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MSG > SEC Filings for MSG > Form 10-K on 24-Aug-2012All Recent SEC Filings

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Form 10-K for MADISON SQUARE GARDEN CO


24-Aug-2012

Annual Report


Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
This Management's Discussion and Analysis of Financial Condition and Results of Operations, or MD&A, contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. In this MD&A, there are statements concerning our future operating and future financial performance, including: the timing and anticipated cost and benefits of the comprehensive Transformation; the impact of the new NBA CBA and revenue sharing plan; expected increased programming costs and the impact of a possible NHL work stoppage. Words such as "expects", "anticipates", "believes", "estimates", "may", "will", "should", "could", "potential", "continue", "intends", "plans", and similar words and terms used in the discussion of future operating and future financial performance identify forward-looking statements. Investors are cautioned that such forward-looking statements are not guarantees of future performance or results and involve risks and uncertainties and that actual results or developments may differ materially from the forward-looking statements as a result of various factors. Factors that may cause such differences to occur include, but are not limited to:
the level of our revenues, which depends in part on the popularity and competitiveness of our sports teams and the level and popularity of the Radio City Christmas Spectacular and other entertainment events which are presented in our venues;

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.


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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.


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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.


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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


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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-


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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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