participation costs at each reporting period to reflect the most current information available. If estimates for a film’s ultimate revenue are revised and indicate a significant decline in a film’s profitability or if events or circumstances change that indicate we should assess whether the fair value of a film is less than its unamortized film costs, we calculate the film's estimated fair value using a discounted cash flows model. If fair value is less than amortized cost, the film is written down.
Revenue recognition for our feature films varies depending on the method of distribution and the extent of control the Company exercises over the distribution and related expenses. We exercise significant control over our self-distributed films and as a result, we record revenues and related expenses on a gross basis in our financial statements. Third-party distribution partners control the distribution and marketing of our licensed films, and as a result, we recognize revenues on a net basis after the third-party distributor recoups distribution fees and expenses and results have been reported to us. This typically occurs in periods subsequent to the initial release of the film.


23



   WWE Studios revenues decreased $1.8 million in the current year quarter as compared to the prior year quarter, primarily due to the relative performance and timing of releases of feature films from our movie portfolio. Revenues from our self-distributed films decreased $0.3 million while revenues for our licensed films decreased $1.5 million in the current year quarter as compared to the prior year quarter. The decrease in revenue associated with our self-distributed films was attributable to the relative performance and timing of releases from our movie portfolio. The decrease in revenue associated with licensed films is primarily attributable to the age our film library, with the most recent film having been release in 2009.
WWE Studios cost of revenues decreased $6.4 million in the current year quarter as compared to the prior year quarter, partially as a result of recording a $5.1 million impairment charge in the prior year quarter. There was no impairment charge recorded in the current year quarter. Excluding the impact of the impairment charge in the prior year quarter, cost of revenues decreased to $3.4 million compared to $4.7 million. Distribution expenses decreased $0.4 million in the current year quarter as compared to the prior year quarter, due to the timing of film releases. In addition, amortization of production assets decreased $0.3 million for our self-distributed films and $0.6 million for our licensed films in the current year quarter as compared to the prior year quarter due to the decreases in revenue as assets are amortized in proportion as revenue received relates to expected revenue.
During the three months ended September 30, 2012, the Company entered into an agreement to co-distribute the feature film, The Day, domestically. The Company intends to recognize revenue generated by this film in a manner similar to how it recognizes revenue for its licensed films; on a net basis, after distribution fees and expenses have been recouped and expenses and results have been reported to us.
Selling, General and Administrative
     The following table presents the amounts and percent change of certain significant overhead items (dollars in millions):
 
Three Months Ended
 
 
 
September 30,
2012
 
September 30,
2011
 
better
(worse)
Staff related
$
15.1

 
$
15.1

 
 %
Management incentive compensation
3.1

 
(2.6
)
 
(219
)%
Legal, accounting and other professional
3.9

 
4.0

 
3
 %
Travel and entertainment expense
1.4

 
1.2

 
(17
)%
Advertising, marketing and promotion
1.5

 
0.9

 
(67
)%
Corporate insurance
0.8

 
1.0

 
20
 %
Bad debt
0.3

 
0.5

 
40
 %
All other
6.4

 
4.4

 
(45
)%
Total SG&A
$
32.5

 
$
24.5

 
(33
)%
SG&A as a percentage of net revenues
31
%
 
23
%
 
 
     Selling, general and administrative expenses increased by 33% in the current year quarter compared to the prior year quarter. Management incentive compensation in the current year quarter, including bonus and stock compensation, increased $5.7 million to reflect amounts expected to be paid based on the Company's operating performance. The prior year third quarter reflects the reversal of amounts previously accrued as it was determined that the Company would not meet performance targets. WWE also incurred $2.1 million in operating expenses during the current year quarter associated with our emerging content and distribution efforts, including a potential network.
Depreciation and Amortization

24


 
Three Months Ended
 
 
 
September 30,
2012
 
September 30,
2011
 
better
(worse)
Depreciation and amortization
5.3

 
$
3.6

 
(47
)%

     Depreciation expense for the current year quarter reflects higher property and equipment balances due to the expansion of our content and distribution platforms.

Investment and Other Income (Expense)
 
Three Months Ended
 
 
 
September 30,
2012
 
September 30,
2011
 
better
(worse)
Investment income, net
$
0.6

 
$
0.5

 
20
 %
Interest expense
(0.4
)
 
(0.1
)
 
(300
)%
Other expense, net
(0.2
)
 
(0.7
)
 
71
 %
     Interest expense for the current year quarter includes the amortization of loan origination costs and a fee on the unused portion of our revolving credit facility established in September 2011. Other expense, net for the current period includes realized foreign exchange gains and losses.
Income Taxes
 
Three Months Ended
 
 
 
September 30,
2012
 
September 30,
2011
 
better
(worse)
Provision for income taxes
$
1.5

 
$
5.0

 
70
%
Effective tax rate
30
%
 
32
%
 
 

          The current and prior year quarter effective tax rates were positively impacted by the recognition of previously unrecognized tax benefits due to statutes of limitations expiring and the resolution of outstanding audits.