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| MSG > SEC Filings for MSG > Form 10-K on 24-Aug-2012 | All Recent SEC Filings |
24-Aug-2012
Annual Report
• costs associated with player injuries, and waivers or contract terminations of players and other team personnel;
• changes in professional sports teams' compensation, including the impact of signing of free agents and trades, subject to league salary caps;
• the level and timing of our capital expenditures, including the comprehensive Transformation of The Garden;
• the impact of the comprehensive Transformation of The Garden or the renovation of the Forum on our operations, including any unexpected delays, costs or other matters associated with the Transformation or the renovation of the Forum;
• the demand for our programming among Distributors, and our ability to renew affiliation agreements with them;
• general economic conditions especially in the New York City metropolitan area where we conduct the majority of our operations;
• the demand for sponsorship arrangements and for advertising and viewer ratings for our programming;
• competition, for example, from other regional sports networks, other teams, other venues and other entertainment options;
• changes in laws, NBA or NHL rules, regulations, guidelines, bulletins, directives, policies and agreements (including the leagues' respective collective bargaining agreements with their players' associations, salary caps, revenue sharing and NBA luxury tax thresholds) or other regulations under which we operate;
• any NBA or NHL work stoppage;
• the relocation or insolvency of professional sports teams with which we have a rights agreement;
• our ability to maintain, obtain or produce content for our MSG Media segment, together with the cost of such content;
• future acquisitions and dispositions of assets;
• the costs associated with, and the outcome of, litigation and other proceedings to the extent uninsured;
• the impact of governmental regulations, including the ability to maintain necessary permits or licenses;
• financial community and rating agency perceptions of our business, operations, financial condition and the industry in which we operate; and
• our ownership of professional sports franchises in the NBA and NHL and certain transfer restrictions on our common stock.
We disclaim any obligation to update or revise the forward-looking statements contained herein, except as otherwise required by applicable federal securities laws.
All dollar amounts included in the following MD&A are presented in thousands,
except as otherwise noted.
Introduction
MD&A is provided as a supplement to, and should be read in conjunction with, the
audited consolidated financial statements and footnotes thereto included in this
Annual Report on Form 10-K to help provide an understanding of our financial
condition, changes in financial condition and results of our operations. Our
MD&A is organized as follows:
Business Overview. This section provides a general description of our business,
as well as other matters that we believe are important in understanding our
results of operations and financial condition and in anticipating future trends.
Results of Operations. Effective June 30, 2011, the Company changed its fiscal
year-end from December 31st to June 30th to better align our financial planning
and reporting cycles with the seasonality of our business, particularly our MSG
Sports and MSG Entertainment segments. This section provides an analysis of our
results of operations for the year ended June 30, 2012 (our first full fiscal
year since the year end change, which we also refer to as "fiscal year 2012" or
"current fiscal year"), the six month transition period ended June 30, 2011 and
the years ended December 31, 2010 and 2009 on both a consolidated and segment
basis. The unaudited information for the year ended June 30, 2011 (which
reflects our combined results for the six months ended December 31, 2010 and the
six month transition period of January 1, 2011 through June 30, 2011) and the
six months ended June 30, 2010 is presented herein for comparative purposes. Our
segments are MSG Media, MSG Entertainment and MSG Sports.
Liquidity and Capital Resources. This section provides a discussion of our
financial condition, as well as an analysis of our cash flows for the years
ended June 30, 2012 and 2011, six months ended June 30, 2011 and 2010 and years
ended December 31, 2010 and 2009. The discussion of our financial condition and
liquidity includes summaries of (i) our primary sources of liquidity and
(ii) our contractual obligations and off balance sheet arrangements that existed
at June 30, 2012.
Seasonality of Our Business. This section discusses the seasonal performance of
our MSG Sports and MSG Entertainment segments.
Recently Issued Accounting Pronouncements and Critical Accounting Policies. This
section includes a discussion of accounting policies considered to be important
to our financial condition and results of operations and which require
significant judgment and estimates on the part of management in their
application. In addition, all of our significant accounting policies, including
our critical accounting policies, are discussed in the notes to our consolidated
financial statements included in Item 8 of this Annual Report on Form 10-K.
Business Overview
The Company is a fully-integrated sports, entertainment and media business
comprised of dynamic and powerful assets and brands. Madison Square Garden's
business grew from the legendary venue widely known as "The World's Most Famous
Arena." The Company is comprised of three business segments: MSG Media, MSG
Entertainment and MSG Sports, which are strategically aligned to work together
to drive our overall business, which is built on a foundation of iconic venues
and compelling content, including live sports and entertainment events that we
create, produce, present and/or distribute through our programming networks and
other media assets. A description of our segments follows:
MSG Media
MSG Media, which represented approximately 48% of our consolidated revenues for
the year ended June 30, 2012, is a leader in production and content development
for multiple distribution platforms, including content originating from our
venues. MSG Media consists of the Company's regional sports networks, MSG
Network and MSG+, collectively the "MSG Networks," and "Fuse", a national
television network dedicated to music. MSG Networks also include high-definition
channels, MSG HD and MSG+ HD, and Fuse includes its high-definition channel,
Fuse HD.
MSG Networks are home to seven professional sports teams: the Knicks, Rangers,
Liberty, Islanders, Devils, Sabres and Red Bulls, as well as to our critically
acclaimed original and other programming. Fuse focuses on music-related
programming, including coverage of premier artists, events and festivals,
original content and concerts.
MSG Media is also responsible for managing interactive and digital initiatives
across all business segments. Our interactive businesses are the network of web
sites (including msg.com, thegarden.com, beacontheatre.com, radiocity.com,
chicagotheatre.com and fuse.tv, as well as sites dedicated to our sports teams
(nyknicks.com, newyorkrangers.com, knicksnow.com, blueshirtsunited.com and
newyorkliberty.com)) and mobile, video on demand and digital platforms for all
Madison Square Garden properties.
Revenue Sources
Our MSG Media segment earns revenues from two primary sources: affiliation fees
and advertising. Affiliation fees, which are the fees we earn from Distributors
that carry our programming, constitute the significant majority of the MSG Media
segment revenues. Fees paid by advertisers to show advertising during our
programs make up a smaller portion of MSG Media segment overall revenues.
Affiliation Fees
We earn affiliation fees from certain Distributors, that carry our programming
services. The fees we receive depend largely on the demand from subscribers for
our programming. Affiliation fees from Cablevision accounted for more than 10%
of the Company's consolidated revenues during the years ended June 30, 2012 and
2011, the six months ended June 30, 2011 and 2010 and the years ended
December 31, 2010 and 2009.
Advertising Revenues
We earn advertising revenues through the sale of commercial time to advertisers
during our programming or through the sale of program sponsorship rights. We
typically sell advertising time through our in-house staff and, to a lesser
extent, through agencies.
Expenses
The principal expenses of our MSG Media segment are rights fees, which we pay to
sports teams in order to carry their games and others who hold rights to the
programming content (such as movies, concerts and other programming) we
telecast; other direct programming costs, which include the salaries of on-air
personalities, producers and technicians; and the costs of studio, broadcast and
transmission facilities. We also allocate a portion of our corporate expenses to
the MSG Media segment.
Programming Acquisition Costs (Rights Fees)
MSG Networks obtains telecast rights for the sports teams whose games we
distribute, the cost of which we recognize in proportion to the economic
benefits received, which is typically on a straight-line basis over the term of
the applicable contract or license period. We negotiate directly with the teams
to determine the fee and other provisions of the rights arrangements. Rights
fees for sports programming are influenced by, among other things, the size and
demographics of the geographic area in which the programming is distributed, and
the popularity and/or the on-court or on-ice competitiveness of a team. For
purposes of reporting our segment information the rights fees we pay to the
Company's owned teams are recognized as inter-segment charges to our MSG Media
segment. These inter-segment charges are eliminated in the consolidated
financial statements. In addition to the rights for our Knicks, Rangers and
Liberty franchises, we have long-term rights agreements in place with the
Islanders, Devils and Sabres.
In addition to rights fees for sports telecasts, we must also pay to acquire the
rights to carry or produce other events or programming, such as movies, concerts
or specials.
Other Direct Programming Costs
Other direct programming costs include, but are not limited to the salaries of
our on-air personalities, producers, directors, technicians, writers and other
creative and technical staff, as well as expenses associated with location costs
and maintaining studios and transmission facilities.
Certain owned original programming is produced for the Company's networks by
independent production companies. Owned original programming costs are expensed
as incurred and included in the other direct programming costs described above.
Marketing and Advertising Costs
We incur costs to market our media business and our programs through outdoor and
newspaper advertisements, television and radio advertising and online marketing.
Factors Affecting Operating Results
The financial performance of our MSG Media segment is affected by the
affiliation arrangements we are able to negotiate with Distributors and also by
the advertising rates we can charge advertisers. These factors in turn depend on
the popularity and/or on-court and on-ice competitiveness of the professional
sports teams carried on MSG Networks as well as the cost and the attractiveness
of the programming content generally on MSG Networks and Fuse.
Due largely to our long-term rights agreements and the generally recurring
nature of our affiliation arrangements, the MSG Networks have consistently
produced operating profits over a number of years. See "Item 1A. Risk Factors -
Risks Relating to Our Media Business - The Success of Our Media Business Also
Depends on Affiliation Fees, and on Agreements with a Limited Number of
Distributors of Our Programming, the Loss of Which or Renewal of Which on Less
Favorable Terms Could Negatively Affect Our Results of Operations" and
"Comparison of the Six Months Ended June 30, 2011 versus the Six Months Ended
June 30, 2010 - Consolidated Results of Operations - Revenues" for a discussion
of risks associated with our affiliation agreements and the expiration of
certain affiliation agreements. Advertising revenues are less predictable and
can vary based upon a number of factors, including general economic conditions.
Our MSG Media segment's future performance is also dependent on the U.S. and
global economies, the impact of direct competition, and the relative strength of
our current and future advertising customers. Continuation of the economic
downturn may lead to lower demand for television advertising. We have already
experienced some of these effects during this economic downturn and any
continuation could adversely affect our future results of operations, cash flows
and financial position.
MSG Entertainment
Our MSG Entertainment segment, which, net of inter-segment revenues, represented
20% of our consolidated revenues for the year ended June 30, 2012, is one of the
country's leaders in live entertainment. MSG Entertainment presents or hosts
live entertainment events in our diverse collection of venues, including
concerts, family shows, performing arts and special events. These venues include
The Garden, The Theater at Madison Square Garden, Radio City Music Hall, the
Beacon Theatre, The Chicago Theatre and the Wang Theatre. In June 2012, we
expanded our geographic footprint with the purchase of the Forum in Inglewood,
California and have plans to renovate the historic venue, which serves the
Greater Los Angeles area. The scope of our collection of venues enables us to
showcase acts that cover a wide spectrum of genres and popular appeal, such as
concerts, including shows by artists such as Prince, Elton John, Phish, The
Allman Brothers Band, Bruce Springsteen, Lady Gaga, Taylor Swift, Justin Bieber,
Swedish House Mafia, Bon Iver and One Direction; family shows, such as Yo Gabba
Gabba!, Sesame Street Live and Disney's Phineas and Ferb; special events such as
the Tony Awards and Amnesty International's Secret Policeman's Ball, and
appearances by the Dalai Lama; and theatrical productions, such as Peter Pan and
A Christmas Story.
MSG Entertainment also creates, produces and/or presents live productions,
including the Radio City Christmas Spectacular, featuring the Rockettes, that
are performed in the Company's and other venues. The Radio City Christmas
Spectacular is the top grossing live holiday family show in North America and
was seen by approximately 1.3 million people nationwide during the 2011 holiday
season. We have also co-produced or presented events by the world-renowned
Cirque du Soleil.
Revenue Sources
Our primary sources of revenue in our entertainment business are ticket sales to
our live audiences for events that we promote or co-promote and license fees for
our venues paid by third-party promoters in connection with events that we do
not produce or promote. We also derive revenue from other sources, including
facility and ticketing fees, concessions, sponsorships, a portion of suite
license fees at The Garden, merchandising and tours of our venues. The levels of
revenue and expense we record in our MSG Entertainment segment for a given event
depends to a significant extent on whether we are promoting or co-promoting the
event or are licensing our venue to a third-party.
Ticket Sales and Suite Licenses
For our productions and for entertainment events in our venues that we promote,
we recognize revenues from the sale of tickets to our audiences. We sell tickets
to the public through our box office, on our web sites and through ticket
agencies. The amount of revenue we earn from ticket sales depends on the number
of shows and the mix of events that we promote, the seating capacity of the
venue used, the extent to which we can sell to our seating capacity and our
average ticket prices.
Prior to the commencement of the Transformation, The Garden had 89 club suites
and ten other premium seating products that were licensed annually. As a result
of the Transformation of The Garden, these suites and products have been or will
be replaced with 20 Event Level suites, 58 Madison Level suites, 18 remodeled
9th Floor Garden Level suites and three new club spaces. Suite licenses at The
Garden are generally sold to corporate customers pursuant to multi-year
licenses. Under standard suite licenses, the licensees pay an annual license
fee, which varies depending on the location of the suite. The license fee
includes, for each seat in the suite, tickets for events at The Garden for which
tickets are sold to the general public, subject to certain exceptions. In
addition, suite holders pay for food and beverage service in their suites at The
Garden. Revenues from the sale of suite licenses are shared between our MSG
Entertainment and MSG Sports segments.
Venue License Fees
For entertainment events held at our venues that we do not produce, promote or
co-promote, we earn venue license fees from
the third-party promoter of the event. The amount of license fees we charge
varies by venue and by the size of the production, among other factors. Our fees
include both the cost of renting space in our venues and costs for providing
production services, such as front-of-house and back-of-house staff, including
stagehands, box office staff, ushers and security staff, staging, lighting and
sound, and building services.
Whether we are promoting an event or licensing our venues to a third-party
promoter has a significant impact on the level of revenues and the costs that we
record in our MSG Entertainment segment.
Facility and Ticketing Fees
For all public and ticketed entertainment events held in our venues, we also
earn additional revenues on substantially all tickets sold, whether we promote
or co-promote the event or license the venue to a third party. These revenues
are earned in the form of certain fees and assessments, including the facility
fee we charge, on tickets we sell, and vary by venue.
Concessions
We sell food and beverages during substantially all entertainment events held at
our venues. In addition to concession-style sales of food and beverages, which
represent the majority of our concession revenues, we also provide catering for
our suites at The Garden.
Merchandise
We earn revenues from the sale of merchandise relating to our proprietary
productions and other live entertainment events that take place at our venues.
The majority of our merchandise revenues are generated through on-site sales
during performances of our productions and other live events. We also generate
revenues from the sales of our Radio City Christmas Spectacular merchandise,
such as DVDs and books, through traditional retail channels. Typically, revenues
from our merchandise sales at our non-proprietary events relate to sales of
merchandise provided by the artist, the producer or promoter of the event.
Venue Signage and Sponsorship
We earn revenues through the sale of signage space and sponsorship rights in
connection with our venues, productions and other live entertainment events.
Signage revenues generally involve the sale of advertising space at The Garden
during entertainment events and otherwise in our venues.
Sponsorship rights may require us to use the name, logos and other trademarks of
a sponsor in our advertising and in promotions for our venues, productions and
other live entertainment events. Sponsorship arrangements may be exclusive
within a particular sponsorship category or non-exclusive and generally permit a
sponsor to use the name, logos and other trademarks of our productions and
events in connection with their own advertising and in promotions in our venues
or in the community.
Expenses
Our MSG Entertainment segment's principal expenses are payments made to
performers and promoters, staging costs and day-of-event costs associated with
events, and advertising costs. We charge a portion of our actual expenses
associated with the ownership, lease, maintenance and operation of our venues,
along with a portion of our corporate expenses to our MSG Entertainment segment.
However, the operating results of our MSG Entertainment segment benefit from the
fact that no rent is imposed on our MSG Entertainment segment for events that it
presents at our owned venues (The Garden, The Theater at Madison Square Garden
and The Chicago Theatre). We do not allocate to our segments any depreciation
expense related to The Garden and The Theater at Madison Square Garden.
Performer Payments
Our productions are performed by talented actors, dancers, singers and
entertainers. In order to attract and retain this talent, we are required to pay
our performers an amount that is commensurate both with their abilities and with
demand for their services from other entertainment companies. Our productions,
including the Radio City Christmas Spectacular, typically feature ensemble casts
(such as the Rockettes), where there is no single "headline" performer. As a
result, most of our performers are paid based on a standard "scale," pursuant to
collective bargaining agreements we negotiate with the performers' unions.
Staging Costs
Staging costs for our proprietary events as well as others that we promote
include the costs of sets, lighting, display technologies, special effects,
sound and all of the other technical aspects involved in presenting a live
entertainment event. These costs vary substantially depending on the nature of
the particular show, but tend to be highest for large-scale theatrical
productions, such as the Radio City Christmas Spectacular. For concerts we
promote, the performer usually provides a fully-
produced show. As with performer salaries, the staging costs associated with a
given production are an important factor in the determination of ticket prices.
Day-of-event Costs
For days on which MSG Entertainment stages its productions, promotes an event or
provides one of our venues to a third-party promoter under a license fee
arrangement, the event is charged the variable costs associated with such event,
including box office personnel, stagehands, ticket takers, ushers, security, and
other similar expenses. In situations where we provide our venues to a
third-party promoter under a license fee arrangement, day-of-event costs are
typically included in the license fees charged to the promoter.
Marketing and Advertising Costs
We incur significant costs promoting our productions and other events through
outdoor and newspaper advertisements, television and radio advertising and
online marketing. In light of the intense competition for entertainment events,
especially in the New York City metropolitan area, such expenditures are a
necessity to drive interest in our productions and encourage members of the
public to purchase tickets to our shows.
Touring Expenses
For productions that we take on the road, we must pay the logistical costs
associated with travel and equipment, as well as fees and expenses, including
the costs of venue staff, for the use of third-party venues.
Factors Affecting Operating Results
The operating results of our MSG Entertainment segment are largely dependent on
our ability to attract concerts, family shows and other events to our venues, as
well as the continued success of our Radio City Christmas Spectacular. Our MSG
Entertainment segment recognized operating losses during the fiscal year 2012
and the comparable period of the prior year, the six months ended June 30, 2011
and 2010 and the years ended December 31, 2010 and 2009 due, in part, to weather
and the economy combined with The Garden being shut down during part of calendar
years 2012 and 2011 and the Theater at Madison Square Garden being shut down
during parts of calendar years 2012, 2011 and 2010. The success of the Radio
City Christmas Spectacular at Radio City Music Hall has allowed us to invest in
the development of the arena and theater touring versions of the show. While the
New York market continues to rebound from the economic downturn, other markets
have been slower to recover, impacting the touring versions of the Radio City
Christmas Spectacular. During the 2012 holiday season we will continue to
present the theater touring version of the show in the following targeted
markets: St. Louis, Dallas, Chicago and the Grand Ole Opry House in Nashville.
Our MSG Entertainment segment's future performance is dependent on general
economic conditions, and the effect of these conditions on our customers. The
continuation of the economic downturn may lead to lower demand for suite
licenses and tickets to our live productions, concerts, family shows and other
events, which would also negatively affect merchandise and concession sales, as
well as lower levels of sponsorship and venue signage. These conditions may also
affect the number of concerts, family shows and other events that take place in
the future. We have already experienced some of these effects during this
economic downturn and any continuation could adversely affect our future results
of operations, cash flows and financial position.
We are pursuing opportunities to create new productions and to selectively
expand our venue network in major live entertainment markets. It is likely that
any such new venues will not initially contribute to operating income, but will
be expected to become operationally profitable over time. In June 2012, we
expanded our geographic footprint with the purchase of the Forum in Inglewood,
California and have plans to renovate the historic venue, which serves the
Greater Los Angeles area. The Forum will not be open for events in fiscal year
2013, but will incur certain operating expenses. Our results will also be
affected by investments in, and the success of, new productions.
As discussed in more detail below, during the Transformation, we are generally
not booking events at The Garden and The Theater at Madison Square Garden from a
period commencing in April and ending in October. See "- Liquidity and Capital
Resources" for discussion of the Transformation of The Garden and its potential
effects on the operating results of the MSG Entertainment segment.
MSG Sports
. . .
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