Madison Square Garden Sports Corp. - Annual Report: 2019 (Form 10-K)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
☑ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended June 30, 2019
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: 1-36900
(Exact name of registrant as specified in its charter)
Delaware | 47-3373056 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |
Two Penn Plaza New York, NY 10121
(Address of principal executive offices) (Zip Code)
Registrant’s telephone number, including area code: (212) 465-6000
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
Class A Common Stock | MSG | New York Stock Exchange |
Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☑ No ☐
Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No ☑
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 has been required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☑ No ☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, 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 ☑ No ☐
Indicate by check mark whether each Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Exchange Act Rule 12b-2.
Large accelerated filer | ☑ | Accelerated filer | ☐ | |
Non-accelerated filer | ☐ | (Do not check if a smaller reporting company) | Smaller reporting company | ☐ |
Emerging growth company | ☐ | |||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☑
Aggregate market value of the voting and non-voting common equity held by non-affiliates of The Madison Square Garden Company as of June 30, 2019 computed by reference to the price at which the common equity was last sold on New York Stock Exchange as of December 31, 2018, the last business day of the registrant’s most recently completed second fiscal quarter, was approximately $5 billion
Number of shares of common stock outstanding as of July 31, 2019:
Class A Common Stock par value $0.01 per share | — | 19,230,061 | |
Class B Common Stock par value $0.01 per share | — | 4,529,517 | |
Documents incorporated by reference — Certain information required for Part III of this report is incorporated herein by reference to the proxy statement for the 2019 annual meeting of the Company’s shareholders, expected to be filed within 120 days after the close of our fiscal year.
TABLE OF CONTENTS
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PART I
Item 1. Business
The Madison Square Garden Company is a Delaware corporation with our principal executive offices at Two Pennsylvania Plaza, New York, NY, 10121. Unless the context otherwise requires, all references to “we,” “us,” “our,” “Madison Square Garden,” “MSG” or the “Company” refer collectively to The Madison Square Garden Company, a holding company, and its direct and indirect subsidiaries. We conduct substantially all of our business activities discussed in this Annual Report on Form 10-K through MSG Sports & Entertainment, LLC and its direct and indirect subsidiaries. Our telephone number is 212-465-6000, our website is http://www.themadisonsquaregardencompany.com and the investor relations section of our web site is http://investor.msg.com. We make available, free of charge through the investor relations section of our web site, annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, as well as proxy statements, as soon as reasonably practicable after we electronically file such material with, or furnish it to, the Securities and Exchange Commission (“SEC”). References to our web site in this report are provided as a convenience and the information contained on, or available through, our web site is not part of this or any other report we file with or furnish to the SEC.
The Company was incorporated on March 4, 2015 as an indirect, wholly-owned subsidiary of MSG Networks Inc. (“MSG Networks”), formerly known as The Madison Square Garden Company. All the outstanding common stock of the Company was distributed to MSG Networks shareholders (the “2015 Distribution”) on September 30, 2015 (the “2015 Distribution Date”).
Potential Spin-off Transaction
On June 27, 2018, the Company announced that its board of directors (“Board”) has authorized the Company’s management to explore a possible spin-off that would create a separately-traded public company comprised of its sports businesses, including the New York Knicks and New York Rangers professional sports franchises (“Sports Spinco”). We refer to the potential spin-off as the “Sports Distribution.” On October 4, 2018, in connection with the Sports Distribution, a subsidiary of the Company submitted an initial Registration Statement on Form 10 with the U.S. Securities and Exchange Commission (which has been amended). If the Company proceeds with the Sports Distribution, it would be structured as a tax-free transaction to all MSG shareholders. Upon completion of the contemplated separation, record holders of MSG common stock would receive a pro-rata distribution, expected to be equivalent, in aggregate, to an approximately two-thirds economic interest in Sports Spinco. The remaining common stock, expected to be equivalent to an approximately one-third economic interest in Sports Spinco, would be retained by the Company. There can be no assurance that the proposed transaction will be completed in the manner described above, or at all. The Sports Distribution is expected to be completed in the first quarter of calendar year 2020. Completion of the transaction is subject to various conditions, including certain league approvals, a private letter ruling from the Internal Revenue Service (the "IRS"), receipt of a tax opinion from counsel and final Board approval.
Overview
The Madison Square Garden Company is a leader in live experiences comprised of celebrated venues, legendary sports teams, exclusive entertainment productions, and other entertainment assets which include dining and nightlife venues and music festivals. Utilizing our powerful assets, brands and live event expertise, the Company delivers premium and unique experiences that set the standard for excellence and innovation while forging deep connections with diverse and passionate audiences. We manage our business through the following two operating segments:
MSG Sports: This segment includes the Company’s professional sports franchises: the New York Knicks (the “Knicks”) of the National Basketball Association (the “NBA”), the New York Rangers (the “Rangers”) of the National Hockey League (the “NHL”), the Hartford Wolf Pack of the American Hockey League (the “AHL”) and the Westchester Knicks of the NBA G League (the “NBAGL”). Our professional sports franchises are collectively referred to herein as “our sports teams.” The MSG Sports segment also includes Counter Logic Gaming (“CLG”), a premier North American esports organization, and Knicks Gaming, MSG’s franchise that competes in the NBA 2K League. CLG and Knicks Gaming are collectively referred to herein as “our esports teams,” and, together with our sports teams, “our teams.” In addition, the MSG Sports segment promotes, produces and/or presents a broad array of other live sporting events, including professional boxing, college basketball, college hockey, professional bull riding, mixed martial arts, esports, and college wrestling.
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MSG Entertainment: This segment features the Company’s live entertainment events — including concerts, and other live events such as family shows, performing arts and special events — which we present or host in our diverse collection of venues. Those venues are: Madison Square Garden (“The Garden”), Hulu Theater at Madison Square Garden, Radio City Music Hall, the Beacon Theatre, the Forum, and The Chicago Theatre. Our MSG Entertainment segment also includes our original production — Christmas Spectacular Starring the Radio City Rockettes (“Christmas Spectacular”) — as well as Boston Calling Events, LLC (“BCE”), the entertainment production company that owns and operates the Boston Calling Music Festival, and TAO Group Holdings LLC (“TAO Group”), a hospitality group with globally-recognized entertainment dining and nightlife brands.
Our Strengths
• | Ownership of legendary sports franchises; |
• | Iconic venues in top live entertainment markets; |
• | Marquee entertainment brands and content, including the Christmas Spectacular and the Radio City Rockettes (“Rockettes”); |
• | Powerful presence in the New York City metropolitan area with established core assets and expertise for strategic expansion; |
• | Strong industry relationships that create opportunities for new content and brand extensions; |
• | Deep connections with loyal and passionate fan bases that span a wide demographic mix; |
• | First-class experience in managing venues, bookings, marketing, sales and hospitality in multiple markets; |
• | Ability to forge strategic partnerships that utilize the Company’s assets, core competencies and scale, while allowing the Company to benefit from growth in those businesses; |
• | Established history of successfully planning and executing comprehensive venue design and construction projects; |
• | Extensive range of proprietary marketing assets, including a customer database that allows us to drive engagement with our brands; and |
• | Strong and seasoned management team. |
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Our Strategy
The Madison Square Garden Company pursues opportunities that strengthen our portfolio of live experiences and capitalize on our iconic venues, popular sports franchises and exclusive entertainment content, as well as our expertise in venue management, bookings, marketing, sales and hospitality. We believe the Company’s unique assets and capabilities, coupled with our deep relationships in the sports and entertainment industries and our strong connection with our diverse and passionate audiences, are what set the Company apart. We continue to look for ways to improve our core operations, while we explore new opportunities to grow and innovate. Specific initiatives we are focused on include:
• | Developing championship caliber teams. The core goal of our sports strategy is to develop teams that consistently compete for championships in their leagues and support and drive revenue streams across the Company. We continue to explore new ways to increase engagement and revenue opportunities across the teams’ broad consumer and corporate customer bases. |
• | Monetizing our exclusive sports content. The Company has media rights agreements with MSG Networks that provide a significant recurring and growing revenue stream to the Company, subject to the terms of such agreements. In addition, these agreements and our relationship with MSG Networks provide our fans with the ability to watch locally televised home and away games of the Knicks and Rangers, as well as other programming related to our teams, on MSG Networks’ award-winning regional sports networks. |
• | Utilizing our integrated approach to marketing and sales. The Company possesses powerful sports and entertainment assets that can create significant value for our business. For example: |
◦ | Our integrated approach to marketing partnerships allows us to use and sell our broad array of assets together in order to maximize their collective value, both for the Company and for our marketing partners. Our ability to offer compelling, broad-based marketing platforms, which we believe are unparalleled in sports and entertainment, enables us to attract world-class partners, such as our “Marquee” marketing partner, JPMorgan Chase, and our “Signature” marketing partners, which include Anheuser-Busch, Charter Communications, Delta Air Lines, DraftKings, Kia, Lexus, PepsiCo, SAP and Squarespace. |
◦ | We continue to forge deep direct-to-consumer relationships with customers and fans, with a focus on understanding how consumers interact with every aspect of the Company. A key component of this strategy is our large and growing proprietary customer database, which drives revenue and engagement across segments, benefiting the Company through ticket sales, merchandise sales and sponsorship activation. This database provides us with an opportunity to cross-promote our products and services, introducing customers to our wide range of assets and brands. |
• | Utilizing a unique strategy for our performance venues. The Company has a collection of performance venues through which we deliver high-quality live sports and entertainment. In addition to our New York venues: The Garden, Hulu Theater at Madison Square Garden, Radio City Music Hall and the Beacon Theatre, our portfolio includes: the Forum in Inglewood, CA and The Chicago Theatre. These venues, along with our venue management capabilities, effective bookings strategy and proven expertise in sponsorships, marketing, ticketing and hospitality, have positioned the Company as an industry leader in live entertainment. We intend to leverage our unique assets, expertise and approach to drive growth and stockholder value, and to ensure we continue to create unmatched experiences for the benefit of all our stakeholders. |
◦ | Maximizing the live entertainment experience for our customers. We use our first-class operations, coupled with new innovations and our ability to attract top talent, to deliver unforgettable experiences for our customers — whether they are first-time visitors, repeat customers, season ticket holders, or suite holders — ensuring they return to our venues. We have a track record of designing world-class facilities that exceed our customers’ expectations. This includes our renovations of Radio City Music Hall, the Beacon Theatre, The Garden and the Forum to deliver top-quality amenities such as state-of-the-art lighting, sound and staging, a full suite of hospitality offerings and enhanced premium products. In addition to better onsite amenities, we continue to explore new ways to utilize technology to improve the customer experience and create communities around our live events. From the way our customers buy their food and beverage; to how we market and process their tickets; to the content we provide them to enhance their sports and entertainment experience, we strive to give our customers the best in-venue experience in the industry. |
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◦ | Leveraging our live entertainment expertise to increase productivity across our performance venues. Part of what drives our success is our “artist first” approach. This includes our renovation of the Forum, which set a new bar for the artist experience by delivering superior acoustics and an intimate feel, along with amenities such as nine star-caliber dressing rooms and dedicated areas for production and touring crews. This talent-friendly environment, coupled with more date availability and our top-tier service, is not only attracting artists to our West Coast venue, but also bringing them back for repeat performances. We will continue to use our “artist first” approach to attract the industry’s top talent with the goal of increasing utilization across all our venues through more multi-night and multi-market concerts and other events, including more recurring high-profile shows that help expand our base of events. Examples of this strategy include our residencies, which feature legendary performers playing our venues each month, and have included Billy Joel at The Garden and Jerry Seinfeld at the Beacon Theatre. |
◦ | Selectively expanding our performance venues in key music and entertainment markets. We believe our proven ability to deliver entertainment-focused venues, coupled with our unique capabilities, technologies and “artist first” approach, can deliver a differentiated experience for artists, fans and partners. In May 2016, the Company announced plans to build a state-of-the-art new entertainment venue in Las Vegas, one of the world’s most important entertainment destinations. In February 2018, we further unveiled our vision for MSG Sphere, which we believe will change entertainment by pioneering the next generation of immersive experiences. The Company broke ground in Las Vegas in September 2018 on its first MSG Sphere venue, which is currently under construction, with the goal to open the venue in calendar year 2021. In February 2018, we also announced the purchase of land in Stratford, London, which we expect — once we have received all necessary approvals and have further advanced our design for the venue — will become home to the second MSG Sphere. MSG Sphere venues will utilize advanced, cutting-edge technologies to create an entirely new platform that is expected to redefine how immersion and storytelling come together in entertainment experiences. Because of the transformative nature of these venues, we believe there will be other markets — both domestic and international — where MSG Sphere can be successful. The design of MSG Sphere will be flexible to accommodate a wide range of sizes and capacities — from large-scale to smaller and more intimate — based on the needs of the individual market. Controlling and booking a network of world-class venues provides the Company with a number of avenues for potential growth, including driving increased bookings and greater marketing and sponsorship opportunities. As we explore selectively extending the MSG Sphere network, we will be open to multiple types of transaction structures, including owned, operated, and joint ventures. As we work with various companies to develop the technologies needed for MSG Sphere venues, we are focused on obtaining appropriate strategic rights with respect to intellectual property. |
• | Expanding our entertainment dining and nightlife venues. The Company owns a controlling interest in TAO Group — a leader in the hospitality industry. TAO Group currently operates 29 entertainment dining and nightlife venues in New York City, Las Vegas, Los Angeles, Chicago, Singapore and Sydney, Australia with globally-recognized brands that include: TAO, Marquee, Lavo, Avenue, Beauty & Essex and Vandal. TAO Group is actively developing opportunities in select markets — both domestically and internationally — to expand. Over the past year, TAO Group opened TAO Chicago, along with new entertainment dining and nightlife venues as part of Moxy Chelsea hotel in New York City. TAO Group also debuted three new venues in Singapore — Marquee, Avenue, and KOMA. |
• | Growing our portfolio of proprietary content. We continue to explore the creation of proprietary content and attractions that enable us to benefit from being both content creator and venue operator. This includes opportunities to develop theatrical productions for our existing and planned venues. For our planned MSG Sphere venues, we are developing a set of tools that will allow both MSG and third parties to create content for the platform, making content creation an intuitive experience — whether someone is adapting existing content or developing original creations that maximize the potential of the venues’ technologies. We expect to use these tools to create our own catalogue of content and original productions, establishing a library of unique and compelling material that can be used across MSG Sphere venues. |
• | Exploring adjacencies that strengthen our business. As part of our commitment to creating unmatched experiences, we explore adjacencies that strengthen our position in sports and entertainment. Potential opportunities include new types of events and festivals, and new opportunities in hospitality, clubs, and food and beverage. Examples over the last several years include the Company’s purchase of a controlling interest in BCE, the entertainment production company known for creating and operating New England’s premier music festival — the Boston Calling Music Festival; TAO Group, a hospitality group with globally-recognized entertainment dining and nightlife brands; and CLG, a premier North American esports organization. |
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• | Continuing to explore external strategic opportunities. We continue to seek strategic opportunities to add compelling assets and brands that resonate with our customers and partners, fit with our core competencies and allow new opportunities for growth across the Company. One of the ways we try to capitalize on our unique combination of dynamic assets, established industry relationships and deep customer connections is through strategic partnerships that bring together the expertise and capabilities of each partner, and enable us to team with recognized leaders in their fields and benefit from growth in those businesses. |
Our Business
MSG Sports
Our Company is synonymous with some of the greatest sporting events in history. Today that tradition continues with our commitment to delivering a broad array of world-class sporting events that create lasting and indelible memories for sports fans. Our MSG Sports segment includes some of the world’s most recognized sports franchises, as well as a diverse selection of other live sporting events, that the Company promotes, produces and/or presents, primarily at The Garden, Hulu Theater at Madison Square Garden and the Forum.
Our Sports Franchises
The Knicks and Rangers are two of the most recognized franchises in professional sports, with storied histories and passionate, multi-generational fan bases. These teams are the primary occupants of The Garden, playing a combined total of 82 regular season home games, often to at or near capacity attendance. For all of our sports teams, the number of home games increases if they qualify for the playoffs.
New York Knicks
As an original franchise of the NBA, the Knicks have a rich history that includes eight trips to the NBA Finals and two NBA Championships, as well as some of the greatest athletes to ever play the game. Under the leadership of head coach, David Fizdale, the Knicks head into the 2019-20 season fielding a young and exciting team that includes Mitchell Robinson, an NBA All-Rookie Second Team selection; RJ Barrett, the number three overall pick in the 2019 NBA Draft; and a number of skilled players who were added to the team during the offseason. The Knicks ranked in the top three in the NBA for ticket sales receipts for the 2018-19 regular season.
New York Rangers
The Rangers hockey club is one of the NHL’s “Original Six” franchises. Heading into its 92nd season, the Rangers are a storied franchise and one of the league’s marquee teams, with four Stanley Cup Championships over its history. Under the leadership of new President, John Davidson, the Rangers are seeking to build the foundation for its next championship-caliber team, which for the 2019-20 season includes the addition of elite forward, Artemi Panarin, as well as Kaapo Kakko, the second overall pick in the 2019 NHL Entry Draft. The Rangers are known to have one of the most passionate, loyal and enthusiastic fan bases in all of sports, and ranked in the top three in the NHL for ticket sales receipts for the 2018-19 regular season.
Westchester Knicks
The Westchester Knicks, an NBAGL team, play their home games at the Westchester County Center in White Plains, NY and serve as the exclusive NBAGL affiliate of the Knicks. In the 2018-19 season, the Westchester Knicks finished with the franchise’s second-most wins in a single season, including the first postseason win in its history.
Hartford Wolf Pack
The Hartford Wolf Pack, a minor-league hockey team, is the player development team for the Rangers and is also competitive in its own right in the AHL. The Rangers send draft picks and other players to the Hartford Wolf Pack for skill development and injury rehabilitation, and can call up players for the Rangers roster to enhance the team’s competitiveness.
Esports
The Company’s portfolio of live experiences includes a presence in the esports industry through a controlling interest in CLG, a premier North American esports organization, as well as Knicks Gaming, our franchise in the NBA 2K Esports League. Founded in 2010, CLG is one of the most established and successful organizations in the industry, operating six teams across several well-known esports games: “League of Legends,” “Fortnite,” “Counter-Strike: Global Offensive,” and “Super Smash Bros.” In 2018, Knicks Gaming made its debut as part of the league’s inaugural season and went on to win the first-ever NBA 2K League championship.
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The Role of the Leagues in Our Operations
As franchises in professional sports leagues, our teams are members of their respective leagues and, as such, are subject to certain limitations, under certain circumstances, on the control and management of their affairs. The respective league constitutions of our sports teams, under which each league is operated, together with the collective bargaining agreements (each a “CBA”) each league has signed with its players’ association, contain numerous provisions that, as a practical matter in certain circumstances, could impact the manner in which we operate our businesses. In addition, under the respective league constitutions of our sports teams, the commissioner of each league, either acting alone or with the consent of a majority (or, in some cases, a supermajority) of the other sports teams in the league, may be empowered in certain circumstances to take certain actions felt to be in the best interests of the league, whether or not such actions would benefit our sports teams and whether or not we consent or object to those actions.
While the precise rights and obligations of member teams vary from league to league, the leagues have varying degrees of control exercisable under certain circumstances over the length and format of the playing season, including preseason and playoff schedules; the number of games in a playing season; the operating territories of the member teams; national and international media and other licensing rights; admission of new members and changes in ownership; franchise relocations; indebtedness affecting the franchises; and labor relations with the players’ associations, including collective bargaining, free agency, and rules applicable to player transactions, luxury taxes and revenue sharing. See “Part II — Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Business Overview — MSG Sports — Expenses.” Additionally, CLG operates multiple teams that participate in several different esports leagues. The rights and obligations of each CLG team (and member teams generally) vary from league to league. The leagues are generally empowered to and have implemented rules with respect to our league participation, as well as operation, and monetization of the CLG teams and brand. From time to time, we may disagree with or challenge actions the leagues take or the power and authority they assert, although the leagues’ governing documents and our agreements with the leagues purport to limit the manner in which we may challenge decisions and actions by a league commissioner or the league itself.
Other Sporting Events
The Company’s MSG Sports segment also includes a broad array of live sporting events that the Company promotes, produces and/or presents, including professional boxing, college basketball, college hockey, professional bull riding, mixed martial arts, esports, and college wrestling. Many of these events are among the most popular in our history and are perennial highlights on our annual calendar, as well as some of The Garden’s longest-running associations.
Professional boxing, beginning with John L. Sullivan in 1882, has had a long history with The Garden. The Arena famously hosted Muhammad Ali and Joe Frazier’s 1971 “Fight of the Century,” considered among the greatest sporting events in modern history, as well as numerous bouts featuring dozens of other boxing greats. These have included: Joe Louis, Rocky Marciano, Sugar Ray Robinson, Willie Pep, Emile Griffith, George Foreman, Roberto Duran, Oscar De La Hoya, Sugar Ray Leonard, Lennox Lewis, Roy Jones, Jr., Mike Tyson, Evander Holyfield, Miguel Cotto, and Wladimir Klitschko. In June 2019, The Garden hosted the World Heavyweight Championship, in a bout that saw champion Anthony Joshua, in his U.S. debut, fall in a stunning loss to Andy Ruiz Jr. in front of a sold-out crowd. Additionally, this past year the Company hosted top fighters Vasiliy Lomachenko, Daniel Jacobs, Demetrius Andrade, Gennady Golovkin, and Terence Crawford, as well as the New York debut of international boxing superstar Canelo Alvarez.
In recent years, the Company has also expanded its presence in the popular sport of mixed martial arts. In June 2016, the Forum hosted its first-ever Ultimate Fighting Championship (“UFC”) event with UFC 199. Since the return of professional mixed martial arts in New York State in 2016, The Garden has annually hosted UFC events, including the historic UFC 205 in November 2016 during which Conor McGregor knocked out Eddie Alvarez to become the first simultaneous two-weight champion in UFC history. Bellator MMA has also hosted internationally-broadcasted events at both The Garden and the Forum, including most recently Bellator 222 at The Garden in June 2019, which featured Rory MacDonald vs. Neiman Gracie in a welterweight title fight. The Professional Fighters League has also held events at Hulu Theater at Madison Square Garden, including its inaugural World Championships on New Year’s Eve this past year, which featured six world title fights.
College sports have been a mainstay at The Garden for decades, with college basketball celebrating 85 years at The World’s Most Famous Arena during the 2018-19 season. In addition to St. John’s University calling The Garden its “home away from home,” this past year the highly-anticipated Big East Tournament celebrated its 37th consecutive year at The Garden. Other college basketball highlights this past year included visits from Duke University’s Blue Devils, where phenoms Zion Williamson and RJ Barrett entertained The Garden crowd in a showcase against Texas Tech, as well as the annual Jimmy V Classic and the 2K Empire Classic.
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In 2007, The Garden sold out its first college hockey game — Red Hot Hockey featuring Cornell University versus Boston University — which has become a popular biennial event that Cornell won for the first time in 2017. College hockey has continued to grow at The Garden and become a fan-favorite over the last decade, attracting top national teams such as Boston College, North Dakota, Harvard, Michigan, and Minnesota.
Other recent world-class sporting events have included the NBA All-Star Game, which The Garden last hosted in 2015, marking the fifth time the arena has hosted the illustrious professional basketball event, and the NCAA Division I Men’s Basketball East Regional Finals, which The Garden hosted in 2014 and 2017, and will again in 2020.
These live sporting events are not contemplated to be included as part of the potential Sports Distribution.
MSG Entertainment
Our Company delivers unforgettable entertainment experiences — including live events and spectacular productions — all in extraordinary settings that span some of the country’s largest entertainment markets. This creates a significant demand for an association with our brands — by artists, premier companies and the public. And with a foundation of iconic venues, our Company has a proven ability to leverage the strength of our industry relationships, marketing assets, customer database and live event expertise to create performance, promotion and distribution opportunities for artists, events and productions, and to increase utilization of our venues.
Specifically, our MSG Entertainment segment produces, presents and hosts concerts, family shows, performing arts events, special events and wholly-owned productions at our venues, which are: The Garden, Hulu Theater at Madison Square Garden, Radio City Music Hall, the Beacon Theatre, the Forum and The Chicago Theatre. With seating capacities and configurations that range from 2,800 to 21,000, our collection of diverse venues enables us to showcase acts and events that cover a wide spectrum of genres and popular appeal.
Our MSG Entertainment segment also includes the beloved holiday show, the Christmas Spectacular — created for Radio City Music Hall and featuring the world-famous Rockettes.
Over the past several years, the Company has also been executing on its plans to build a robust, diversified portfolio of live experiences. In July 2016, the Company acquired a controlling interest in BCE, the entertainment production company that owns and operates the Boston Calling Music Festival. This was followed in January 2017 by the Company’s purchase of a controlling interest in TAO Group, a hospitality group with globally-recognized entertainment dining and nightlife brands.
Our Live Entertainment Bookings
Our Company is an established industry leader that books a wide variety of live entertainment events in our venues, which perennially include some of the biggest names in music and entertainment. Over the last several years, our venues have been a key destination for artists such as the Eagles, U2, Pearl Jam, Foo Fighters, Paul McCartney, Drake, Bruno Mars, Justin Bieber, Dead and Company, Madonna, Mumford & Sons, Phish, Fleetwood Mac, Adele, Eric Clapton, Bruce Springsteen, Rihanna, Justin Timberlake, P!nk, Kanye West, Stevie Wonder, Ariana Grande and Dave Chappelle.
Our efforts to find new ways to increase the utilization of our venues and create unique experiences for artists and fans has led to the creation of various residencies — including The Garden’s first music franchise: Billy Joel at The Garden. As part of this extraordinary residency, Billy Joel has appeared monthly at MSG since January 2014, for a total of 66 shows, bringing his overall performances at The World’s Most Famous Arena to 112 overall (through July 2019). In 2016, the Company launched its second residency, as legendary New Yorker and comedian Jerry Seinfeld began a successful two-year run at the Beacon Theatre, with all 36 performances — which concluded in December 2017 — selling out. In 2019 Seinfeld resumed his successful residency, which now includes 56 total performances (through July 2019). This past year, the Company also announced a new multi-year, dual-city residency with Tedeschi Trucks Band at both the Beacon Theatre and The Chicago Theatre — the first residency to span two cities.
Our venues also attract family shows and theatrical productions, which this past year included: PAW Patrol Live!, Sesame Street Live!, Dr. Seuss’ How the Grinch Stole Christmas!, The Lightning Thief: The Percy Jackson Musical, and Pride & Joy: The Marvin Gaye Musical. In addition, we frequently serve as the backdrop for high-profile special events such as the 60th Annual Grammy Awards, which returned to The Garden for the first time in 15 years in 2018. Other significant events that have been hosted in our venues include the Tony Awards, “America’s Got Talent,” the final season premiere of HBO’s “Game of Thrones” and the MTV Video Music Awards; appearances by luminaries such as His Holiness Pope Francis, His Holiness the Dalai Lama and the Prime Minister of India, Narendra Modi; graduations, television upfronts, product launches and film premieres.
Although we primarily license our venues to third-party promoters for a fee, we also promote or co-promote shows where we have economic risk relating to the event. MSG Entertainment currently does not promote or co-promote events outside of our venues.
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Our Productions
One of the Company’s core properties, the Christmas Spectacular — created for Radio City Music Hall and featuring the world-famous Rockettes — has been performed at Radio City Music Hall for 86 years. The Rockettes, along with show-stopping performances, festive holiday scenes and state-of-the-art special effects, have played an important role in the critically-acclaimed show’s enduring popularity. This past year the show featured several new technology enhancements, including an all-new groundbreaking finale scene, “Christmas Lights.” Additionally, large-scale digital projections were incorporated to enhance both the finale and classic numbers throughout the show, creating an immersive environment that extended beyond the stage onto all eight of Radio City’s proscenium arches. During the 2018 holiday season, the Christmas Spectacular once again sold more than one million tickets.
We acquired the rights to the Christmas Spectacular in 1997, and those rights are separate from, and do not depend on the continuation of, our lease of Radio City Music Hall. We also hold rights to the Rockettes brand in the same manner.
The Company believes it has a significant and unique asset in the Rockettes and continues to strengthen and broaden the Rockettes brand by targeting the most prominent and effective vehicles that elevate their visibility and underscore their reputation as beloved American cultural icons. The Rockettes have appeared or performed at high-profile events, including Presidential Inaugurations, the Macy’s Thanksgiving Day Parade, Macy’s 4th of July Fireworks event, the New Year’s Eve Times Square Ball Drop, the Tony Awards, and television shows (“America’s Got Talent,” “Project Runway,” “The Today Show,” “Live with Kelly and Ryan,” and “The Tonight Show with Jimmy Fallon”), among many others. We continue to pursue opportunities to generate greater brand awareness, including television and public appearances and dance education offerings.
Our Entertainment Dining and Nightlife Offerings
The Company owns a controlling interest in TAO Group, which strengthens the Company’s portfolio of live offerings with a complementary, hospitality group with widely-recognized brands that include: TAO, Marquee, Lavo, Avenue, Beauty & Essex, and Vandal. Since 2000, TAO Group has been creating some of the most innovative premium experiences in the entertainment dining and hospitality industry. Today, TAO Group operates 29 venues – 12 venues in New York City, six venues in Las Vegas, five venues in Los Angeles, one venue in Chicago, four venues in Singapore and one venue in Sydney, Australia — and is actively developing opportunities to expand on their success with new venues. Over the past year, TAO Group opened TAO Chicago, along with new entertainment dining and nightlife venues as part of Moxy Chelsea hotel in New York City. TAO Group also debuted three new venues in Singapore — Marquee, Avenue, and KOMA.
Essentially all of the venues have either long-term leases or long-term management agreements with options to renew for multiple years.
Our Festival Offering
The Company owns a controlling interest in BCE, the entertainment production company known for successfully creating and operating New England’s premier music festival — Boston Calling, which this year celebrated its 10th edition. The 2019 three-day festival took place over Memorial Day weekend at the Harvard Athletic Complex, and featured more than 50 performances from a diverse array of musicians, bands, and comedians, including headliners Twenty One Pilots, Tame Impala and Travis Scott.
Our Performance Venues
The Company operates a mix of iconic performance venues that continue to build on their historic prominence as destinations for unforgettable experiences and events. Individually, these venues are each premier showplaces, with a passionate and loyal following of fans, performers and events. Taken together, we believe they represent an outstanding collection of venues.
We own or operate under long-term leases a total of six venues in New York City, Chicago and Inglewood, CA. Our New York City venues are the Madison Square Garden Complex (which includes both The Garden and Hulu Theater at Madison Square Garden), Radio City Music Hall and the Beacon Theatre. Our portfolio of venues also includes the Forum in Inglewood, CA and The Chicago Theatre. The Company is also currently building a new venue in Las Vegas, MSG Sphere at The Venetian, and has announced plans to build an MSG Sphere venue in London, once we have received all necessary approvals and have further advanced our design for the venue.
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The Garden
The Garden has been a celebrated center of New York life since it first opened its doors in 1879. Over its 140-year history, there have been four Garden buildings, each known for showcasing the best of the era’s live sports and entertainment offerings. We believe that The Garden has come to epitomize the power and passion of live sports and entertainment to people around the world, with an appearance at The Garden often representing a pinnacle of an athlete’s or performer’s career. Known as “The World’s Most Famous Arena,” The Garden has been the site of some of the most memorable events in sports and entertainment, and, together with Hulu Theater at Madison Square Garden, has hosted hundreds of events and millions of visitors this past year. In 2009, Billboard Magazine ranked The Garden the number one venue of the decade in its respective class based upon gross ticket sales. Music industry subscribers of the trade magazine Pollstar have voted The Garden “Arena of the Year” 22 times since the inception of the awards in 1989. The Garden is the highest-grossing entertainment venue of its size in the world based on Billboard Magazine’s 2019 mid-year rankings.
The Garden is home to the Knicks and Rangers and is associated with countless “big events,” inspired performances and one-of-a-kind moments. Highlights include: “The Fight of the Century” between Muhammad Ali and Joe Frazier in 1971; the 1970 Knicks’ NBA Championship; the Rangers’ 1994 Stanley Cup Championship; three Democratic National Conventions and one Republican National Convention; Marilyn Monroe’s famous birthday serenade to President John F. Kennedy; Frank Sinatra’s “Main Event” concert in 1974; the only U.S. concerts from the reunited Cream; the 25th Anniversary Rock and Roll Hall of Fame concerts; the 60th Annual Grammy Awards; and Billy Joel’s record-breaking 112 total performances at The Garden (through July 2019). In September 2015, His Holiness Pope Francis celebrated Mass at The Garden as part of his successful U.S. visit, which marked the first time a current pope has visited The Garden since Pope John Paul II in 1979. The Garden has also hosted four prominent benefit concerts, which galvanized the public to respond to national and global crises, including the first of its kind, “The Concert for Bangladesh” in 1972, as well as “The Concert for New York City,” following the events of 9/11; “From the Big Apple to the Big Easy,” held after Hurricane Katrina in 2005; and “12-12-12, The Concert for Sandy Relief” in 2012.
The current Madison Square Garden Complex, located between 31st and 33rd Streets and Seventh and Eighth Avenues on Manhattan’s West Side, opened on February 11, 1968 with a salute to the United Service Organizations hosted by Bob Hope and Bing Crosby. From a structural standpoint, the construction of the current Garden was considered an engineering wonder for its time, including its famous circular shape and unique, cable-supported ceiling, which contributes to its intimate feel. It was the first large structure built over an active railroad track. The builder, R.E. McKee, had a national reputation and was later recognized as a “Master Builder” by the construction industry. Architect Charles Luckman had one of the largest firms in the country and designed such buildings as the Prudential Tower in Boston, NASA’s flight center in Houston and the Forum in Inglewood, CA.
Following a three-year, top-to-bottom transformation, in October 2013, the Company debuted a fully-transformed Garden, featuring improved sightlines; additional entertainment and dining options; new concourses; upgraded hospitality areas; new technology; unique historic exhibits; and a completely transformed interior, where the intimacy of the arena bowl and The Garden’s world-famous ceiling were maintained. Focused on the total fan experience, the transformation was designed to benefit everyone in attendance, whether first time visitors, season ticket subscribers, athletes, artists, suite holders or marketing partners. The Garden’s transformation ensured that attending an event at “The World’s Most Famous Arena” remained unlike anywhere else.
We own the Madison Square Garden Complex, the platform on which it is built and development rights (including air rights) above our property. Madison Square Garden sits atop Pennsylvania Station (“Penn Station”), a major commuter hub in Manhattan, which is owned by the National Railroad Passenger Corporation (Amtrak). While the development rights we own would permit us to expand in the future, any such use of development rights would require various approvals from the City of New York. The Garden seats up to approximately 21,000 spectators for sporting and entertainment events and, along with Hulu Theater at Madison Square Garden, contains approximately 1,100,000 square feet of floor space over 11 levels.
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Hulu Theater at Madison Square Garden
Hulu Theater at Madison Square Garden, which has approximately 5,600 seats, opened as part of the fourth Madison Square Garden Complex in 1968 with seven nights of performances by Judy Garland. Since then, some of the biggest names in live entertainment have played Hulu Theater at Madison Square Garden, including The Who, Bob Dylan, Diana Ross, Elton John, James Taylor, Mary J Blige, Pentatonix, John Legend, Ellie Goulding, Chris Rock, Neil Young, Bill Maher, Radiohead, Jerry Seinfeld and Van Morrison. Hulu Theater at Madison Square Garden has also hosted boxing events and the NBA Draft; award shows such as The Daytime Emmys; and other special events including “Wheel of Fortune” and audition shows for “America’s Got Talent,” as well as a variety of theatrical productions and family shows, including A Christmas Story, Elf The Musical, Paw Patrol Live!, and Sesame Street Live!. In March 2018, the Company and Hulu, a leading premium streaming service, announced a multi-faceted marketing partnership that included exclusive naming rights, after which the venue was rebranded as Hulu Theater at Madison Square Garden. Hulu Theater at Madison Square Garden is the seventh highest-grossing entertainment venue of its size in the world, based on Billboard Magazine’s 2019 mid-year rankings.
Radio City Music Hall
Radio City Music Hall has a rich history as a national theatrical and cultural mecca since it was first built by theatrical impresario S.L. “Roxy” Rothafel in 1932. Known as “The Showplace of the Nation,” it was the first building in the Rockefeller Center complex and, at the time, the largest indoor theater in the world. Radio City Music Hall, a venue with approximately 6,000 seats, hosts concerts, family shows and special events, and is home to the Christmas Spectacular. See “— MSG Entertainment — Our Productions.” Over its history, entertainers who have graced the Great Stage include: Yes, Aretha Franklin, Lady Gaga, Brian Wilson, Harry Styles, Bastille, John Mulaney, Mariah Carey, Nine Inch Nails, Christina Aguilera, Britney Spears, Tony Bennett, Billie Eilish, Sebastian Maniscalco and Dave Chappelle. In 2009, Billboard Magazine ranked Radio City Music Hall the number one venue of the decade in its respective class based upon gross ticket sales. Radio City Music Hall is the highest-grossing entertainment venue of its size in the world, based on Billboard Magazine’s 2019 mid-year rankings.
In 1978, Radio City Music Hall was designated a New York City landmark by the NYC Landmarks Preservation Commission and a national landmark on the National Register of Historic Places. We acquired the lease in 1997, and in 1999, we invested in a complete restoration that returned the legendary theater to its original grandeur. Our acclaimed restoration touched all aspects of the venue and included burnishing the ceilings of Radio City Music Hall with 720,000 sheets of gold and aluminum leaf, replacing the existing stage curtain with a new 112-foot wide golden silk curtain, and cleaning the three-story tall mural “The Fountain of Youth,” by Ezra Winter, which looms above the grand staircase. State-of-the-art sound systems, lighting and HDTV capabilities were also installed.
We lease Radio City Music Hall, located at Sixth Avenue and 50th Street in Manhattan, pursuant to a long-term lease agreement. The lease on Radio City Music Hall expires in 2023. We have the option to renew the lease for an additional 10 years by providing two years’ notice prior to the initial expiration date.
Beacon Theatre
In November 2006, we entered into a long-term lease agreement to operate the legendary Beacon Theatre, a venue with approximately 2,800 seats, which sits on the corner of Broadway and 74th Street in Manhattan. The Beacon Theatre was conceived of by S. L. “Roxy” Rothafel and is considered the “older sister” to Radio City Music Hall. Designed by Chicago architect Walter Ahlschlager, the Beacon Theatre opened in 1929 as a forum for vaudeville acts, musical productions, drama, opera, and movies. The Beacon Theatre was designated a New York City landmark by the NYC Landmarks Preservation Commission in 1979 and a national landmark on the National Register of Historic Places in 1982. Over its history, the Beacon Theatre has been a venerable rock and roll room for some of the greatest names in music including Steely Dan, Coldplay, Alice Cooper, Dave Matthews Band, Crosby Stills & Nash, Elton John, John Fogerty, Hozier, Tom Petty and the Heartbreakers, Tedeschi Trucks Band, Eddie Vedder and Bob Dylan, as well as The Allman Brothers Band, which played their 238th show at the Beacon Theatre in October 2014, marking their final concert as a band. The venue has also hosted special events such as film premieres for the Tribeca Film Festival and comedy events, including our Jerry Seinfeld residency, along with numerous luminaries such as His Holiness the Dalai Lama in 2009 and 2013, and President Bill Clinton in 2006 when the Rolling Stones played a private concert in honor of his 60th birthday.
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In August of 2008 we closed the Beacon Theatre for a seven-month restoration project to return the theater to its original 1929 grandeur. The restoration of the Beacon Theatre focused on all historic, interior public spaces of the building, backstage and back-of-house areas, and was based on extensive historic research, as well as detailed, onsite examination of original, decorative painting techniques that had been covered by decades-old layers of paint. The Beacon Theatre has won several architectural awards recognizing its outstanding restoration. The widely acclaimed, comprehensive restoration was similar to our restoration of Radio City Music Hall, and reflects our commitment to New York City. The Beacon Theatre is the sixth highest-grossing entertainment venue of its size in the world, based on Billboard Magazine’s 2019 mid-year rankings.
Our lease on the Beacon Theatre expires in 2026.
The Forum
In June 2012, we added a West Coast home with the purchase of the Forum in Inglewood, CA, which serves the Greater Los Angeles area. Following an extensive reinvention of the historic venue, on January 15, 2014, the Forum re-opened with the first of six concerts by the legendary Eagles and is once again a thriving destination for both artists and music fans. With both the Forum and The Garden, the Company has an iconic arena in each of the country’s two largest entertainment markets.
The Forum is the only arena-sized venue in the country dedicated to music and entertainment, and offers something exceptional for everyone. Architecturally, the interior of the bowl has been completely modernized and features superior acoustics, along with flexible seating that ranges from 7,000 seats to 17,600 seats. Fans seated on the floor have access to one of the largest general admission floors in the country, with approximately 8,000 square feet of event level hospitality offerings. The Forum also offers exclusive spaces for VIP customers, including the historic Forum Club, and, for artists, delivers a first-class experience that includes nine, star-caliber dressing rooms with high-end amenities. Among the key features that were resurrected in an effort to replicate the original design is the exterior color of the venue, which was returned to the 1960’s “California sunset red,” and is now known as “Forum Red.” Other outdoor features include the addition of a distinct and iconic Forum marquee and a 40,000-square foot terrace that surrounds the perimeter of the building.
The original Forum was designed by renowned architect, Charles Luckman, who also designed The Garden that opened in 1968. The historic West Coast venue, which opened in 1967, has played host to some of the greatest musical performers of all time, including The Rolling Stones, The Jackson 5, Bob Dylan, Led Zeppelin, Madonna, Van Halen, Coldplay, Prince and many others. In addition, the Forum was home to the Los Angeles Lakers and Los Angeles Kings until 1999.
Since re-opening in 2014, the Forum has received several architectural awards recognizing its outstanding restoration. The venue’s impressive lineup of entertainers since the restoration has included: the Eagles, Justin Timberlake, U2, Drake, Kanye West, Eric Clapton, Guns N’ Roses, Stevie Wonder, Aerosmith, Steely Dan, Fleetwood Mac, Jennifer Lopez, KISS, Mumford & Sons, Foo Fighters, The Weeknd, P!nk and Rihanna as well as His Holiness the Dalai Lama. The Forum has also hosted a number of special events such as the MTV Video Music Awards and Nickelodeon’s Kids’ Choice Awards, as well as select sporting events, including Championship Boxing and mixed martial arts. The Forum is the third highest-grossing entertainment venue of its size in the world, based on Billboard Magazine’s 2019 mid-year rankings.
The Chicago Theatre
In October 2007, to provide us with an anchor for content and distribution in a key market in the Midwest, we purchased the legendary Chicago Theatre, a venue with approximately 3,600 seats. The Chicago Theatre, which features its famous six-story-high “C-H-I-C-A-G-O” marquee, was built in 1921 and designed in the French Baroque style by architects Cornelius W. Rapp and George L. Rapp. It is the oldest surviving example of this architectural style in Chicago today, and was designated a Chicago landmark building in 1983 by the Mayor of Chicago and the Chicago City Council.
The Chicago Theatre has become a highly attractive destination for concerts, comedy shows and other live events, hosting a wide range of entertainers, including Bob Dylan, Mumford & Sons, David Byrne, Neil Young, Janelle Monae, Jerry Seinfeld, Janet Jackson, Bob Weir, Jim Gaffigan, Conan O’Brien, Amy Schumer and Steely Dan. The venue has also hosted theatrical tours such as A Christmas Story, The Wizard of Oz, Paw Patrol Live! and Dr. Seuss’ How The Grinch Stole Christmas! The Musical. The Chicago Theatre is the fifth highest-grossing entertainment venue of its size in the world, based on Billboard Magazine’s 2019 mid-year rankings.
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MSG Sphere
The Company is progressing with its plans to create the “venue of the future” with MSG Sphere, which will utilize cutting-edge technologies to create the next-generation of immersive experiences. Key design features of MSG Sphere are expected to include:
• | a fully-programmable LED exterior and an interior bowl that features the world’s largest and highest resolution LED screen known today — more than 160,000 square feet of display surface; |
• | an advanced acoustics system featuring beamforming technology that will deliver crystal clear audio; |
• | a custom video system capable of capturing, curating and distributing both today’s and tomorrow’s content; |
• | an infrasound haptic system that will use deep vibrations so guests can “feel” the experience; and |
• | an advanced architecture for connectivity that will enable a broader range of content, greater interaction among guests and more immersive entertainment experiences. |
These technologies will come together to create a powerful platform, which we believe will make MSG Sphere the venue of choice for a wide variety of content — including attractions, concerts, residencies, corporate events, award shows, product launches and select sporting events.
The Company will build its first MSG Sphere in Las Vegas on land leased from Las Vegas Sands Corp. (“Sands”), which is adjacent to The Venetian Resort. The Company broke ground on the approximately 17,500-seat venue in September 2018 with the start of site preparations, and construction is currently ongoing. Our goal is to open MSG Sphere in Las Vegas in calendar year 2021. Sands will provide us with $75 million to help fund the construction costs, including the cost of a pedestrian bridge that links MSG Sphere in Las Vegas to the Sands Expo Convention Center. Sands will receive priority access to purchase tickets to events at the venue for inclusion in hotel packages or other uses, as well as certain rent-free use of the venue to support its Expo Center business. The ground lease has no fixed rent; however, if certain return objectives are achieved, Sands will receive 25% of the after-tax cash flow in excess of such objectives. The lease is for a term of 50 years.
In February 2018, we announced the purchase of land in Stratford, London, which we expect will become home to the Company’s second MSG Sphere and first large-scale international venue. The Company submitted a planning application to the local planning authority in March 2019 and expects a planning determination by the end of calendar year 2019 (which may become the subject of further discussions with the planning authority). Our plan is to begin construction on the MSG Sphere venue in London only once we have received all necessary approvals and have further advanced our design for the venue. We currently expect that MSG Sphere in London will be substantially similar to MSG Sphere in Las Vegas, including having approximately the same seating capacity.
We continue to explore additional domestic and international markets where next-generation venues can be successful. The design of MSG Sphere will be flexible to accommodate a wide range of sizes and capacities — from large-scale to smaller and more intimate — based on the needs of any individual market. As we explore selectively extending the MSG Sphere network, we will be open to multiple types of transaction structures, including owned, operated, and joint ventures.
See “Part II — Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources — MSG Spheres.”
Our Interactive Initiatives
The Company has a digital presence that includes web sites, social networking sites and mobile applications for our sports and entertainment properties. In 2017, the Company consolidated a collection of individual web sites dedicated to our venues into a new platform, MSG.com, designed to deliver greater value to our customers by providing one place where they can explore upcoming events in all our venues, learn more about our brands, and purchase tickets. Web sites dedicated to our teams (nhl.com/rangers, nba.com/knicks, westchester.gleague.nba.com, hartfordwolfpack.com, clg.gg, knicksgaming.nba.com) remain separate from MSG.com, as do the web sites for TAO Group (taogroup.com) and Boston Calling (bostoncalling.com). Like our MSG Sports business, the online operations relating to our teams may, in certain circumstances, be subject to certain agreements, rules, policies, regulations and directives of the leagues in which the respective team operates. See “— Our Business — Regulation.” In addition to driving ticket sales to our events, this interactive business generates revenue for the Company’s segments via the sale of advertising and sponsorships on these digital properties. Additionally, it offers strategic marketing assets that create opportunities to market directly to our fans and cross-promote our businesses.
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Other Investments
We continue to explore additional opportunities that strengthen our existing position within the sports and entertainment landscape and/or allow us to exploit our assets and core competencies for growth.
In July 2018, the Company acquired a 30% interest in SACO, a global provider of high-performance LED video lighting and media solutions for a total consideration of approximately $47.2 million. The Company is utilizing SACO as a preferred display technology provider for MSG Spheres and is benefiting from agreed upon commercial terms.
In addition, the Company also has other investments in various sports and entertainment companies and related technologies, accounted for either under the equity method or at fair value.
Garden of Dreams Foundation
Our Company has a close association with The Garden of Dreams Foundation (the “Foundation”), a 501(c)(3) non-profit charity that is dedicated to making dreams come true for children facing obstacles. The Foundation works with 30 partner organizations throughout the tristate area, including hospitals, wish organizations and community-based organizations, to reach children who are facing challenges such as homelessness, extreme poverty, illness and foster care. Since it began in 2006, Garden of Dreams has used the magic of The Madison Square Garden Company — including the Rangers, Knicks, Rockettes and famed showplaces — to brighten the lives of more than 375,000 children and their families. The Foundation takes pride in its commitment to truly change lives, hosting more than 500 events and programs each year. They include: events with the Knicks and Rangers; special celebrations and event attendance at The Garden, Radio City Music Hall and the Beacon Theatre; visits by Madison Square Garden celebrities; The Garden of Dreams Talent Show, where children perform on the Great Stage at Radio City Music Hall; The Garden of Dreams Prom, which brings together teens who may not otherwise have the opportunity to attend their own proms; toy drives; and the “Make A Dream Come True Program,” where children enjoy unforgettable experiences with celebrities and at events. In addition, through its Garden of Dreams Giving program, the Foundation helps its partner organizations meet the critical needs of the children they serve through direct support of scholarships and tangible, targeted community projects. To date, the Foundation has awarded scholarships to 77 children. Garden of Dreams has also served its partners by refurbishing pediatric wards at area hospitals, activity rooms and gymnasiums at community facilities and by creating brand new spaces such as music and dance studios — with plans for many more vital civic enhancements in the years to come.
Regulation
Our sports and entertainment businesses are subject to legislation governing the sale and resale of tickets and consumer protection statutes generally.
In addition, our venues, like all public spaces, are subject to building and health codes and fire regulations imposed by the state and local governments in the jurisdictions in which they are located. Our venues are also subject to zoning and outdoor advertising regulations, and, with respect to Radio City Music Hall and the Beacon Theatre, landmark regulations which restrict us from making certain modifications to our facilities as of right or from operating certain types of businesses. Our venues also require a number of licenses in order for us to operate, including occupancy permits, exhibition licenses, food and beverage permits, liquor licenses and other authorizations and, with respect to The Garden, a zoning special permit granted by the New York City Planning Commission. In the jurisdictions in which our venues are located, we are subject to statutes that generally provide that serving alcohol to a visibly intoxicated or minor patron is a violation of the law and may provide for strict liability for certain damages arising out of such violations. In addition, our venues are subject to the federal Americans with Disabilities Act (and related state and local statutes), which requires us to maintain certain accessibility features at each of our facilities. We and our venues are also subject to environmental laws and regulations. See “Item 1A. Risk Factors — General Risks — We Are Subject to Extensive Governmental Regulation and Our Failure to Comply with These Regulations May Have a Material Negative Effect on Our Business and Results of Operations.” The professional sports leagues in which we operate, primarily the NBA and NHL, have the right under certain circumstances to regulate important aspects of our sports business and our team-related online and mobile businesses. See “— Our Business — MSG Sports — The Role of the Leagues in Our Operations.”
Our sports and entertainment businesses are also subject to certain regulations applicable to our Internet web sites and mobile applications. We maintain various web sites and mobile applications that provide information and content regarding our businesses, offer merchandise and tickets for sale, make available sweepstakes and/or contests and offer hospitality services. The operation of these web sites and applications may be subject to a range of federal, state and local laws such as privacy and protection of personal information, accessibility for persons with disabilities and consumer protection regulations. In addition, to the extent any of our web sites collect information from children under 13 years of age or are intended primarily for children under 13 years of age, we must comply with certain limits on commercial matter.
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Our businesses are also subject to regulation regarding working conditions and minimum wage requirements. See “Item 1A. Risk Factors — Risks Relating to Our Entertainment Business — Increases in Labor Costs Could Slow the Growth of or Harm TAO Group.”
Our international operations are subject to laws and regulations of the countries in which they operate, as well as international bodies, such as the European Union. We are subject to laws and regulations relating to, among other things, foreign privacy and data protection, such as the E.U. General Data Protection Regulation, currency and repatriation of funds, anti-bribery, anti-money laundering and anti-corruption, such as the Foreign Corrupt Practices Act and the U.K. Bribery Act. These laws and regulations apply to the activities of the Company and, in some cases, to individual directors, officers, and employees of the Company and agents acting on our behalf. Certain of these laws impose stringent requirements on how we can conduct our foreign operations and could place restrictions on our business and partnering activities.
Competition
Competition in Our Sports Business
Our sports business operates in a market in which numerous sports and entertainment opportunities are available. In addition to the NBA, NHL, AHL and NBAGL teams that we own and operate, the New York City metropolitan area is home to two Major League Baseball teams (the New York Yankees (the “Yankees”) and the New York Mets (the “Mets”)), two National Football League teams (the New York Giants (the “Giants”) and the New York Jets (the “Jets”)), two additional NHL teams (the New York Islanders (the “Islanders”) and the New Jersey Devils (the “Devils”)), a second NBA team (the Brooklyn Nets (the “Nets”) and two Major League Soccer franchises (the New York Red Bulls and the New York City Football Club). In addition, there are a number of other amateur and professional teams that compete in other sports, including at the collegiate and minor league levels. New York is also home to the U.S. Open tennis event each summer, as well as many other non-sports related entertainment options.
As a result of the large number of options available, we face strong competition for the New York area sports fan. We must compete with these other sporting events in varying respects and degrees, including on the basis of the quality of the teams we field, their success in the leagues in which they compete, our ability to provide an entertaining environment at our games and the prices we charge for our tickets. In addition, for fans who prefer the unique experience of NHL hockey, we must compete with the Islanders and Devils as well as, in varying respects and degrees, with other NHL hockey teams and the NHL itself. Similarly, for those fans attracted to the equally unique experience of NBA basketball, we must compete with the Nets as well as, in varying respects and degrees, with other NBA teams and the NBA itself. In addition, we also compete to varying degrees with other productions and live entertainment events for advertising and sponsorship dollars.
The amount of revenue we earn is influenced by many factors, including the popularity and on-court or on-ice performance of our sports teams and general economic conditions. In particular, when our sports teams have strong on-court and on-ice performance, we benefit from increased demand for tickets, potentially greater food and merchandise sales from increased attendance and increased sponsorship opportunities. When our sports teams qualify for the playoffs, we also benefit from the attendance and in-game spending at the playoff games. The year-to-year impact of team performance is somewhat moderated by the fact that a significant portion of our revenue derives from rights fees, suite rental fees and sponsorship and signage revenue, all of which are generally contracted on a multi-year basis. Nevertheless, the long-term performance of our business is tied to the success and popularity of our sports teams and our ability to attract other compelling sports content.
We own a controlling interest in CLG, a premier North American esports organization. Due to the nature of esports, CLG competes with other teams across North America and globally. CLG competes for sponsorship, merchandise rights, media rights, and event prize winnings. Esports teams vary in their amount of funding, size of existing business, and amount of social following, among other factors, which can impact our ability to compete effectively.
See “Item 1A. Risk Factors — Risks Relating to Our Sports Business — Our Sports Business Faces Intense and Wide-Ranging Competition, Which May Have a Material Negative Effect on Our Business and Results of Operations” and “— Our Businesses Are Substantially Dependent on the Continued Popularity and/or Competitive Success of the Knicks and Rangers, Which Cannot Be Assured.”
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Competition in Our Entertainment Business
Our entertainment business competes, in certain respects and to varying degrees, with other live performances, sporting events, movies, home entertainment (including the Internet and online services, social media and social networking platforms, television, video and gaming devices), restaurants and nightlife venues, and the large number of other entertainment and public attraction options available to members of the public. Our businesses typically represent alternative uses for the public’s entertainment dollars. The primary geographic area in which we operate, New York City, is among the most competitive entertainment markets in the world, with the world’s largest live theater industry and extensive performing arts venues, 12 major professional sports teams, thousands of restaurants and nightlife venues, numerous museums, galleries and other attractions, and numerous movie theaters available to the public. We also have significant operations in Los Angeles and Las Vegas. Our venues and live offerings outside of New York City similarly compete with other entertainment, dining and nightlife options in their respective markets and elsewhere. We compete with these other entertainment options on the basis of the quality of our productions, the public’s interest in our content, the price of our tickets, the quality, location and atmosphere, including the nature and condition of the setting, of our venues, our service, the price, quality and presentation of our food and the overall experience we provide.
We compete for bookings with a large number of other venues both in the cities in which our venues are located and in alternative locations capable of booking the same productions and events. Generally, we compete for bookings on the basis of the size, quality, expense and nature of the venue required for the booking. Some of our competitors may have a larger network of venues and/or greater financial resources.
In addition to competition for ticket sales and bookings, we also compete to varying degrees with other productions and sporting events for advertising and sponsorship dollars.
See “Item 1A. Risk Factors — Risks Relating to Our Entertainment Business — Our Entertainment Business Faces Intense and Wide-Ranging Competition Which May Have a Material Negative Effect on Our Business and Results of Operations,” “— The Success of Our Entertainment Business Depends on the Continued Popularity of Our Live Productions, Particularly the Christmas Spectacular, the Decline of Which Could Have a Material Negative Effect on Our Business and Results of Operations,” “— The Geographic Concentration of Our Businesses Could Subject Us to Greater Risk Than Our Competitors and Have a Material Negative Effect on Our Business and Results of Operations” and “ — Negative Publicity with Respect to Any of the Existing or Future TAO Group Brands Could Reduce Sales at One or More of the Existing or Future TAO Group Venues and Make the TAO Group Brands Less Valuable, Which Could Have a Material Negative Effect on Our Business and Results of Operations.”
Employees
As of June 30, 2019, we had approximately 2,900 full-time union and non-union employees and 10,100 part-time union and non-union employees. Approximately 52% of our employees were represented by unions as of June 30, 2019. Approximately 13% of such union employees are subject to CBAs that were expired as of June 30, 2019 and approximately 36% are subject to CBAs that will expire by June 30, 2020 if they are not extended prior thereto. Labor relations in general and in the sports and entertainment industry in particular can be volatile, though our current relationships with our unions taken as a whole are positive. We have from time to time faced labor action or had to make contingency plans because of threatened or potential labor actions.
The NHL players and the NBA players are covered by CBAs between the NHL Players’ Association (“NHLPA”) and the NHL and between the National Basketball Players Association (“NBPA”) and the NBA, respectively. Both the NHL and the NBA have experienced labor difficulties in the past and may have labor issues in the future. On June 30, 2011 the prior CBA between the NBA and NBPA expired and there was a work stoppage for approximately five months until a new CBA was entered into in December 2011. On September 15, 2012 the prior CBA between the NHL and NHLPA expired and there was a work stoppage for approximately four months until a new CBA was entered into in January 2013. See “Item 1A. Risk Factors — General Risks — Organized Labor Matters May Have a Material Negative Effect on Our Business and Results of Operations.”
Financial Information about Segments and Geographic Areas
Substantially all of the Company’s revenues and a significant majority of assets are attributed to or located in the United States and are primarily concentrated in the New York City metropolitan area. Financial information by business segments for each of the years ended June 30, 2019, 2018, and 2017 is set forth in “Part II — Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Part II — Item 8. Financial Statements and Supplementary Data — Consolidated Financial Statements — Notes to Consolidated Financial Statements — Note 19. Segment Information.”
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Item 1A. Risk Factors
Risks Relating to Our Sports Business
Our Sports Business Faces Intense and Wide-Ranging Competition, Which May Have a Material Negative Effect on Our Business and Results of Operations.
The success of a sports business, like ours, is dependent upon the performance and/or popularity of its franchises. Our Knicks and Rangers and other sports franchises compete, in varying respects and degrees, with other live sporting events, and with sporting events delivered over television networks, radio, the Internet and online services, mobile applications and other alternative sources. For example, our sports teams compete for attendance, viewership and advertising with a wide range of alternatives available in the New York City metropolitan area. During some or all of the basketball and hockey seasons, our sports teams face competition, in varying respects and degrees, from professional baseball (including the Yankees and the Mets), professional football (including the Giants and the Jets), professional soccer (including the New York Red Bulls and the New York City Football Club) and each other. For fans who prefer the unique experience of NHL hockey, we must compete with two other NHL hockey teams located in the New York City metropolitan area (the Islanders and the Devils) as well as, in varying respects and degrees, with other NHL hockey teams and the NHL itself. Similarly, for those fans attracted to the equally unique experience of NBA basketball, we must compete with another NBA team located in the New York City metropolitan area (the Nets) as well as, in varying respects and degrees, with other NBA teams and the NBA itself.
As a result of the large number of options available, we face strong competition for the New York City metropolitan area sports fan. We must compete with these other sports teams and sporting events, in varying respects and degrees, including on the basis of the quality of the teams we field, their success in the leagues in which they compete, our ability to provide an entertaining environment at our games, prices we charge for tickets and the viewing availability of our teams on multiple media alternatives. Given the nature of sports, there can be no assurance that we will be able to compete effectively, including with companies that may have greater resources than we have, and as a consequence, our business and results of operations may be materially negatively affected.
The success of our sports business is largely dependent on our ability to attract strong attendance to our professional sports franchises’ home games at The Garden. Our sports business also competes, in certain respects and to varying degrees, with other leisure-time activities and entertainment options in the New York CIty metropolitan area, such as television, motion pictures, concerts and other live performances, restaurants and nightlife venues, the Internet, social media and social networking platforms and online and mobile services, including sites for online content distribution, video on demand and other alternative sources of entertainment.
Our sports teams also compete with other teams in their leagues to attract free agents. Players who are free agents are generally permitted to sign with the team of their choice. These players may make their decision based upon any number of factors, including the compensation they are offered, the makeup and competitiveness of the team bidding for their services, geographic preferences and other non-economic factors.
Our Businesses Are Substantially Dependent on the Continued Popularity and/or Competitive Success of the Knicks and Rangers, Which Cannot Be Assured.
Our financial results have historically been dependent on, and are expected to continue to depend in large part on, the Knicks and Rangers remaining popular with our fan bases and, in varying degrees, on the teams achieving on-court and on-ice success, which can generate fan enthusiasm, resulting in sustained ticket, premium seating, suite, sponsorship, food and beverage and merchandise sales during the season. In addition, the popularity of our sports teams can impact television ratings, which could affect the long-term value of the media rights for the Knicks and/or Rangers. Furthermore, success in the regular season may qualify one of our sports teams for participation in post-season playoffs, which provides us with additional revenue by increasing the number of games played by our sports teams and, more importantly, by generating increased excitement and interest in our sports teams, which can help drive a number of our revenue streams, including by improving attendance and television ratings, in subsequent seasons. There can be no assurance that any of our sports teams, including the Knicks and Rangers, will maintain continued popularity or compete in post-season play in the future.
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Our Basketball and Hockey Decisions, Especially Those Concerning Player Selection and Salaries, May Have a Material Negative Effect on Our Business and Results of Operations.
Creating and maintaining our sports teams’ popularity and/or on-court and on-ice competitiveness is key to the success of our sports business. Accordingly, efforts to improve our revenues and earnings from operations from period to period may be secondary to actions that management believes will generate long-term growth and asset value creation. As with other sports teams, the competitive positions of our sports teams depend primarily on our ability to develop, obtain and/or retain talented players, coaches and team executives, for which we compete with other professional sports teams. Our efforts in this regard may include, among other things, trading for highly compensated players, signing draft picks, free agents or current players to new contracts, engaging in salary arbitration with existing players, terminating and waiving players and replacing coaches and team executives. Any of these actions could increase expenses for a particular period, subject to any salary cap restrictions contained in the respective leagues’ CBAs. There can be no assurance that any actions taken by management to generate and increase our long-term growth and asset value creation will be successful.
A significant factor in our ability to attract and retain talented players is player compensation. NBA and NHL player salaries have generally increased significantly and may continue to increase. Although CBAs between the NBA and the NBPA and the NHL and the NHLPA generally cap league-wide player salaries at a prescribed percentage of league-wide revenues, we may pay our players different aggregate salaries and a different proportion of our revenues than other NBA or NHL franchises. In addition, both of the NBA and NHL CBAs include salary floors, which limit our ability to decrease costs below a certain amount. Future CBAs may increase the percentage of league-wide revenues to which NBA or NHL players are entitled or impose other conditions, which may further increase our costs. In addition, we have paid the NBA a luxury tax in the past and we may also be obligated to pay the NBA a luxury tax in future years, the calculation of which is determined by a formula based on the aggregate salaries paid to our NBA players. See “Part II — Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations — MSG Sports — Expenses — Player Salaries, Escrow System/Revenue Sharing and NBA Luxury Tax.”
We have incurred, and may in the future incur, significant charges for costs associated with transactions relating to players on our sports teams for season-ending and career-ending injuries and for trades, waivers and contract terminations of players and other team personnel, including team executives. These transactions can result in significant charges as the Company recognizes the estimated ultimate costs of these events in the period in which they occur, although amounts due to these individuals may be paid over their remaining contract terms. These expenses add to the volatility of the results of our MSG Sports segment.
The Actions of the Basketball and Hockey Leagues May Have a Material Negative Effect on Our Business and Results of Operations.
The governing bodies of the NBA (including the NBAGL) and the NHL have certain rights under certain circumstances to take actions that they deem to be in the best interests of their respective leagues, which may not necessarily be consistent with maximizing our results of operations and which could affect our sports teams in ways that are different than the impact on other sports teams. Certain of these decisions by the NBA or the NHL could have a material negative effect on our business and results of operations. From time to time, we may disagree with or challenge actions the leagues take or the power and authority they assert. The following discussion highlights certain areas in which decisions of the NBA and the NHL could materially affect our businesses.
The NBA and the NHL may assert control over certain matters, under certain circumstances, that may affect our revenues such as the local, national and international rights to telecast the games of league members, including the Knicks and Rangers, licensing of the rights to produce and sell merchandise bearing the logos and/or other intellectual property of our sports teams and the leagues, and the Internet and mobile-based activities of our sports teams. The NBA and NHL have each entered into agreements regarding the national and international telecasts of NBA and NHL games. We receive a share of the income the NBA and the NHL generate from these contracts, which expire from time to time. There can be no assurance that the NBA or the NHL will be able to renew these contracts following their expiration on terms as favorable to us as those in the current agreements or that we will continue to receive the same level of revenues in the future. We receive significant revenues from MSG Networks for the right to telecast games of the Knicks and Rangers. Changes to league rules, regulations and/or agreements, including national and international media rights, could impact the availability of games covered by our local media rights and could negatively affect the rights fees we receive from MSG Networks and our business and results of operations. The sports leagues have asserted control over certain other important decisions, under certain circumstances, such as the length and format of, and the number of games in, the playing season, preseason and playoff schedules, the operating territories of the member teams, admission of new members, franchise relocations, labor relations with the players associations, collective bargaining, free agency, luxury taxes and revenue sharing. The esports leagues have adopted a number of rules and regulations governing the length and format of the playing season, how teams may generate revenue, and player rosters.
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Decisions on these matters, some of which are also subject to the terms of a CBA, may materially negatively affect our business and results of operations. In addition, the NBA imposes a luxury tax and escrow system with respect to player salaries and a revenue sharing plan, and the NHL imposes an escrow system with respect to player salaries and a revenue sharing plan. For fiscal year 2019, the Knicks and Rangers recorded approximately $59.3 million in estimated revenue sharing expenses, net of escrow receipts. The actual amounts for the 2018-19 season may vary significantly from the estimate based on actual operating results for the respective leagues and all teams for the season and other factors. For a discussion of the NBA luxury tax impacts, see “— Our Basketball and Hockey Decisions, Especially Those Concerning Player Selection and Salaries, May Have a Material Negative Effect on Our Business and Results of Operations.”
The NBA and the NHL have imposed certain restrictions on the ability of owners to undertake some types of transactions in respect of teams, including a change in ownership and a relocation of a team. The NBA and NHL have also imposed restrictions on certain types and/or amounts of financing transactions. In certain instances, these restrictions could impair our ability to proceed with a transaction that is in the best interest of the Company and its stockholders if we were unable to obtain any required league approvals in a timely manner or at all.
The leagues impose certain rules that define, under certain circumstances, the territories in which we operate, including the markets in which our games can be telecast. Changes to these rules could have a material negative effect on our business and results of operations.
Each league’s governing body has imposed a number of rules, regulations, guidelines, bulletins, directives, policies and agreements upon its teams. Changes to these provisions may apply to our teams and their personnel, and the Company as a whole, regardless of whether we agree or disagree with such changes, have voted against such changes or have challenged them through other means, and it is possible that any such changes could materially negatively affect our business and results of operations to the extent they are ultimately determined to bind our teams. The commissioners of each of the NBA and NHL assert significant authority to take certain actions on behalf of their respective leagues under certain circumstances. Decisions by the commissioners of the NBA and the NHL, including on the matters described above, may materially negatively affect our businesses and results of operations. The leagues’ governing documents and our agreements with the leagues purport to limit the manner in which we may challenge decisions and actions by a league commissioner or the league itself.
Injuries to Players on Our Sports Teams Could Hinder Our Success.
To the degree that our financial results are dependent on our sports teams’ popularity and/or on-court and on-ice success, the likelihood of achieving such popularity or competitive success may, given the nature of sports, be substantially impacted by serious and/or untimely injuries to key players. Nearly all of our Knicks and Rangers players, including those with multi-year contracts, have partially or fully guaranteed contracts, meaning that in some cases (subject to the terms of the applicable player contract and CBA), a player or his estate may be entitled to receive his salary even if the player dies, or is unable to play as a result of injury. These salaries represent significant financial commitments for our sports teams. We maintain insurance against having to pay certain player salaries in the event of a player’s death or disability. In the event of injuries sustained resulting in lost services (as defined in the applicable insurance policies), generally the insurance policies provide for payment to us of a portion of the player’s salary for the remaining term of the contract or until the player can resume play, in each case following a deductible number of missed games. Such insurance may not be available in every circumstance or on terms that are commercially feasible or such insurance may contain significant dollar limits and/or exclusions from coverage for preexisting medical conditions. We may choose not to obtain (or may not be able to obtain) such insurance in some cases and we may change coverage levels (or be unable to change coverage levels) in the future.
In the absence of disability insurance, we may be obligated to pay all of an injured player’s salary. In addition, player disability insurance policies do not cover any NBA luxury tax that we may be required to pay under the NBA CBA. For purposes of determining NBA luxury tax under the NBA CBA, salary payable to an injured player is included in team salary, unless and until that player’s salary is removed from the team salary for purposes of calculating NBA luxury tax which, pursuant to the terms of the NBA CBA, requires a waiting period of one year and satisfaction of other conditions. Replacement of an injured player may result in an increase in salary and NBA luxury tax expense for us.
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Risks Relating to Our Entertainment Business
Our Entertainment Business Faces Intense and Wide-Ranging Competition Which May Have a Material Negative Effect on Our Business and Results of Operations.
Our entertainment business competes, in certain respects and to varying degrees, with other leisure-time activities such as television, radio, motion pictures, sporting events, other live performances, restaurants and nightlife venues, the Internet, social media and social networking platforms, and online and mobile services, including sites for online content distribution, video on demand and other alternative sources of entertainment and information, in addition to competing for concerts with other event venues, and other restaurants and nightlife venues, for total entertainment dollars in our marketplace. The success of our entertainment business is largely dependent on the continued success of our Christmas Spectacular and the TAO Group business, and the availability of, and our venues’ ability to attract, concerts, family shows and other events, competition for which is intense, and the ability of acts to attract strong attendance at our venues. For example, The Garden, Hulu Theater at Madison Square Garden, Radio City Music Hall and the Beacon Theatre all compete with other entertainment options in the New York City metropolitan area. The Forum and The Chicago Theatre face similar competition from other entertainment options in their respective markets and elsewhere. A new entertainment complex, which will include both a football stadium and a 6,000 seat performing arts venue, is under construction in Inglewood, CA adjacent to the Forum, and is reportedly scheduled to open during the summer of 2020. In addition, the Los Angeles Clippers NBA team has announced plans to open a new multi-purpose, 18,000 to 20,000-seat arena, by 2024, featuring NBA basketball, concerts and other events to be located in Inglewood, CA, approximately one mile from the Forum. The Company has filed a lawsuit against the City of Inglewood and other defendants contending that, among other claims, the City of Inglewood’s entry into exclusive negotiations with the Los Angeles Clippers, and other actions in support of the proposed arena, breach the Development Agreement between the City of Inglewood and the Company, and that the Company’s decision to enter into a termination agreement with respect to its lease and option to buy a portion of the property where the proposed arena would be built was procured by fraud and should be rescinded. Such an entertainment complex could, and the Los Angeles Clippers arena would, materially adversely affect the performance and operations of the Forum. The restaurant, nightlife and hospitality industries are intensely competitive with respect to, among other things, service, price, food quality and presentation, location, atmosphere, overall experience, and the nature and condition of the setting. Competitors of TAO Group business include a large and diverse group of well-recognized upscale restaurants and nightlife venues and brands. Some of our competitors may have a larger network of venues and/or greater financial resources.
Further, in order to maintain the competitive positions of The Garden and our other venues, we must invest on a continuous basis in state-of-the-art technology. In addition, we must maintain a competitive pricing structure for events that may be held in our venues, many of which have alternative venue options available to them in New York and other cities. In addition, we invest a substantial amount in our Christmas Spectacular and in new productions to continue to attract audiences. We cannot be assured that such investments will generate revenues that are sufficient to justify our investment or even that exceed our expenses. For a discussion of substantial investments in state-of-the-art technology by the Company in connection with the MSG Sphere, see “— We Are Building and Plan to Build and Operate Entertainment Venues in Las Vegas and London and are Exploring Other Potential Sites. These State-of-the-Art Venues Will Use Cutting-Edge Technologies and Will Require Significant Capital Investment by the Company. There Can Be No Assurance That the MSG Spheres Will Be Successful.”
The Success of Our Entertainment Business Depends on the Continued Popularity of Our Live Productions, Particularly the Christmas Spectacular, the Decline of Which Could Have a Material Negative Effect on Our Business and Results of Operations.
The financial results of our entertainment business are dependent on the popularity of our live productions, particularly the Christmas Spectacular, which represented 16% of our MSG Entertainment segment’s revenues in fiscal year 2019. Should the popularity of the Christmas Spectacular decline, our revenues from ticket sales, and concession and merchandise sales would likely also decline, and we might not be able to replace the lost revenue with revenues from other sources.
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We Are Building and Plan to Build and Operate Entertainment Venues in Las Vegas and London and are Exploring Other Potential Sites. These State-of-the-Art Venues Will Use Cutting-Edge Technologies and Will Require Significant Capital Investment by the Company. There Can Be No Assurance That the MSG Spheres Will Be Successful.
The Company is progressing with its venue strategy to create, build and operate new music and entertainment-focused venues — called MSG Sphere — that will use cutting-edge technologies to create the next generation of immersive experiences. There is no assurance that the MSG Sphere in Las Vegas or London will be successful. We have begun building the first MSG Sphere in Las Vegas with the goal of opening in calendar year 2021. The Company submitted a planning application for the MSG Sphere in London to the local planning authority in March 2019 and expects a planning determination by the end of calendar year 2019 (which may become the subject of further discussions with the planning authority). Our plan is to begin construction on the MSG Sphere venue in London only once we have received all necessary approvals and have further advanced our design for the venue. Our primary focus now is to build the Las Vegas and London MSG Spheres, but we also continue to explore additional domestic and international markets where these next-generation venues can be successful. While both the Las Vegas and London venues would have a scalable capacity of approximately 17,500 seats, moving forward, our goal is to develop a venue model that will accommodate a wide range of sizes and seating capacities — from large-scale to more intimate — based on the needs of any individual market.
We expect the costs of the MSG Spheres in Las Vegas and London to be substantial. While it is always difficult to provide a definitive construction cost estimate for large-scale construction projects, it is particularly challenging for one as unique as MSG Sphere. For more information regarding the costs of MSG Spheres, see “Part II - Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources — MSG Spheres.”
As the Company moves forward with the planning and construction of these and other major new venues, the Company may face unexpected project delays, costs and other complications. Our agreement with Sands to lease the land where the MSG Sphere in Las Vegas is being constructed requires that we start, and complete, construction within specified time periods. The failure to meet these specified deadlines could result in a termination of the lease. In light of the ambitious and unique design of MSG Sphere, including the use of technologies that have not previously been employed in major entertainment venues, the risk of delays and higher than anticipated costs are elevated. In connection with the construction of the MSG Sphere venues, the Company will need to obtain additional capital beyond what is available from cash on hand, cash flows from operations and borrowings under our revolving credit facilities. There is no assurance that we will be able to obtain such capital. The NBA and NHL have imposed restrictions on certain types and/or amounts of financing transactions. See also “— The Actions of the Basketball and Hockey Leagues May Have a Material Negative Effect on Our Business and Results of Operations.”
The MSG Sphere will employ novel and transformative technologies and new applications of existing technologies. As a result, there can be no assurance that the MSG Sphere will achieve the technical, operational and artistic goals the Company is seeking. Any failure to do so could have a material negative effect on our business and results of operations.
While the Company believes that these next-generation venues will enable new experiences and innovative opportunities to engage with audiences, there can be no assurance that customers, artists, promoters, advertisers and marketing partners will embrace this new platform. The cost of building the MSG Sphere in Las Vegas will be substantial and may constrain the Company’s ability to undertake other initiatives during the multi-year construction period.
Our Entertainment Business is Highly Sensitive to Customer Tastes and Depends on Our Ability to Attract Artists and Events.
The success of our entertainment business depends in part upon our ability to offer live entertainment that is popular with customers. We contract with promoters and others to provide performers and events at our venues. There may be a limited number of popular artists, groups or events that can attract audiences to our venues, and our entertainment segment would suffer to the extent that we are unable to continue to attract such artists, groups and events to perform at our venues.
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We Depend on Licenses from Third Parties for the Performance of Musical Works at Our Venues, the Loss of Which or Renewal of Which on Less Favorable Terms May Have a Negative Effect on Our Business and Results of Operations.
We are required to obtain public performance licenses from music performing rights organizations, commonly known as “PROs” in connection with the performance of musical works at concerts and certain other live events held at our venues. In exchange for public performance licenses, PROs are paid a per-event royalty, calculated either as a percentage of ticket revenue or a per-ticket amount. The PRO royalty obligation is generally paid by, or charged to, the promoter of the event concerned.
If we are unable to obtain these licenses, or are unable to obtain them on terms consistent with past practice, it may have a negative effect on our business and results of operations. An increase in the royalty rate and/or the revenue base on which the royalty rate is applied could substantially increase the cost of presenting concerts and certain other live events at our venues. If we are no longer able to pass all or a portion of these royalties on to promoters, it may have a negative effect on our business and results of operations.
Our Strategy for Our Entertainment Business Includes the Development of New Live Productions and the Possible Addition of New Venues, Each of Which Could Require Us to Make Considerable Investments for Which There Can Be No Guarantee of Success.
As part of our business strategy, we intend to develop new productions, attractions and live entertainment events, which may include expansions or enhancements of our existing productions or relationships or the creation of entirely new live productions. Expansion or enhancement of productions and/or the development of new productions, attractions and live entertainment events could require significant upfront investment in sets, staging, creative processes, commissioning and/or licensing of intellectual property, casting and advertising and dislocation of other alternative sources of entertainment that may have played in our venues absent these productions. To the extent that any efforts at expanding or enhancing productions or creating new productions do not result in a viable live show, or to the extent that any such productions do not achieve expected levels of popularity among audiences, we may be subject to a write-down of all or a portion of such investments. In addition, any delay in launching such productions or enhancements could result in the incurrence of operating costs which may not be recouped. For example, in fiscal 2016 we wrote off approximately $41.8 million of deferred production costs of the New York Spectacular Starring the Radio City Rockettes (“New York Spectacular”) and in fiscal 2017 we wrote off the remaining balance of $33.6 million of deferred production costs related to the New York Spectacular.
The Geographic Concentration of Our Businesses Could Subject Us to Greater Risk Than Our Competitors and Have a Material Negative Effect on Our Business and Results of Operations.
The Company primarily operates in three markets — New York City, Las Vegas and Los Angeles — and, as a result, is subject to greater degrees of risk than competitors with more operating properties or that operate in more markets. The Garden, Hulu Theater at Madison Square Garden, Radio City Music Hall and the Beacon Theatre are all located in New York City, our sports teams are all based in the New York City metropolitan area, and TAO Group currently operates 12 venues in New York City, including the food and beverage operations at the Dream Downtown and Dream Midtown hotels. In addition, TAO Group currently operates six venues in Las Vegas, where the Company is constructing its first MSG Sphere. The Forum is located in Inglewood, California, which is adjacent to Los Angeles, where TAO Group currently operates five venues. Therefore, the Company is particularly vulnerable to adverse events (including acts of terrorism, natural disasters, weather conditions, labor market disruptions and government actions) and economic conditions in New York City, Las Vegas, Los Angeles and surrounding areas. Any adverse event or conditions in those markets could have a material negative effect on our business and results of operations.
TAO Group’s Revenue Growth Depends Upon its Strategy of Adding New Venues and TAO Group Plans to Add a Significant Number of New Venues. This Will Require Additional Capital and There Can Be No Guarantee of Success.
TAO Group’s ability to increase its revenues depends upon opening new venues. TAO Group has plans to open new venues both domestically and internationally. In pursuing its expansion strategy, TAO Group faces risks associated with cost overruns and construction delays, obtaining financing and operating in new or existing markets. In addition, TAO Group faces the risk that new venues may not be successful and that TAO Group may lose all or a part of its investment in such new venues, which could have a material negative effect on our business and results of operations.
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A Lack of Availability of Suitable Locations for New TAO Group Venues or a Decline in the Quality of the Locations of Current TAO Group Venues May Have a Material Negative Effect on Our Business and Results of Operations.
The success of the existing TAO Group venues depends in large part on their locations. Possible declines in neighborhoods where TAO Group venues are located or adverse economic conditions in areas surrounding those neighborhoods could result in reduced sales in those venues. Further, TAO Group’s growth strategy is based, in part, on the expansion of TAO Group venues into new geographic markets where its business has not previously operated. Desirable locations for new openings or for the relocation of existing venues may not be available at an acceptable cost when TAO Group identifies a particular opportunity for a new venue or relocation. In addition, the success of new TAO Group venues tends to expand or revive interest in TAO Group venues that have been in operation for an extended period of time. Thus, the inability to successfully open new TAO Group venues could also negatively impact the existing TAO Group business. The occurrence of one or more of these events could have a material negative effect on our business and results of operations.
The Success of TAO Group Depends in Part Upon the Continued Retention of Certain Key Personnel.
The success of TAO Group depends, in part, on certain key members of its management, including its four original founders. The expertise of TAO Group’s senior management team in developing, acquiring, reinventing, integrating and growing businesses, particularly those focused on entertainment and hospitality, has been and will continue to be a significant factor in the growth of TAO Group’s business and the ability of TAO Group to execute its business strategy. The loss of such key personnel could have a material negative effect on our business and results of operations.
Negative Publicity with Respect to Any of the Existing or Future TAO Group Brands Could Reduce Sales at One or More of the Existing or Future TAO Group Venues and Make the TAO Group Brands Less Valuable, Which Could Have a Material Negative Effect on Our Business and Results of Operations.
The success of TAO Group depends upon the reputation and popularity of the TAO Group venues and brands. If customers have a poor experience at a restaurant or nightlife venue owned, operated or managed by TAO Group, the TAO Group venues may experience a decrease in customer traffic. Negative publicity with respect to any of the TAO Group brands could adversely affect TAO Group. Such publicity could relate to food quality, illness, injury or other health concerns, poor service, negative experiences or other problems and reduce demand in the TAO Group business. The risk of negative publicity is exacerbated by the growing influence of social media, which can result in immediate and widespread dissemination of information (which may be false) with limited ability on our part to respond or correct such reports.
Increases in Labor Costs Could Slow the Growth of or Harm TAO Group.
TAO Group has a substantial number of hourly employees whose compensation may be impacted by increases in government-imposed minimum wage rates. In addition, TAO Group employs a substantial number of employees whose income is supplemented through the receipt of gratuities. In certain jurisdictions in which TAO Group operates, the minimum hourly wage to which gratuity eligible employees are entitled under law is lower than the minimum wage required to be paid to other employees, subject to the former’s receipt of sufficient gratuities. The difference between the two minimum rates is referred to as a “tip credit”. Governmental entities, including in New York, Las Vegas and Chicago, have acted to increase minimum wage rates in jurisdictions where TAO Group operates or may operate in the future. In addition, governmental entities have acted to eliminate, or considered the elimination of, tip credits in the application of minimum wage laws. As minimum wage rates increase, or if tip credits are reduced or eliminated, TAO Group may need to increase wages paid to a substantial number of employees, which will increase the labor costs of TAO Group. In addition, TAO Group’s labor costs may increase if certain employees elect to be union represented and to collectively bargain their compensation. TAO Group may be unable offset these increased labor cost either through increased prices or changes to its operations, which could have a material negative effect on our business and results of operations.
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General Risks
Our Business Has Been Adversely Impacted and May, in the Future, Be Materially Adversely Impacted by an Economic Downturn and Financial Instability or Changes in Consumer Tastes and Preferences.
Our businesses depend upon the ability and willingness of consumers and businesses to purchase tickets (including season tickets) at our venues, license suites at The Garden, spend on food and beverages and merchandise, and drive continued advertising and sponsorship revenues. Further, the restaurant, nightlife and hospitality industries are often affected by changes in consumer tastes, national, regional and local economic conditions, discretionary spending priorities, demographic trends, traffic patterns and the type, number and location of competing businesses.
As a result, instability and weakness of the U.S. and global economies and the negative effects on consumers’ and businesses’ discretionary spending may materially negatively affect our business and results of operations.
We Have Incurred Substantial Operating Losses, Negative Adjusted Operating Income and Negative Cash Flow and There is No Assurance We Will Have Operating Income, Positive Adjusted Operating Income or Positive Cash Flow in the Future.
We incurred operating losses of $13.9 million and $56.3 million in fiscal years 2019 and 2017, respectively. In addition, we have in prior periods incurred operating losses and negative cash flow and there is no assurance that we will have operating income or positive cash flow in the future. Our MSG Entertainment segment recognized an operating loss in fiscal year 2017. Significant operating losses may limit our ability to raise necessary financing, or to do so on favorable terms, as such losses could be taken into account by potential investors, lenders and the organizations that issue investment ratings on indebtedness. See “Part II — Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations — MSG Sports — Factors Affecting Operating Results” and “Part II — Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations — MSG Entertainment — Factors Affecting Operating Results.”
Our Operating Results and Cash Flow Can Vary Substantially from Period to Period.
Our operating results and cash flow reflect significant variation from period to period and will continue to do so in the future. Therefore, period-to-period comparisons of our operating results may not necessarily be meaningful and the operating results of one period are not indicative of our financial performance during a full fiscal year. This variability may adversely affect our business, results of operations and financial condition.
Weather or Other Conditions May Impact Events at Our Venues, Which May Have a Material Negative Effect on Our Business and Results of Operations.
Weather or other conditions, including natural disasters, acts of terrorism and similar events, in the New York metropolitan area and other locations in which we own or operate venues may affect patron attendance as well as sales of food and beverages and merchandise, among other things. Weather conditions may also require us to cancel or postpone events. Any of these events may have a material negative effect on our business and results of operations.
Our Business Could Be Adversely Affected by Terrorist Activity or the Threat of Terrorist Activity and Other Developments that Discourage Congregation at Prominent Places of Public Assembly.
The success of our businesses is dependent upon the willingness and ability of patrons to attend events at our venues. The venues we operate, like all prominent places of public assembly, could be the target of terrorist activities, including acts of domestic terrorism, or other actions that discourage attendance. Any such activity at or near one of our venues or other similar venues could result in a material negative effect on our business and results of operations. In addition, terrorist activity, including acts of domestic terrorism, or other actions that discourage attendance at other locations, or even the threat of such activity, could result in reduced attendance at our venues. Similarly, a major epidemic or pandemic, or the threat of such an event, could adversely affect attendance at our events.
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We May Pursue Acquisitions and Other Strategic Transactions to Complement or Expand Our Business that May Not Be Successful; We Have Significant Investments in Businesses We Do Not Control.
From time to time, we explore opportunities to purchase or invest in other businesses, venues or assets that we believe will complement, enhance or expand our current business or that might otherwise offer us growth opportunities, including opportunities that may differ from the Company’s current business. Any transactions that we are able to identify and complete may involve risks, including the commitment of significant capital, the incurrence of indebtedness, the payment of advances, the diversion of management’s attention and resources, litigation or other claims in connection with acquisitions or against companies we invest in or acquire, our lack of control over certain joint venture companies and other minority investments, the inability to successfully integrate such business into our operations or even if successfully integrated, the risk of not achieving the intended results and the exposure to losses if the underlying transactions or ventures are not successful. We have significant investments in businesses that we account for under the equity method of accounting. These investments have generated operating losses each year and certain have required additional investments from us in the form of equity or loans. We incurred losses in our equity method investments of approximately $7.8 million and $30.0 million in fiscal years 2018 and 2017, respectively. There can be no assurance that these investments will become profitable individually or in the aggregate or that they will not require material additional funding from us in the future.
We do not control the day-to-day operations of these investments. We have in the past written down and, to the extent that these investments are not successful in the future, we may write down all or a portion of such investments. Additionally, these businesses are subject to laws, rules and other circumstances, and have risks in their operations, which may be similar to, or different from, those to which we are subject. Any of the foregoing risks could result in a material negative effect on our business and results of operations or adversely impact the value of our investments.
We Do Not Own All of Our Venues and Our Failure to Renew Our Leases or Venue Management Agreements on Economically Attractive Terms May Have a Material Negative Effect on Our Business and Results of Operations; Our Lease on Radio City Music Hall Requires Us to Maintain a Certain Net Worth or Meet Certain Other Requirements.
The lease on Radio City Music Hall expires in 2023. We have the option to renew the lease at fair market value for an additional ten years by providing two years’ notice prior to the initial expiration date. Similarly, we lease the Beacon Theatre pursuant to a lease that expires in 2026. If we are unable to renew these leases on economically attractive terms, our business could be materially negatively affected. MSG Sports & Entertainment, LLC, the entity that guarantees the Radio City Music Hall lease, is required to maintain a certain net worth or, if such net worth is not maintained, the entity must either post a letter of credit or provide cash collateral. The MSG Sphere in Las Vegas is being constructed on property we lease from Sands under a 50 year lease.
TAO Group operates venues under various agreements that include leases with third parties and management agreements. The long-term success of TAO Group will depend in part on the availability of real estate, the ability to lease this real estate and the ability to enter into management agreements. As many of these agreements are with third parties over whom TAO Group has little or no control, they may be unable to renew these agreements or enter into new agreements on acceptable terms or at all, and may be unable to obtain favorable agreements with venues. In addition, some of these agreements include conditions that, if not met, would permit the counterparty to terminate the management agreement under certain circumstances. The ability to renew these agreements and obtain new agreements on favorable terms depends on a number of other factors, many of which are beyond the control of us or TAO Group, such as national and local business conditions and competition from other businesses. There can be no assurance that TAO Group will be able to renew these agreements on acceptable terms or at all, or that they will be able to obtain attractive agreements with appropriate venues or real estate owners, which could have a material negative effect on our business and results of operations.
We Are Subject to Extensive Governmental Regulation and Our Failure to Comply with These Regulations May Have a Material Negative Effect on Our Business and Results of Operations.
Our operations are subject to federal, state and local laws and regulations.
We hold liquor licenses at each of our venues and are subject to licensing requirements with respect to the sale of alcoholic beverages in the jurisdictions in which we serve those beverages. Failure to receive or retain, or the suspension of, liquor licenses or permits could interrupt or terminate our ability to serve alcoholic beverages at the applicable venue and could have a material negative effect on our business and our results of operations. Additional regulation relating to liquor licenses may limit our activities in the future or significantly increase the cost of compliance, or both. In the jurisdictions in which our venues are located, we are subject to statutes that generally provide that serving alcohol to a visibly intoxicated or minor patron is a violation of the law and may provide for strict liability for certain damages arising out of such violations. Our liability insurance coverage may not be adequate or available to cover any potential liability.
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We and our venues are subject to environmental laws and regulations relating to the use, disposal, storage, emission and release of hazardous and non-hazardous substances, as well as zoning and noise level restrictions which may affect, among other things, the operations of our venues. Additionally, certain laws and regulations could hold us strictly, jointly and severally responsible for the remediation of hazardous substance contamination at our facilities or at third-party waste disposal sites, and could hold us responsible for any personal or property damage related to any contamination. Any requirements to dispose of, or remediate, such hazardous or non-hazardous materials and any associated costs and impact on operations of such efforts may be heightened as a result of the purchase, construction or renovation of a venue.
Our venues are subject to zoning and building regulations including permits relating to the operation of The Garden. In addition, The Garden requires a zoning special permit. The original permit was granted by the New York City Planning Commission in 1963 and renewed in July 2013 for 10 years. In connection with the renewal, certain government officials and special interest groups sought to use the renewal process to pressure us to improve Penn Station or to relocate The Garden. There can be no assurance regarding the future renewal of the permit or the terms thereof.
We are subject to various data privacy laws in the jurisdictions we operate. These include, but are not limited to, the E.U. General Data Protection Regulation and the California Consumer Privacy Act. These laws obligate us to comply with certain consumer and employee rights concerning data we may collect about these individuals. In addition, some of these laws have only recently become effective and new laws may create additional obligations in the future. Actions required to comply with these rights are complex and violations could expose us to fines and other penalties that may be significant.
Our businesses are, and may in the future be, subject to a variety of other laws and regulations, including licensing, permitting, and historic designation and similar requirements; working conditions, labor, immigration and employment laws; health, safety and sanitation requirements; and compliance with the Americans with Disabilities Act (and related state and local statutes).
Our failure to comply with applicable governmental laws and regulations, or to maintain necessary permits or licenses, could have a material negative effect on our business and results of operations.
We Face Continually Evolving Cybersecurity and Similar Risks, Which Could Result in Loss, Disclosure or Misappropriation of, or Access to, Our Confidential Information and Cause Disruption of Our Business, Damage to Our Brands and Reputation, Legal Exposure and Financial Losses.
Through our operations, we may collect and store, including by electronic means, certain personal information, including payment card information, that is provided to us through purchases, registration on our websites, or otherwise in communication or interaction with us. These activities require the use of centralized data storage, including through third party service providers. Data maintained in electronic form is subject to the risk of security incidents, including breach, compromise, intrusion, tampering, theft, misappropriation or other malicious activity. Further, hardware and operating system software and applications that we produce or procure from third parties may contain defects in design or manufacture, including “bugs” and other problems that could unexpectedly interfere with the operation of such systems. Our ability to safeguard such personal information and other confidential information, including information regarding the Company and our distributors, advertisers and employees, is important to our business. We take these matters seriously and take significant steps to protect our stored information, including the implementation of systems and processes to thwart malicious activity. These protections are costly and require ongoing monitoring and updating as technologies change and efforts to overcome security measures become more sophisticated. In addition, in the event of a security incident, changes in legislation may increase the risk of potential litigation. For example, the California Consumer Privacy Act (“CCPA”), which provides a private right of action (in addition to statutory damages) for California residents whose sensitive personal information was breached as a result of a business’ violation of its duty to reasonably secure such information, takes effect on January 1, 2020.
Despite our efforts, the risks of a security incident cannot be entirely eliminated and our information technology and other systems that maintain and transmit consumer, distributor, advertiser, Company, employee and other confidential information may be compromised. Such compromise could affect the security of information on our network or that of a third party service provider, and could result in personal information and/or confidential information being lost, disclosed, accessed or taken without consent. For example, on November 22, 2016, the Company announced it had identified and addressed a payment card issue that affected cards used at merchandise and food and beverage locations at several of the Company’s New York venues and The Chicago Theatre. The Company, working with security firms, promptly fixed the issue and implemented enhanced security measures. The Company also continues to review and enhance our security measures in light of the constantly evolving techniques used to gain unauthorized access to networks, data, software and systems. The Company has incurred expenses associated with the payment card incident and may be required to incur significant expenses in order to address any additional actual or potential security incidents that arise.
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If we experience a security incident, our ability to conduct business may be interrupted or impaired, we may incur damage to our systems, we may lose profitable opportunities or the value of those opportunities may be diminished and we may lose revenue as a result of unlicensed use of our intellectual property. Further, a security incident, such as a penetration of our network, affecting personal or confidential information could subject us to business and litigation risk and damage our reputation, including with customers and advertisers, which could have a material negative effect on our business and results of operations.
Our Properties Are Subject to, and Benefit from, Certain Easements, the Availability of Which May Not Continue on Terms Favorable to Us or at All.
Our properties are subject to, and benefit from, certain easements. For example, the “breezeway” into the Madison Square Garden Complex from Seventh Avenue in New York City is a significant easement that we share with other property owners. Additionally, our planned MSG Sphere in Las Vegas will have the benefit of easements with respect to the planned pedestrian bridge to the Sands Expo Convention Center. Our ability to continue to utilize these and other easements, including for advertising purposes, requires us to comply with a number of conditions. Moreover, certain adjoining property owners have easements over our property, which we are required to maintain so long as those property owners meet certain conditions. It is possible that we will be unable to continue to access or maintain any easements on terms favorable to us, or at all, which could have a material negative effect on our business and results of operations.
A Change to or Withdrawal of a New York City Real Estate Tax Exemption May Have a Material Negative Effect on Our Business and Results of Operations.
Many arenas, ballparks and stadiums nationally and in New York City have received significant public support, such as tax exempt financing, other tax benefits, direct subsidies and other contributions, including for public infrastructure critical to the facilities such as parking lots and transit improvements. Our Madison Square Garden Complex benefits from a more limited real estate tax exemption pursuant to an agreement with the City of New York, subject to certain conditions, and legislation enacted by the State of New York in 1982. For fiscal year 2019, the tax exemption was $42.4 million. From time to time there have been calls to repeal or amend the tax exemption. Repeal or amendment would require legislative action by New York State. There can be no assurance that the tax exemption will not be amended in a manner adverse to us or repealed in its entirety, either of which could have a material negative effect on our business and results of operations.
Certain of Our Subsidiaries Have Incurred Indebtedness, and the Occurrence of an Event of Default Under Our Subsidiaries’ Credit Facilities Could Substantially Impair the Assets of Those Subsidiaries; Failure of Our Joint Ventures or Other Parties to Perform as Expected, Including the Repayment of Outstanding Loans, Could Have a Negative Effect on Our Business.
Certain of our subsidiaries have incurred indebtedness, which indebtedness in the case of the TAO Group is significant relative to the assets of the TAO Group business. New York Knicks, LLC and New York Rangers, LLC, which own the assets of the Knicks and Rangers franchises, respectively, have also entered into credit facilities, both of which were undrawn as of June 30, 2019. The occurrence of an event of default under our subsidiaries’ credit facilities could substantially impair the assets of those subsidiaries and, as a result, have a negative effect on our business and results of operations. In addition, in May 2019 we extended a $49 million subordinated loan to the TAO Group. The occurrence of an event of default under TAO Group’s senior credit agreement could lead to an event of default under our subordinated loan to TAO Group and could impair our ability to have the Company’s subordinated loan repaid.
In addition, we have made investments in, or otherwise extended loans to, one or more of our joint ventures or other parties and may make additional investments in, or otherwise extend loans to, one or more of such parties in the future. To the extent that such parties do not perform as expected, including with respect to repayment of such loans, it could impair such assets or create losses related to such loans, and, as a result, have a negative effect on our business and results of operations.
We Will Require Financing to Fund Our Ongoing Operations and Capital Expenditures, the Availability of Which is Highly Uncertain.
The capital and credit markets can experience volatility and disruption. Such markets can exert extreme downward pressure on stock prices and upward pressure on the cost of new debt capital and can severely restrict credit availability for most issuers.
Our business has been characterized by significant expenditures for properties, businesses, renovations and productions. In the future we may engage in transactions that depend on our ability to obtain financing. We may also seek financing to fund our ongoing operations.
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Depending upon conditions in the financial markets and/or the Company’s financial performance, we may not be able to raise additional capital on favorable terms, or at all. In addition, as described above, the leagues in which our sports teams compete may have, under certain circumstances, approval rights over certain financing transactions, and in connection with those rights, could affect our ability to obtain such financing. If we are unable to pursue our current and future spending programs, we may be forced to cancel or scale back those programs. Failure to successfully pursue our capital expenditure and other spending plans could negatively affect our ability to compete effectively and have a material negative effect on our business and results of operations.
Our financing plan for MSG Sphere contemplates completion of the Sports Distribution followed by sales by the Company of all or a portion of the interests Sports Spinco that the Company will retain following the Sports Distribution. Successful completion of those sales will depend upon conditions in the capital markets. Failure to successfully complete those sales could adversely affect our ability to fund the construction of the MSG Spheres.
Our Business is Subject to Seasonal Fluctuations.
Our revenues have been seasonal and we expect they will continue to be seasonal. For example, 16% of our MSG Entertainment segment’s revenues and 8% of our consolidated revenues in fiscal year 2019 were derived from the Christmas Spectacular. Revenues of the MSG Entertainment segment are highest in the second quarter of our fiscal year when these performances primarily occur. As a result, MSG Entertainment earns a disproportionate amount of its revenue and operating income in the second quarter of each fiscal year. Similarly, because of the nature of the NBA and NHL playing seasons, revenues from our sports teams are concentrated in the second and third quarters of each fiscal year. Revenues from our business on a consolidated basis tend to be at their lowest in the first and fourth quarters of the fiscal year.
Organized Labor Matters May Have a Material Negative Effect on Our Business and Results of Operations.
Our business is dependent upon the efforts of unionized workers. Approximately 52% of our employees are represented by unions. Any labor disputes, such as strikes or lockouts, with the unions with which we have CBAs could have a material negative effect on our business and results of operations (including our ability to produce or present concerts, theatrical productions, sporting events and other events).
NBA players are covered by a CBA between the NBPA and the NBA. NHL players are covered by a CBA between the NHLPA and the NHL. Both the NBA and the NHL have experienced labor difficulties in the past and may have labor issues in the future. Labor difficulties may include players’ strikes or management lockouts. For example, the NHL has experienced labor difficulties, including a lockout during the 1994-95 NHL season, which resulted in the regular season being shortened from 84 to 48 games, a lockout beginning in September 2004, which resulted in the cancellation of the entire 2004-05 NHL season, and a lockout during the 2012-13 NHL season, which resulted in the regular season being shortened from 82 to 48 games. The current NHL CBA expires on September 15, 2022 (although the NHL and NHLPA each have the right to terminate the CBA effective following the 2019-20 season). The NBA has also experienced labor difficulties, including a lockout during the 1998-99 season, which resulted in the regular season being shortened from 82 to 50 games, and a lockout during the 2011-12 season, which resulted in the regular season being shortened from 82 games to 66 games. The current NBA CBA expires after the 2023-24 season (although the NBA and NBPA each has the right to terminate the CBA effective following the 2022-23 season).
The Unavailability of Systems Upon Which We Rely May Have a Material Negative Effect on Our Business and Results of Operations.
We rely upon various internal and third-party software or systems in the operation of our business, including, with respect to ticket sales, credit card processing, email marketing, point of sale transactions, database, inventory, human resource management and financial systems. From time to time, certain of these arrangements may not be covered by long-term agreements. The failure or unavailability of these internal or third-party services or systems, depending upon its severity and duration, could have a material negative effect on our business and results of operations.
We May Become Subject to Infringement or Other Claims Relating to Our Content or Technology.
From time to time, third parties may assert against us alleged intellectual property (e.g., copyright, trademark and patent) or other claims relating to our productions, technologies or other content or material, some of which may be important to our business. In addition, our productions could potentially subject us to claims of defamation or similar types of allegations. Any such claims, regardless of their merit, could cause us to incur significant costs. In addition, if we are unable to continue use of certain intellectual property rights, our business and results of operations could be materially negatively impacted.
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There Is the Risk of Personal Injuries and Accidents in Connection with Our Venues, Which Could Subject Us to Personal Injury or Other Claims; We are Subject to the Risk of Adverse Outcomes in Other Types of Litigation.
There are inherent risks associated with producing and hosting events and operating, maintaining or renovating our venues and in operating the restaurant and nightlife venues. As a result, personal injuries, accidents and other incidents have occurred and may occur from time to time, which could subject us to claims and liabilities.
These risks might not be covered by insurance or could involve exposures that exceed the limits of any applicable insurance. Incidents in connection with events at any of our venues could also reduce attendance at our events, and cause a decrease in our revenue and operating income. While we seek to obtain contractual indemnities for events at our venues that we do not promote and we maintain insurance policies that provide coverage for incidents in the ordinary course of business, there can be no assurance that such indemnities or insurance will be adequate at all times and in all circumstances.
From time to time, we become subject to other kinds of litigation. The outcome of litigation is inherently unpredictable. As a result, we could incur liability from litigation which could be material and for which we may have inadequate or no insurance coverage or be subject to other forms of relief which might adversely affect the Company.
We face risks from doing business internationally.
We have operations and own property outside of the United States. As a result, our business is subject to certain risks inherent in international business, many of which are beyond our control. These risks include:
• | laws and policies affecting trade and taxes, including laws and policies relating to currency, the repatriation of funds and withholding taxes, and changes in these laws; |
• | changes in local regulatory requirements, including restrictions on foreign ownership; |
• | exchange rate fluctuation; |
• | exchange controls, tariffs and other trade barriers; |
• | differing degrees of protection for intellectual property and varying attitudes towards the piracy of intellectual property; |
• | foreign privacy and data protection laws and regulations, such as the E.U. General Data Protection Regulation, and changes in these laws; |
• | the impact of Brexit, particularly in the event of the U.K.’s departure from the E.U. without an agreement on terms; |
• | the instability of foreign economies and governments; |
• | war and acts of terrorism; |
• | anti-corruption laws and regulations such as the Foreign Corrupt Practices Act and the U.K. Bribery Act that impose stringent requirements on how we conduct our foreign operations and changes in these laws and regulations; and |
• | shifting consumer preferences regarding entertainment. |
Events or developments related to these and other risks associated with international operations could have a material negative effect on our business and results of operations.
The 2015 Distribution Could Result in Significant Tax Liability.
We have received an opinion from Sullivan & Cromwell LLP substantially to the effect that, among other things, the 2015 Distribution qualified as a tax-free distribution under the Internal Revenue Code (the “Code”). The opinion is not binding on the IRS or the courts. Additionally, MSG Networks received a private letter ruling from the IRS concluding that certain limited aspects of the 2015 Distribution do not prevent the 2015 Distribution from satisfying certain requirements for tax-free treatment under the Code. The opinion and the private letter ruling relied on factual representations and reasonable assumptions, which if incorrect or inaccurate may jeopardize the ability to rely on such opinion and letter ruling.
If the 2015 Distribution does not qualify for tax-free treatment for U.S. federal income tax purposes, then, in general, MSG Networks would recognize taxable gain in an amount equal to the excess of the fair market value of the common stock of our Company over MSG Networks’ tax basis therein (i.e., as if it had sold the common stock of our Company in a taxable sale for its fair market value). In addition, the receipt by MSG Networks’ stockholders of common stock of our Company would be a taxable distribution, and each U.S. holder that participated in the 2015 Distribution would recognize a taxable distribution as if the U.S. holder had received a distribution equal to the fair market value of our common stock that was distributed to it, which generally would be treated first as a taxable dividend to the extent of MSG Networks’ earnings and profits, then as a non-taxable return of capital to the extent of each U.S. holder’s tax basis in its MSG Networks common stock, and thereafter as capital gain with respect to any remaining value. It is expected that the amount of any such taxes to MSG Networks’
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stockholders and MSG Networks would be substantial. See “— We May Have a Significant Indemnity Obligation to MSG Networks if the 2015 Distribution Is Treated as a Taxable Transaction.”
We May Have a Significant Indemnity Obligation to MSG Networks if the 2015 Distribution Is Treated as a Taxable Transaction.
We have entered into a Tax Disaffiliation Agreement with MSG Networks, which sets out each party’s rights and obligations with respect to deficiencies and refunds, if any, of federal, state, local or foreign taxes for periods before and after the 2015 Distribution and related matters such as the filing of tax returns and the conduct of IRS and other audits. Pursuant to the Tax Disaffiliation Agreement, we are required to indemnify MSG Networks for losses and taxes of MSG Networks resulting from the breach of certain covenants and for certain taxable gain recognized by MSG Networks, including as a result of certain acquisitions of our stock or assets. If we are required to indemnify MSG Networks under the circumstances set forth in the Tax Disaffiliation Agreement, we may be subject to substantial liabilities, which could materially adversely affect our financial position.
We are Controlled by the Dolan Family. As a Result of Their Control, the Dolan Family Has the Ability to Prevent or Cause a Change in Control or Approve, Prevent or Influence Certain Actions by the Company.
We have two classes of common stock:
• | Class A Common Stock, par value $0.01 per share (“Class A Common Stock”), which is entitled to one vote per share and is entitled collectively to elect 25% of our Board of Directors; and |
• | Class B Common Stock, par value $0.01 per share (“Class B Common Stock”), which is entitled to ten votes per share and is entitled collectively to elect the remaining 75% of our Board of Directors. |
As of July 31, 2019, the Dolan family, including trusts for the benefit of members of the Dolan family (collectively, the “Dolan Family Group”), collectively own all of our Class B Common Stock, approximately 2.9% of our outstanding Class A Common Stock and approximately 71.1% of the total voting power of all our outstanding common stock. The members of the Dolan Family Group holding Class B Common Stock have executed a stockholders agreement (the “Stockholders Agreement”) that has the effect of causing the voting power of the holders of our Class B Common Stock to be cast as a block with respect to all matters to be voted on by holders of Class B Common Stock. Under the Stockholders Agreement, the shares of Class B Common Stock owned by members of the Dolan Family Group (representing all of the outstanding Class B Common Stock) are to be voted on all matters in accordance with the determination of the Dolan Family Committee, except that the decisions of the Dolan Family Committee are non-binding with respect to the Class B Common Stock owned by certain Dolan family trusts that collectively own 40.5% of the outstanding Class B Common Stock (“Excluded Trust”). The “Dolan Family Committee” consists of Charles F. Dolan and his six children, James L. Dolan, Thomas C. Dolan, Patrick F. Dolan, Kathleen M. Dolan, Marianne Dolan Weber and Deborah A. Dolan-Sweeney. The Dolan Family Committee generally acts by majority vote, except that approval of a going-private transaction must be approved by a two-thirds vote and approval of a change-in-control transaction must be approved by not less than all but one vote. The voting members of the Dolan Family Committee are James L. Dolan, Thomas C. Dolan, Kathleen M. Dolan, Deborah A. Dolan-Sweeney and Marianne Dolan Weber, with each member having one vote other than James L. Dolan, who has two votes. Because James L. Dolan has two votes, he has the ability to block Dolan Family Committee approval of any Company change in control transaction. Shares of Class B Common Stock owned by Excluded Trusts are to be voted on all matters in accordance with the determination of the Excluded Trusts holding a majority of the Class B Common Stock held by all Excluded Trusts, except in the case of a vote on a going-private transaction or a change in control transaction, in which case a vote of trusts holding two-thirds of the Class B Common Stock owned by Excluded Trusts is required.
The Dolan Family Group is able to prevent a change in control of our Company and no person interested in acquiring us will be able to do so without obtaining the consent of the Dolan Family Group. The Dolan Family Group, by virtue of their stock ownership, have the power to elect all of our directors subject to election by holders of Class B Common Stock and are able collectively to control stockholder decisions on matters on which holders of all classes of our common stock vote together as a single class. These matters could include the amendment of some provisions of our certificate of incorporation and the approval of fundamental corporate transactions.
In addition, the affirmative vote or consent of the holders of at least 66 2⁄3% of the outstanding shares of the Class B Common Stock, voting separately as a class, is required to approve:
• | the authorization or issuance of any additional shares of Class B Common Stock; and |
• | any amendment, alteration or repeal of any of the provisions of our certificate of incorporation that adversely affects the powers, preferences or rights of the Class B Common Stock. |
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As a result, the Dolan Family Group also has the power to prevent such issuance or amendment.
The Dolan Family Group also controls MSG Networks and AMC Networks Inc. (“AMC Networks”).
Following the potential Sports Distribution, it is expected that the Dolan Family Group will continue to own a sufficient number of shares of the Company’s Class B Common Stock to control the Company.
We Have Elected to Be a “Controlled Company” for NYSE Purposes Which Allows Us Not to Comply with Certain of the Corporate Governance Rules of NYSE.
Members of the Dolan Family Group have entered into a Stockholders Agreement relating, among other things, to the voting of their shares of our Class B Common Stock. As a result, we are a “controlled company” under the corporate governance rules of NYSE. As a controlled company, we have the right to elect not to comply with the corporate governance rules of NYSE requiring: (i) a majority of independent directors on our Board, (ii) an independent corporate governance and nominating committee and (iii) an independent compensation committee. Our Board of Directors has elected for the Company to be treated as a “controlled company” under NYSE corporate governance rules and not to comply with the NYSE requirement for a majority independent board of directors and for an independent corporate governance and nominating committee because of our status as a controlled company. Nevertheless, our Board of Directors has elected to comply with the NYSE requirement for an independent compensation committee.
Future Stock Sales, Including as a Result of the Exercise of Registration Rights by Certain of Our Stockholders, Could Adversely Affect the Trading Price of Our Class A Common Stock.
Certain parties have registration rights covering a portion of our shares. We have entered into registration rights agreements with Charles F. Dolan, members of his family, certain Dolan family interests, and the Dolan Family Foundation that provide them with “demand” and “piggyback” registration rights with respect to approximately 5.1 million shares of Class A Common Stock, including shares issuable upon conversion of shares of Class B Common Stock. Sales of a substantial number of shares of Class A Common Stock could adversely affect the market price of the Class A Common Stock and could impair our future ability to raise capital through an offering of our equity securities. It is possible that the potential Sports Distribution could lead to increased sales of our Class A Common Stock.
Transfers and Ownership of Our Common Stock Are Subject to Restrictions Under Rules of the NBA and NHL and Our Certificate of Incorporation Provides Us with Remedies Against Holders Who Do Not Comply with Those Restrictions.
The Company is the owner of professional sports franchises in the NBA and NHL. As a result, transfers and ownership of our common stock are subject to certain restrictions under the governing documents of the NBA and NHL as well as the Company’s consent and other agreements with the NBA and NHL in connection with their approval of the Distribution. These restrictions are described under “Description of Capital Stock — Class A Common Stock and Class B Common Stock — Transfer Restrictions” in our Information Statement filed as Exhibit 99.1 to Amendment No. 6 to the registration statement on Form 10 filed with the SEC on September 11, 2015. In order to protect the Company and its NBA and NHL franchises from sanctions that might be imposed by the NBA or NHL as a result of violations of these restrictions, our amended and restated certificate of incorporation provides that, if a transfer of shares of our common stock to a person or the ownership of shares of our common stock by a person requires approval or other action by a league and such approval or other action was not obtained or taken as required, the Company shall have the right by written notice to the holder to require the holder to dispose of the shares of common stock which triggered the need for such approval. If a holder fails to comply with such a notice, in addition to any other remedies that may be available, the Company may redeem the shares at 85% of the fair market value of those shares.
We Share Certain Key Executives and Directors with MSG Networks and/or AMC Networks, Which Means Those Executives Do Not Devote Their Full Time and Attention to Our Affairs and the Overlap May Give Rise to Conflicts; Certain Directors Are Also Directors and/or Executives of AMC Networks.
Our Executive Chairman and Chief Executive Officer, James L. Dolan, also serves as the Executive Chairman of MSG Networks, and our Executive Vice President and General Counsel, Lawrence J. Burian, also serves as the Executive Vice President and General Counsel of MSG Networks. As a result, not all of our executive officers devote their full time and attention to the Company’s affairs. Our Vice Chairman, Gregg G. Seibert, also serves as the Vice Chairman of both MSG Networks and AMC Networks, and our Senior Vice President, Associate General Counsel and Secretary, Mark C. Cresitello, also serves as Secretary of MSG Networks. In addition, one of our directors, Charles F. Dolan, is the Executive Chairman of AMC Networks. Furthermore, six members of our Board of Directors (including James L. Dolan) are also directors of MSG Networks, and eight members of our Board of Directors (including James L. Dolan) are also directors of AMC Networks. The overlapping officers and directors may have actual or apparent conflicts of interest with respect to matters involving or affecting each company. For example, the potential for a conflict of interest exists when we on the one hand, and MSG Networks and/or
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AMC Networks on the other hand, look at certain acquisitions and other corporate opportunities that may be suitable for more than one of the companies. Also, conflicts may arise if there are issues or disputes under the commercial arrangements that exist between MSG Networks or AMC Networks and us. In addition, certain of our directors and officers hold MSG Networks and/or AMC Networks stock, stock options, restricted stock units and/or cash performance awards. These ownership interests could create actual, apparent or potential conflicts of interest when these individuals are faced with decisions that could have different implications for our Company and MSG Networks or AMC Networks. See “Certain Relationships and Potential Conflicts of Interest” in our Proxy Statement filed with the SEC on October 25, 2018 and “Certain Relationships and Related Party Transactions — Certain Relationships and Potential Conflicts of Interest” in our Information Statement filed as Exhibit 99.1 to Amendment No. 6 to the registration statement on Form 10 filed with the SEC on September 11, 2015 for a discussion of certain procedures we instituted to help ameliorate such potential conflicts with MSG Networks and/or AMC Networks that may arise.
While decisions on the identities of executives and directors of Sports Spinco have not been finalized, it is likely that, if the potential Sports Distribution occurs, conflicts related to overlapping executives and directors of the Company and Sports Spinco, similar to those described above, will exist.
Our Overlapping Directors and Executive Officers with MSG Networks and/or AMC Networks May Result in the Diversion of Corporate Opportunities to MSG Networks and/or AMC Networks and Other Conflicts and Provisions in Our Amended and Restated Certificate of Incorporation May Provide Us No Remedy in That Circumstance.
The Company’s amended and restated certificate of incorporation acknowledges that directors and officers of the Company (the “Overlap Persons”) may also be serving as directors, officers, employees or agents of MSG Networks and/or AMC Networks (each an “Other Entity”), and that the Company may engage in material business transactions with such Other Entities. The Company has renounced its rights to certain business opportunities and the Company’s amended and restated certificate of incorporation provides that no director or officer of the Company who is also serving as a director, officer, employee or agent of one or more of the Other Entities will be liable to the Company or its stockholders for breach of any fiduciary duty that would otherwise occur by reason of the fact that any such individual directs a corporate opportunity (other than certain limited types of opportunities set forth in our amended and restated certificate of incorporation) to one or more of the Other Entities instead of the Company, or does not refer or communicate information regarding such corporate opportunities to the Company. These provisions in our amended and restated certificate of incorporation also expressly validate certain contracts, agreements, arrangements and transactions (and amendments, modifications or terminations thereof) between the Company and the Other Entities and, to the fullest extent permitted by law, provide that the actions of the overlapping directors or officers in connection therewith are not breaches of fiduciary duties owed to the Company, any of its subsidiaries or their respective stockholders. See “Certain Relationships and Potential Conflicts of Interest” in our Proxy Statement filed with the SEC on October 25, 2018 and “Description of Capital Stock — Certain Corporate Opportunities and Conflicts” in our Information Statement filed as Exhibit 99.1 to Amendment No. 6 to the registration statement on Form 10 filed with the SEC on September 11, 2015. While decisions on the identities of executives and directors of Sports Spinco have not been finalized, it is likely that, if the potential Sports Distribution occurs, conflicts related to overlapping executives and directors of the Company and Sports Spinco, similar to those described above, will exist.
Risks Relating to the Impact of the Potential Spin-off Transaction
The Sports Distribution, if Consummated, Could Result in Significant Tax Liability.
We expect to obtain an opinion from Sullivan & Cromwell LLP substantially to the effect that, among other things, the Sports Distribution will qualify as a tax-free distribution under the Code. The opinion will not be binding on the IRS or the courts. Additionally, we will request a private letter ruling from the IRS concluding that certain limited aspects of the Sports Distribution will not prevent the Sports Distribution from satisfying certain requirements for tax-free treatment under the Code, and the opinion from Sullivan & Cromwell LLP will rely on such private letter ruling. Certain transactions related to the Sports Distribution are not expected to be addressed by either the opinion or the private letter ruling and could result in the recognition of income or gain by us. The opinion and the private letter ruling will rely on factual representations and reasonable assumptions, which, if incorrect or inaccurate, may jeopardize the ability to rely on such opinion and letter ruling.
If the Sports Distribution does not qualify for tax-free treatment for U.S. federal income tax purposes, then, in general, we would be subject to tax as if we had sold Sports Spinco common stock in a taxable sale for its fair value. Sports Spinco stockholders would be subject to tax as if they had received a distribution equal to the fair value of Sports Spinco common stock that was distributed to them, which generally would be treated first as a taxable dividend to the extent of such holder’s pro rata share of our earnings and profits, then as a non-taxable return of capital to the extent of each holder’s tax basis in its Sports Spinco common stock, and thereafter as capital gain with respect to any remaining value. It is expected that the amount of any such taxes to Sports Spinco stockholders and us would be substantial.
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The Tax Rules Applicable to the Sports Distribution, if Consummated, May Restrict us From Engaging in Certain Corporate Transactions or From Raising Equity Capital Beyond Certain Thresholds for a Period of Time After the Sports Distribution.
To preserve the tax-free treatment of the Sports Distribution to our and Sports Spinco’s stockholders, under a tax disaffiliation agreement that would be entered into between the Company and Sports Spinco, for the two-year period following the Sports Distribution, we will be subject to restrictions with respect to our activities, including restrictions relating to certain issuances or repurchases of our common stock, asset sales, mergers and liquidations.
These restrictions may limit our ability during that two-year period to pursue strategic transactions of a certain magnitude that involve the issuance or acquisition of our stock or engage in new businesses or other transactions that might increase the value of our business. These restrictions may also limit our ability to raise significant amounts of cash through the issuance of stock, especially if our stock price were to suffer substantial declines, or through the sale of certain of our assets.
We May Not Enjoy All the Benefits of Scale that We Achieved Prior to the Sports Distribution, if Consummated.
If the Sports Distribution is consummated, following the Sports Distribution we will no longer share with Sports Spinco the benefits of scope and scale in administrative and other overhead costs and expenses resulting from various factors, including financial reporting, costs associated with complying with federal securities laws (including compliance with the Sarbanes-Oxley Act of 2002), tax administration, legal and human resources related functions. While we expect to enter into agreements with Sports Spinco that govern a number of our commercial and other relationships after the Sports Distribution, those arrangements will not fully capture the benefits we currently enjoy as a result of the common ownership of the MSG Sports and MSG Entertainment businesses.
If the Sports Distribution Occurs, We Will Rely on Sports Spinco’s Performance Under Various Agreements.
If the Sports Distribution occurs, we expect to enter into various agreements with Sports Spinco, including a distribution agreement, a tax disaffiliation agreement, a transition services agreement, an employee matters agreement, an advertising sales representation agreement and team arena license agreements, as well as certain other arrangements. These agreements will govern our relationship with Sports Spinco subsequent to the Sports Distribution and will provide for the allocation of employee benefits, taxes and certain other liabilities and obligations attributable to periods prior to the Sports Distribution. These agreements will also include arrangements with respect to transition services and a number of on-going commercial relationships. Under the distribution agreement we will provide Sports Spinco with indemnities with respect to liabilities arising out of our businesses and Sports Spinco will provide us with indemnities with respect to liabilities arising out of the businesses we will transfer to Sports Spinco. We and Sports Spinco will each rely on the other to perform its obligations under all of these agreements. If Sports Spinco were to breach or to be unable to satisfy its material obligations under these agreements, including a failure to satisfy its indemnification or other financial obligations, we could suffer operational difficulties and/or significant losses.
Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
We own the Madison Square Garden Complex, which includes The Garden (with a maximum capacity of approximately 21,000 seats) and Hulu Theater at Madison Square Garden (approximately 5,600 seats) in New York City, comprising approximately 1,100,000 square feet; a training center in Greenburgh, NY with approximately 105,000 square feet of space; The Chicago Theatre (approximately 3,600 seats) in Chicago comprising approximately 72,600 square feet; and the Forum (approximately 17,600 seats) in Inglewood, CA comprising approximately 307,000 square feet.
Significant properties that are leased in New York City include approximately 328,500 square feet housing Madison Square Garden’s administrative and executive offices, approximately 577,000 square feet comprising Radio City Music Hall (approximately 6,000 seats) and approximately 57,000 square feet comprising the Beacon Theatre (approximately 2,800 seats). We also lease storage space in various other locations. For more information on our venues, see “Item 1. Business — Our Business — Our Performance Venues.”
We also lease property in Las Vegas, Nevada and own property in Stratford, London on which we intend to construct new venues — known as “MSG Sphere.” See “Item 1. Business — Our Business — Our Performance Venues — MSG Sphere.”
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Our Madison Square Garden Complex is subject to and benefits from various easements, including over the “breezeway” into Madison Square Garden from Seventh Avenue in New York City (which we share with other property owners). Additionally, our planned MSG Sphere in Las Vegas will have the benefit of easements with respect to the planned pedestrian bridge to the Sands Expo Convention Center. Our ability to continue to utilize these and other easements requires us to comply with certain conditions. Moreover, certain adjoining property owners have easements over our property, which we are required to maintain so long as those property owners meet certain conditions.
In addition, TAO Group is engaged in the management and operation of restaurants, nightlife and hospitality venues in New York City, Las Vegas, Los Angeles, Chicago, Singapore and Australia, of which 14 venues are leased properties. The size of the TAO Group’s leased venues ranges from approximately 5,400 to 34,000 square feet and total approximately 206,000 square feet. TAO Group also manages 15 venues (including one venue located in Australia and four venues located in Singapore) that are not owned or leased properties.
Item 3. Legal Proceedings
On March 29, 2019, a purported stockholder of the Company filed a complaint in the Court of Chancery of the State of Delaware, derivatively on behalf of the Company, against certain directors of the Company who are members of the Dolan family group and against the directors of the Company who are members of the Compensation Committee (collectively, the “Director Defendants”). The Company is also named as a nominal defendant in the complaint. The complaint alleges that the Director Defendants breached their fiduciary duties to the Company’s stockholders in approving the compensation packages for James L. Dolan in his capacity as the Executive Chairman and Chief Executive Officer of the Company. The complaint seeks monetary damages in an unspecified amount from the Director Defendants in favor of the Company; rescission of Mr. Dolan’s employment agreements; restitution and disgorgement by Mr. Dolan in respect of his compensation; and costs and disbursements for the plaintiff. On June 5, 2019, the Board formed a Special Litigation Committee to investigate the claims made by the plaintiff and to determine the Company’s response thereto. The parties agreed to stay the litigation until December 19, 2019.
The Company is a defendant in various lawsuits. Although the outcome of these lawsuits cannot be predicted with certainty (including the extent of available insurance, if any), management does not believe that resolution of these lawsuits will have a material adverse effect on the Company.
Item 4. Mine Safety Disclosures
Not applicable.
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PART II
Item 5. Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Our Class A Common Stock, par value $0.01 per share (“Class A Common Stock”), is listed on the New York Stock Exchange (“NYSE”) under the symbol “MSG.” The Company’s Class A Common Stock began “regular way” trading on the NYSE on October 1, 2015.
Performance Graph
The following graph compares the relative performance of our Class A Common Stock, the Russell 3000 Index and the Bloomberg Americas Entertainment Index. This graph covers the period from October 1, 2015 through June 30, 2019. The comparison assumes an investment of $100 on October 1, 2015 and reinvestment of dividends. The stock price performance included in this graph is not necessarily indicative of future stock performance.
Base Period 10/1/15 | 6/30/16 | 6/30/17 | 6/30/18 | 6/30/19 | ||||||||||||||||
The Madison Square Garden Company | $ | 100.00 | $ | 108.16 | $ | 123.46 | $ | 194.49 | $ | 175.52 | ||||||||||
Russell 3000 Index | 100.00 | 109.96 | 130.31 | 149.56 | 163.00 | |||||||||||||||
Bloomberg Americas Entertainment Index | 100.00 | 106.98 | 118.88 | 156.68 | 172.89 | |||||||||||||||
This performance graph shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) or incorporated by reference into any of our filings under the Securities Act of 1933, as amended, or the Exchange Act, except as expressly set forth by specific reference in such filing.
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As of June 30, 2019, there were 663 holders of record of our Class A Common Stock. There is no public trading market for our Class B Common Stock, par value $.01 per share (“Class B Common Stock”). As of June 30, 2019, there were 15 holders of record of our Class B Common Stock.
We did not pay any dividend on our common stock during fiscal year 2019 and do not have any current plans to pay a cash dividend on our common stock for the foreseeable future.
Issuer Purchases of Equity Securities
As of June 30, 2019, the Company had approximately $260 million remaining under the $525 million Class A Common Stock share repurchase program authorized by the Company’s board of directors (“Board”) on September 11, 2015. Under the authorization, shares of Class A Common Stock may be purchased from time to time in accordance with applicable insider trading and other securities laws and regulations, with the timing and amount of purchases depending on market conditions and other factors. The Company has been funding and expects to continue to fund stock repurchases through a combination of cash on hand and cash generated by operations. During the fiscal year ended June 30, 2019, the Company did not engage in any share repurchase activity under its share repurchase program.
Item 6. Selected Financial Data
The operating and balance sheet data included in the following selected financial data table have been derived from the consolidated and combined financial statements of The Madison Square Garden Company and its subsidiaries. The balance sheet data as of June 30, 2019, 2018, 2017 and 2016 and the operating data for the years ended June 30, 2019, 2018 and 2017 and the nine months ended June 30, 2016 are presented on a consolidated basis, as the Company became a standalone public company (the “2015 Distribution”) on the September 30, 2015 (the “2015 Distribution Date”). Operating data prior to the 2015 Distribution Date, which included operating data for the year ended June 30, 2015, as well as operating data for the three months ended September 30, 2015 that is included in results of operations for the year ended June 30, 2016, were prepared on a standalone basis derived from the consolidated financial statements and accounting records of MSG Networks Inc. (“MSG Networks”) and are presented as carve-out financial statements as the Company was not a standalone public company prior to the 2015 Distribution Date (“carve-out and combined basis”). Balance sheet data as of June 30, 2015 were also presented on a carve-out and combined basis.
For periods prior to the 2015 Distribution Date, the financial information presented below does not necessarily reflect what our results of operations and financial position would have been if we had operated as a separate publicly-traded entity. The selected financial data presented below should be read in conjunction with the consolidated financial statements included in Item 8 of this Annual Report on Form 10-K and with “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.” As discussed in note (a) below, our operating results for the year ended June 30, 2018 are not directly comparable with the year ended June 30, 2017 primarily due to the timing of our acquisition of a controlling interest in TAO Group Holdings LLC ( “TAO Group”).
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Years Ended June 30, | |||||||||||||||||||
2019 | 2018 | 2017 | 2016 | 2015 | |||||||||||||||
(d) | (in thousands, except per share data) | ||||||||||||||||||
Operating Data (a): | |||||||||||||||||||
Revenues | $ | 1,631,068 | $ | 1,559,095 | $ | 1,318,452 | $ | 1,115,311 | $ | 1,071,551 | |||||||||
Net income (loss) | (3,117 | ) | 134,448 | (76,789 | ) | (77,290 | ) | (40,684 | ) | ||||||||||
Less: Net loss attributable to redeemable noncontrolling interests | (7,299 | ) | (628 | ) | (4,370 | ) | — | — | |||||||||||
Less: Net income (loss) attributable to nonredeemable noncontrolling interests | (7,245 | ) | (6,518 | ) | 304 | — | — | ||||||||||||
Net Income (loss) attributable to The Madison Square Garden Company’s stockholders | $ | 11,427 | $ | 141,594 | $ | (72,723 | ) | $ | (77,290 | ) | $ | (40,684 | ) | ||||||
Basic earnings (loss) per common share attributable to The Madison Square Garden Company’s stockholders | $ | 0.48 | $ | 5.99 | $ | (3.05 | ) | $ | (3.12 | ) | $ | (1.63 | ) | ||||||
Diluted earnings (loss) per common share attributable to The Madison Square Garden Company’s stockholders | $ | 0.48 | $ | 5.94 | $ | (3.05 | ) | $ | (3.12 | ) | $ | (1.63 | ) | ||||||
Weighted-average number of common shares outstanding (b): | |||||||||||||||||||
Basic | 23,767 | 23,639 | 23,853 | 24,754 | 24,928 | ||||||||||||||
Diluted | 23,900 | 23,846 | 23,853 | 24,754 | 24,928 | ||||||||||||||
Balance Sheet Data (a): | |||||||||||||||||||
Total assets | $ | 3,763,551 | $ | 3,736,173 | $ | 3,712,753 | $ | 3,543,950 | $ | 2,148,942 | |||||||||
Long-term debt (including current portion), net of deferred financing costs (c) | 54,598 | 105,700 | 105,433 | — | — | ||||||||||||||
Total The Madison Square Garden Company stockholders’ equity / divisional equity | 2,620,500 | 2,536,483 | 2,408,163 | 2,586,421 | 1,223,275 | ||||||||||||||
(a) | Operating and balance sheet data beginning in fiscal year 2017 includes results from the acquisitions of Boston Calling Events, LLC (“BCE”) operating information from July 1, 2016 to June 30, 2017 and TAO Group operating information from February 1, 2017 to March 26, 2017. Operating and balance sheet data beginning in fiscal year 2018 includes results from the acquisitions of Counter Logic Gaming (“CLG”) and Obscura Digital (“Obscura”) since their acquisition dates of July 28, 2017 and November 20, 2017, respectively. See Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Introduction — Factors Affecting Results of Operations. In addition, see “Item 8. Financial Statements and Supplementary Data — Consolidated Financial Statements — Notes to Consolidated Financial Statements — Note 2. Summary of Significant Accounting Policies — Business Combinations and Noncontrolling Interests” for more information on our acquisitions of BCE, TAO Group and CLG. |
(b) | Following the 2015 Distribution Date, the Company had 24,928 common shares outstanding on September 30, 2015. This amount has been utilized to calculate earnings (loss) per share for the year ended June 30, 2015 as no Madison Square Garden common stock or equity-based awards were outstanding prior to September 30, 2015. |
(c) | Long-term debt presented above is net of debt issuance costs of $1,039, $3,613, and $4,567 as of June 30, 2019, 2018 and 2017, respectively. See “Part II — Item 8. Financial Statements and Supplementary Data — Consolidated Financial Statements — Notes to Consolidated Financial Statements — Note 12. Credit Facilities” for more information. |
(d) | The Company’s operating results for the year ended June 30, 2019 were impacted by the adoption of ASC Topic 606. The Company used the modified retrospective method of adoption. Results for reporting periods beginning after July 1, 2018 are presented under ASC Topic 606, while prior period amounts are not adjusted and continue to be reported in accordance with the historic accounting guidance under ASC Topic 605. See “Part II — Item 8. Financial Statements and Supplementary Data — Consolidated Financial Statements — Notes to Consolidated Financial Statements — Note 2. Summary of Significant Accounting Policies — Recently Adopted Accounting Pronouncements” for more information. |
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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 (“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 the future operating and future financial performance of The Madison Square Garden Company and its direct and indirect subsidiaries (collectively, “we,” “us,” “our,” “Madison Square Garden,” “MSG,” or the “Company”), including possible impacts from the timing and costs of new venue construction, increased investment in personnel, content and technology for the MSG Spheres, the potential spin-off of the Company’s sports businesses (the “Sports Distribution”), and the winding down of Obscura’s third-party production business. See “Part I — Item 1. Business” for further discussion of the Sports Distribution. 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, results or events 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:
• | our ability to successfully design, construct, finance and operate new venues in Las Vegas, London and other markets, and the investments, costs and timing associated with those efforts, including the impact of any unexpected construction delays and/or cost overruns; |
• | the level of our revenues, which depends in part on the popularity and competitiveness of our sports teams and the level of popularity of the Christmas Spectacular Starring the Radio City Rockettes (“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 free agents and trades, subject to league salary caps and the impact of luxury tax; |
• | the level of our capital expenditures and other investments; |
• | general economic conditions, especially in the New York City, Los Angeles, Las Vegas and London metropolitan areas where we have business activities; |
• | the demand for sponsorship arrangements and for advertising; |
• | competition, for example, from other teams, other venues and other sports and entertainment options, including the construction of new competing venues; |
• | changes in laws, National Basketball Association (the “NBA”) or National Hockey League (the “NHL”) rules, regulations, guidelines, bulletins, directives, policies and agreements, including the leagues’ respective collective bargaining agreements (each a “CBA”) with their players’ associations, salary caps, revenue sharing, NBA luxury tax thresholds and media rights, or other regulations under which we operate; |
• | any NBA, NHL or other work stoppage; |
• | seasonal fluctuations and other variation in our operating results and cash flow from period to period; |
• | the level of our expenses, including our corporate expenses; |
• | the successful development of new live productions, enhancements or changes to existing productions and the investments associated with such development, enhancements, or changes, as well as investment in personnel, content and technology for the MSG Spheres; |
• | the continued popularity and success of the TAO Group restaurants and nightlife and hospitality venues, as well as its existing brands, and the ability to successfully open and operate new restaurants and nightlife and hospitality venues; |
• | the ability of BCE to attract attendees and performers to its festival; |
• | the evolution of the esports industry and its potential impact on our esports businesses; |
• | the acquisition or disposition of assets or businesses and/or the impact of, and our ability to successfully pursue, acquisitions or other strategic transactions; |
• | our ability to successfully integrate acquisitions, new venues or new businesses into our operations; |
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• | the operating and financial performance of our strategic acquisitions and investments, including those we do not control; |
• | the costs associated with, and the outcome of, litigation and other proceedings to the extent uninsured, including litigation or other claims against companies we invest in or acquire; |
• | the impact of governmental regulations or laws, including changes in how those regulations and laws are interpreted and the continued benefit of certain tax exemptions and the ability to maintain necessary permits or licenses; |
• | the impact of any government plans to redesign New York City’s Pennsylvania Station; |
• | business, reputational and litigation risk if there is a security incident resulting in loss, disclosure or misappropriation of stored personal information or other breaches of our information security; |
• | a default by our subsidiaries under their respective credit facilities; |
• | financial community and rating agency perceptions of our business, operations, financial condition and the industry in which we operate; |
• | the ability of our investees and others to repay loans and advances we have extended to them; |
• | our ownership of professional sports franchises in the NBA and NHL and certain related transfer restrictions on our common stock; |
• | the tax free treatment of the 2015 Distribution; |
• | whether or not we pursue and complete the Sports Distribution and, if so, its impact on our business, financial condition and results of operations; and |
• | the factors described under “Part I — Item 1A. Risk Factors” included in this Annual Report on Form 10-K. |
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 Item 8 of this Annual Report on Form 10-K to help provide an understanding of our financial condition, changes in financial condition and results of 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. This section provides an analysis of our results of operations for the years ended June 30, 2019, 2018 and 2017 on both a consolidated and segment basis. Our segments are 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, 2019 and 2018. 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, 2019.
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 sports and entertainment business comprised of dynamic and powerful assets and brands. The Company is comprised of two business segments: MSG Entertainment and MSG Sports, which is built on a foundation of iconic venues and compelling content, including live sports and entertainment events that we create, produce and present. The Company conducts
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a significant portion of its operations at venues that it either owns or operates under long-term leases. The Company owns Madison Square Garden (“The Garden”) and Hulu Theater at Madison Square Garden in New York City, the Forum in Inglewood, CA and The Chicago Theatre in Chicago. In addition, the Company leases Radio City Music Hall and the Beacon Theatre in New York City.
Description of Our Segments
MSG Entertainment
Our MSG Entertainment segment, which represented approximately 50% of our consolidated revenues for the year ended June 30, 2019, is one of the country’s leaders in live entertainment. MSG Entertainment produces, presents and hosts live entertainment events, including (i) concerts and (ii) other live events such as family shows, performing arts events and special events, in our diverse collection of venues. Those venues include The Garden, Hulu Theater at Madison Square Garden, Radio City Music Hall, the Beacon Theatre, the Forum, and The Chicago Theatre. The scope of our collection of venues enables us to showcase acts that cover a wide spectrum of genres and popular appeal.
Although we primarily license our venues to third-party promoters for a fee, we also promote or co-promote shows in which case we have economic risk relating to the event.
MSG Entertainment also creates, produces and/or presents live productions that are performed in the Company’s venues. This includes the Christmas Spectacular, which is the top grossing live holiday family show in North America, featuring the Rockettes. The Christmas Spectacular has been performed at Radio City Music Hall for 86 years and more than one million tickets were sold for performances during the 2018 holiday season.
In July 2016, the Company acquired a controlling interest in BCE, the entertainment production company that owns and operates the Boston Calling Music Festival. This was followed in January 2017 by the Company’s purchase of a controlling interest in TAO Group, a hospitality group with globally-recognized entertainment dining and nightlife brands. These companies are part of the MSG Entertainment segment. In November 2017, the Company acquired a 100% controlling interest in Obscura, a creative studio, recognized for its work in designing and developing next-generation immersive experiences. Revenues generated by Obscura’s third-party production business (and related costs) are reflected in the MSG Entertainment segment. The Company has decided to wind down this third-party productions business to focus on MSG Sphere development. Any costs incurred by Obscura that are associated with MSG Sphere development that are not capitalized are reported in “Corporate and Other”.
Revenue Sources
Our primary sources of revenue in our MSG Entertainment segment are ticket sales to our audiences for live events that we produce or promote/co-promote and license fees for our venues paid by third-party promoters in connection with events that we do not produce or promote/co-promote. We also generate revenue from other sources, including facility and ticketing fees, concessions, sponsorships and signage, a portion of suite license fees at The Garden, merchandising and tours at certain of our venues. The amount 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. In addition, a significant component of the MSG Entertainment segment revenues are generated by the TAO Group through entertainment dining and nightlife offerings, which primarily consist of food and beverage sales and venue management fees.
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, via our web sites and ticketing agencies and through group sales. The amount of revenue we earn from ticket sales depends on the number of shows and the mix of events that we promote, the capacity of the venue used, the extent to which we can sell to fully utilize the capacity and our ticket prices. During the fiscal year 2017, we implemented significant changes to how we sell Christmas Spectacular tickets. By eliminating block sales to third party brokers, we brought a significant number of tickets back in-house, which created the opportunity for more customers to buy tickets to the production directly from us.
The Garden has 21 Event Level suites, 58 Lexus Madison Level suites, and 18 Signature Level suites. 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 separately 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.
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Venue License Fees
For entertainment events held at our venues that we do not produce, promote or co-promote, we typically earn revenue from venue license fees charged to the third-party promoter of the event. The amount of license fees we charge varies by venue, as well as by the size of the production and the number of days utilized, among other factors. Our fees typically include both the cost of renting space in our venues and costs for providing event staff, such as front-of-house and back-of-house staff, including stagehands, electricians, laborers, box office staff, ushers and security as well as production services such as staging, lighting and sound.
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/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, 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 generate revenue from 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 Christmas Spectacular merchandise, such as ornaments and apparel, 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 and are generally subject to a revenue sharing arrangement.
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 sponsors 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, events and venues in connection with their own advertising and in promotions in our venues or in the community.
Entertainment Dining and Nightlife Offerings
We earn revenues from entertainment dining and nightlife offerings through our operations of the TAO Group’s restaurants and nightlife and hospitality venues. These revenues primarily consist of food and beverage sales and banquet hosting services at TAO Group leased restaurants and nightclubs. In addition, we earn fees from our real estate partners for operating certain of our restaurants and nightclubs.
Expenses
Our MSG Entertainment segment’s principal expenses are payments made to performers of our productions, 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 charged to the segment for use of the Company’s owned venues. We do not allocate to our segments depreciation expense on property and equipment related to The Garden, Hulu Theater at Madison Square Garden or the Forum.
Performer Payments
Our productions are performed by talented actors, dancers, singers, musicians and entertainers. In order to attract and retain this talent, we are required to pay our performers an amount that is commensurate with both their abilities and the demand for their services from other entertainment companies. Our productions typically feature ensemble casts (such as the Rockettes), where most of our performers are paid based on a standard “scale,” pursuant to CBAs we negotiate with the performers’ unions. Certain performers, however, have individually negotiated contracts.
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Staging Costs
Staging costs for our proprietary events as well as other events 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 Christmas Spectacular. For concerts we promote, the performer usually provides a fully-produced show. Along 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 staff, 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 various advertising campaigns, including advertising on outdoor platforms and in newspapers, on television and radio, and on social and digital platforms. In light of the intense competition for entertainment events, such expenditures are a necessity to drive interest in our productions and encourage members of the public to purchase tickets to our shows.
Entertainment Dining and Nightlife Offerings Costs
Through our ownership in the operations of the TAO Group restaurants and nightlife and hospitality venues, we incur costs for providing food and beverage as well as banquet hosting services to our customers. Our dining and nightlife offering costs primarily include the following:
• | labor costs, consisting of restaurant management salaries, hourly staff payroll and other payroll-related items, including taxes and fringe benefits; |
• | food and beverage costs; |
• | operating costs, consisting of maintenance, utilities, bank and credit card charges, and any other restaurant-level expenses; and |
• | occupancy costs, consisting of both fixed and variable portions of rent, common area maintenance charges, insurance premiums and taxes. |
Factors Affecting Operating Results
The operating results of our MSG Entertainment segment are largely dependent on our ability to attract concerts and other live events to our venues, as well as the continuing popularity of the Christmas Spectacular at Radio City Music Hall. Our MSG Entertainment segment recognized an operating loss during the year ended June 30, 2017, which includes a $33,629 write-off of deferred production costs related to the New York Spectacular Starring the Radio City Rockettes (“New York Spectacular”).
Our MSG Entertainment segment’s future performance is dependent in part on general economic conditions and the effect of these conditions on our customers. Weak economic conditions may lead to lower demand for our entertainment and nightlife offerings, suite licenses and tickets to our live productions, concerts, family shows and other events, which would also negatively affect concession and merchandise 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. An economic downturn could adversely affect our business and results of operations.
The Company continues to explore additional opportunities to expand our presence in the entertainment industry. Any new investment may not initially contribute to operating income, but is intended to become operationally profitable over time. Our results will also be affected by investments in, and the success of, new productions.
MSG Sports
Our MSG Sports segment, which represented approximately 50% of our consolidated revenues for the year ended June 30, 2019, owns and operates professional sports franchises, including the New York Knicks (the “Knicks”), a founding member of the NBA, and the New York Rangers (the “Rangers”), one of the “original six” franchises of the NHL. MSG Sports also owns and operates the Hartford Wolf Pack of the American Hockey League (the “AHL”), which is the primary player development team for the Rangers and is also competitive in its own right in the AHL. The Company owns and operates an NBA G League
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team, named the Westchester Knicks, which plays its home games at the Westchester County Center in White Plains, NY. The Knicks and Rangers play their home games at The Garden. In January 2019, the Company sold the New York Liberty (the “Liberty”) of the Women’s National Basketball Association (the “WNBA”). For all periods through the sale date, MSG Sports includes the Liberty. Our professional sports franchises are collectively referred to herein as “our sports teams.” The MSG Sports segment also includes CLG, a premier North American esports organization, and Knicks Gaming, MSG’s franchise that competes in the NBA 2K League. CLG and Knicks Gaming are collectively referred to herein as “our esports teams,” and, together with our sports teams, “our teams.” In addition, our sports business also promotes, produces and/or presents a broad array of live sporting events including professional boxing, college basketball, college hockey, professional bull riding, mixed martial arts, esports, and college wrestling.
Revenue Sources
We earn revenue in our MSG Sports segment from several primary sources: ticket sales and a portion of suite rental fees at The Garden, our share of distributions from NHL and NBA league-wide national and international television contracts and other league-wide revenue sources, venue signage and other sponsorships, concessions and merchandising. Our MSG Sports segment also earns substantial fees from MSG Networks for the local media rights to telecast the games of our professional sports teams. We also earn venue license fees, primarily from the rental of The Garden to third-party promoters or conferences holding sporting events at our arena. The amount of revenue we earn is influenced by many factors, including the popularity and on-court or on-ice performance of our sports teams and general economic conditions. In particular, when our sports teams have strong on-court and on-ice performance, we benefit from increased demand for tickets, potentially greater food and merchandise sales from increased attendance and increased sponsorship opportunities. When our sports teams qualify for the playoffs, we also benefit from the attendance and in-game spending at the playoff games. The year-to-year impact of team performance is somewhat moderated by the fact that a significant portion of our revenue derives from rights fees, suite rental fees and sponsorship and signage revenue, all of which are generally contracted on a multi-year basis. Nevertheless, the long-term performance of our business is tied to the success and popularity of our sports teams and our ability to attract other compelling sports content.
Ticket Sales, Suite Licenses, Venue Licenses, Facility and Ticketing Fees
Ticket sales have historically constituted the largest single source of revenue for our MSG Sports segment. We sell tickets to our sports teams’ home games through season tickets, which are typically held by long-term season subscribers, through group sales, and through single-game tickets, which are purchased by fans either individually or in multi-game packages. The prices of our tickets vary, depending on the sports team and the location of the seats. We generally review and set the price of our tickets before the start of each team’s season. During the fiscal year 2017 we made changes to our ticketing polices, resulting in fewer full season tickets sold and more sales of individual and group tickets, as well as partial season plans.
Revenues from the sale of suite licenses are shared between the MSG Entertainment and MSG Sports segments. See “— MSG Entertainment — Revenue Sources” for further discussion.
In addition to our sports teams’ home games, we also present or host other live sporting events at our venues. When the Company acts as the promoter or co-promoter of such events, the Company typically earns revenues from ticket sales and incurs expenses associated with the event. When these events are promoted by third-party promoters, the Company typically earns venue license fees from the promoter for use of our venues. When licensing our venues, the amount recorded as revenue also includes the event’s variable costs such as the costs of front-of-house and back-of-house staffs, including electricians, laborers, box office staff, ushers, security and building services, which we pass along to the promoter. The number and mix of live sporting events, including whether we are the promoter or co-promoter of an event or license our venues to a third-party promoter, could have a significant impact on the level of revenues and expenses that we record in our MSG Sports segment.
Our MSG Sports segment also earns revenues in the form of certain fees added to ticket prices for events held at our venues, regardless of whether we act as promoter or co-promoter for such events. This currently includes a facility fee the Company charges on tickets it sells to all events at our venues, except for our sports teams’ season tickets and certain other limited exceptions.
Media Rights
We earn revenue from the licensing of media rights for our sports teams’ home and away games and also through the receipt of our share of fees paid for league-wide media rights, which are awarded under contracts negotiated and administered by each league.
The Company and MSG Networks are parties to media rights agreements covering the local telecast rights for the Knicks and Rangers. The financial success of our MSG Sports segment is significantly dependent on the rights fees we receive from MSG Networks in connection with the telecast of our Knicks and Rangers games.
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National and international telecast arrangements differ by league. Fees paid by telecasters under these arrangements are pooled by each league and then generally shared equally among all teams.
Venue Signage and Sponsorships and Ad Sales Commission
We earn revenues through the sale of signage space at The Garden and sponsorship rights in connection with our teams and certain other sporting events. Our strategy is to develop marketing partnerships with world-class brands by creating customized platforms that achieve our partners’ business objectives. Signage sales generally involve the sale of advertising space within The Garden during our sports teams’ home games and include the sale of signage on the ice and on the boards of the hockey rink during Rangers games, courtside during Knicks games, and/or on the various scoreboards and display panels at The Garden. We offer both television camera-visible and non-camera-visible signage space.
Sponsorship rights generally require us to use the name, logos and other trademarks of a sponsor in our advertising and in promotions for our teams and during our sports 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 teams and venues in connection with their own advertising and in promotions in The Garden or in the community.
The Company and MSG Networks are parties to an advertising sales representation agreement. Pursuant to the agreement, we have the exclusive right and obligation to sell advertising availabilities of MSG Networks. We are entitled to and earn commission revenue on such sales. The expense associated with advertising personnel, which was transferred from MSG Networks in connection with this advertising sales representation agreement, is recognized in selling, general and administrative expenses.
Concessions
We sell food and beverages during all sporting 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 higher-end dining at our full service restaurant and clubs as well as catering for suites at The Garden.
Merchandise
We earn revenues from the sale of our teams’ merchandise both through the in-venue (and in some cases, online) sale of items bearing the logos or other marks of our teams and through our share of sports league distributions of royalties and other revenues from the sports leagues’ licensing of team and sports league trademarks, which revenues are generally shared equally among the teams in the sports leagues. By agreement among the teams, each of the sports leagues in which we operate acts as an agent for the sports teams to license their logos and other marks, as well as the marks of the leagues, subject to certain rights retained by the teams to license these marks within their arenas and the geographic areas in which they operate.
Expenses
The most significant expenses in our MSG Sports segment are player and other team personnel salaries and charges for transactions relating to players for career-ending and season-ending injuries, trades, and waivers and contract termination costs of players and other team personnel, including team executives. We also incur costs for travel, player insurance, league operating assessments (including a 6% NBA assessment on regular season ticket sales), NHL and NBA revenue sharing and NBA luxury tax. 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 Sports segment. However, the operating results of our MSG Sports segment benefit from the fact that no rent is charged to the segment for use of the Company’s owned venues. We do not allocate to our segments depreciation expense on property and equipment related to The Garden, Hulu Theater at Madison Square Garden or the Forum.
Player Salaries, Escrow System/Revenue Sharing and NBA Luxury Tax
The amount we pay an individual player is typically determined by negotiation between the player (typically represented by an agent) and us, and is generally influenced by the player’s past performance, the amounts paid to players with comparable past performance by other sports teams and restrictions in the CBAs, including the salary floors and caps and NBA luxury tax. The leagues’ CBAs typically contain restrictions on when players may move between league clubs following expiration of their contracts and what rights their current and former clubs have.
NBA CBA. The NBA CBA expires after the 2023-24 season (although the NBA and the National Basketball Players Association (“NBPA”) each have the right to terminate the CBA following the 2022-23 season). The NBA CBA contains a salary floor (i.e., a floor on each team’s aggregate player salaries with a requirement that the team pay any deficiency to the players on its roster) and a “soft” salary cap (i.e., a cap on each team’s aggregate player salaries but with certain exceptions that enable teams to pay players more, sometimes substantially more, than the cap).
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NBA Luxury Tax. Amounts in this paragraph are in thousands, except for luxury tax rates. The NBA CBA provides for a luxury tax that is applicable to all teams with aggregate player salaries exceeding a threshold that is set prior to each season based upon projected league-wide revenues (as defined under the CBA). The luxury tax rates for teams with aggregate player salaries above such threshold start at $1.50 for each $1.00 of team salary above the threshold up to $5,000 and scale up to $3.25 for each $1.00 of team salary that is from $15,000 to $20,000 over the threshold, and an additional tax rate increment of $0.50 applies for each additional $5,000 (or part thereof) of team salary in excess of $20,000 over the threshold. In addition, for teams that are taxpayers in at least three of four previous seasons, the above tax rates are increased by $1.00 for each increment. Fifty percent of the aggregate luxury tax payments is a funding source for the revenue sharing plan and the remaining 50% of such payments is distributed in equal shares to non-taxpaying teams. For the 2018-19, 2017-18, and 2016-17 seasons, the Knicks were not a luxury tax payer and we recorded approximately $3,100, $2,200, and $500, respectively, of luxury tax proceeds from tax-paying teams. Tax obligations for years beyond the 2018-19 season will be subject to contractual player payroll obligations and corresponding NBA luxury tax thresholds. The Company recognizes the estimated amount associated with luxury tax expense or the amount it expects to receive as a non-tax paying team, if applicable, on a straight-line basis over the NBA regular season as a component of direct operating expenses.
NBA Escrow System/Revenue Sharing. The NBA CBA also provides that players collectively receive a designated percentage of league-wide revenues (net of certain direct expenses) as compensation (approximately 51%), and the teams retain the remainder. The percentage of league-wide revenues paid as compensation and retained by the teams does not apply evenly across all teams and, accordingly, the Company may pay its players a higher or lower percentage of the Knicks’ revenues than other NBA teams. Throughout each season, NBA teams withhold 10% of each player’s salary and contribute the withheld amounts to an escrow account. If the league’s aggregate player compensation exceeds the designated percentage of league-wide revenues, some or all of such escrowed amounts are distributed equally to all NBA teams. In the event that the league’s aggregate player compensation is below the designated percentage of league-wide revenues, the teams will remit the shortfall to the NBPA for distribution to the players.
The NBA also has a revenue sharing plan that generally requires the distribution of a pool of funds to teams with below-average net revenues (as defined in the plan), subject to reduction or elimination based on individual team market size and profitability. The plan is funded by a combination of disproportionate contributions from teams with above-average net revenues, subject to certain profit-based limits (each as defined in the plan); 50% of aggregate league-wide luxury tax proceeds (see above); and collective league sources, if necessary. Additional amounts may also be distributed on a discretionary basis, funded by assessments on playoff ticket revenues and through collective league sources.
We record our revenue sharing expense net of the amount we expect to receive from the escrow. Our net provision for these items for the year ended June 30, 2019 was approximately $36,000. The actual amounts for the 2018-19 season may vary significantly from the recorded provision based on actual operating results for the league and all NBA teams for the season and other factors.
NHL CBA. The NHL CBA expires September 15, 2022 (although the NHL and NHL Players’ Association each have the right to terminate the CBA effective following the 2019-20 season). The NHL CBA provides for a salary floor (i.e., a floor on each team’s aggregate player salaries) and a “hard” salary cap (i.e., teams may not exceed a stated maximum that was negotiated for the 2013-14 season and has been adjusted each season thereafter based upon league-wide revenues).
NHL Escrow System/Revenue Sharing. The NHL CBA provides that each season the players receive as player compensation 50% of that season’s league-wide revenues. Because the aggregate amount to be paid to the players is based upon league-wide revenues and not on a team-by-team basis, the Company may pay its players a higher or lower percentage of the Rangers’ revenues than other NHL teams pay of their own revenues. In order to implement the salary cap system, NHL teams withhold a portion of each player’s salary and contribute the withheld amounts to an escrow account. If the league’s aggregate player compensation for a season exceeds the designated percentage (50%) of that season’s league-wide revenues, the excess is retained by the league. Any such excess funds are distributed to all teams in equal shares.
The NHL CBA also provides for a revenue sharing plan. The plan generally requires the distribution of a pool of funds approximating 6.055% of league-wide revenues to certain qualifying lower-revenue teams and is funded as follows: (a) 50% from contributions by the top ten revenue earning teams (based on pre-season and regular season revenues) in accordance with a formula; (b) then from payments by teams participating in the playoffs, with each team contributing 35% of its gate receipts for each home playoff game; and (c) the remainder from centrally-generated NHL sources. We record our revenue sharing expense net of the amount we expect to receive from the escrow. Our net provisions for these items for the years ended June 30, 2019 and 2018 were approximately $23,300 and $21,100, respectively. The actual amounts for the 2018-19 and 2017-18 seasons may vary significantly from the recorded provision based on actual operating results for the league and all NHL teams for the season and other factors.
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Other Team Operating Expenses
Our teams also pay expenses associated with day-to-day operations, including for travel, equipment maintenance and player insurance. Direct variable day-of-event costs incurred at The Garden, such as the costs of front-of-house and back-of-house staff, including electricians, laborers, box office staff, ushers, security, and event production are charged to our MSG Sports segment.
Operating costs of the Company’s training center in Greenburgh, NY are also charged to our MSG Sports segment. The operation of the Hartford Wolf Pack is also a net Rangers player development expense for our MSG Sports segment.
As members of the NBA and NHL, the Knicks and Rangers, respectively, are also subject to league assessments. The governing bodies of each league determine the amount of each season’s league assessments that are required from each member team. The NBA imposed on each team a 6% assessment on regular season ticket revenue.
Our MSG Sports segment also incurs costs associated with VIP amenities provided to certain ticket holders.
Other Expenses
MSG Sports also incurs selling, general and administrative expenses.
Factors Affecting Operating Results
The operating results of our MSG Sports segment are largely dependent on the continued popularity and/or on-ice or on-court competitiveness of our Rangers and Knicks teams, which have a direct effect on ticket sales for the teams’ home games and are each team’s largest single source of revenue, as well as our ability to attract high-caliber sporting events. As with other sports teams, the competitive positions of our sports teams depend primarily on our ability to develop, obtain and retain talented players, for which we compete with other professional sports teams. A significant factor in our ability to attract and retain talented players is player compensation. Our MSG Sports segment results reflect the impact of high costs for player salaries (including NBA luxury tax, if any) and salaries of non-player team personnel. In addition, we have incurred significant charges for costs associated with transactions relating to players on our sports teams for season-ending and career-ending injuries and for trades, waivers and contract terminations of players and other team personnel, including team executives. Waiver and termination costs reflect our efforts to improve the competitiveness of our sports teams. These transactions can result in significant charges as the Company recognizes the estimated ultimate costs of these events in the period in which they occur, although amounts due to these individuals are generally paid over their remaining contract terms. For example, the expense for these items was $53,134, $27,514 and $42,337 for fiscal years 2019, 2018 and 2017, respectively. These expenses add to the volatility of the results of our MSG Sports segment. We expect to continue to pursue opportunities to improve the overall quality of our sports teams and our efforts may result in continued significant expenses and charges. Such expenses and charges may result in future operating losses for our MSG Sports segment although it is not possible to predict their timing or amount. Our MSG Sports segment’s performance has been, and may in the future be, impacted by work stoppages. See “Part I — Item 1A. Risk Factors — General Risks — Organized Labor Matters May Have a Material Negative Effect on Our Business and Results of Operations.”
In addition to our MSG Sports segment’s future performance being dependent upon the continued popularity and/or on-ice or on-court competitiveness of our Rangers and Knicks teams, it is also dependent on general economic conditions, in particular those in the New York City metropolitan area, and the effect of these conditions on our customers. An economic downturn could adversely affect our business and results of operations as it may lead to lower demand for suite licenses and tickets to the games of our sports teams, which would also negatively affect merchandise and concession sales, as well as decrease levels of sponsorship and venue signage revenues. These conditions may also affect the number of other live sporting events that this segment is able to present.
Factors Affecting Results of Operations
Adoption of ASC Topic 606, Revenue From Contracts With Customers
The Company’s consolidated and segment operating results for the year ended June 30, 2019 were impacted by the adoption of Accounting Standards Codification (“ASC”) Topic 606. As a result, the Company’s revenues were lower by $22,996 and direct operating expenses were lower by $26,239 for the year ended June 30, 2019. The impact of the adoption of ASC Topic 606 resulted in net decreases in MSG Entertainment’s revenues and direct operating expenses of $24,347 and $24,545, respectively, for the year ended June 30, 2019, primarily due to the application of principal versus agent revenue recognition on event-related food, beverage and merchandise activities. For the MSG Sports’ operating results, the adoption of ASC Topic 606 resulted in a net increase in revenues of $1,351 for the year ended June 30, 2019 primarily associated with professional sports teams’ sponsorship and signage revenues. In addition, the adoption of ASC Topic 606 resulted in a decrease in direct operating expenses of $1,694 for the year ended June 30, 2019, due to the application of principal versus agent revenue recognition on event-related food, beverage and merchandise activities.
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Prior year period results have not been adjusted to reflect the adoption of ASC Topic 606 and, therefore, the Company’s consolidated and segment operating results for the year ended June 30, 2019 are not directly comparable to results for the year ended June 30, 2018.
Under ASC Topic 606, the suite license revenues for the Company’s MSG Entertainment and MSG Sports segments are now recognized proportionately as events at The Garden take place, as opposed to being recognized on a straight-line basis over the fiscal year under the prior standard. In addition, most of local media rights revenue is now recognized over the course of the regular season, as opposed to being recognized on a straight-line basis over the fiscal year under the prior standard.
See Item 8. Financial Statements and Supplementary Data — Consolidated Financial Statements — Notes to Consolidated Financial Statements — Note 2. Summary of Significant Accounting Policies — Recently Adopted Accounting Pronouncements and Note 3. Revenue Recognition for further discussion of the adoption of ASC Topic 606.
Renewal of a Ticketing Agreement
The Company’s consolidated and segment operating results for the year ended June 30, 2019 were impacted by the recognition of revenue for events that took place during prior year due to the renewal of the agreement with the Company’s ticketing platform provider during fiscal year 2019. The following table presents the impact on the Company’s consolidated revenues, operating income and adjusted operating income for the year ended June 30, 2019 from events in the prior year as a result of the ticketing agreement renewal.
MSG Entertainment segment | $ | 2,316 | ||
MSG Sports segment | 2,930 | |||
Total MSG | $ | 5,246 | ||
Corporate Expenses and Venue Operating Costs
The Company allocates certain corporate costs and its performance venues operating expenses to both reportable segments. Allocated performance venue operating expenses include the non-event related costs of operating the Company’s performance venues, and include such costs as rent for the Company’s leased venues, real estate taxes, insurance, utilities, repairs and maintenance, and labor related to the overall management of the venues. Depreciation expense on property and equipment related to The Garden, Hulu Theater at Madison Square Garden and the Forum is not allocated to the reportable segments.
Purchase Accounting Adjustments
In connection with the BCE, TAO Group, CLG and Obscura acquisitions in the fiscal years 2017 and 2018 (“Recent Business Acquisitions”), the Company recorded certain fair value adjustments related to acquired assets and liabilities in accordance with Accounting Standards Codification (“ASC”) Topic 805, Business Combinations. For the Company’s Recent Business Acquisitions, the Company recognized fair value adjustments primarily for (i) recognition of intangible assets such as trade names, venue management contracts, favorable leases, and festival rights, (ii) step-up of property and equipment, (iii) step-up of inventory, (iv) unfavorable lease obligation, and (v) goodwill. The aforementioned fair value adjustments, except for goodwill, will be expensed as incremental non-cash expenses in the Company’s consolidated statements of operations based on their estimated useful lives (“Purchase Accounting Adjustments”). The Company does not allocate any Purchase Accounting Adjustments to the reporting segments and reports any Purchase Accounting Adjustments as reconciliation items in reporting segment operating results. See “Part II — Item 8. Financial Statements and Supplementary Data — Consolidated Financial Statements — Notes to Consolidated Financial Statements — Note 19. Segment Information” for more information on the presentation of Purchase Accounting Adjustments.
Investments in Nonconsolidated Affiliates
In July 2018, the Company acquired a 30% interest in SACO, a global provider of high-performance LED video lighting and media solutions for a total consideration of approximately $47,244. The Company is utilizing SACO as a preferred display technology provider for MSG Spheres and is benefiting from agreed upon commercial terms.
In addition, the Company also has other investments in various sports and entertainment companies and related technologies, accounted for either under the equity method or at fair value. See Note 7 to the consolidated financial statements included in Item 8 of this Annual Report on Form 10-K for more information on our investments in nonconsolidated affiliates.
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Results of Operations
Comparison of the Year Ended June 30, 2019 versus the Year Ended June 30, 2018
Consolidated Results of Operations
The table below sets forth, for the periods presented, certain historical financial information.
Years Ended June 30, | Change | ||||||||||||||
2019 | 2018 | Amount | Percentage | ||||||||||||
Revenues | $ | 1,631,068 | $ | 1,559,095 | $ | 71,973 | 5 | % | |||||||
Direct operating expenses | 997,077 | 944,276 | 52,801 | 6 | % | ||||||||||
Selling, general and administrative expenses | 528,672 | 469,276 | 59,396 | 13 | % | ||||||||||
Depreciation and amortization | 119,193 | 122,486 | (3,293 | ) | (3 | )% | |||||||||
Operating income (loss) | (13,874 | ) | 23,057 | (36,931 | ) | NM | |||||||||
Other income (expense): | |||||||||||||||
Earnings (loss) in equity method investments | 7,062 | (7,770 | ) | 14,832 | NM | ||||||||||
Interest income, net | 9,795 | 6,167 | 3,628 | 59 | % | ||||||||||
Miscellaneous expenses, net | (4,752 | ) | (3,878 | ) | (874 | ) | (23 | )% | |||||||
Income (loss) from operations before income taxes | (1,769 | ) | 17,576 | (19,345 | ) | NM | |||||||||
Income tax benefit (expense) | (1,348 | ) | 116,872 | (118,220 | ) | NM | |||||||||
Net income (loss) | (3,117 | ) | 134,448 | (137,565 | ) | NM | |||||||||
Less: Net loss attributable to redeemable noncontrolling interests | (7,299 | ) | (628 | ) | (6,671 | ) | NM | ||||||||
Less: Net loss attributable to nonredeemable noncontrolling interests | (7,245 | ) | (6,518 | ) | (727 | ) | (11 | )% | |||||||
Net income attributable to The Madison Square Garden Company’s stockholders | $ | 11,427 | $ | 141,594 | $ | (130,167 | ) | (92 | )% | ||||||
NM — Percentage is not meaningful
The following is a summary of changes in segments’ operating results for the year ended June 30, 2019 as compared to the prior year.
Changes attributable to | Revenues | Direct operating expenses | Selling, general and administrative expenses | Depreciation and amortization | Operating income (loss) | |||||||||||||||
MSG Entertainment segment (a) | $ | 39,204 | $ | 24,218 | $ | 16,576 | $ | (345 | ) | $ | (1,245 | ) | ||||||||
MSG Sports segment (a) | 34,093 | 28,967 | 11,409 | 297 | (6,580 | ) | ||||||||||||||
Corporate and Other | — | 411 | 31,507 | (2,642 | ) | (29,276 | ) | |||||||||||||
Purchase accounting adjustments | — | (395 | ) | 502 | (603 | ) | 496 | |||||||||||||
Inter-segment eliminations | (1,324 | ) | (400 | ) | (598 | ) | — | (326 | ) | |||||||||||
$ | 71,973 | $ | 52,801 | $ | 59,396 | $ | (3,293 | ) | $ | (36,931 | ) | |||||||||
(a) | See “Business Segment Results” for a more detailed discussion of the operating results of our segments. |
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Direct operating expenses primarily include:
• | compensation expense for our sports teams’ players and certain other team personnel; |
• | cost of team personnel transactions for season-ending player injuries (net of anticipated insurance recoveries), trades, and waivers/contract termination costs of players and other team personnel; |
• | NBA luxury tax, NBA and NHL revenue sharing and league assessments for the MSG Sports segment; |
• | event costs related to the presentation, production and marketing of our live entertainment and other live sporting events; |
• | venue lease, maintenance and other operating expenses; |
• | the cost of concessions, merchandise and food and beverage sold at our venues; and |
• | restaurant operating expenses, inclusive of labor costs. |
Selling, general and administrative expenses
Selling, general and administrative expenses primarily consist of administrative costs, including compensation, professional fees, sales and marketing costs, including non-event related advertising expenses, business development costs, as well as costs associated with the development of MSG Sphere, including technology and content development costs.
Selling, general and administrative expenses in Corporate and Other for the year ended June 30, 2019 increased $31,507, or 34%, to $123,347 as compared to the prior year. The increase was primarily due to (i) an increase in employee compensation and related benefits, (ii) higher professional fees, inclusive of costs associated with the potential Sports Distribution, and (iii) the inclusion of Obscura’s selling, general and administrative costs not related to its third-party production business.
In connection with its MSG Sphere initiative, the Company expects to continue increasing its investment in personnel, content and technology. Based on the timing of these efforts, the Company expects increased expenses in Corporate and Other in fiscal year 2020.
Depreciation and amortization
Depreciation and amortization for the year ended June 30, 2019 decreased $3,293, or 3%, to $119,193 as compared to the prior year primarily due to certain assets being fully depreciated and amortized.
Operating loss - Corporate and Other
Operating loss in Corporate and Other for the year ended June 30, 2019 increased $29,276, or 17%, to $199,592 as compared to the prior year. The increase was primarily due to higher selling, general and administrative expenses as discussed above, partially offset by lower depreciation and amortization as a result of certain assets being fully depreciated and amortized. See Note 19 to the consolidated financial statements included in Item 8 of this Annual Report on Form 10-K for discussion of depreciation and amortization under Corporate and Other.
Earnings (loss) in equity method investments
Earnings in equity method investments for the year ended June 30, 2019 were $7,062 as compared to a loss of $7,770 in the prior year. The year-over-year improvement is primarily due to (i) the improvement in the net earnings attributable to the Company’s investees as compared to the prior year, (ii) the gain on the sale of an Azoff MSG Entertainment LLC (“AMSGE”) investment during the current year prior to the Company’s sale of its interest in AMSGE, and (iii) a gain on the sale of the Company’s interest in AMSGE during the current year. The increase was partially offset by an impairment charge recorded for the Company’s investment in Tribeca Enterprises LLC (“Tribeca Enterprises”) and the amortization of basis difference attributable to intangible assets for the new investments in the current year. The Company sold its interest in Tribeca Enterprises, including the outstanding loan and PIK, effective August 5, 2019. See Note 7 to the consolidated financial statements included in Item 8 of this Annual Report on Form 10-K for further discussion of an impairment charge recorded for the Company’s investment in Tribeca Enterprises.
Interest income, net
Net interest income for the year ended June 30, 2019 increased $3,628, or 59%, to $9,795 as compared to the prior year primarily due to higher interest income earned by the Company as a result of higher interest rate. The increase was partially offset by higher interest expense incurred under the TAO Senior Credit Agreement and 2017 TAO Credit Agreement. See Note 12 to the consolidated financial statements included in Item 8 of this Annual Report on Form 10-K for further discussion of the TAO Senior Credit Agreement entered in May 2019.
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Miscellaneous expenses, net
Miscellaneous expenses, net in the current year principally consist of (i) a loss on extinguishment of debt in connection with the 2017 TAO Credit Agreement in the fourth quarter of fiscal year 2019, (ii) non-service components of net period pension and post retirement benefit cost in accordance with ASU No. 2017-07, and (iii) dividend income from the Company’s investment in TSQ. Miscellaneous expenses, net in the prior year principally consist of non-service components of net period pension and postretirement benefit cost in accordance with ASU No. 2017-07. See Note 12 to the consolidated financial statements included in Item 8 of this Annual Report on Form 10-K for further discussion of the 2017 TAO Credit Agreement and Note 2 to the consolidated financial statements included in Item 8 of this Annual Report on Form 10-K for further discussion of the retrospective adoption of ASU No. 2017-07.
Income taxes
On December 22, 2017, the enactment of the Tax Cuts and Jobs Act (“TCJA”) significantly changed U.S. tax law and included a reduction in the corporate federal income tax rate from 35% to 21% effective January 1, 2018.
Income tax expense for the year ended June 30, 2019 was $1,348 and income tax benefit for the year ended June 30, 2018 was $116,872.
Income tax expense for the year ended June 30, 2019 of $1,348 differs from income tax benefits derived from applying the statutory federal rate of 21% to pretax loss primarily due to a decrease in valuation allowance of $9,421, tax expense of $8,651 relating to nondeductible officers’ compensation and tax expense of $3,054 relating to noncontrolling interests. See Note 18 to the consolidated financial statements included in Item 8 of this Annual Report on Form 10-K for further details on the components of income tax and a reconciliation of the statutory federal rate to the effective tax rate.
For the year ended June 30, 2018, the Company used a blended statutory federal income rate of 28% based upon the number of days that it would be taxed at the former rate of 35% and the number of days it would be taxed at the new rate of 21%, effective January 1, 2018.
Income tax benefit for the year ended June 30, 2018 of $116,872 differs from the income tax expense derived from applying the blended statutory federal rate of 28% to pretax income primarily as a result of a deferred income tax benefit of $113,494 related to the revaluation of the Company’s deferred tax assets and liabilities under provisions contained in the new tax legislation, of which (i) $51,015 was due to the reduction of net deferred tax liabilities in connection with the lower federal income tax rate of 21%, and (ii) $62,479 was due to a reduction in the valuation allowance attributable to the new rules, which provide that future federal net operating losses have an unlimited carry-forward period. These rules on future federal net operating losses allow the Company to recognize a portion of its unrecognized deferred tax assets for future deductible items. Other decreases to the statutory rate include $13,211 of income tax benefit related to a decrease in the valuation allowance, which offsets the income tax expense attributable to most of the operating income, and $1,974 of income tax benefit related to the vesting of restricted stock units. These decreases were partially offset by (i) $1,800 of tax expense related to state and local income taxes (net of federal benefit), (ii) $1,998 of tax expense primarily related to non-deductible expenses, (iii) $2,006 of tax expense related to consolidated partnership book income attributable to non-controlling interests, (iv) $846 of tax expense related to a change in state tax rates and (v) $223 of other.
Adjusted operating income
The Company evaluates segment performance based on several factors, of which the key financial measure is their operating income (loss) before (i) depreciation, amortization and impairments of property and equipment and intangible assets, (ii) share-based compensation expense or benefit, (iii) restructuring charges or credits, and (iv) gains or losses on sales or dispositions of businesses, which is referred to as adjusted operating income (loss), a non-GAAP measure. In addition to excluding the impact of items discussed above, the impact of purchase accounting adjustments related to business acquisitions is also excluded in evaluating the Company’s consolidated adjusted operating income (loss). The Company has presented the components that reconcile operating income (loss) to adjusted operating income (loss).
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The following is a reconciliation of operating income (loss) to adjusted operating income:
________________
Years Ended June 30, | Change | ||||||||||||||
2019 | 2018 | Amount | Percentage | ||||||||||||
Operating income (loss) | $ | (13,874 | ) | $ | 23,057 | $ | (36,931 | ) | NM | ||||||
Share-based compensation | 59,474 | 47,563 | |||||||||||||
Depreciation and amortization (a) | 119,193 | 122,486 | |||||||||||||
Other purchase accounting adjustments (b) | 4,965 | 4,858 | |||||||||||||
Adjusted operating income | $ | 169,758 | $ | 197,964 | $ | (28,206 | ) | (14 | )% | ||||||
NM — Percentage is not meaningful
(a) | Depreciation and amortization included purchase accounting adjustments of $17,531 and $18,134 for the years ended June 30, 2019 and 2018, respectively. |
(b) | Other purchase accounting adjustments for the years ended June 30, 2019 and 2018 primarily included the amortization of favorable leases in connection with the TAO Group acquisition. |
Adjusted operating income for the year ended June 30, 2019 decreased $28,206, or 14%, to $169,758 as compared to the prior year. The net decrease is attributable to the following:
Decrease in adjusted operating income of the MSG Entertainment segment | $ | (4 | ) |
Decrease in adjusted operating income of the MSG Sports segment | (5,408 | ) | |
Increase in adjusted operating loss in Corporate and Other | (22,468 | ) | |
Inter-segment eliminations | (326 | ) | |
$ | (28,206 | ) | |
Increase in adjusted operating loss in Corporate and Other was lower than the increase in operating loss in Corporate and Other primarily due to higher share-based compensation expenses, partially offset by lower depreciation and amortization.
Net loss attributable to redeemable and nonredeemable noncontrolling interests
For the year ended June 30, 2019, the Company recorded a net loss attributable to redeemable noncontrolling interests of $7,299 and a net loss attributable to nonredeemable noncontrolling interests of $7,245 as compared to $628 of net loss attributable to redeemable noncontrolling interests and $6,518 of net loss attributable to nonredeemable noncontrolling interests for the year ended June 30, 2018. These amounts represent the share of net loss of TAO Group, BCE, and CLG that are not attributable to the Company. In addition, the net loss attributable to redeemable and nonredeemable noncontrolling interests includes a proportional share of expenses related to purchase accounting adjustments.
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Business Segment Results
MSG Entertainment
The table below sets forth, for the periods presented, certain historical financial information and a reconciliation of operating income to adjusted operating income for the Company’s MSG Entertainment segment.
Years Ended June 30, | Change | ||||||||||||||
2019 | 2018 | Amount | Percentage | ||||||||||||
Revenues | $ | 819,930 | $ | 780,726 | $ | 39,204 | 5 | % | |||||||
Direct operating expenses | 507,091 | 482,873 | 24,218 | 5 | % | ||||||||||
Selling, general and administrative expenses | 208,577 | 192,001 | 16,576 | 9 | % | ||||||||||
Depreciation and amortization | 18,170 | 18,515 | (345 | ) | (2 | )% | |||||||||
Operating income | $ | 86,092 | $ | 87,337 | $ | (1,245 | ) | (1 | )% | ||||||
Reconciliation to adjusted operating income: | |||||||||||||||
Share-based compensation | 14,086 | 12,500 | |||||||||||||
Depreciation and amortization | 18,170 | 18,515 | |||||||||||||
Adjusted operating income | $ | 118,348 | $ | 118,352 | $ | (4 | ) | NM | |||||||
—————
NM — Percentage is not meaningful
The results of operations of the MSG Entertainment segment for the year ended June 30, 2018 include Obscura’s results of operations associated with its third-party production business from the date of acquisition, which was November 20, 2017. The current year results include activities from Obscura for a full fiscal year as compared to approximately seven months (from November 20, 2017 to June 30, 2018) in fiscal year 2018. The Company made a decision to wind down Obscura’s third-party production business to focus on MSG Sphere development.
Revenues
Revenues for the year ended June 30, 2019 increased $39,204, or 5%, to $819,930 as compared to the prior year. The net increase is attributable to the following:
Increase in event-related revenues from concerts | $ | 19,966 | |
Increase in revenues from the presentation of the Christmas Spectacular | 14,797 | ||
Increase in revenues associated with entertainment dining and nightlife offerings | 10,837 | ||
Increase in venue-related sponsorship and signage and suite rental fee revenues | 9,527 | ||
Increase in revenues from Obscura | 5,311 | ||
Decrease in event-related revenues from other live events | (16,899 | ) | |
Decrease in BCE event-related revenues | (3,255 | ) | |
Other net decreases | (1,080 | ) | |
$ | 39,204 | ||
The increase in event-related revenues from concerts was primarily due to additional events and higher per event revenue during the current year, and to a lesser extent, the impact from the recognition during the current year of $1,278 of revenue associated with events that took place in prior year as a result of the ticketing agreement renewal. The increase was partially offset by the impact of the new revenue recognition standard in the current year.
The increase in revenues from the presentation of the Christmas Spectacular was primarily due to (i) higher ticket-related revenue mainly as a result of higher average ticket prices, (ii) an increase in paid attendance in the current year as compared to the prior year, and (iii) the recognition during the current year of $880 of revenue associated with performances that took place in prior year as a result of the ticketing agreement renewal. The Company had 210 performances of the production in fiscal year 2019, as compared to 200 performances in fiscal year 2018 due to an extension of the show’s run announced in December 2018. For fiscal year 2019, more than one million tickets were sold, representing a mid-single digit percentage increase as compared to the prior year.
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The increase in revenues associated with entertainment dining and nightlife offerings was primarily due to the impact of the opening of a new venue, partially offset by (i) the impact of the current year containing 52 weeks of operations as compared to 53 weeks during the prior year, due to the timing of the retail calendar, (ii) closing of one venue, and other decreases. TAO Group’s operating results are recorded in the Company’s consolidated statements of operations on a three-month lag basis. As a result, TAO Group’s related revenues for fiscal year 2019 are for the period from April 2, 2018 to March 31, 2019, as compared to TAO Group’s related revenues for fiscal year 2018, which are for the period from March 27, 2017 to April 1, 2018.
The increase in venue-related sponsorship and signage and suite rental fee revenues was due to increased sales of existing sponsorship and signage inventory and rate increases in suite licenses.
Revenues from Obscura are included as a result of its acquisition by the Company on November 20, 2017. The current year results include revenues from Obscura for a full fiscal year as compared to approximately seven months (from November 20, 2017 to June 30, 2018) in fiscal year 2018. Revenues from Obscura are principally related to its third-party production business.
The decrease in event-related revenues from other live events was primarily due to (i) the impact of a large-scale special event series held at The Garden and Hulu Theater at Madison Square Garden during the prior year, (ii) lower per-event revenue during the current year as compared to the prior year and, to a lesser extent, (iii) the impact of the new revenue recognition standard in the current year. The decrease was slightly offset by additional events held at the Company’s venues during the current year as compared to the prior year.
The decrease in BCE event-related revenues was primarily due to lower ticket-related revenues from the Boston Calling Music Festival.
Direct operating expenses
Direct operating expenses for the year ended June 30, 2019 increased $24,218, or 5%, to $507,091 as compared to the prior year. The net increase is attributable to the following:
Increase in direct operating expenses associated with entertainment dining and nightlife offerings | $ | 21,364 | |
Increase in direct operating expenses associated with Obscura | 5,871 | ||
Increase in direct operating expenses associated with the presentation of the Christmas Spectacular | 5,187 | ||
Increase in direct operating expenses associated with the Company’s exploration of a new theatrical production | 1,485 | ||
Increase in direct operating expenses associated with venue-related sponsorship and signage and suite licenses | 1,389 | ||
Decrease in event-related direct operating expenses associated with other live events | (9,757 | ) | |
Decrease in BCE event-related direct operating expenses | (1,914 | ) | |
Decrease in event-related direct operating expenses associated with concerts | (978 | ) | |
Other net increases | 1,571 | ||
$ | 24,218 | ||
The increase in direct operating expenses associated with entertainment dining and nightlife offerings was primarily due to the costs associated with the opening of a new venue inclusive of increases in (i) employee compensation and related benefits, (ii) costs of food and beverage, and (iii) performer costs, as well as (iv) the impact of certain costs being reported as direct operating expenses during the current year as compared to being reported as selling, general and administrative expenses during the prior year.
Direct operating expenses from Obscura are included as a result of its acquisition by the Company on November 20, 2017. The current year results include direct operating expenses from Obscura for a full fiscal year as compared to approximately seven months (from November 20, 2017 to June 30, 2018) in fiscal year 2018. Direct operating expenses from Obscura are principally related to third-party production business.
The increase in direct operating expenses associated with the presentation of the Christmas Spectacular was primarily due to (i) higher labor costs, (ii) higher costs associated with more performances in the current year, (iii) costs related to show enhancements, and (iv) higher marketing expenses during the current year as compared to the prior year. The Company had 210 performances of the production in fiscal year 2019, as compared to 200 performances in fiscal year 2018 due to an extension of the show’s run announced in December 2018.
The increase in direct operating expenses associated with the venue-related sponsorship and signage and suite licenses was primarily due to increased sales of existing sponsorship inventory.
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The decrease in event-related direct operating expenses from other live events was primarily due to (i) the impact of a large-scale special event series held at The Garden and Hulu Theater at Madison Square Garden during the prior year, (ii) the impact of the new revenue recognition standard in the current year, and (iii) to a lesser extent, lower per event expenses during the current year as compared to prior year. The decrease was slightly offset by additional events held at the Company's venues during the current year as compared to prior year.
The decrease in BCE event-related direct operating expenses was due to lower costs related to the Boston Calling Music Festival in the current year as compared to prior year.
The decrease in event-related direct operating expenses from concerts was primarily due to the impact of the new revenue recognition standard in the current year. The decrease was largely offset by additional events held at the Company’s venues and higher per event expenses during the current year as compared to prior year.
Selling, general and administrative expenses
Selling, general and administrative expenses for the year ended June 30, 2019 increased $16,576, or 9%, to $208,577 as compared to the prior year mainly due to (i) higher employee compensation and related benefits, (ii) an increase in professional fees, (iii) venue pre-opening costs associated with entertainment dining and nightlife offerings, and (iv) the inclusion of Obscura’s selling, general and administrative costs related to its third-party production business for a full fiscal year as compared to approximately seven months (from November 20, 2017 to June 30, 2018) in fiscal year 2018. The increase was partially offset by the impact of certain costs being reported as direct operating expenses during the current year as compared to being reported as selling, general and administrative expenses during the prior year.
Operating income
Operating income for the year ended June 30, 2019 decreased $1,245, or 1%, to $86,092 as compared to the prior year due to increases in direct operating expenses and selling, general and administrative expenses largely offset by higher revenues as discussed above.
Adjusted operating income
Adjusted operating income for the year ended June 30, 2019 decreased $4 to $118,348 as compared to the prior year. The decrease was lower than a decrease in operating income primarily due to higher share-based compensation expense and, to a lesser extent, an increase in depreciation and amortization.
MSG Sports
The table below sets forth, for the periods presented, certain historical financial information and a reconciliation of operating income to adjusted operating income for the Company’s MSG Sports segment.
Years Ended June 30, | Change | ||||||||||||||
2019 | 2018 | Amount | Percentage | ||||||||||||
Revenues | $ | 812,746 | $ | 778,653 | $ | 34,093 | 4 | % | |||||||
Direct operating expenses | 485,899 | 456,932 | 28,967 | 6 | % | ||||||||||
Selling, general and administrative expenses | 196,548 | 185,139 | 11,409 | 6 | % | ||||||||||
Depreciation and amortization | 7,778 | 7,481 | 297 | 4 | % | ||||||||||
Operating income | $ | 122,521 | $ | 129,101 | $ | (6,580 | ) | (5 | )% | ||||||
Reconciliation to adjusted operating income: | |||||||||||||||
Share-based compensation | 16,373 | 15,498 | |||||||||||||
Depreciation and amortization | 7,778 | 7,481 | |||||||||||||
Adjusted operating income | $ | 146,672 | $ | 152,080 | $ | (5,408 | ) | (4 | )% | ||||||
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Revenues
Revenues for the year ended June 30, 2019 increased $34,093, or 4%, to $812,746 as compared to the prior year. The net increase is attributable to the following:
Increase in event-related revenues from other live sporting events | $ | 16,172 | |
Increase in revenues from league distributions | 13,883 | ||
Increase in local media rights fees from MSG Networks | 5,750 | ||
Increase in suite license fee revenues | 3,532 | ||
Increase in professional sports teams’ sponsorship and signage revenues and ad sales commission | 790 | ||
Decrease in professional sports teams’ pre/regular season ticket-related revenues | (6,174 | ) | |
Decrease in professional sports teams’ pre/regular season food, beverage and merchandise sales | (1,670 | ) | |
Other net increases | 1,810 | ||
$ | 34,093 | ||
The increase in event-related revenues from other live sporting events was due to higher per event revenue, slightly offset by fewer events during the current year as compared to the prior year.
The increase in revenues from league distributions included the impact of timing.
The increase in local media rights fees from MSG Networks was primarily due to contractual rate increases.
The increase in suite license fee revenue was primarily due to rate increases, partially offset by lower sales of suite products.
The increase in professional sports teams’ sponsorship and signage revenues and ad sales commission was primarily due to higher ad sales commission revenue and the impact of the new revenue recognition standard in the current year, partially offset by decreased sales of existing sponsorship and signage inventory.
The decrease in professional sports teams’ pre/regular season ticket-related revenues was primarily due to lower average Rangers, Knicks and Liberty per-game revenue, partially offset by the impact of the recognition of $2,753 during the current year associated with games played in the prior year as a result of the ticketing agreement renewal.
The decrease in professional sports teams’ pre/regular season food, beverage and merchandise sales was primarily due to lower average per-game revenue during the current year as compared to the prior year and the Liberty playing fewer games at The Garden during the current year as compared to the prior year. The Liberty played ten fewer regular season games at The Garden during the current year as compared to the prior year, as the Liberty played the majority of their home games at the Westchester County Center, located in White Plains, NY, during the current year. Additionally, the Liberty was sold in January 2019.
Direct operating expenses
Direct operating expenses for the year ended June 30, 2019 increased $28,967, or 6%, to $485,899 as compared to the prior year. The net increase is attributable to the following:
Increase in net provisions for certain team personnel transactions | $ | 25,620 | |
Increase in event-related expenses associated with other live sporting events | 10,501 | ||
Increase in other team operating expenses not discussed elsewhere in this table | 3,846 | ||
Increase in net provisions for league revenue sharing expense (excluding playoffs) and NBA luxury tax | 733 | ||
Decrease in team personnel compensation | (11,513 | ) | |
Other net decreases | (220 | ) | |
$ | 28,967 | ||
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Net provisions for certain team personnel transactions and for league revenue sharing expense (excluding playoffs) and NBA luxury tax were as follows:
Years Ended June 30, | Increase | |||||||||||
2019 | 2018 | |||||||||||
Net provisions for certain team personnel transactions | $ | 53,134 | $ | 27,514 | $ | 25,620 | ||||||
Net provisions for league revenue sharing expense (excluding playoffs) and NBA luxury tax | 56,183 | 55,450 | 733 | |||||||||
Team personnel transactions for the year ended June 30, 2019 reflect provisions, net of recoveries recorded in the current year associated with prior year team personnel provisions, recorded for (i) waivers/contract terminations of $46,950, (ii) player trades of $5,642, and (iii) season-ending player injuries of $542. Team personnel transactions for the year ended June 30, 2018 reflect provisions recorded for (i) waivers/contract terminations of $21,559, (ii) season-ending player injuries of $4,273, which is net of insurance recoveries of $468 and (iii) player trades of $1,682.
The increase in net provisions for league revenue sharing expense (excluding playoffs) and NBA luxury tax reflects higher provisions for league revenue sharing expense of $1,647, partially offset by higher estimated NBA luxury tax credit of $914. Higher league revenue sharing expense primarily reflected higher estimated NHL and NBA revenue sharing expense for the 2018-19 season, partially offset by higher estimated net player escrow recoveries and, to a lesser extent, net adjustments to prior seasons’ revenue sharing expense. The actual amounts for the 2018-19 season may vary significantly from the recorded provisions based on actual operating results for each league and all teams within each league for the season and other factors. The Knicks were not a luxury tax payer for the 2018-19 and 2017-18 seasons and, therefore, received equal share of the portion of luxury tax receipts that were distributed to non-tax paying teams.
The increase in event-related expenses associated with other live sporting events was due to higher per event expenses, slightly offset by fewer events during the current year as compared to the prior year.
The increase in other team operating expenses was primarily due to an increase in league assessments and other net increases, partially offset by lower player insurance costs and lower day-of-event costs, primarily driven by the Liberty playing fewer games at The Garden during the current year as compared to the prior year. During the current year, the majority of the Liberty’s home games were played at the Westchester County Center, located in White Plains, NY. Additionally, the Liberty was sold in January 2019.
The decrease in team personnel compensation was primarily due to roster changes at the Company’s sports teams.
Selling, general and administrative expenses
Selling, general and administrative expenses for the year ended June 30, 2019 increased $11,409, or 6%, to $196,548 as compared to the prior year primarily due to higher employee compensation and related benefits and an increase in marketing costs.
Operating income
Operating income for the year ended June 30, 2019 decreased $6,580, or 5%, to $122,521 as compared to the prior year primarily due to higher direct operating expenses, and to a lesser extent, an increase in selling, general and administrative expenses, partially offset by an increase in revenues, as discussed above.
Adjusted operating income
Adjusted operating income for the year ended June 30, 2019 decreased $5,408, or 4%, to $146,672, as compared to the prior year. The decrease was lower than the decrease in operating income primarily due to higher share-based compensation expense and, to a lesser extent, an increase in depreciation and amortization.
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Comparison of the Year Ended June 30, 2018 versus the Year Ended June 30, 2017
Factors Affecting Operating Results from Acquisitions
TAO Group’s Operating Results
The Company completed the TAO Group acquisition on January 31, 2017. TAO Group’s financial statements are not available within the time constraints the Company requires to ensure the financial accuracy of the operating results. Therefore, the Company records TAO Group’s operating results in its consolidated statements of operations under the MSG Entertainment segment on a three-month lag basis. As a result, TAO Group’s related operating results for the year ended June 30, 2018 are for the period from March 27, 2017 to April 1, 2018. TAO Group’s related operating results for the year ended June 30, 2017 are for the period from February 1, 2017 to March 26, 2017.
CLG’s Operating Results
The results of operations of the Company and the MSG Sports segment for the year ended June 30, 2018 include CLG’s results of operations from the date of acquisition, which was July 28, 2017. The Company’s results for the year ended June 30, 2017 do not include any of CLG’s operating results.
Obscura’s Operating Results
The results of operations of the Company and the MSG Entertainment segment for the year ended June 30, 2018 include Obscura’s results of operations from the date of acquisition, which was November 20, 2017. The Company’s results for the year ended June 30, 2017 do not include any of Obscura’s operating results.
Consolidated Results of Operations
The table below sets forth, for the periods presented, certain historical financial information.
Years Ended June 30, | Change | ||||||||||||||
2018 | 2017 | Amount | Percentage | ||||||||||||
Revenues | $ | 1,559,095 | $ | 1,318,452 | $ | 240,643 | 18 | % | |||||||
Direct operating expenses | 944,276 | 860,423 | 83,853 | 10 | % | ||||||||||
Selling, general and administrative expenses | 469,276 | 406,951 | 62,325 | 15 | % | ||||||||||
Depreciation and amortization | 122,486 | 107,388 | 15,098 | 14 | % | ||||||||||
Operating income (loss) | 23,057 | (56,310 | ) | 79,367 | NM | ||||||||||
Other income (expense): | |||||||||||||||
Loss in equity method investments | (7,770 | ) | (29,976 | ) | 22,206 | 74 | % | ||||||||
Interest income, net | 6,167 | 7,647 | (1,480 | ) | (19 | )% | |||||||||
Miscellaneous expense, net | (3,878 | ) | (2,554 | ) | (1,324 | ) | (52 | )% | |||||||
Income (loss) from operations before income taxes | 17,576 | (81,193 | ) | 98,769 | NM | ||||||||||
Income tax benefit | 116,872 | 4,404 | 112,468 | NM | |||||||||||
Net income (loss) | 134,448 | (76,789 | ) | 211,237 | NM | ||||||||||
Less: Net loss attributable to redeemable noncontrolling interests | (628 | ) | (4,370 | ) | 3,742 | 86 | % | ||||||||
Less: Net income (loss) attributable to nonredeemable noncontrolling interests | (6,518 | ) | 304 | (6,822 | ) | NM | |||||||||
Net income (loss) attributable to The Madison Square Garden Company’s stockholders | $ | 141,594 | $ | (72,723 | ) | $ | 214,317 | NM | |||||||
NM — Percentage is not meaningful
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The following is a summary of changes in segments’ operating results for the year ended June 30, 2018 as compared to the prior year.
Changes attributable to | Revenues | Direct operating expenses | Selling, general and administrative expenses | Depreciation and amortization | Operating income (loss) | |||||||||||||||
MSG Entertainment segment (a) | $ | 274,258 | $ | 104,911 | $ | 72,449 | $ | 7,176 | $ | 89,722 | ||||||||||
MSG Sports segment (a) | (33,331 | ) | (16,063 | ) | (22,820 | ) | (1,838 | ) | 7,390 | |||||||||||
Corporate and Other | — | 120 | 12,400 | (5,222 | ) | (7,298 | ) | |||||||||||||
Purchase accounting adjustments (b) | — | (4,831 | ) | 223 | 14,982 | (10,374 | ) | |||||||||||||
Inter-segment eliminations | (284 | ) | (284 | ) | 73 | — | (73 | ) | ||||||||||||
$ | 240,643 | $ | 83,853 | $ | 62,325 | $ | 15,098 | $ | 79,367 | |||||||||||
(a) | See “Business Segment Results” for a more detailed discussion of the operating results of our segments. |
(b) | In connection with the purchase price allocation of the TAO Group acquisition on January 31, 2017, the inventory value was increased by $8,705 and was fully expensed to direct operating expenses for the year ended June 30, 2017 as the related inventory was consumed. In addition, the direct operating expenses for the year ended June 30, 2018 principally reflect the amortization of favorable leases in connection with the TAO Group acquisition. |
Selling, general and administrative expenses - Corporate and Other
Selling, general and administrative expenses in Corporate and Other for the year ended June 30, 2018 increased $12,400, or 16%, to $91,840 as compared to prior year. The increase was primarily due to higher employee compensation and related benefits, as well as the inclusion of Obscura’s selling, general and administrative costs not related to its third-party production business. The increase was partially offset by a management fee earned for providing management and strategic services to TAO Group (see “ — Factors Affecting Operating Results from Acquisitions — TAO Group’s Operating Results” for further discussion), which is eliminated in the Company’s consolidated results of operations presented above, as well as certain favorable adjustments related to contingent payments for the Company’s business acquisitions.
Depreciation and amortization
Depreciation and amortization for the year ended June 30, 2018 increased $15,098, or 14%, to $122,486 as compared to the prior year primarily due to purchase accounting adjustments and the inclusion of depreciation and amortization expense related to property and equipment associated with the business acquisitions (see “ — Factors Affecting Operating Results from Acquisitions” for further discussion), partially offset by certain assets being fully depreciated and amortized.
Operating loss - Corporate and Other
Operating loss in Corporate and Other for the year ended June 30, 2018 increased $7,298, or 4%, to $170,316 as compared to the prior year. The increase was primarily due to higher selling, general and administrative expenses as discussed above, partially offset by lower depreciation and amortization as a result of certain assets being fully depreciated and amortized. See Note 19 to the consolidated financial statements included in Item 8 of this Annual Report on Form 10-K for discussion of depreciation and amortization under Corporate and Other.
Loss in equity method investments
Loss in equity method investments for the year ended June 30, 2018 improved $22,206, or 74%, to $7,770 as compared to the prior year. The year-over-year improvement is primarily due to a pre-tax non-cash impairment charge of $20,613 recorded during the prior year to write off the carrying value of the equity method investment in Fuse Media.
Interest income, net
Net interest income for the year ended June 30, 2018 decreased $1,480, or 19%, to $6,167 as compared to the prior year primarily due to interest expense incurred under the 2017 TAO Credit Agreement. See “— Factors Affecting Operating Results from Acquisitions — TAO Group’s Operating Results” for discussion. The decrease was partially offset by higher interest income earned by the Company as a result of higher interest rates and a change in investment mix. In addition, during the year ended June 30, 2018, the Company recognized interest income of $938, which was received in connection with the repayment of a loan receivable from one of the Company’s nonconsolidated affiliates that was on a nonaccrual status.
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Miscellaneous expense, net
Miscellaneous expense, net for the year ended June 30, 2018 principally consist of non-service components of net period pension and postretirement benefit cost in accordance with ASU No. 2017-07. Miscellaneous income in the prior year consists principally of (i) non-service components of net period pension and postretirement benefit cost in accordance with ASU No. 2017-07 and (ii) the recovery of certain claims in connection with a third-party bankruptcy proceeding. See Note 2 to the consolidated financial statements included in Item 8 of this Annual Report on Form 10-K for further discussion of the retrospective adoption of ASU No. 2017-07.
Income taxes
On December 22, 2017, TCJA was enacted, which significantly changed the existing U.S. tax laws, including a reduction in the corporate federal income tax rate from 35% to 21% effective January 1, 2018. During the second quarter of fiscal year 2018, the Company was required to recognize the effect of tax law changes in the period of enactment even though certain key aspects of the new law became effective January 1, 2018. The Company used a blended statutory federal income tax rate of 28% based upon the number of days that it will be taxed at the former rate of 35% and the number of days it will be taxed at the new rate of 21% to calculate its most recent effective tax rate.
Income tax benefit for the year ended June 30, 2018 was $116,872 and income tax benefit for the year ended June 30, 2017 was $4,404.
Income tax benefit for the year ended June 30, 2018 of $116,872 differs from the income tax expense derived from applying the blended statutory federal rate of 28% to pretax income primarily as a result of a deferred income tax benefit of $113,494 related to the revaluation of the Company’s deferred tax assets and liabilities under provisions contained in the new tax legislation, of which (i) $51,015 was due to the reduction of net deferred tax liabilities in connection with the lower federal income tax rate of 21%, and (ii) $62,479 was due to a reduction in the valuation allowance attributable to the new rules, which provide that future federal net operating losses have an unlimited carry-forward period. These rules on future federal net operating losses allow the Company to recognize a portion of its unrecognized deferred tax assets for future deductible items. Other decreases to the statutory rate include $13,211 of income tax benefit related to a decrease in the valuation allowance, which offsets the income tax expense attributable to most of the operating income, and $1,974 of income tax benefit related to the vesting of restricted stock units. These decreases were partially offset by (i) $1,800 of tax expense related to state and local income taxes (net of federal benefit), (ii) $1,998 of tax expense primarily related to non-deductible expenses, (iii) $2,006 of tax expense related to consolidated partnership book income attributable to non-controlling interests, (iv) $846 of tax expense related to a change in state tax rates and (v) $223 of other.
Income tax benefit for the year ended June 30, 2017 of $4,404 differs from the income tax expense derived from applying the statutory federal rate of 35% to pretax income primarily as a result of (i) an increase of $30,697 in recorded federal and state valuation allowances, (ii) tax expense of $3,449 related to non-deductible expenses, (iii) the tax impact of consolidated partnership book income attributable to non-controlling interests of $1,414, (iv) deferred expense of $1,329 based on tax amortization on indefinite-lived intangibles that are not available as a source of taxable income to support the realization of deferred tax assets, and (v) expense of $672 recorded due to a state rate change computed as a result of filed state tax returns. This tax expense is offset by (i) $6,716 of state tax benefit (net of federal effect), (ii) $6,477 of tax benefit related to other comprehensive income gains recorded in continuing operations and (iii) $354 of other.
Adjusted operating income
The following is a reconciliation of operating income (loss) to adjusted operating income:
Years Ended June 30, | Change | ||||||||||||||
2018 | 2017 | Amount | Percentage | ||||||||||||
Operating income (loss) | $ | 23,057 | $ | (56,310 | ) | $ | 79,367 | NM | |||||||
Share-based compensation | 47,563 | 41,129 | |||||||||||||
Depreciation and amortization (a) | 122,486 | 107,388 | |||||||||||||
Other purchase accounting adjustments (b) | 4,858 | 9,466 | |||||||||||||
Adjusted operating income | $ | 197,964 | $ | 101,673 | $ | 96,291 | 95 | % | |||||||
NM — Percentage is not meaningful
(a) | Depreciation and amortization included purchase accounting adjustments of $18,134 and $3,152 for the years ended June 30, 2018 and 2017, respectively. |
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(b) | Other purchase accounting adjustments for the year ended June 30, 2018 primarily included the amortization of favorable leases in connection with the TAO Group acquisition. Other purchase accounting adjustments for the year ended June 30, 2017 primarily included an inventory adjustment of $8,705 that was expensed to direct operating expenses and associated with the TAO Group acquisition on January 31, 2017 as the related inventory was consumed. |
Adjusted operating income for the year ended June 30, 2018 increased $96,291, or 95%, to $197,964 as compared to the prior year. The net increase is attributable to the following:
Increase in adjusted operating income of the MSG Entertainment segment | $ | 95,075 | |
Increase in adjusted operating income of the MSG Sports segment | 6,502 | ||
Increase in adjusted operating loss in Corporate and Other | (5,213 | ) | |
Inter-segment eliminations | (73 | ) | |
$ | 96,291 | ||
Increase in adjusted operating loss in Corporate and Other were primarily due to higher employee compensation and related benefits, excluding share-based compensation expense, and the inclusion of Obscura expenses associated with the Company’s business development initiatives partially offset by a management fee earned for providing management and strategic services to TAO Group (see “ — Factors Affecting Operating Results from Acquisitions — TAO Group’s Operating Results” for further discussion), which is eliminated in the Company’s consolidated results of operations presented above. These increases were offset by certain favorable adjustments related to contingent payments for the Company’s business acquisitions.
Net income (loss) attributable to redeemable and nonredeemable noncontrolling interests
For the year ended June 30, 2018, the Company recorded net loss attributable to redeemable noncontrolling interests of $628 and a net loss attributable to nonredeemable noncontrolling interests of $6,518 as compared to $4,370 of net loss attributable to redeemable noncontrolling interests and $304 of net income attributable to nonredeemable noncontrolling interests for the year ended June 30, 2017. These amounts represent the share of net income (loss) of TAO Group, BCE, and CLG that are not attributable to the Company. In addition, the net income (loss) attributable to redeemable and nonredeemable noncontrolling interests includes a proportional share of expenses related to purchase accounting adjustments. See “— Factors Affecting Operating Results from Acquisitions” for further discussion.
Business Segment Results
MSG Entertainment
The table below sets forth, for the periods presented, certain historical financial information and a reconciliation of operating income (loss) to adjusted operating income for the Company’s MSG Entertainment segment.
Years Ended June 30, | Change | ||||||||||||||
2018 | 2017 | Amount | Percentage | ||||||||||||
Revenues | $ | 780,726 | $ | 506,468 | $ | 274,258 | 54 | % | |||||||
Direct operating expenses | 482,873 | 377,962 | 104,911 | 28 | % | ||||||||||
Selling, general and administrative expenses | 192,001 | 119,552 | 72,449 | 61 | % | ||||||||||
Depreciation and amortization | 18,515 | 11,339 | 7,176 | 63 | % | ||||||||||
Operating income (loss) | $ | 87,337 | $ | (2,385 | ) | $ | 89,722 | NM | |||||||
Reconciliation to adjusted operating income: | |||||||||||||||
Share-based compensation | 12,500 | 14,323 | |||||||||||||
Depreciation and amortization | 18,515 | 11,339 | |||||||||||||
Adjusted operating income | $ | 118,352 | $ | 23,277 | $ | 95,075 | NM | ||||||||
NM — Percentage is not meaningful
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Revenues
Revenues for the year ended June 30, 2018 increased $274,258, or 54%, to $780,726 as compared to the prior year. The net increase is attributable to the following:
Inclusion of revenues associated with entertainment dining and nightlife offerings | $ | 208,629 | |
Increase in event-related revenues at The Garden | 28,390 | ||
Increase in event-related revenues at Radio City Music Hall, excluding the Christmas Spectacular and the New York Spectacular | 14,638 | ||
Increase in event-related revenues at the Forum | 11,395 | ||
Increase in event-related revenues at Hulu Theater at Madison Square Garden | 6,912 | ||
Increase in event-related revenues at The Chicago Theatre | 6,031 | ||
Increase in revenues from the presentation of the Christmas Spectacular | 5,055 | ||
Increase in venue-related sponsorship and signage and suite rental fee revenues | 1,140 | ||
Decrease in revenues from the presentation of the New York Spectacular as a result of no scheduled performances in the current year | (11,483 | ) | |
Decrease in BCE event-related revenues | (2,712 | ) | |
Other net increases, primarily due to the inclusion of revenue associated with the acquisition of Obscura | 6,263 | ||
$ | 274,258 | ||
The inclusion of revenues associated with entertainment dining and nightlife offerings is the result of the acquisition of a 62.5% interest in TAO Group on January 31, 2017, and primarily reflects revenues generated from food and beverage sales. TAO Group’s operating results are recorded in the Company’s consolidated statements of operations on a three-month lag basis. As a result, TAO Group’s related revenues for fiscal year 2018 are for the period from March 27, 2017 to April 1, 2018, as compared to TAO Group’s related revenues for fiscal year 2017, which are for the period from February 1, 2017 to March 26, 2017. See “ — Factors Affecting Operating Results from Acquisitions — TAO Group’s Operating Results” for further discussion.
The increase in event-related revenues at The Garden was due to a change in the mix of events (including the impact of a large-scale event held during the current year) and additional events held at the venue during fiscal year 2018 as compared to the prior year.
The increase in event-related revenues at Radio City Music Hall, excluding the Christmas Spectacular and the New York Spectacular, was primarily due to additional events held at the venue during fiscal year 2018 as compared to the prior year.
The increase in event-related revenues at the Forum was due to a change in the mix of events and an additional event held at the venue during fiscal year 2018 as compared to the prior year.
The increase in event-related revenues at Hulu Theater at Madison Square Garden was primarily due to a change in the mix of events partially offset by fewer events held at the venue during fiscal year 2018 as compared to the prior year.
The increase in event-related revenues at The Chicago Theatre was primarily due to additional events held at the venue during fiscal year 2018 as compared to the prior year.
The increase in revenues from the presentation of the Christmas Spectacular was primarily due to higher ticket-related revenue, mainly as a result of higher average ticket prices and the impact of additional scheduled performances, partially offset by a decrease in average per-show paid attendance in fiscal year 2018 as compared to the prior year. The Company had 200 scheduled performances of the production during the 2018 holiday season as compared to 197 scheduled performances during the 2017 holiday season. For the 2017 holiday season, more than one million tickets were sold, representing a low single digit percentage decrease as compared to the 2016 holiday season.
The increase in venue-related sponsorship and signage and suite rental fee revenues was due to higher suite rental fee revenue mainly driven by contractual rate increases.
The decrease in revenues from the presentation of the New York Spectacular was driven by no scheduled performances in fiscal year 2018 as compared to 56 scheduled performances presented in the prior year. This was a result of the Company’s decision to suspend the planned 2017 presentation announced in February 2017.
The decrease in BCE event-related revenues was primarily due to a decrease in ticket-related revenue.
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Direct operating expenses
Direct operating expenses for the year ended June 30, 2018 increased $104,911, or 28%, to $482,873 as compared to the prior year. The net increase is attributable to the following:
Inclusion of direct operating expenses associated with entertainment dining and nightlife offerings | $ | 112,958 | |
Increase in event-related direct operating expenses at The Garden | 15,273 | ||
Increase in event-related direct operating expenses at the Forum | 7,919 | ||
Increase in event-related direct operating expenses at Radio City Music Hall, excluding the Christmas Spectacular and the New York Spectacular | 4,391 | ||
Increase in BCE event-related direct operating expenses | 3,954 | ||
Increase in event-related direct operating expenses at The Chicago Theatre | 3,842 | ||
Increase in venue operating costs | 3,086 | ||
Increase in event-related direct operating expenses at The Hulu Theater at Madison Square Garden | 2,429 | ||
Increase in direct operating expenses associated with the presentation of the Christmas Spectacular | 1,386 | ||
Decrease in direct operating expenses associated with the presentation of the New York Spectacular as a result of no scheduled performances in the current year | (56,196 | ) | |
Other net increases, principally the inclusion of direct expenses related to Obscura’s third-party production business | 5,869 | ||
$ | 104,911 | ||
The inclusion of direct operating expenses associated with entertainment dining and nightlife offerings is the result of the acquisition of a 62.5% interest in TAO Group on January 31, 2017, and primarily reflects costs associated with food and beverage sales, inclusive of labor costs, as well as venue-related operating expenses. TAO Group’s operating results are recorded in the Company’s consolidated statements of operations on a three-month lag basis. As a result, TAO Group’s related direct operating expenses for fiscal year 2018 are for the period from March 27, 2017 to April 1, 2018, as compared to TAO Group’s related direct operating expenses for fiscal year 2017, which are for the period from February 1, 2017 to March 26, 2017. See “ — Factors Affecting Operating Results from Acquisitions — TAO Group’s Operating Results” for further discussion.
The increase in event-related direct operating expenses at The Garden was due to a change in the mix of events (including the impact of a large-scale event held during the current year) and additional events held at the venue during fiscal year 2018 as compared to the prior year.
The increase in event-related direct operating expenses at the Forum was due to a change in the mix of events as well as one additional event held at the venue during fiscal year 2018 as compared to the prior year.
The increase in event-related direct operating expenses at Radio City Music Hall, excluding the Christmas Spectacular and the New York Spectacular, was due to additional events partially offset by a change in the mix of events held at the venue during fiscal year 2018 as compared to the prior year.
The increase in BCE event-related direct operating expenses was due to higher costs related to the Boston Calling Music Festival in fiscal year 2018.
The increase in event-related direct operating expenses at The Chicago Theatre was primarily due to additional events held at the venue during fiscal year 2018 as compared to the prior year.
The increase in venue operating costs was primarily due to higher labor-related costs at our venues during fiscal year 2018 as compared to the prior year.
The increase in event-related direct operating expenses at Hulu Theater at Madison Square Garden was due to a change in the mix of events partially offset by fewer events held at the venue during fiscal year 2018 as compared to the prior year.
The increase in direct operating expenses associated with the presentation of the Christmas Spectacular was primarily due to higher labor costs and an increase in deferred production cost amortization, partially offset by lower marketing expenses during fiscal year 2018 as compared to the prior year. The Company had 200 scheduled performances of the production during the 2018 holiday season as compared to 197 scheduled performances during the 2017 holiday season.
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The decrease in direct operating expenses associated with the presentation of the New York Spectacular was driven by no scheduled performances in fiscal year 2018 as compared to 56 scheduled performances presented in the prior year. This was a result of the Company’s decision to suspend the planned 2017 presentation announced in February 2017.
Selling, general and administrative expenses
Selling, general and administrative expenses for the year ended June 30, 2018 increased $72,449, or 61%, to $192,001 as compared to the prior year mainly due to (i) inclusion of TAO Group’s selling, general and administrative costs, including a management fee incurred by TAO Group payable to the Company for providing management and strategic services and, to a lesser extent, (ii) higher professional fees and (iii) an increase in corporate general and administrative costs. See “ — Factors Affecting Operating Results from Acquisitions — TAO Group’s Operating Results” for further discussion.
Depreciation and amortization
Depreciation and amortization for the year ended June 30, 2018 increased $7,176, or 63%, to $18,515 as compared to the prior year primarily due to the inclusion of depreciation and amortization expenses for TAO Group’s property and equipment before the purchase accounting adjustments. See “ — Factors Affecting Operating Results from Acquisitions — TAO Group’s Operating Results” for further discussion.
Operating income (loss)
Operating income for the year ended June 30, 2018 improved $89,722 to $87,337 as compared to the prior year due to higher revenues, partially offset by increases in direct operating expenses, selling, general and administrative expenses and depreciation and amortization expenses, as discussed above.
Adjusted operating income
Adjusted operating income for the year ended June 30, 2018 improved by $95,075 to $118,352 as compared to the prior year due to higher revenues, partially offset by increases in direct operating expenses and selling, general and administrative expenses, as discussed above, excluding share-based compensation expense.
MSG Sports
The table below sets forth, for the periods presented, certain historical financial information and a reconciliation of operating income to adjusted operating income for the Company’s MSG Sports segment.
Years Ended June 30, | Change | ||||||||||||||
2018 | 2017 | Amount | Percentage | ||||||||||||
Revenues | $ | 778,653 | $ | 811,984 | $ | (33,331 | ) | (4 | )% | ||||||
Direct operating expenses | 456,932 | 472,995 | (16,063 | ) | (3 | )% | |||||||||
Selling, general and administrative expenses | 185,139 | 207,959 | (22,820 | ) | (11 | )% | |||||||||
Depreciation and amortization | 7,481 | 9,319 | (1,838 | ) | (20 | )% | |||||||||
Operating income | $ | 129,101 | $ | 121,711 | $ | 7,390 | 6 | % | |||||||
Reconciliation to adjusted operating income: | |||||||||||||||
Share-based compensation | 15,498 | 14,548 | |||||||||||||
Depreciation and amortization | 7,481 | 9,319 | |||||||||||||
Adjusted operating income | $ | 152,080 | $ | 145,578 | $ | 6,502 | 4 | % | |||||||
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Revenues
Revenues for the year ended June 30, 2018 decreased $33,331, or 4%, to $778,653 as compared to the prior year. The net decrease is attributable to the following:
Decrease in professional sports teams’ playoff related revenues | $ | (29,333 | ) |
Decrease in revenues from league distributions | (24,820 | ) | |
Decrease in event-related revenues from other live sporting events | (10,817 | ) | |
Increase in professional sports teams’ sponsorship and signage revenues and ad sales commission | 12,454 | ||
Increase in local media rights fees from MSG Networks | 6,528 | ||
Increase in professional sports teams’ pre/regular season ticket-related revenues | 5,640 | ||
Increase in suite rental fee revenues | 4,764 | ||
Other net increases, inclusive of certain revenues from CLG | 2,253 | ||
$ | (33,331 | ) | |
The decrease in professional sports team’s playoff related revenues was primarily due to the Rangers playing six home playoff games as the team advanced to the second round of the playoffs in the prior year versus not qualifying for playoffs in fiscal year 2018.
The decrease in revenues from league distributions primarily reflects an NHL expansion fee of $15,500 and approximately $15,000 of non-recurring distributions from the NHL and NBA, which were both recorded by the Company in fiscal year 2017. These decreases were partially offset by other net increases, inclusive of league distributions related to CLG, which was acquired on July 28, 2017.
The decrease in event-related revenues from other live sporting events was due to a change in the mix of events held during the fiscal year 2018 as compared to the prior year and one event that generated lower revenue during fiscal year 2018 as compared to the prior year.
The increase in professional sports teams’ sponsorship and signage revenues and ad sales commissions was primarily due to sales of new sponsorship and signage inventory, increased sales of existing sponsorship and signage inventory and the impact of a marketing partner, upon renewal of its agreement, shifting its marketing partnership spend from a combination of entertainment and sports entirely to sports.
The increase in local media rights fees from MSG Networks was primarily due to contractual rate increases.
The increase in professional sports teams’ pre/regular season ticket-related revenues was primarily due to higher average Rangers per-game revenue, partially offset by lower average Liberty and Knicks per-game revenue.
The increase in suite rental fee revenue was primarily due to contractual rate increases.
Direct operating expenses
Direct operating expenses for the year ended June 30, 2018 decreased $16,063, or 3%, to $456,932 as compared to the prior year. The net decrease is attributable to the following:
Decrease in professional sports teams’ playoff related expenses | $ | (14,290 | ) |
Decrease in event-related expenses associated with other live sporting events | (5,612 | ) | |
Decrease in team personnel compensation | (3,726 | ) | |
Decrease in net provisions for NBA and NHL revenue sharing expense (excluding playoffs) and NBA luxury tax | (3,590 | ) | |
Increase in net provisions for certain team personnel transactions | 5,535 | ||
Increase in other team operating expenses | 4,209 | ||
Other net increases | 1,411 | ||
$ | (16,063 | ) | |
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The decrease in professional sports teams’ playoff related expenses was primarily due to the Rangers playing six home playoff games as the team advanced to the second round of the playoffs in the prior year versus not qualifying for playoffs in fiscal year 2018.
The decrease in event-related expenses associated with other live sporting events was primarily due to a change in the mix of events during fiscal year 2018 as compared to the prior year, and to a lesser extent, one event that generated lower expense during the fiscal year 2018 as compared to the prior year.
The decrease in team personnel compensation was primarily due to lower overall player salaries during fiscal year 2018 as a result of roster changes, partially offset by higher other team personnel compensation and the inclusion of team personnel compensation for CLG, which was acquired on July 28, 2017.
Net provisions for NBA and NHL revenue sharing expense (excluding playoffs) and NBA luxury tax and for certain team personnel transactions were as follows:
Years Ended June 30, | Increase (Decrease) | |||||||||||
2018 | 2017 | |||||||||||
Net provisions for NBA and NHL revenue sharing expense (excluding playoffs) and NBA luxury tax | $ | 55,450 | $ | 59,040 | $ | (3,590 | ) | |||||
Net provisions for certain team personnel transactions | 27,514 | 21,979 | 5,535 | |||||||||
The decrease in net provisions for NBA and NHL revenue sharing expense (excluding playoffs) and NBA luxury tax reflects a lower provision for NBA and NHL revenue sharing expense of $1,878 and a higher estimated NBA luxury tax receipt of $1,712. Lower NBA and NHL revenue sharing expense primarily reflects an increase in estimated net player escrow recoveries, partially offset by higher estimated NBA and NHL revenue sharing expense for the 2017-18 season and, to a lesser extent, net adjustments to prior season’s revenue sharing expense. The increase in estimated NBA luxury tax receipt is based on the Knicks’ roster, which as of June 30, 2018 did not result in luxury tax for the 2017-18 season. The Knicks were not a luxury tax payer for the 2016-17 season and, therefore, received an equal share of the portion of luxury tax receipts that were distributed to non-tax paying teams. The actual amounts for the 2017-18 season may vary significantly from the recorded provisions based on actual operating results for each league and all teams within each league for the season and other factors.
Team personnel transactions for the year ended June 30, 2018 reflect provisions recorded for (i) waivers/contract terminations of $21,559, (ii) season-ending player injuries of $4,273, which is net of insurance recoveries of $468 and (iii) player trades of $1,682. Team personnel transactions for the year ended June 30, 2017 reflect provisions recorded for waivers/contract terminations and player trades of $13,979 and $8,000, respectively.
The increase in other team operating expenses was primarily due to higher day-of-event costs and league expenses.
Selling, general and administrative expenses
Selling, general and administrative expenses for the year ended June 30, 2018 decreased $22,820, or 11%, to $185,139 as compared to the prior year, primarily due to lower employee compensation and related benefits, and to a lesser extent, lower marketing costs, partially offset by an increase in corporate general and administrative costs. The reduction in employee compensation and related benefits as compared to the prior year is primarily driven by severance-related costs in the prior year, which were attributable to a separation agreement with a team executive.
Depreciation and amortization
Depreciation and amortization for the year ended June 30, 2018 decreased $1,838, or 20%, to $7,481 as compared to the prior year primarily as a result of an intangible asset becoming fully amortized.
Operating income
Operating income for the year ended June 30, 2018 increased $7,390, or 6%, to $129,101 as compared to the prior year primarily due to lower selling, general and administrative expenses and direct operating expenses, partially offset by a decrease in revenues, as discussed above.
Adjusted operating income
Adjusted operating income for the year ended June 30, 2018 increased $6,502, or 4%, to $152,080, as compared to the prior year primarily due to lower selling, general and administrative expenses, excluding share-based compensation expense, and direct operating expenses, partially offset by a decrease in revenues.
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Liquidity and Capital Resources
Overview
Our primary sources of liquidity are cash and cash equivalents, cash flows from the operations of our businesses and maximum borrowing capacity under our $390,000 revolving credit facilities. Our principal uses of cash include working capital-related items, capital spending (including our planned construction of large-scale venues in Las Vegas and London), investments and related loans that we may fund from time to time, repurchases of shares of the Company’s Class A Common Stock, repayment of debt, and the payment of earn-out obligations and mandatory purchases from prior acquisitions. The decisions of the Company as to the use of its available liquidity will be based upon the ongoing review of the funding needs of the business, the optimal allocation of cash resources, and the timing of cash flow generation. To the extent the Company desires to access alternative sources of funding through the capital and credit markets, challenging U.S. and global economic conditions could adversely impact its ability to do so at that time.
We regularly monitor and assess our ability to meet our net funding and investing requirements. Without regard to the impact of the potential Sports Distribution, which would have a positive impact on the Company’s liquidity, if and when it is completed, we believe we have sufficient liquidity, including approximately $1,086,000 in unrestricted cash and cash equivalents and $108,000 of short-term investments as of June 30, 2019, along with available borrowing capacity under our revolving credit facilities combined with operating cash flows, over the next 12 months, to fund our operations, to pursue the development of the new venues discussed below and other new business opportunities and to repurchase shares of the Company’s Class A Common Stock (see Note 2 and Note 11 to the consolidated financial statements included in Item 8 of this Annual Report on Form 10-K for a discussion of the Company’s short-term investments).
TAO Group’s principal uses of cash include working capital related-items, investments in new venues, tax-related cash distributions, interest expense payments and repayment of debt. TAO Group plans to continue to grow its business through the opening of new venues. TAO Group regularly monitors and assesses its ability to meet its funding and investment requirements. Over the next 12 months, the Company believes that TAO Group has sufficient liquidity from cash on hand, cash generated from operations and its revolving credit facility to fund its operations, service debt obligations and pursue new business opportunities.
MSG Spheres
The Company has made significant progress on MSG Sphere at The Venetian, its state-of-the-art entertainment venue currently under construction in Las Vegas.
We view both innovative design and cost management as key imperatives to the construction process. While it is always difficult to provide a definitive construction cost estimate for large-scale construction projects, it is particularly challenging for one as unique as MSG Sphere. In May, our Board of Directors approved a preliminary cost estimate of $1,200,000 based upon schematic designs for purposes of developing the Company’s budget and financial projections. We expect the estimation process for MSG Sphere construction costs will be dynamic as the project moves forward. The actual construction costs for MSG Sphere in Las Vegas incurred through June 30, 2019 were approximately $109,000.
In June, the Company announced that it engaged AECOM — a leading builder known for creating bold, innovative projects — as its general contractor for the Las Vegas project. We made the strategic decision to enter into a “cost plus” construction contract with AECOM. While this type of contract adds to the complexity of the cost estimation process, we believe our “cost plus” construction contract with AECOM will help our efforts to maximize the quality of the work, while permitting us to play a more vigilant role in managing the project’s costs, including full transparency into the selection of, negotiations with, and labor and materials utilized by subcontractors.
In order to further drive cost control, under the terms of the construction contract, AECOM will receive lower fees if the “hard” construction costs come in greater than an “incentive benchmark” agreed upon by the Company and AECOM. The process of setting the incentive benchmark began in July when AECOM provided the Company with its proposal, representing its estimate of the hard construction costs of the project. AECOM’s initial benchmark proposal, together with the costs of additional core technology and estimated soft costs, results in a project cost estimate that is approximately $1,700,000. We believe this cost estimate is too high and are now in the contractual process of reviewing, testing and challenging the elements of AECOM’s estimates and assumptions. We are also value engineering aspects of the project to further reduce costs. We intend to do this in a granular fashion using, among other resources, our outside project manager. We believe we will be successful in achieving significant cost reductions through this process, while noting that there are no assurances that we will reach an agreement on the incentive benchmark.
The above cost estimates for the MSG Sphere in Las Vegas have been reduced to reflect the $75,000 that the Las Vegas Sands Corp. has agreed to pay the Company to defray the construction costs of a pedestrian bridge that will link the venue to the Sands Expo Convention Center. The estimates and costs also do not contain significant capitalized and non-capitalized costs for items
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such as content creation, internal labor costs, and furniture and equipment. As with any major construction project, the construction of MSG Spheres is subject to potential unexpected delays, costs or other complications. Our goal is to open MSG Sphere in Las Vegas in calendar year 2021.
See Exhibit 10.65 to this Form 10-K for a copy of the Construction Agreement, dated May 13, 2019, by and between MSG Las Vegas, LLC and Hunt Construction Group Inc. (AECOM).
In February 2018, we announced the purchase of land in Stratford, London, which we expect will become home to the Company’s second MSG Sphere and first large-scale international venue. Cost estimates for MSG Sphere in London are still in development as the Company continues to refine its design, which it currently expects will be substantially similar to MSG Sphere in Las Vegas, including having approximately the same seating capacity. The Company submitted a planning application to the local planning authority in March 2019 and expects a planning determination by the end of calendar year 2019 (which may become the subject of further discussions with the planning authority). Our plan is to begin construction on the MSG Sphere venue in London only once we have received all necessary approvals and have further advanced our design for the venue.
We anticipate that MSG Sphere in Las Vegas will generate substantial incremental revenue and adjusted operating income on an annual basis. For additional information regarding the Company’s capital expenditures related to the MSG Spheres, see Note 19 to the consolidated financial statements included in Item 8 of this Annual Report on Form 10-K.
In connection with these efforts, the Company will need to pursue additional capital beyond that which is available from cash on hand, cash flows from operations and borrowings under our revolving credit facilities. There is no assurance that the Company will be able to obtain such capital.
The potential Sports Distribution, if consummated, will provide the Company with additional liquidity, some or all of which could be used to finance part of the cost of constructing the MSG Spheres. The current plan for the Sports Distribution contemplates that the Company would retain up to about one-third of the common stock of Sports Spinco. Some or all of that interest could be sold for cash by the Company.
We will continue to explore additional domestic and international markets where we believe next-generation venues such as the MSG Sphere can be successful.
Financing Agreements, Revolving Credit Facilities Provided to Nonconsolidated Affiliates and Stock Repurchases
Financing Agreements
On September 30, 2016, New York Knicks, LLC (“Knicks LLC”), a wholly owned subsidiary of the Company, entered into a credit agreement with a syndicate of lenders providing for a senior secured revolving credit facility of up to $200,000 with a term of five years (the “Knicks Revolving Credit Facility”) to fund working capital needs and for general corporate purposes. Amounts borrowed may be distributed to the Company except during an event of default. There was no borrowing under the Knicks Revolving Credit Facility as of June 30, 2019. As of June 30, 2019, Knicks LLC was in compliance with the required financial covenant.
On September 30, 2016, Knicks LLC entered into an unsecured revolving credit facility with a lender for an initial maximum credit amount of $15,000 and a 364-day term (the “Knicks Unsecured Credit Facility”). Knicks LLC renewed this facility with the lender on the same terms in successive years and the facility has been renewed for a new term effective as of September 27, 2019. There was no borrowing under the Knicks Unsecured Credit Facility as of June 30, 2019. This facility does not have financial covenants.
On January 25, 2017, New York Rangers, LLC (“Rangers LLC”), a wholly owned subsidiary of the Company, entered into a credit agreement with a syndicate of lenders providing for a senior secured revolving credit facility of up to $150,000 with a term of five years (the “Rangers Revolving Credit Facility”) to fund working capital needs and for general corporate purposes. Amounts borrowed may be distributed to the Company except during an event of default. There was no borrowing under the Rangers Revolving Credit Facility as of June 30, 2019. As of June 30, 2019, Rangers LLC was in compliance with the required financial covenant.
On May 23, 2019, TAO Group Intermediate Holdings LLC (“TAOIH”) and TAO Group Operating LLC (“TAOG”), entered into a credit agreement (the “TAO Senior Credit Agreement”) with JPMorgan Chase Bank, N.A., and the lenders party thereto. The TAO Senior Credit Agreement provides TAOG with senior secured credit facilities (the “TAO Senior Secured Credit Facilities”) consisting of: (i) an initial $40,000 term loan facility with a term of five years and (ii) a $25,000 revolving credit facility with a term of five years (the “TAO Revolving Credit Facility”). The TAO Senior Secured Credit Facilities were obtained without recourse to the Company or any of its affiliates (other than TAOG, TAOIH and its subsidiaries). The outstanding amount drawn
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on the TAO Revolving Credit Facility was $15,000 as of June 30, 2019. As of June 30, 2019, TAOIH was in compliance with the required financial covenants.
On May 23, 2019, a subsidiary of the Company and a subsidiary of TAO Group Holdings LLC entered into an intercompany subordinated term loan credit agreement providing for a credit facility of $49,000 that matures in August 2024 (the “TAO Subordinated Credit Facility”). The balances and interest-related activities pertaining to the TAO Subordinated Credit Agreement have been eliminated in the consolidated financial statements in accordance with ASC Topic 810, Consolidation. As of June 30, 2019, TAO Group Holdings LLC was in compliance with the required financial covenants.
See Note 12 to the consolidated financial statements included in Item 8 of this Annual Report on Form 10-K for additional information on the Knicks Revolving Credit Facility, Knicks Unsecured Credit Facility, Rangers Revolving Credit Facility and the TAO Senior Secured Credit Facility.
Revolving Credit Facilities Provided to Nonconsolidated Affiliates, Financing Agreements and Stock Repurchases
See Note 7 and Note 15 to the consolidated financial statements included in Item 8 of this Annual Report on Form 10-K for discussions of the Company’s revolving credit facility extended to a nonconsolidated affiliate and the Company’s stock repurchases, respectively.
Bilateral Letters of Credit Lines
The Company has established bilateral credit lines with a bank to issue letters of credit in support of the Company’s business operations. The Company pays fees for the letters of credit that are credited against interest income the Company receives in return from its investments in notes receivable with the same bank. As of June 30, 2019, the Company had $12,512 of letters of credit outstanding pursuant to which fees were credited against note investments. Of which, TAO Group had two letters of credit outstanding for $750 as of March 31, 2019.
Cash Flow Discussion
As of June 30, 2019, cash, cash equivalents and restricted cash totaled $1,117,901, as compared to $1,256,620 as of June 30, 2018. The following table summarizes the Company’s cash flow activities for the years ended June 30, 2019, 2018 and 2017:
Years Ended June 30, | ||||||||||||
2019 | 2018 | 2017 | ||||||||||
Net cash provided by operating activities | $ | 161,253 | $ | 217,629 | $ | 223,532 | ||||||
Net cash used in investing activities | (232,895 | ) | (182,357 | ) | (264,301 | ) | ||||||
Net cash used in financing activities | (71,746 | ) | (51,097 | ) | (158,525 | ) | ||||||
Effect of exchange rates on cash, cash equivalents and restricted cash | 4,669 | 331 | — | |||||||||
Net decrease in cash, cash equivalents and restricted cash | $ | (138,719 | ) | $ | (15,494 | ) | $ | (199,294 | ) | |||
Operating Activities
Net cash provided by operating activities for the year ended June 30, 2019 decreased by $56,376 to $161,253 as compared to the prior year primarily due to changes in certain assets and liabilities, as well as a decrease in net income to a net loss in the current year adjusted for non-cash items. The changes in certain assets and liabilities are driven by decreases in collections due to promoters and prepaid expenses and other assets, partially offset by higher accrued and other liabilities, all due to timing. The decrease in net income adjusted for non-cash items was impacted by earnings in equity method investments in the current year as compared to a loss in the prior year and lower depreciation and amortization in the current year.
Net cash provided by operating activities for the year ended June 30, 2018 decreased by $5,903 to $217,629 as compared to the prior year primarily due to higher net income adjusted for non-cash items including (i) a reduction in net deferred tax liabilities as a result of the recently enacted Tax Cuts and Jobs Act effective January 1, 2018, (ii) a write-off of deferred production costs associated with the New York Spectacular in the prior year, and (iii) an impairment charge to write off the carrying value of the Company’s equity investment in Fuse Media in the prior year, partially offset by increases in depreciation and amortization and share-based compensation expense in fiscal year 2018 as compared to the prior year. This increase was offset by a severance-related payment in fiscal year 2018 attributable to a separation agreement with a team executive which was accrued for as of June 30, 2017 and a decrease in cash received related to deferred revenue primarily due to timing.
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Investing Activities
Net cash used in investing activities for the year ended June 30, 2019 increased by $50,538 to $232,895 as compared to the prior year primarily due to the Company’s investment in a British pound-denominated time deposit and an investment in SACO, partially offset by proceeds received from the sale of the Company’s 50% interest in AMSGE.
Net cash used in investing activities for the year ended June 30, 2018 decreased by $81,944 to $182,357 as compared to the prior year primarily due to (i) a net decrease in business acquisitions, (ii) repayments received from loans to nonconsolidated affiliates, and (iii) the acquisition of available-for-sale securities in the prior year. These decreases were partially offset by (i) higher capital expenditures in fiscal year 2018, primarily associated with the purchase of land in London and costs incurred in developing the Company’s new venues in Las Vegas and London, (ii) new investments made in nonconsolidated affiliates, and (iii) a franchise fee payment made in fiscal year 2018 associated with CLG’s membership in the “League of Legends” North American League Championship Series.
Financing Activities
Net cash used in financing activities for the year ended June 30, 2019 increased by $20,649 to $71,746 as compared to the prior year due to the repayment of all obligations under the 2017 TAO Credit Agreement partially offset by (i) proceeds received from borrowings under the TAO Senior Credit Agreement, (ii) lower taxes paid in lieu of shares issued for equity-based compensation in the current year as compared to the prior year, (iii repurchases of shares of the Company’s Class A Common Stock in the prior year as compared to no repurchases in the current year, and other financing activities.
Net cash used in investing activities for the year ended June 30, 2018 decreased by $107,428 to $51,097 as compared to the prior year largely due to lower repurchases of shares of the Company’s Class A Common Stock in the current year as compared to the prior year. This decrease was partially offset by (i) higher taxes paid in lieu of shares issued for equity-based compensation in fiscal year 2018 as compared to the prior year, (ii) distributions to noncontrolling interest holders related to the acquisition of TAO Group in fiscal year 2018 and (iii) a contingent consideration payment related to the acquisition of CLG in fiscal year 2018.
Contractual Obligations and Off Balance Sheet Arrangements
Future cash payments required under contracts entered into by the Company in the normal course of business and outstanding letters of credit as of June 30, 2019 are summarized in the following table:
_________________
Payments Due by Period | |||||||||||||||||||
Total | Year 1 | Years 2-3 | Years 4-5 | More Than 5 Years | |||||||||||||||
Off balance sheet arrangements: (a) | |||||||||||||||||||
Contractual obligations (b) | $ | 256,913 | $ | 115,483 | $ | 110,976 | $ | 24,294 | $ | 6,160 | |||||||||
Operating lease obligations (c) | 377,148 | 55,078 | 109,065 | 89,647 | 123,358 | ||||||||||||||
Letters of credit (d) | 12,512 | 12,512 | — | — | — | ||||||||||||||
646,573 | 183,073 | 220,041 | 113,941 | 129,518 | |||||||||||||||
Contractual obligations reflected on the balance sheet (e) | 117,160 | 79,064 | 18,179 | 8,042 | 11,875 | ||||||||||||||
Total (f) | $ | 763,733 | $ | 262,137 | $ | 238,220 | $ | 121,983 | $ | 141,393 | |||||||||
(a) | Off balance sheet arrangements disclosed in the table above do not include MSG Sphere related commitments that are not reflected on the balance sheet of $1,049,781. Such arrangements are associated with the development and construction of MSG Sphere in Las Vegas. The timing of the future cash payments disclosed is uncertain and may change as the development and construction of MSG Sphere in Las Vegas progresses. |
(b) | Contractual obligations not reflected on the balance sheet consist principally of the MSG Sports segment’s obligations under employment agreements that the Company has with its professional sports teams’ personnel that are generally guaranteed regardless of employee injury or termination. |
(c) | Operating lease obligations primarily represent future minimum rental payments on various long-term, noncancelable leases for the Company’s venues, including the TAO Group venues, CLG facility, and various corporate offices. |
(d) | Consist of letters of credit obtained by the Company as collateral for development of MSG Sphere in Las Vegas and lease agreements. |
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(e) | Consist primarily of amounts earned under employment agreements that the Company has with certain of its professional sports teams’ personnel in the MSG Sports segment. In addition, the amount includes MSG Sphere related commitments of approximately $19,700, all due within fiscal year 2020. |
(f) | Pension obligations have been excluded from the table above as the timing of the future cash payments is uncertain. See Note 13 to the consolidated financial statements included in Item 8 of this Annual Report on Form 10-K for more information on the future funding requirements under our pension obligations. |
See Note 7 to the consolidated financial statements included in Item 8 of this Annual Report on Form 10-K for discussion of the revolving credit facilities provided by the Company to Tribeca Enterprises.
In connection with the TAO Group and CLG acquisitions, the Company has accrued contingent consideration liabilities as part of the purchase price. See Note 11 to the consolidated financial statements included in Item 8 of this Annual Report on Form 10-K for further details of the amount reflected on the balance sheet as of June 30, 2019. In addition, see Note 12 to the consolidated financial statements included in Item 8 of this Annual Report on Form 10-K for further details of the principal repayments required under the TAO Senior Secured Credit Facilities and the TAO Revolving Credit Facility.
MSG and a subsidiary of the Las Vegas Sands Corp. entered into a 50-year ground lease in Las Vegas pursuant to which MSG has agreed to construct a large-scale venue. MSG has announced plans to construct an MSG Sphere on that site. See “Item 1. Business — Our Business — Our Performance Venues — MSG Sphere.”
MSG has the right to increase its equity interest in TAO Group through a call right on the equity of the other TAO Group equityholders after the fifth anniversary of the closing date (January 31, 2022) and prior to such date in certain events. The other TAO Group equityholders have the right to put to TAO Group their equity interests in TAO Group after the fifth anniversary of the closing and, in certain circumstances to put to MSG prior to the fifth anniversary. The put and call prices are at fair market value (or in certain circumstances, subject to a discount). Consideration paid upon the exercise of any such put or call right shall be, at MSG’s option, in cash, debt, or MSG Class A Common Stock, subject to certain limitations.
Seasonality of Our Business
The dependence of the MSG Sports segment on revenues from its NBA and NHL sports teams generally means it earns a disproportionate share of its revenues in the second and third quarters of the Company’s fiscal year. The dependence of the MSG Entertainment segment on revenues from the Christmas Spectacular generally means it earns a disproportionate share of its revenues and operating income in the second quarter of the Company’s fiscal year. In addition, while it does not have a material impact on seasonality of our business, the first and third calendar quarters are seasonally lighter quarters for TAO Group as compared to its second and fourth calendar quarters. As the Company consolidates TAO Group results of operations on a three-month lag basis, the seasonally lighter quarters for TAO will be reflected in the second and fourth quarters of the Company’s fiscal year.
Recently Issued Accounting Pronouncements and Critical Accounting Policies
Recently Issued Accounting Pronouncements
See Note 2 to the consolidated financial statements included in Item 8 of this Annual Report on Form 10-K for discussion of recently issued accounting pronouncements.
Critical Accounting Policies
The preparation of the Company’s consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions about future events. These estimates and the underlying assumptions affect the amounts of assets and liabilities reported, disclosures about contingent assets and liabilities, and reported amounts of revenues and expenses. Management believes its use of estimates in the consolidated financial statements to be reasonable. The significant accounting policies which we believe are the most critical to aid in fully understanding and evaluating our reported financial results include the following:
Arrangements with Multiple Performance Obligations
See Note 3 to the consolidated financial statements included in Item 8 of this Annual Report on Form 10-K for discussion of the Company’s arrangements with multiple performance obligations, primarily multi-year sponsorship agreements.
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Impairment of Long-Lived and Indefinite-Lived Assets
The Company’s long-lived and indefinite-lived assets accounted for approximately 58% of the Company’s consolidated total assets as of June 30, 2019 and consisted of the following:
Goodwill | $ | 392,513 | |
Indefinite-lived intangible assets | 176,485 | ||
Amortizable intangible assets, net of accumulated amortization | 220,706 | ||
Property and equipment, net | 1,380,392 | ||
$ | 2,170,096 | ||
In assessing the recoverability of the Company’s long-lived and indefinite-lived assets, the Company must make estimates and assumptions regarding future cash flows and other factors to determine the fair value of the respective assets. These estimates and assumptions could have a significant impact on whether an impairment charge is recognized and also the magnitude of any such charge. Fair value estimates are made at a specific point in time, based on relevant information. These estimates are subjective in nature and involve significant uncertainties and judgments and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates. If these estimates or material related assumptions change in the future, the Company may be required to record impairment charges related to its long-lived and/or indefinite-lived assets.
Goodwill
Goodwill is tested annually for impairment as of August 31st and at any time upon the occurrence of certain events or changes in circumstances. The Company performs its goodwill impairment test at the reporting unit level, which is one level below the operating segment level. The Company has two operating and reportable segments, MSG Entertainment and MSG Sports, consistent with the way management makes decisions and allocates resources to the business.
For purposes of evaluating goodwill for impairment, the Company has three reporting units across its two operating segments, which are MSG Sports, MSG Entertainment and TAO Group. TAO Group was acquired after the annual goodwill impairment test for fiscal year 2017 and represents a separate reporting unit within the MSG Entertainment segment for goodwill impairment testing.
The goodwill balance reported on the Company’s consolidated balance sheet as of June 30, 2019 by reporting unit was as follows:
MSG Sports | $ | 226,955 | |
MSG Entertainment | 76,975 | ||
TAO Group | 88,583 | ||
$ | 392,513 | ||
The Company has the option to perform a qualitative assessment to determine if an impairment is more likely than not to have occurred. If the Company can support the conclusion that it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, the Company would not need to perform the two-step impairment test for that reporting unit. If the Company cannot support such a conclusion or the Company does not elect to perform the qualitative assessment, the first step of the goodwill impairment test is used to identify potential impairment by comparing the fair value of a reporting unit with its carrying amount, including goodwill. The estimates of the fair value of the Company’s reporting units are primarily determined using discounted cash flows and comparable market transactions. These valuations are based on estimates and assumptions including projected future cash flows, discount rates, determination of appropriate market comparables and the determination of whether a premium or discount should be applied to comparables. Significant judgments inherent in a discounted cash flow analysis include the selection of the appropriate discount rate, the estimate of the amount and timing of projected future cash flows and identification of appropriate continuing growth rate assumptions. The discount rates used in the analysis are intended to reflect the risk inherent in the projected future cash flows. If the carrying amount of a reporting unit exceeds its fair value, the second step of the goodwill impairment test is performed to measure the amount of impairment loss, if any. The second step of the goodwill impairment test compares the implied fair value of the reporting unit’s goodwill with the carrying amount of that goodwill. If the carrying amount of the reporting unit’s goodwill exceeds the implied fair value of that goodwill, an impairment loss is recognized in an amount equal to that excess. The implied fair value of goodwill is determined in the same manner as the amount of goodwill that would be recognized in a business combination.
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The Company elected to perform the qualitative assessment of impairment for all of the Company’s reporting units for the fiscal year 2019 impairment test. These assessments considered factors such as:
• | macroeconomic conditions; |
• | industry and market considerations; |
• | cost factors; |
• | overall financial performance of the reporting unit; |
• | other relevant company-specific factors such as changes in management, strategy or customers; and |
• | relevant reporting unit specific events such as changes in the carrying amount of net assets. |
The Company performed its most recent annual impairment test of goodwill during the first quarter of fiscal year 2019, and there was no impairment of goodwill identified for any of its reporting units. Based on these impairment tests, the Company’s MSG Sports, MSG Entertainment and TAO Group reporting units had sufficient safety margins, defined as the excess of the amount by which the estimated fair value of each reporting unit exceeded the respective carrying value of each reporting unit (including goodwill allocated to each respective reporting unit). For MSG Sports and MSG Entertainment the most recent quantitative assessments were used in making this determination and due to the proximity of the acquisition date for TAO Group to the goodwill impairment test date, the initial purchase price was assumed to be the fair value of the TAO Group reporting unit for purposes of the goodwill impairment test. The Company believes that if the fair value of a reporting unit exceeds its carrying value by greater than 10%, a sufficient safety margin has been realized.
Identifiable Indefinite-Lived Intangible Assets
Identifiable indefinite-lived intangible assets are tested annually for impairment as of August 31st and at any time upon the occurrence of certain events or substantive changes in circumstances. The following table sets forth the amount of identifiable indefinite-lived intangible assets reported in the Company’s consolidated balance sheet as of June 30, 2019 by reportable segment:
Sports franchises (MSG Sports segment) | $ | 111,064 | |
Trademarks (MSG Entertainment segment) | 62,421 | ||
Photographic related rights (MSG Sports segment) | 3,000 | ||
$ | 176,485 | ||
The Company has the option to perform a qualitative assessment to determine if an impairment is more likely than not to have occurred. In the qualitative assessment, the Company must evaluate the totality of qualitative factors, including any recent fair value measurements, that impact whether an indefinite-lived intangible asset other than goodwill has a carrying amount that more likely than not exceeds its fair value. The Company must proceed to conducting a quantitative analysis, if the Company (i) determines that such an impairment is more likely than not to exist, or (ii) forgoes the qualitative assessment entirely. Under the quantitative assessment, the impairment test for identifiable indefinite-lived intangible assets consists of a comparison of the estimated fair value of the intangible asset with its carrying value. If the carrying value of the intangible asset exceeds its fair value, an impairment loss is recognized in an amount equal to that excess. For all periods presented, the Company elected to perform a qualitative assessment of impairment for the indefinite-lived intangible assets in the MSG Sports segment and the majority of the trademarks in the MSG Entertainment segment. These assessments considered the events and circumstances that could affect the significant inputs used to determine the fair value of the intangible asset. Examples of such events and circumstances include:
• | cost factors; |
• | financial performance; |
• | legal, regulatory, contractual, business or other factors; |
• | other relevant company-specific factors such as changes in management, strategy or customers; |
• | industry and market considerations; and |
• | macroeconomic conditions. |
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The Company performed its most recent annual impairment test of identifiable indefinite-lived intangible assets during the first quarter of fiscal year 2019, and there were no impairments identified. Based on these impairment tests, the Company’s indefinite-lived intangible assets had sufficient safety margins, representing the excess of each identifiable indefinite-lived intangible asset’s estimated fair value over its respective carrying value. The Company believes that if the fair value of an indefinite-lived intangible asset exceeds its carrying value by greater than 10%, a sufficient safety margin has been realized.
Other Long-Lived Assets
For other long-lived assets, including intangible assets that are amortized, the Company evaluates assets for recoverability when there is an indication of potential impairment. If the undiscounted cash flows from a group of assets being evaluated is less than the carrying value of that group of assets, the fair value of the asset group is determined and the carrying value of the asset group is written down to fair value.
The estimated useful lives and net carrying values of the Company’s intangible assets subject to amortization as of June 30, 2019 are as follows:
Estimated Useful Lives | Net Carrying Value | ||||||
Trade names | 5 | to | 25 years | $ | 88,602 | ||
Venue management contracts | 12 | to | 25 years | 69,113 | |||
Favorable lease assets | 1.5 | to | 16 years | 43,871 | |||
Season ticket holder relationships | 15 years | 2,491 | |||||
Non-compete agreements | 5 | to | 5.75 years | 7,089 | |||
Festival rights | 15 years | 6,463 | |||||
Other intangibles | 3 months | to | 15 years | 3,077 | |||
$ | 220,706 | ||||||
The Company has recognized intangible assets for trade names, venue management contracts, favorable lease assets, season ticket holder relationships, non-compete agreements, festival rights and other intangibles as a result of purchase accounting. The Company has determined that these intangible assets have finite lives.
The useful lives of the Company’s long-lived assets are based on estimates of the period over which the Company expects the assets to be of economic benefit to the Company. In estimating the useful lives, the Company considers factors such as, but not limited to, risk of obsolescence, anticipated use, plans of the Company, and applicable laws and permit requirements. In light of these facts and circumstances, the Company has determined that its estimated useful lives are appropriate.
Contingent Consideration
Some of the Company’s acquisition agreements include contingent earn-out arrangements, which are generally based on the achievement of future operating targets.
The fair values of these earn-out arrangements are included as part of the purchase price of the acquired companies on their respective acquisition dates. For each transaction, the Company estimates the fair value of contingent earn-out payments as part of the initial purchase price and records the estimated fair value of contingent consideration that the Company will pay to the former owners as a liability in Other liabilities on the consolidated balance sheets.
The Company measures its contingent earn-out liabilities at fair value on a recurring basis using significant unobservable inputs classified within Level III of the fair value hierarchy, which can result in a significantly higher or lower liability with a higher liability capped by the contractual maximum of the contingent earn-out obligation. Ultimately, the liability will be equivalent to the amount paid, and the difference between the fair value estimate and amount paid will be recorded in earnings.
See Note 11 to the consolidated financial statements included in Item 8 of this Annual Report on Form 10-K for more information regarding the fair value of the Company’s contingent consideration liabilities related to the acquisition of TAO Group and CLG.
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Defined Benefit Pension Plans and Other Postretirement Benefit Plan
The Company utilizes actuarial methods to calculate pension and other postretirement benefit obligations and the related net periodic benefit cost which are based on actuarial assumptions. Key assumptions, the discount rates and the expected long-term rate of return on plan assets, are important elements of the plans’ expense and liability measurement and we evaluate these key assumptions annually. Other assumptions include demographic factors, such as mortality, retirement age and turnover. The actuarial assumptions used by the Company may differ materially from actual results due to various factors, including, but not limited to, changing economic and market conditions. Differences between actual and expected occurrences could significantly impact the actual amount of net periodic benefit cost and the benefit obligation recorded by the Company. Material changes in the costs of the plans may occur in the future due to changes in these assumptions, changes in the number of the plan participants, changes in the level of benefits provided, changes in asset levels and changes in legislation. Our assumptions reflect our historical experience and our best estimate regarding future expectations.
Accumulated and projected benefit obligations reflect the present value of future cash payments for benefits. We use the Willis Towers Watson U.S. Rate Link: 40-90 Discount Rate Model (which is developed by examining the yields on selected highly rated corporate bonds) to discount these benefit payments on a plan by plan basis, to select a rate at which we believe each plan’s benefits could be effectively settled. Additionally, the Company measures service and interest costs by applying the specific spot rates along that yield curve to the plans’ liability cash flows (“Spot Rate Approach”). The Company believes the Spot Rate Approach provides a more accurate measurement of service and interest costs by improving the correlation between projected benefit cash flows and their corresponding spot rates on the yield curve.
Lower discount rates increase the present value of benefit obligations and will usually increase the subsequent year’s net periodic benefit cost. The weighted-average discount rates used to determine benefit obligations as of June 30, 2019 for the Company’s Pension Plans and Postretirement Plan were 3.58% and 3.18%, respectively. A 25 basis point decrease in each of these assumed discount rates would increase the projected benefit obligations for the Company’s Pension Plans and Postretirement Plan at June 30, 2019 by $5,950 and $80, respectively. The weighted-average discount rates used to determine service cost, interest cost and the projected benefit obligation components of net periodic benefit cost were 4.25%, 3.90% and 4.19%, respectively, for the year ended June 30, 2019 for the Company’s Pension Plans. The weighted-average discount rates used to determine service cost, interest cost and the projected benefit obligation components of net periodic benefit cost were 4.25%, 3.67% and 4.06%, respectively, for the year ended June 30, 2019 for the Company’s Postretirement Plan. A 25 basis point decrease in these assumed discount rates would increase the total net periodic benefit cost for the Company’s Pension Plans by $100 and decrease net periodic benefit cost for Postretirement Plan by $6 for the year ended June 30, 2019.
The expected long-term return on plan assets is based on a periodic review and modeling of the plans’ asset allocation structures over a long-term horizon. Expectations of returns for each asset class are the most important of the assumptions used in the review and modeling, and are based on comprehensive reviews of historical data, forward-looking economic outlook, and economic/financial market theory. The expected long-term rate of return was selected from within the reasonable range of rates determined by (a) historical real returns, net of inflation, for the asset classes covered by the investment policy, and (b) projections of inflation over the long-term period during which benefits are payable to plan participants. The expected long-term rate of return on plan assets for the Company’s funded pension plans was 3.72% for the year ended June 30, 2019.
Performance of the capital markets affects the value of assets that are held in trust to satisfy future obligations under the Company’s funded plans. Adverse market performance in the future could result in lower rates of return for these assets than projected by the Company which could increase the Company’s funding requirements related to these plans, as well as negatively affect the Company’s operating results by increasing the net periodic benefit cost. A 25 basis point decrease in the long-term return on pension plan assets assumption would increase net periodic pension benefit cost by $300 for the year ended June 30, 2019.
Another important assumption for our Postretirement Plan is healthcare cost trend rates. We developed our estimate of the healthcare cost trend rates through examination of the Company’s claims experience and the results of recent healthcare trend surveys.
Assumptions for healthcare cost trend rates used to determine the net periodic benefit cost and benefit obligation for our Postretirement Plan as of and for the year ended June 30, 2019 are as follows:
Net Periodic Benefit Cost | Benefit Obligation | ||
Healthcare cost trend rate assumed for next year | 7.00% | 6.75% | |
Rate to which the cost trend rate is assumed to decline (the ultimate trend rate) | 5.00% | 5.00% | |
Year that the rate reaches the ultimate trend rate | 2027 | 2027 | |
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A one percentage point change in assumed healthcare cost trend rates would have the following effects on the net periodic postretirement benefit cost and benefit obligation for our postretirement plan as of and for the year ended June 30, 2019:
Increase (Decrease) on Total of Service and Interest Cost Components | Increase (Decrease) on Benefit Obligation | ||||||
One percentage point increase | $ | 19 | $ | 335 | |||
One percentage point decrease | (17 | ) | (303 | ) | |||
GAAP includes mechanisms that serve to limit the volatility in the Company’s earnings that otherwise would result from recording changes in the value of plan assets and benefit obligations in our consolidated financial statements in the periods in which those changes occur. For example, while the expected long-term rate of return on the plans’ assets should, over time, approximate the actual long-term returns, differences between the expected and actual returns could occur in any given year. These differences contribute to the deferred actuarial gains or losses, which are then amortized over time.
See Note 13 to the consolidated financial statements included in Item 8 of this Annual Report on Form 10-K for more information on our pension plans and other postretirement benefit plan.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
For sensitivity analysis and other information regarding market risks we face in connection with our Pension Plans and Postretirement Plan, see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Recently Issued Accounting Pronouncements and Critical Accounting Policies — Critical Accounting Policies — Defined Benefit Pension Plans and Other Postretirement Benefit Plan,” which information is incorporated by reference herein.
Borrowings under our Knicks Revolving Credit Facility, Knicks Unsecured Credit Facility and Rangers Revolving Credit Facility, collectively, the “MSG Credit Facilities”, would incur interest, depending on our election, at a floating rate based upon LIBOR, the U.S. Federal Funds Rate or the U.S. Prime Rate, plus, in each case, a fixed spread. If appropriate, we may seek to reduce such exposure through the use of interest rate swaps or similar instruments. See Note 12 to the consolidated financial statements included in Item 8 of this Annual Report on Form 10-K for more information on our MSG Credit Facilities. We currently have no interest rate risk exposure with our MSG Credit Facilities as we have no debt outstanding under our MSG Credit Facilities.
In addition to the MSG Credit Facilities above, the Company, through the consolidation of TAO Group, also has TAO Term Loan Facility and TAO Revolving Credit Facility, collectively, the “TAO Credit Facilities”. Borrowings under the TAO Credit Facilities incur interest, depending on TAO Group Operating LLC’s election, at a floating rate based upon LIBOR, the U.S. Federal Funds Rate or the U.S. Prime Rate, plus, in each case, an additional spread which is dependent upon the total leverage ratio at the time. Accordingly, TAO Credit Facilities are subject to interest rate risk with respect to the tenor of any borrowings incurred. The effect of a hypothetical 100 basis point increase in floating interest rates prevailing as of June 30, 2019 and continuing for a full year would increase interest expense of the amount outstanding on the TAO Credit Facilities by $550. If appropriate, the TAO entities may seek to reduce such exposure through the use of interest rate swaps or similar instruments that qualify for hedge accounting treatment. See Note 12 to the consolidated financial statements included in Item 8 of this Annual Report on Form 10-K for more information on the TAO Credit Facilities.
We are exposed to market risk resulting from foreign currency fluctuations, primarily to the British pound sterling through our net investment position initiated with our acquisition of land in London in the second quarter of fiscal year 2018 and through cash and invested funds which will be deployed in the construction of our London venue. We may evaluate and decide, to the extent reasonable and practical, to reduce the translation risk of foreign currency fluctuations by entering into foreign currency forward exchange contracts with financial institutions. If we were to enter into such hedging transactions, the market risk resulting from foreign currency fluctuations is unlikely to be entirely eliminated. We do not plan to enter into derivative financial instrument transactions for foreign currency speculative purposes.
As of June 30, 2019, a uniform hypothetical 5% fluctuation in the GBP/USD exchange rate would have resulted in a change of approximately $15,155 in net asset value.
We do not have any meaningful commodity risk exposures associated with the operation of our venues.
Item 8. Financial Statements and Supplementary Data
The Financial Statements required by this Item 8 appear beginning on page F-1 of this Annual Report on Form 10-K, and are incorporated by reference herein.
74
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
An evaluation was carried out under the supervision and with the participation of the Company’s management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this report. Based upon that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that as of June 30, 2019 the Company’s disclosure controls and procedures were effective.
Management’s Report on Internal Control over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rule 13a-15(f) under the Exchange Act. The Company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Company’s assets that could have a material effect on the financial statements.
Internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements prepared for external purposes in accordance with generally accepted accounting principles. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Under the supervision and with the participation of management, including the Company’s Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on the results of this evaluation, our management concluded that our internal control over financial reporting was effective as of June 30, 2019.
The effectiveness of our internal control over financial reporting as of June 30, 2019 has been audited by KPMG LLP, an independent registered public accounting firm, as stated in their report which is included herein.
Changes in Internal Control over Financial Reporting
There were no changes in the Company’s internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the fiscal quarter ended June 30, 2019 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
Item 9B. Other Information
None.
75
PART III
Item 10. Directors, Executive Officers and Corporate Governance
Information relating to our directors, executive officers and corporate governance will be included in the proxy statement for the 2019 annual meeting of the Company’s stockholders, which is expected to be filed within 120 days of our fiscal year end, and is incorporated herein by reference.
Item 11. Executive Compensation
Information relating to executive compensation will be included in the proxy statement for the 2019 annual meeting of the Company’s stockholders, which is expected to be filed within 120 days of our fiscal year end, and is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Information relating to the beneficial ownership of our common stock will be included in the proxy statement for the 2019 annual meeting of the Company’s stockholders, which is expected to be filed within 120 days of our fiscal year end, and is incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions, and Director Independence
Information relating to certain relationships and related transactions and director independence will be included in the proxy statement for the 2019 annual meeting of the Company’s stockholders, which is expected to be filed within 120 days of our fiscal year end, and is incorporated herein by reference.
Item 14. Principal Accountant Fees and Services
Information relating to principal accountant fees and services will be included in the proxy statement for the 2019 annual meeting of the Company’s stockholders, which is expected to be filed within 120 days of our fiscal year end, and is incorporated herein by reference.
76
PART IV
Item 15. Exhibits and Financial Statement Schedules
Page No. | |||
The following documents are filed as part of this report: | |||
1. | The financial statements as indicated in the index set forth on page | ||
2. | Financial statement schedule: | ||
Schedule supporting consolidated financial statements: | |||
Schedules other than that listed above have been omitted, since they are either not applicable, not required or the information is included elsewhere herein. | |||
3. | Exhibits: | ||
EXHIBIT NO. | DESCRIPTION | |
77
EXHIBIT NO. | DESCRIPTION | |
78
EXHIBIT NO. | DESCRIPTION | |
79
EXHIBIT NO. | DESCRIPTION | |
80
EXHIBIT NO. | DESCRIPTION | |
101.INS | XBRL Instance Document — the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. | |
101.SCH | XBRL Taxonomy Extension Schema. | |
101.CAL | XBRL Taxonomy Extension Calculation Linkbase. | |
101.DEF | XBRL Taxonomy Extension Definition Linkbase. | |
101.LAB | XBRL Taxonomy Extension Label Linkbase. | |
101.PRE | XBRL Taxonomy Extension Presentation Linkbase. | |
+ | Confidential treatment has been granted with respect to certain portions of this exhibit. Omitted portions have been filed separately with the Securities and Exchange Commission. |
** | Certain confidential information, identified by bracketed asterisks “[*****]” has been omitted from this exhibit pursuant to Item 601(b)(10) of Regulation S-K because it is both (i) not material and (ii) would be competitively harmful to the Company if publicly disclosed. |
† | This exhibit is a management contract or a compensatory plan or arrangement. |
Item 16. Form 10-K Summary
The Company has elected not to provide summary information.
81
THE MADISON SQUARE GARDEN COMPANY
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
(in thousands)
(Additions) / Deductions | ||||||||||||||||||||||||
Balance at Beginning of Period | Charged to Costs and Expenses | Charged to Other Accounts | Deductions | Balance at End of Period | ||||||||||||||||||||
Year ended June 30, 2019 | ||||||||||||||||||||||||
Allowance for doubtful accounts | $ | (777 | ) | $ | (1,426 | ) | $ | — | $ | 389 | $ | (1,814 | ) | |||||||||||
Deferred tax valuation allowance | (88,246 | ) | 8,708 | 3,837 | — | (75,701 | ) | |||||||||||||||||
$ | (89,023 | ) | $ | 7,282 | $ | 3,837 | $ | 389 | $ | (77,515 | ) | |||||||||||||
Year ended June 30, 2018 | ||||||||||||||||||||||||
Allowance for doubtful accounts | $ | (601 | ) | $ | (647 | ) | $ | — | $ | 471 | $ | (777 | ) | |||||||||||
Deferred tax valuation allowance | (218,639 | ) | 130,393 | (a) | — | — | (88,246 | ) | ||||||||||||||||
$ | (219,240 | ) | $ | 129,746 | $ | — | $ | 471 | $ | (89,023 | ) | |||||||||||||
Year ended June 30, 2017 | ||||||||||||||||||||||||
Allowance for doubtful accounts | $ | (1,282 | ) | $ | (111 | ) | $ | — | $ | 792 | $ | (601 | ) | |||||||||||
Deferred tax valuation allowance | (190,602 | ) | (30,697 | ) | — | 2,660 | (b) | (218,639 | ) | |||||||||||||||
$ | (191,884 | ) | $ | (30,808 | ) | $ | — | $ | 3,452 | $ | (219,240 | ) | ||||||||||||
(a) | Net decrease in valuation allowance reflects $51,015 of reduction to net deferred tax liabilities in connection with the lower federal income tax rate of 21% and other of $2,453. |
(b) | Net decrease in valuation allowance is primarily due to the reclassification of tax impact to the accumulated other comprehensive loss. |
82
SIGNATURES
Pursuant to the requirements of the Section 13 or 15(d) the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on the 20th day of August 2019.
The Madison Square Garden Company | ||
By: | /s/ VICTORIA M. MINK | |
Name: | Victoria M. Mink | |
Title: | Executive Vice President and Chief Financial Officer | |
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Andrew Lustgarten and Victoria M. Mink, and each of them, as such person’s true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for such person in such person’s name, place and stead, in any and all capacities, to sign this report, and file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, full power and authority to do and perform each and every act and thing requisite and necessary to be done as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents or any of them may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this report has been signed below by the following persons in the capacities and on the dates indicated.
Name | Title | Date | ||
/s/ JAMES L. DOLAN | Executive Chairman and Chief Executive Officer (Principal Executive Officer) and Director | August 20, 2019 | ||
James L. Dolan | ||||
/s/ VICTORIA M. MINK | Executive Vice President and Chief Financial Officer (Principal Financial Officer) | August 20, 2019 | ||
Victoria M. Mink | ||||
/s/ JOSEPH F. YOSPE | Senior Vice President, Controller and Principal Accounting Officer | August 20, 2019 | ||
Joseph F. Yospe | ||||
/s/ FRANK J. BIONDI, JR. | Director | August 20, 2019 | ||
Frank J. Biondi, Jr. | ||||
/s/ CHARLES F. DOLAN | Director | August 20, 2019 | ||
Charles F. Dolan | ||||
/s/ CHARLES P. DOLAN | Director | August 20, 2019 | ||
Charles P. Dolan | ||||
/s/ KRISTIN A. DOLAN | Director | August 20, 2019 | ||
Kristin A. Dolan | ||||
83
Name | Title | Date | ||
/s/ MARIANNE DOLAN WEBER | Director | August 20, 2019 | ||
Marianne Dolan Weber | ||||
/s/ THOMAS C. DOLAN | Director | August 20, 2019 | ||
Thomas C. Dolan | ||||
/s/ JOSEPH J. LHOTA | Director | August 20, 2019 | ||
Joseph J. Lhota | ||||
/s/ RICHARD D. PARSONS | Director | August 20, 2019 | ||
Richard D. Parsons | ||||
/s/ NELSON PELTZ | Director | August 20, 2019 | ||
Nelson Peltz | ||||
/s/ ALAN D. SCHWARTZ | Director | August 20, 2019 | ||
Alan D. Schwartz | ||||
/s/ SCOTT M. SPERLING | Director | August 20, 2019 | ||
Scott M. Sperling | ||||
/s/ BRIAN G. SWEENEY | Director | August 20, 2019 | ||
Brian G. Sweeney | ||||
/s/ VINCENT TESE | Director | August 20, 2019 | ||
Vincent Tese | ||||
84
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page | |
F- 1
Report of Independent Registered Public Accounting Firm
To the Stockholders and Board of Directors
The Madison Square Garden Company:
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of The Madison Square Garden Company and subsidiaries (the “Company”) as of June 30, 2019 and 2018, the related consolidated statements of operations, comprehensive income (loss), equity and redeemable noncontrolling interests, and cash flows for each of the years in the three-year period ended June 30, 2019, and the related notes and financial statement schedule II (collectively, the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of June 30, 2019 and 2018, and the results of its operations and its cash flows for each of the years in the three-year period ended June 30, 2019, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the Company’s internal control over financial reporting as of June 30, 2019, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated August 20, 2019 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.
Change in Accounting Principle
As described in Note 2 to the consolidated financial statements, the Company has changed its method of accounting for revenue recognition effective July 1, 2018 due to the adoption of Accounting Standards Codification Topic 606, Revenue from Contracts with Customers.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
Evaluation of the identification of related parties and related party transactions
As discussed in Note 16 to the consolidated financial statements, the Dolan family, including trusts for the benefit of members of the Dolan family (collectively, the Dolan Family Group) is the majority beneficial owner of the Company, MSG Networks Inc. (MSGN), and AMC Networks Inc. (AMC). In addition, there are certain overlapping directors and executive officers between the companies. Each of these entities is a related party. The Company has entered into a number of transactions with MSGN, including agreements for media rights, advertising sales representation and services, as well as transactions for aircraft timesharing and certain shared executive support costs for the Company’s Executive Chairman and Vice Chairman. The Company has also entered into transactions with AMC. Further, the Company has entered into a number of arrangements with members of the Dolan Family Group for shared office space and aircraft services and timesharing. Additionally, the Company routinely enters into transactions with certain non-consolidated affiliates which are accounted for under the equity method.
F- 2
We identified the evaluation of the identification of related parties and related party transactions as a critical audit matter. Auditor judgment was involved in assessing the sufficiency of the procedures performed to identify related parties and related party transactions of the Company.
The primary procedures we performed to address this critical audit matter included the following. We tested certain internal controls over the Company’s related party process, including controls over the identification of the Company’s related party relationships and transactions. We performed the following procedures to evaluate the identification of related parties and related party transactions by the Company:
• | Read public filings, external news, and research sources for information related to transactions between the Company and related parties; |
• | Listened to the Company’s quarterly investor relations calls; |
• | Queried the accounts payable system for transactions with related parties; |
• | Inspected director and officer questionnaires from the Company’s directors and officers; |
• | Evaluated the Company’s reconciliation of its applicable accounts to the related parties’ records of transactions and balances; |
• | Inspected the Company’s minutes from meetings of the Board of Directors and related committees; |
• | Read new agreements and contracts between the Company and related parties; and |
• | Inquired with executive officers, key members of management, and the Audit Committee of the Board of Directors regarding related party transactions. |
Evaluation of the Adoption of Accounting Standards Codification Topic 606
As discussed in Notes 2 and 3 to the consolidated financial statements, the Company adopted ASC Topic 606 on July 1, 2018. As part of the adoption, the Company identified three main changes to the nature and pattern of recognition, related to suite license arrangements, multi-year sponsorship arrangements, and local media rights agreements, which significantly influences the timing of revenue recognition.
We identified the adoption of ASC Topic 606 related to these revenue streams as a critical audit matter because the applicability of series guidance and how the revenue should be recognized over the term of the contract involved subjective auditor judgment.
The primary procedures we performed to address this critical audit matter included the following. We tested certain internal controls over the Company’s ASC Topic 606 implementation process, including controls related to the Company’s establishment of new accounting policies, performing contract reviews, and calculating the transition adjustment. We assessed the evidence underlying the treatment of performance obligations as a series and the recognition of revenue over the term of the contract. Specifically, we read and evaluated the Company’s ASC Topic 606 accounting memorandums that documented the facts and circumstances in customer contracts referred to by the Company as factors to the accounting treatment applied. In addition, we read and analyzed a sample of customer contracts and compared the facts and circumstances to the Company’s accounting memorandums.
/s/ KPMG LLP
We have served as the Company’s auditor since 2015.
New York, New York
August 20, 2019
F- 3
Report of Independent Registered Public Accounting Firm
To the Stockholders and Board of Directors
The Madison Square Garden Company:
Opinion on Internal Control Over Financial Reporting
We have audited The Madison Square Garden Company and subsidiaries’ (the “Company”) internal control over financial reporting as of June 30, 2019, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of June 30, 2019, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the consolidated balance sheets of the Company as of June 30, 2019 and 2018, the related consolidated statements of operations, comprehensive income (loss), equity and redeemable noncontrolling interests, and cash flows for each of the years in the three-year period ended June 30, 2019, and the related notes and financial statement schedule II (collectively, the “consolidated financial statements”), and our report dated August 20, 2019 expressed an unqualified opinion on those consolidated financial statements.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ KPMG LLP
New York, New York
August 20, 2019
F- 4
THE MADISON SQUARE GARDEN COMPANY | ||||||||
CONSOLIDATED BALANCE SHEETS | ||||||||
(in thousands, except per share data) | ||||||||
June 30, | ||||||||
2019 | 2018 | |||||||
ASSETS | ||||||||
Current Assets: | ||||||||
Cash and cash equivalents | $ | 1,086,372 | $ | 1,225,638 | ||||
Restricted cash | 31,529 | 30,982 | ||||||
Short-term investments | 108,416 | — | ||||||
Accounts receivable, net | 96,856 | 100,725 | ||||||
Net related party receivables | 1,483 | 567 | ||||||
Prepaid expenses | 45,150 | 28,761 | ||||||
Other current assets | 43,303 | 28,996 | ||||||
Total current assets | 1,413,109 | 1,415,669 | ||||||
Investments and loans to nonconsolidated affiliates | 84,560 | 209,951 | ||||||
Property and equipment, net | 1,380,392 | 1,253,671 | ||||||
Amortizable intangible assets, net | 220,706 | 243,806 | ||||||
Indefinite-lived intangible assets | 176,485 | 175,985 | ||||||
Goodwill | 392,513 | 392,513 | ||||||
Other assets | 95,786 | 44,578 | ||||||
Total assets | $ | 3,763,551 | $ | 3,736,173 | ||||
See accompanying notes to consolidated financial statements. | ||||||||
F- 5
THE MADISON SQUARE GARDEN COMPANY | ||||||||
CONSOLIDATED BALANCE SHEETS (Continued) | ||||||||
(in thousands, except per share data) | ||||||||
June 30, | ||||||||
2019 | 2018 | |||||||
LIABILITIES, REDEEMABLE NONCONTROLLING INTERESTS AND EQUITY | ||||||||
Current Liabilities: | ||||||||
Accounts payable | $ | 25,009 | $ | 28,939 | ||||
Net related party payables | 19,048 | 13,675 | ||||||
Current portion of long-term debt, net of deferred financing costs | 6,042 | 4,365 | ||||||
Accrued liabilities: | ||||||||
Employee related costs | 137,660 | 123,992 | ||||||
Other accrued liabilities | 211,403 | 180,272 | ||||||
Collections due to promoters | 67,212 | 89,513 | ||||||
Deferred revenue | 293,410 | 324,749 | ||||||
Total current liabilities | 759,784 | 765,505 | ||||||
Related party payables, noncurrent | 172 | — | ||||||
Long-term debt, net of deferred financing costs | 48,556 | 101,335 | ||||||
Defined benefit and other postretirement obligations | 41,318 | 49,240 | ||||||
Other employee related costs | 62,015 | 53,501 | ||||||
Deferred tax liabilities, net | 79,098 | 78,968 | ||||||
Other liabilities | 66,221 | 56,905 | ||||||
Total liabilities | 1,057,164 | 1,105,454 | ||||||
Commitments and contingencies (see Note 10) | ||||||||
Redeemable noncontrolling interests | 67,627 | 76,684 | ||||||
The Madison Square Garden Company Stockholders’ Equity: | ||||||||
Class A Common stock, par value $0.01, 120,000 shares authorized; 19,229 and 19,136 shares outstanding as of June 30, 2019 and 2018, respectively | 204 | 204 | ||||||
Class B Common stock, par value $0.01, 30,000 shares authorized; 4,530 shares outstanding as of June 30, 2019 and 2018 | 45 | 45 | ||||||
Preferred stock, par value $0.01, 15,000 shares authorized; none outstanding as of June 30, 2019 and 2018 | — | — | ||||||
Additional paid-in capital | 2,845,961 | 2,817,873 | ||||||
Treasury stock, at cost, 1,219 and 1,312 shares as of June 30, 2019 and 2018, respectively | (207,790 | ) | (223,662 | ) | ||||
Retained earnings (accumulated deficit) | 29,003 | (11,059 | ) | |||||
Accumulated other comprehensive loss | (46,923 | ) | (46,918 | ) | ||||
Total The Madison Square Garden Company stockholders’ equity | 2,620,500 | 2,536,483 | ||||||
Nonredeemable noncontrolling interests | 18,260 | 17,552 | ||||||
Total equity | 2,638,760 | 2,554,035 | ||||||
Total liabilities, redeemable noncontrolling interests and equity | $ | 3,763,551 | $ | 3,736,173 | ||||
See accompanying notes to consolidated financial statements.
F- 6
THE MADISON SQUARE GARDEN COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
Years Ended June 30, | ||||||||||||
2019 | 2018 | 2017 | ||||||||||
Revenues (a) | $ | 1,631,068 | $ | 1,559,095 | $ | 1,318,452 | ||||||
Operating expenses: | ||||||||||||
Direct operating expenses (b) | 997,077 | 944,276 | 860,423 | |||||||||
Selling, general and administrative expenses (c) | 528,672 | 469,276 | 406,951 | |||||||||
Depreciation and amortization | 119,193 | 122,486 | 107,388 | |||||||||
Operating income (loss) | (13,874 | ) | 23,057 | (56,310 | ) | |||||||
Other income (expense): | ||||||||||||
Earnings (loss) in equity method investments | 7,062 | (7,770 | ) | (29,976 | ) | |||||||
Interest income (d) | 30,205 | 21,582 | 11,836 | |||||||||
Interest expense | (20,410 | ) | (15,415 | ) | (4,189 | ) | ||||||
Miscellaneous expense, net | (4,752 | ) | (3,878 | ) | (2,554 | ) | ||||||
12,105 | (5,481 | ) | (24,883 | ) | ||||||||
Income (loss) from operations before income taxes | (1,769 | ) | 17,576 | (81,193 | ) | |||||||
Income tax benefit (expense) | (1,348 | ) | 116,872 | 4,404 | ||||||||
Net income (loss) | (3,117 | ) | 134,448 | (76,789 | ) | |||||||
Less: Net loss attributable to redeemable noncontrolling interests | (7,299 | ) | (628 | ) | (4,370 | ) | ||||||
Less: Net income (loss) attributable to nonredeemable noncontrolling interests | (7,245 | ) | (6,518 | ) | 304 | |||||||
Net income (loss) attributable to The Madison Square Garden Company’s stockholders | $ | 11,427 | $ | 141,594 | $ | (72,723 | ) | |||||
Basic earnings (loss) per common share attributable to The Madison Square Garden Company’s stockholders | $ | 0.48 | $ | 5.99 | $ | (3.05 | ) | |||||
Diluted earnings (loss) per common share attributable to The Madison Square Garden Company’s stockholders | $ | 0.48 | $ | 5.94 | $ | (3.05 | ) | |||||
Weighted-average number of common shares outstanding: | ||||||||||||
Basic | 23,767 | 23,639 | 23,853 | |||||||||
Diluted | 23,900 | 23,846 | 23,853 | |||||||||
(a) | Include revenues from related parties of $164,406, $156,368 and $150,534 for the years ended June 30, 2019, 2018 and 2017, respectively. |
(b) | Include net charges from related parties of $911, $1,082 and $1,284 for the years ended June 30, 2019, 2018 and 2017, respectively. |
(c) | Include net charges to related parties of $8,424, $5,188 and $5,852 for the years ended June 30, 2019, 2018 and 2017, respectively. |
(d) | Interest income includes interest income from nonconsolidated affiliates of $3,105, $5,696 and $4,157 for the years ended June 30, 2019, 2018 and 2017, respectively. |
See accompanying notes to consolidated financial statements.
F- 7
THE MADISON SQUARE GARDEN COMPANY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(in thousands)
Years Ended June 30, | ||||||||||||||||||||||||
2019 | 2018 | 2017 | ||||||||||||||||||||||
Net income (loss) | $ | (3,117 | ) | $ | 134,448 | $ | (76,789 | ) | ||||||||||||||||
Other comprehensive income (loss), before income taxes: | ||||||||||||||||||||||||
Pension plans and postretirement plan: | ||||||||||||||||||||||||
Net unamortized gains (losses) arising during the period | $ | (2,565 | ) | $ | (3,415 | ) | $ | 4,027 | ||||||||||||||||
Amounts reclassified from accumulated other comprehensive loss: | ||||||||||||||||||||||||
Amortization of net actuarial loss included in net periodic benefit cost | 1,286 | 1,319 | 1,365 | |||||||||||||||||||||
Amortization of net prior service credit included in net periodic benefit cost | (7 | ) | (37 | ) | (48 | ) | ||||||||||||||||||
Settlement loss | 52 | (1,234 | ) | 87 | (2,046 | ) | — | 5,344 | ||||||||||||||||
Cumulative translation adjustments | (4,341 | ) | (502 | ) | — | |||||||||||||||||||
Net changes related to available-for-sale securities | — | (12,095 | ) | 9,629 | ||||||||||||||||||||
Other comprehensive income (loss), before income taxes | (5,575 | ) | (14,643 | ) | 14,973 | |||||||||||||||||||
Income tax expense related to items of other comprehensive income | — | — | (6,477 | ) | ||||||||||||||||||||
Other comprehensive income (loss), net of income taxes | (5,575 | ) | (14,643 | ) | 8,496 | |||||||||||||||||||
Comprehensive income (loss) | (8,692 | ) | 119,805 | (68,293 | ) | |||||||||||||||||||
Less: Comprehensive loss attributable to redeemable noncontrolling interests | (7,299 | ) | (628 | ) | (4,370 | ) | ||||||||||||||||||
Less: Comprehensive income (loss) attributable to nonredeemable noncontrolling interests | (7,245 | ) | (6,518 | ) | 304 | |||||||||||||||||||
Comprehensive income (loss) attributable to The Madison Square Garden Company’s stockholders | $ | 5,852 | $ | 126,951 | $ | (64,227 | ) | |||||||||||||||||
See accompanying notes to consolidated financial statements.
F- 8
THE MADISON SQUARE GARDEN COMPANY | ||||||||||||
CONSOLIDATED STATEMENTS OF CASH FLOWS | ||||||||||||
(in thousands) | ||||||||||||
Years Ended June 30, | ||||||||||||
2019 | 2018 | 2017 | ||||||||||
Cash flows from operating activities: | ||||||||||||
Net income (loss) | $ | (3,117 | ) | $ | 134,448 | $ | (76,789 | ) | ||||
Adjustments to reconcile net income (loss) to net cash provided by operating activities: | ||||||||||||
Depreciation and amortization | 119,193 | 122,486 | 107,388 | |||||||||
Share-based compensation expense | 59,474 | 47,563 | 41,129 | |||||||||
(Earnings) loss in equity method investments, net of income distributions | (6,312 | ) | 7,770 | 30,831 | ||||||||
Provision for (benefit from) deferred income taxes | 150 | (117,311 | ) | (4,404 | ) | |||||||
Write-off of deferred production costs | — | — | 33,629 | |||||||||
Purchase accounting adjustments associated with rent-related intangibles and deferred rent | 4,240 | 4,628 | 718 | |||||||||
Unrealized loss on equity investment with readily determinable fair value | 3,496 | — | — | |||||||||
Purchase accounting adjustments associated with amortization of inventory step-up | — | — | 8,705 | |||||||||
Loss on extinguishment of debt including deferred financing costs | 3,977 | — | — | |||||||||
Other non-cash adjustments | 104 | (39 | ) | 693 | ||||||||
Change in assets and liabilities, net of acquisitions: | ||||||||||||
Accounts receivable, net | 2,734 | 2,435 | (20,363 | ) | ||||||||
Net related party receivables | (916 | ) | 2,147 | 2,826 | ||||||||
Prepaid expenses and other assets | (26,080 | ) | 16,371 | 8,749 | ||||||||
Accounts payable | (3,930 | ) | 5,067 | 2,047 | ||||||||
Net related party payables | 5,545 | (3,901 | ) | 2,301 | ||||||||
Accrued and other liabilities | 23,716 | (28,424 | ) | 33,455 | ||||||||
Collections due to promoters | (22,301 | ) | 17,113 | 26,523 | ||||||||
Deferred revenue | 1,280 | 7,276 | 26,094 | |||||||||
Net cash provided by operating activities | 161,253 | 217,629 | 223,532 | |||||||||
Cash flows from investing activities: | ||||||||||||
Capital expenditures, net of acquisitions | (188,834 | ) | (191,914 | ) | (44,224 | ) | ||||||
Purchase of short-term investments | (112,693 | ) | — | — | ||||||||
Payments to acquire available-for-sale securities | — | — | (23,222 | ) | ||||||||
Payments for acquisition of businesses, net of cash acquired | — | (8,288 | ) | (192,095 | ) | |||||||
Payments for acquisition of assets | — | (6,000 | ) | (1,000 | ) | |||||||
Investments and loans to nonconsolidated affiliates | (52,707 | ) | (11,255 | ) | (8,235 | ) | ||||||
Proceeds from sales of nonconsolidated affiliates | 125,750 | — | — | |||||||||
Loan repayments received from nonconsolidated affiliates | — | 36,600 | — | |||||||||
Loan repayment received from subordinated debt | 4,765 | — | ||||||||||
Cash received / (paid) for notes receivable | (9,176 | ) | (1,500 | ) | 4,475 | |||||||
Net cash used in investing activities | (232,895 | ) | (182,357 | ) | (264,301 | ) | ||||||
See accompanying notes to consolidated financial statements. | ||||||||||||
F- 9
THE MADISON SQUARE GARDEN COMPANY | ||||||||||||
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued) | ||||||||||||
(in thousands) | ||||||||||||
Years Ended June 30, | ||||||||||||
2019 | 2018 | 2017 | ||||||||||
Cash flows from financing activities: | ||||||||||||
Repurchases of common stock | — | (11,830 | ) | (147,967 | ) | |||||||
Proceeds from stock option exercises | — | — | 7 | |||||||||
Taxes paid in lieu of shares issued for equity-based compensation | (19,525 | ) | (34,393 | ) | (7,335 | ) | ||||||
Noncontrolling interest capital contributions | 6,310 | 4,000 | — | |||||||||
Distributions to noncontrolling interest holders | (2,186 | ) | (4,124 | ) | — | |||||||
Loans from noncontrolling interest holders | 606 | — | — | |||||||||
Payment of contingent consideration | — | (4,000 | ) | — | ||||||||
Proceeds from loan facility | 40,000 | — | — | |||||||||
Proceeds from revolving credit facility | 15,000 | — | — | |||||||||
Repayment on long-term debt | (109,312 | ) | (688 | ) | — | |||||||
Payments for extinguishment of debt | (1,151 | ) | — | — | ||||||||
Payments for financing costs | (1,488 | ) | (62 | ) | (3,230 | ) | ||||||
Net cash used in financing activities | (71,746 | ) | (51,097 | ) | (158,525 | ) | ||||||
Effect of exchange rates on cash, cash equivalents and restricted cash | 4,669 | 331 | — | |||||||||
Net decrease in cash, cash equivalents and restricted cash | (138,719 | ) | (15,494 | ) | (199,294 | ) | ||||||
Cash, cash equivalents and restricted cash at beginning of period | 1,256,620 | 1,272,114 | 1,471,408 | |||||||||
Cash, cash equivalents and restricted cash at end of period | $ | 1,117,901 | $ | 1,256,620 | $ | 1,272,114 | ||||||
Non-cash investing and financing activities: | ||||||||||||
Investments and loans to nonconsolidated affiliates | $ | — | $ | 16 | $ | 368 | ||||||
Capital expenditures incurred but not yet paid | 35,026 | 9,688 | 8,834 | |||||||||
Tenant improvement paid by landlord | 14,528 | — | — | |||||||||
Share-based compensation capitalized in property and equipment | 3,946 | — | — | |||||||||
Accrued earn-out liability and other contingencies | — | 4,573 | 7,900 | |||||||||
Acquisition of assets not yet paid | 500 | 3,000 | — | |||||||||
See accompanying notes to consolidated financial statements.
F- 10
THE MADISON SQUARE GARDEN COMPANY | ||||||||||||||||||||||||||||||||||||
CONSOLIDATED STATEMENTS OF EQUITY | ||||||||||||||||||||||||||||||||||||
AND REDEEMABLE NONCONTROLLING INTERESTS | ||||||||||||||||||||||||||||||||||||
(in thousands) | ||||||||||||||||||||||||||||||||||||
Common Stock Issued | Additional Paid-In Capital | Treasury Stock | Accumulated Deficit | Accumulated Other Comprehensive Loss | Total The Madison Square Garden Company Stockholders’ Equity | Nonredeemable Noncontrolling Interests | Total Equity | Redeemable Noncontrolling Interests | ||||||||||||||||||||||||||||
Balance as of June 30, 2016 | $ | 249 | $ | 2,806,352 | $ | (101,882 | ) | $ | (75,687 | ) | $ | (42,611 | ) | $ | 2,586,421 | $ | — | $ | 2,586,421 | $ | — | |||||||||||||||
Net income (loss) | — | — | — | (72,723 | ) | — | (72,723 | ) | 304 | (72,419 | ) | (4,370 | ) | |||||||||||||||||||||||
Other comprehensive income | — | — | — | — | 8,496 | 8,496 | — | 8,496 | — | |||||||||||||||||||||||||||
Comprehensive income (loss) | — | — | — | — | — | (64,227 | ) | 304 | (63,923 | ) | (4,370 | ) | ||||||||||||||||||||||||
Exercise of stock options | — | (39 | ) | 46 | — | — | 7 | — | 7 | — | ||||||||||||||||||||||||||
Share-based compensation | — | 41,264 | — | — | — | 41,264 | — | 41,264 | — | |||||||||||||||||||||||||||
Tax withholding associated with shares issued for equity-based compensation | — | (6,003 | ) | (1,332 | ) | — | — | (7,335 | ) | — | (7,335 | ) | — | |||||||||||||||||||||||
Common stock issued under stock incentive plans | — | (9,058 | ) | 9,058 | — | — | — | — | — | — | ||||||||||||||||||||||||||
Repurchases of common stock | — | — | (147,967 | ) | — | — | (147,967 | ) | — | (147,967 | ) | — | ||||||||||||||||||||||||
Noncontrolling interests from acquisitions | — | — | — | — | — | — | 11,394 | 11,394 | 85,000 | |||||||||||||||||||||||||||
Balance as of June 30, 2017 | $ | 249 | $ | 2,832,516 | $ | (242,077 | ) | $ | (148,410 | ) | $ | (34,115 | ) | $ | 2,408,163 | $ | 11,698 | $ | 2,419,861 | $ | 80,630 | |||||||||||||||
See accompanying notes to consolidated financial statements. | ||||||||||||||||||||||||||||||||||||
F- 11
THE MADISON SQUARE GARDEN COMPANY | ||||||||||||||||||||||||||||||||||||
CONSOLIDATED STATEMENTS OF EQUITY | ||||||||||||||||||||||||||||||||||||
AND REDEEMABLE NONCONTROLLING INTERESTS (Continued) | ||||||||||||||||||||||||||||||||||||
(in thousands) | ||||||||||||||||||||||||||||||||||||
Common Stock Issued | Additional Paid-In Capital | Treasury Stock | Accumulated Deficit | Accumulated Other Comprehensive Loss | Total The Madison Square Garden Company Stockholders’ Equity | Nonredeemable Noncontrolling Interests | Total Equity | Redeemable Noncontrolling Interests | ||||||||||||||||||||||||||||
Balance as of June 30, 2017 | $ | 249 | $ | 2,832,516 | $ | (242,077 | ) | $ | (148,410 | ) | $ | (34,115 | ) | $ | 2,408,163 | $ | 11,698 | $ | 2,419,861 | $ | 80,630 | |||||||||||||||
Adoption of ASU No. 2016-09 | — | 2,403 | — | (2,403 | ) | — | — | — | — | — | ||||||||||||||||||||||||||
Adoption of ASU No. 2018-02 | — | — | — | (1,840 | ) | 1,840 | — | — | — | — | ||||||||||||||||||||||||||
Net income (loss) | — | — | — | 141,594 | — | 141,594 | (6,518 | ) | 135,076 | (628 | ) | |||||||||||||||||||||||||
Other comprehensive loss | — | — | — | — | (14,643 | ) | (14,643 | ) | — | (14,643 | ) | — | ||||||||||||||||||||||||
Comprehensive income (loss) | — | — | — | — | — | 126,951 | (6,518 | ) | 120,433 | (628 | ) | |||||||||||||||||||||||||
Share-based compensation | — | 47,592 | — | — | — | 47,592 | — | 47,592 | — | |||||||||||||||||||||||||||
Tax withholding associated with shares issued for equity-based compensation | — | (34,393 | ) | — | — | — | (34,393 | ) | — | (34,393 | ) | — | ||||||||||||||||||||||||
Common stock issued under stock incentive plans | — | (30,245 | ) | 30,245 | — | — | — | — | — | — | ||||||||||||||||||||||||||
Repurchases of common stock | — | — | (11,830 | ) | — | — | (11,830 | ) | — | (11,830 | ) | — | ||||||||||||||||||||||||
Distributions to noncontrolling interest holders | — | — | — | — | — | — | (806 | ) | (806 | ) | (3,318 | ) | ||||||||||||||||||||||||
Noncontrolling interests from acquisition | — | — | — | — | — | — | 8,182 | 8,182 | — | |||||||||||||||||||||||||||
Contribution of joint venture interests | — | — | — | — | — | — | 4,996 | 4,996 | — | |||||||||||||||||||||||||||
Balance as of June 30, 2018 | $ | 249 | $ | 2,817,873 | $ | (223,662 | ) | $ | (11,059 | ) | $ | (46,918 | ) | $ | 2,536,483 | $ | 17,552 | $ | 2,554,035 | $ | 76,684 | |||||||||||||||
See accompanying notes to consolidated financial statements. | ||||||||||||||||||||||||||||||||||||
F- 12
THE MADISON SQUARE GARDEN COMPANY | ||||||||||||||||||||||||||||||||||||
CONSOLIDATED STATEMENTS OF EQUITY | ||||||||||||||||||||||||||||||||||||
AND REDEEMABLE NONCONTROLLING INTERESTS (Continued) | ||||||||||||||||||||||||||||||||||||
(in thousands) | ||||||||||||||||||||||||||||||||||||
Common Stock Issued | Additional Paid-In Capital | Treasury Stock | Retained Earnings (Accumulated Deficit) | Accumulated Other Comprehensive Loss | Total The Madison Square Garden Company Stockholders’ Equity | Nonredeemable Noncontrolling Interests | Total Equity | Redeemable Noncontrolling Interests | ||||||||||||||||||||||||||||
Balance as of June 30, 2018 | $ | 249 | $ | 2,817,873 | $ | (223,662 | ) | $ | (11,059 | ) | $ | (46,918 | ) | $ | 2,536,483 | $ | 17,552 | $ | 2,554,035 | $ | 76,684 | |||||||||||||||
Adoption of ASU No. 2016-01 | — | — | — | (5,570 | ) | 5,570 | — | — | — | — | ||||||||||||||||||||||||||
Adoption of ASC Topic 606 | — | — | — | 34,205 | — | 34,205 | — | 34,205 | — | |||||||||||||||||||||||||||
Net income (loss) | — | — | — | 11,427 | — | 11,427 | (7,245 | ) | 4,182 | (7,299 | ) | |||||||||||||||||||||||||
Other comprehensive loss | — | — | — | — | (5,575 | ) | (5,575 | ) | — | (5,575 | ) | — | ||||||||||||||||||||||||
Comprehensive income (loss) | — | — | — | — | — | 5,852 | (7,245 | ) | (1,393 | ) | (7,299 | ) | ||||||||||||||||||||||||
Share-based compensation | — | 63,420 | — | — | — | 63,420 | — | 63,420 | — | |||||||||||||||||||||||||||
Tax withholding associated with shares issued for equity-based compensation | — | (19,525 | ) | — | — | — | (19,525 | ) | — | (19,525 | ) | — | ||||||||||||||||||||||||
Common stock issued under stock incentive plans | — | (15,872 | ) | 15,872 | — | — | — | — | — | — | ||||||||||||||||||||||||||
Distributions to noncontrolling interest holders | — | — | — | — | — | — | (428 | ) | (428 | ) | (1,758 | ) | ||||||||||||||||||||||||
Contribution of joint venture interests | — | — | — | — | — | — | 8,446 | 8,446 | — | |||||||||||||||||||||||||||
Adjustments to noncontrolling interests | — | 65 | — | — | — | 65 | (65 | ) | — | — | ||||||||||||||||||||||||||
Balance as of June 30, 2019 | $ | 249 | $ | 2,845,961 | $ | (207,790 | ) | $ | 29,003 | $ | (46,923 | ) | $ | 2,620,500 | $ | 18,260 | $ | 2,638,760 | $ | 67,627 | ||||||||||||||||
See accompanying notes to consolidated financial statements.
F- 13
THE MADISON SQUARE GARDEN COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
All amounts included in the following Notes to Consolidated Financial Statements are presented in thousands, except per share data or as otherwise noted.
Note 1. Description of Business and Basis of Presentation
The Distribution
The Madison Square Garden Company (together with its subsidiaries, the “Company” or “Madison Square Garden”), formerly named MSG Spinco, Inc., was incorporated on March 4, 2015 as an indirect, wholly-owned subsidiary of MSG Networks Inc. (“MSG Networks” or “Former Parent”), formerly known as The Madison Square Garden Company. On September 11, 2015, MSG Networks’ board of directors approved the distribution of all the outstanding common stock of Madison Square Garden to MSG Networks’ stockholders (the “2015 Distribution”), which occurred on September 30, 2015. Each holder of record of MSG Networks Class A common stock as of close of business on September 21, 2015 (the “Record Date”) received one share of Madison Square Garden Class A common stock, par value $0.01 per share (“Class A Common Stock”), for every three shares of MSG Networks Class A common stock held. Each holder of record of MSG Networks Class B common stock as of the Record Date received one share of Madison Square Garden Class B common stock, par value $0.01 per share (“Class B Common Stock”), for every three shares of MSG Networks Class B common stock held.
Description of Business
Madison Square Garden is a live sports and entertainment business. The Company classifies its business interests into two reportable segments: MSG Entertainment and MSG Sports. MSG Entertainment includes live entertainment events including concerts and other live events, such as family shows, performing arts and special events, which are presented or hosted in the Company’s diverse collection of venues along with live offerings through TAO Group Holdings LLC (“TAO Group”) and Boston Calling Events LLC (“BCE”). TAO Group is a hospitality group with globally-recognized entertainment dining and nightlife brands: TAO, Marquee, Lavo, Avenue, Beauty & Essex and Vandal. BCE owns and operates New England’s premier Boston Calling Music Festival. MSG Entertainment also includes the Company’s original production — the Christmas Spectacular Starring the Radio City Rockettes (the “Christmas Spectacular”). MSG Entertainment also includes the results of the third-party production business of Obscura Digital (“Obscura”), a creative studio, which the Company has begun to wind down.
MSG Sports includes the Company’s professional sports franchises: the New York Knicks (the “Knicks”) of the National Basketball Association (the “NBA”), the New York Rangers (the “Rangers”) of the National Hockey League (the “NHL”), the Hartford Wolf Pack of the American Hockey League, and the Westchester Knicks of the NBA G League. These professional sports franchises are collectively referred to herein as the “sports teams.” In January 2019, the Company sold the New York Liberty (the “Liberty”) of the Women’s National Basketball Association (the “WNBA”). For all periods through the sale date, MSG Sports includes the Liberty. The MSG Sports segment also includes other live sporting events, including professional boxing, college basketball, professional bull riding, mixed martial arts, esports and college wrestling, all of which the Company promotes, produces and/or presents. In addition, the MSG Sports segment includes Counter Logic Gaming (“CLG”), a premier North American esports organization, which the Company acquired in July 2017, and Knicks Gaming, the Company’s franchise that competes in the NBA 2K League. CLG and Knicks Gaming are collectively referred to herein as “the esports teams,” and together with the sports teams, “the teams.”
The Company conducts a significant portion of its operations at venues that it either owns or operates under long-term leases. The Company owns the Madison Square Garden Arena (“The Garden”) and Hulu Theater at Madison Square Garden in New York City, the Forum in Inglewood, CA and The Chicago Theatre in Chicago. In addition, the Company leases Radio City Music Hall and the Beacon Theatre in New York City. Additionally, TAO Group operates various restaurants, nightlife and hospitality venues under long-term leases and management contracts in New York, Las Vegas, Los Angeles, Chicago, Australia and Singapore.
F- 14
THE MADISON SQUARE GARDEN COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Potential Spin-off Transaction
On June 27, 2018, the Company announced that its board of directors (“Board”) had authorized the Company’s management to explore a possible spin-off that would create a separately-traded public company comprised of its sports business, including the New York Knicks and New York Rangers professional sports franchises (“Sports Spinco”). The Company refers to the potential spin-off as the “Sports Distribution”. On October 4, 2018, in connection with the Sports Distribution, a subsidiary of the Company submitted an initial Registration Statement on Form 10 with the U.S. Securities and Exchange Commission (“SEC”) (which has been amended). If the Company proceeds with the Sports Distribution, it would be structured as a tax-free transaction to the Company’s stockholders. Upon completion of the contemplated separation, record holders of the Company’s common stock would receive a pro-rata distribution, expected to be equivalent, in the aggregate, to an approximately two-thirds economic interest in Sports Spinco. The remaining common stock, expected to be equivalent to an approximately one-third economic interest in Sports Spinco, would be retained by the Company. There can be no assurance that the proposed transaction will be completed in the manner described above, or at all. Completion of the transaction would be subject to various conditions, including certain league approvals, a private letter ruling from the Internal Revenue Service, receipt of a tax opinion from counsel and final Board approval. The Company will maintain the current operating structure and will continue to report the financial results of its sports business in continuing operations until the Sports Distribution is completed.
Reclassifications
Certain reclassifications have been made in order to conform to the current period’s presentation. The reclassifications primarily relate to: (i) the presentation in the consolidated statement of cash flows for fiscal years 2018 and 2017 in connection with the adoption of Accounting Standards Update (“ASU”) No. 2016-18, Statement of Cash Flows: Restricted Cash, (ii) the presentation of the non-service cost components of net periodic pension and postretirement benefit cost in the consolidated statement of operations for fiscal years 2018 and 2017 in connection with the adoption of ASU No. 2017-07, Compensation - Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost, (iii) segregation of amounts due to promoters from deferred revenue in connection with the adoption of Accounting Standards Codification (“ASC”) Topic 606, Revenue from Contracts with Customers (Topic 606) (referred to herein as “ASC Topic 606”), and (iv) an indefinite-lived intangible asset that was previously reported under other assets. See Note 2 for further details related to the adoption of ASU No. 2016-18, ASU No. 2017-07, and ASC Topic 606.
Note 2. Summary of Significant Accounting Policies
Principles of Consolidation
The Company reports on a fiscal year basis ending on June 30th. In these consolidated financial statements, the years ended on June 30, 2019, 2018, and 2017 are referred to as “fiscal year 2019”, “fiscal year 2018”, and “fiscal year 2017”, respectively. The consolidated financial statements of the Company include the accounts of The Madison Square Garden Company and its subsidiaries. All significant intracompany transactions and accounts within the Company’s consolidated financial statements have been eliminated.
Business Combinations and Noncontrolling Interests
The acquisition method of accounting for business combinations requires management to use significant estimates and assumptions, including fair value estimates, as of the business combination date and to refine those estimates as necessary during the measurement period (defined as the period, not to exceed one year, in which the Company is allowed to adjust the provisional amounts recognized for a business combination).
Under the acquisition method of accounting, the Company recognizes separately from goodwill the identifiable assets acquired, the liabilities assumed, and any noncontrolling interests in an acquiree, generally at the acquisition date fair value. The Company measures goodwill as of the acquisition date as the excess of consideration transferred, which is also measured at fair value if the consideration is non-cash, over the net of the acquisition date amounts of the identifiable assets acquired and liabilities assumed. Costs that the Company incurs to complete a business combination such as investment banking, legal and other professional fees are not considered part of consideration and the Company charges these costs to selling, general and administrative expense as they are incurred. In addition, the Company recognizes measurement-period adjustments in the period in which the amount is determined, including the effect on earnings of any amounts the Company would have recorded in previous periods if the accounting had been completed at the acquisition date.
F- 15
THE MADISON SQUARE GARDEN COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Interests held by third parties in consolidated majority-owned subsidiaries are presented as noncontrolling interests, which represent the noncontrolling stockholders’ interests in the underlying net assets of the Company’s consolidated majority-owned subsidiaries. Noncontrolling interests that are not redeemable are reported in the equity section of the consolidated balance sheets. Noncontrolling interests, where the Company may be required to repurchase under put options or other contractual redemption requirements that are not solely within the Company’s control, are reported in the consolidated balance sheets between liabilities and equity, as redeemable noncontrolling interests.
In July 2016 and 2017, the Company acquired controlling interests in BCE and CLG, respectively. In accordance with FASB ASC Topic 805, Business Combinations (“ASC Topic 805”), and ASC Topic 810, Consolidation (“ASC Topic 810”), the financial position of BCE and CLG has been consolidated with the Company’s consolidated balance sheets as of June 30, 2019 and 2018. In addition, the results of operations for BCE and CLG have been included in the Company’s consolidated results of operations from the date of acquisition in the MSG Entertainment segment and MSG Sports segment, respectively. The relevant amounts attributable to investors other than the Company are reflected under “Nonredeemable noncontrolling interests,” “Net income (loss) attributable to nonredeemable noncontrolling interests” and “Comprehensive income (loss) attributable to nonredeemable noncontrolling interests” on the accompanying consolidated balance sheets, consolidated statements of operations and consolidated statements of comprehensive income (loss), respectively.
On January 31, 2017, the Company acquired a controlling interest in TAO Group. In accordance with ASC Topic 805 and ASC Topic 810, the financial position of TAO Group has been consolidated with the Company’s consolidated balance sheet as of June 30, 2019 and 2018. TAO Group’s financial statements are not available within the time constraints the Company requires to ensure the financial accuracy of the operating results. Therefore, the Company records TAO Group’s operating results in its consolidated statements of operations on a three-month lag basis. Any specific events having significant financial impact that occur during the lag period are included in the Company’s current period results. TAO Group reports on a fiscal year reflecting the retail-based calendar (containing 4-4-5 week calendar quarters). Accordingly, the Company’s results of operations for the years ended June 30, 2019, 2018 and 2017 include TAO Group’s operating results from April 2, 2018 to March 31, 2019 (a 52-week year), March 27, 2017 to April 1, 2018 (a 53-week year) and February 1, 2017 to March 26, 2017, respectively, as part of the MSG Entertainment segment. In addition, the Company’s consolidated balance sheets as of June 30, 2019 and 2018 reflect the financial position of TAO Group as of March 31, 2019 and April 1, 2018, respectively. With the exception of the balances and activities pertaining to the TAO Group’s credit agreements entered into in May 2019, which are recorded as of June 30, 2019, as well as cash distributions, all other disclosures related to TAO Group's financial position are therefore reported as of March 31, 2019 and April 1, 2018, as applicable. See Note 12 for TAO Group’s credit agreements entered in May 2019.
The TAO Group purchase agreement contains a put option to require the Company to purchase the other owners’ equity interests under certain circumstances. The noncontrolling interest combined with the put option is classified as redeemable noncontrolling interest in the consolidated balance sheet, separate from equity. The relevant amounts attributable to investors other than the Company are reflected under “Redeemable noncontrolling interests,” “Net income (loss) attributable to redeemable noncontrolling interests” and “Comprehensive income (loss) attributable to redeemable noncontrolling interests” on the accompanying consolidated balance sheets, consolidated statements of operations and consolidated statements of comprehensive income (loss), respectively. The put option can be settled, at the Company’s option, in cash, debt or shares of the Company’s Class A Common Stock. The ultimate amount paid upon the exercise of the put option will likely be different from the estimated fair value, given the calculation required pursuant to the TAO Group operating agreement.
Use of Estimates
The preparation of the accompanying financial statements in conformity with generally accepted accounting principles (“GAAP”) requires management to make estimates and assumptions about future events. These estimates and the underlying assumptions affect the amounts of assets and liabilities reported, disclosures about contingent assets and liabilities, and reported amounts of revenues and expenses. Such estimates include the valuation of accounts receivable, investments, goodwill, intangible assets, other long-lived assets, tax accruals and other liabilities. In addition, estimates are used in revenue recognition, revenue sharing expense (net of escrow), luxury tax expense, income tax expense, performance and share-based compensation, depreciation and amortization, litigation matters and other matters, as well as in the valuation of contingent consideration and noncontrolling interests resulting from business combination transactions. Management believes its use of estimates in the financial statements to be reasonable.
Management evaluates its estimates on an ongoing basis using historical experience and other factors, including the general economic environment and actions it may take in the future. The Company adjusts such estimates when facts and circumstances dictate. However, these estimates may involve significant uncertainties and judgments and cannot be determined with precision.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
In addition, these estimates are based on management’s best judgment at a point in time and as such these estimates may ultimately differ from actual results. Changes in estimates resulting from weakness in the economic environment or other factors beyond the Company’s control could be material and would be reflected in the Company’s financial statements in future periods.
Revenue Recognition
See Recently Adopted Accounting Pronouncements below for disclosure related to the transitional impact of adopting ASC Topic 606 and Note 3 for details of accounting policies related to revenue recognition and other disclosures required under ASC Topic 606.
Direct Operating Expenses
Direct operating expenses include, but are not limited to, compensation expense for the Company’s professional sports teams’ players and certain other team personnel, as well as NBA luxury tax, NBA and NHL revenue sharing and league assessments for the MSG Sports segment; event costs related to the presentation and production of the Company’s live entertainment and sporting events; and venue lease, maintenance and other operating expenses.
Player Costs and Other Team Personnel Transactions, NBA Luxury Tax, Escrow System/Revenue Sharing and League Assessments for the MSG Sports Segment
Player Costs and Other Team Personnel Transactions
Costs incurred to acquire player contracts, including signing bonuses, are deferred and amortized over the applicable NBA or NHL regular season on a straight-line basis over the fixed contract period of the respective player. The NBA and NHL seasons are typically from mid-October through mid-April and October through mid-April, respectively. Player salaries are also expensed over the applicable NBA, NHL or WNBA regular season typically on a straight-line basis. In certain player contracts the annual contractual salary amounts (including any applicable signing bonuses) may fluctuate such that expensing the salary for the entire contract on a straight-line basis over each regular season more appropriately reflects the economic benefit of the services provided.
In instances where a player sustains what is deemed to be a season-ending or career-ending injury, a provision is recorded, when that determination can be reasonably made, for the remainder of the player’s seasonal or contractual salary and related costs, together with any associated NBA luxury tax, net of any anticipated insurance recoveries. When players are traded, waived or contracts are terminated, any remaining unamortized signing bonuses and prepaid salaries are expensed to current operations. Amounts due to these individuals are generally paid over their remaining contract terms. Team personnel contract termination costs are recognized in the period in which those events occur. See Note 5 for further discussion of significant team personnel transactions.
The NBA and NHL each have collective bargaining agreements (each a “CBA”) with the respective league’s players association, to which the Company is subject. The NBA CBA expires after the 2023-24 season (although the NBA and the National Basketball Players Association (“NBPA”) each have the right to terminate the CBA following the 2022-23 season). The NHL CBA expires on September 15, 2022 (although the NHL and National Hockey League Players’ Association each have the right to terminate the CBA following the 2019-20 season).
The NBA CBA contains a salary floor (i.e., a floor on each team’s aggregate player salaries with a requirement that the team pay any deficiency to the players on its roster) and a “soft” salary cap (i.e., a cap on each team’s aggregate player salaries but with certain exceptions that enable teams to pay more, sometimes substantially more, than the cap). The NHL CBA provides for a “hard” salary cap (i.e., teams may not exceed a stated maximum that was negotiated for the 2013-14 season and has been adjusted each season thereafter based upon league-wide revenues).
NBA Luxury Tax
Amounts in this paragraph are in thousands, except for luxury tax rates.
The NBA CBA provides for a luxury tax that is applicable to all teams with aggregate player salaries exceeding a threshold that is set prior to each season based upon projected league-wide revenues (as defined under the CBA). The luxury tax rates for teams with aggregate player salaries above such threshold start at $1.50 for each $1.00 of team salary above the threshold up to $5,000 and scale up to $3.25 for each $1.00 of team salary that is from $15,000 to $20,000 over the threshold, and an additional tax rate increment of $0.50 applies for each additional $5,000 (or part thereof) of team salary in excess of $20,000 over the threshold. In addition, for teams that are taxpayers in at least three of four previous seasons, the above tax rates are increased by
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
$1.00 for each increment. Fifty percent of the aggregate luxury tax payments is a funding source for the revenue sharing plan and the remaining 50% of such payments is distributed in equal shares to non-taxpaying teams. The Company recognizes the estimated amount associated with luxury tax expense or the amount it expects to receive as a non-tax paying team, if applicable, on a straight-line basis over the NBA regular season as a component of direct operating expenses.
NBA and NHL Escrow System/Revenue Sharing
The NBA CBA also provides that players collectively receive a designated percentage of league-wide revenues (net of certain direct expenses) as compensation (approximately 51%), and the teams retain the remainder. The percentage of league-wide revenues paid as compensation and retained by the teams does not apply evenly across all teams and accordingly the Company may pay its players a higher or lower percentage of the Knicks’ revenues than other NBA teams. Throughout each season, NBA teams withhold 10% of each player’s salary and contribute the withheld amounts to an escrow account. If the league’s aggregate player compensation exceeds the designated percentage of league-wide revenues, some or all of such escrowed amounts are distributed equally to all NBA teams. In the event that the league’s aggregate player compensation is below the designated percentage of league-wide revenues, the teams will remit the shortfall to the NBPA for distribution to the players.
The NBA also has a revenue sharing plan that generally requires the distribution of a pool of funds to teams with below-average net revenues (as defined in the plan), subject to reduction or elimination based on individual team market size and profitability. The plan is funded by a combination of disproportionate contributions from teams with above-average net revenues, subject to certain profit-based limits (each as defined in the plan); 50% of aggregate league-wide luxury tax proceeds; and collective league sources, if necessary. Additional amounts may also be distributed on a discretionary basis, funded by assessments on playoff ticket revenues and through collective league sources.
The NHL CBA provides that each season the players receive as player compensation 50% of that season’s league-wide revenues, excluding the impact of agreed-upon aggregate transition payments of $300,000 paid on a deferred basis over three years beginning in 2014. Because the aggregate amount to be paid to the players is based upon league-wide revenues and not on a team-by-team basis, the Company may pay its players a higher or lower percentage of the Rangers’ revenues than other NHL teams pay of their own revenues. In order to implement the salary cap system, NHL teams withhold a portion of each player’s salary and contribute the withheld amounts to an escrow account. If the league’s aggregate player compensation for a season exceeds the designated percentage (50%) of that season’s league-wide revenues, the excess is retained by the league. Any excess funds will be distributed by the NHL to all teams in equal shares.
The NHL CBA provides for a revenue sharing plan which generally requires the distribution of a pool of funds approximating 6.055% of league-wide revenues to certain qualifying lower-revenue teams. Under the NHL CBA, the pool is funded as follows: (a) 50% from contributions by the top ten revenue earning teams (based on pre-season and regular season revenues) in accordance with a formula; (b) then from payments by teams participating in the playoffs, with each team contributing 35% of its gate receipts for each home playoff game; and (c) the remainder from centrally-generated NHL sources. The Rangers are consistently among the top ten revenue teams and, accordingly, have consistently contributed to the top ten revenue teams component of the plan.
The Company recognizes the amount of its estimated revenue sharing expense associated with the pre-season and regular season, net of the amount the Company expects to receive from the escrow, on a straight-line basis over the applicable NBA and NHL seasons as a component of direct operating expenses. In years when the Knicks or Rangers participate in the playoffs, the Company recognizes its estimate of the playoff revenue sharing contribution in the periods when the playoffs occur.
League Assessments
As members of the NBA and NHL, the Knicks and Rangers, respectively, are also subject to annual league assessments. The governing bodies of each league determine the amount of each season’s league assessments that are required from each member team. The Company recognizes its teams’ estimated league assessments on a straight-line basis over the applicable NBA or NHL season.
Production Costs for the MSG Entertainment Segment
The Company defers certain costs of productions such as creative design, scenery, wardrobes, rehearsal and other related costs for the Company’s proprietary shows. Deferred production costs are amortized on a straight-line basis over the course of a production’s performance period using the expected life of a show’s assets, which is currently 5 years. Deferred production costs are subject to recoverability assessments whenever there is an indication of potential impairment. During the fourth quarter of fiscal year 2017, the Company wrote off the remaining balance of deferred production costs related to the New York
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Spectacular Starring the Radio City Rockettes (“New York Spectacular”) of $33,629 due to assessments of the show’s creative direction, timing and scale. The Company has $7,427 and $6,288 of net deferred production costs recorded within other current assets and other assets in the accompanying consolidated balance sheets as of June 30, 2019 and 2018, respectively.
Advertising Expenses
Advertising costs are typically charged to expense when incurred, however, advertising for productions and other live entertainment events are generally deferred within interim periods and expensed over the run of the show, but by no later than the end of the fiscal year. Total advertising costs classified in direct operating and selling, general and administrative expenses were $17,584, $16,314 and $18,963 for the years ended June 30, 2019, 2018 and 2017, respectively.
Income Taxes
The Company accounts for income taxes in accordance with ASC Topic 740, Income Taxes (“ASC Topic 740”). The Company’s provision for income taxes is based on current period income, changes in deferred tax assets and liabilities and changes in estimates with regard to uncertain tax positions. Deferred tax assets are subject to an ongoing assessment of realizability. In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax asset will not be realized. The Company’s ability to realize its deferred tax assets depends upon the generation of sufficient future taxable income to allow for the realization of its deductible temporary differences. If such estimates and related assumptions change in the future, the Company may be required to record valuation allowances against its deferred tax assets, resulting in additional income tax expense in the Company’s consolidated statements of operations.
Interest and penalties, if any, associated with uncertain tax positions are included in income tax expense.
The Company accounts for investment tax credits, if any, using the “flow-through” method, under which the tax benefit generated from an investment tax credit is recorded in the period the credit is generated.
Share-based Compensation
The Company measures the cost of employee services received in exchange for an award of equity-based instruments based on the grant date fair value of the award. Share-based compensation cost is recognized in earnings over the period during which an employee is required to provide service in exchange for the award, except for restricted stock units granted to non-employee directors which, unless otherwise provided under the applicable award agreement, are fully vested, and are expensed at the grant date.
Prior to the adoption of ASU No. 2016-09, Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-based Payment Accounting in fiscal year 2018, the Company estimated forfeitures based upon historical experience and its expectations regarding future vesting of awards. To the extent actual forfeitures were different from the Company’s estimates, share-based compensation was adjusted accordingly. Beginning in the first quarter of fiscal year 2018, upon the adoption of ASU No. 2016-09, the Company elected on a prospective basis effective July 1, 2017, to account for forfeitures as they occur, rather than estimating expected forfeitures as was required under the prior guidance. In connection with the adoption of ASU No. 2016-09, the Company used the modified retrospective transition method and recorded a cumulative effect of $2,403, which was an increase in beginning accumulated deficits with the offset by an equal increase in additional paid in capital.
In addition, for the Company’s stock option awards, the Company applies the fair value recognition provisions of ASC Topic 718 “Compensation — Stock Compensation”. ASC Topic 718 requires companies to estimate the fair value of share-based payment awards on the date of grant using an option-pricing model. The Company determines the fair value as of the grant date. For awards with graded vesting conditions, the values of the awards are determined by valuing all vesting tranches in the aggregate as one award using an average expected term.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
The Company determines its assumptions for option-pricing models in accordance with ASC Topic 718 and SEC Staff Accounting Bulletin (“SAB”) No. 107, “Share-Based Payment” based on the following:
• | The expected term of stock options is estimated using the simplified method. |
• | The expected risk-free interest rate is based on the U.S. Treasury interest rate which term is consistent with the expected term of the stock options. |
• | The expected volatility is based on the historical volatility of the Company’s stock price. |
In December 2007, the SEC staff issued SAB No. 110, “Certain Assumptions Used In Valuation Methods — Expected Term”. SAB No. 110 allows companies to continue to use the simplified method, as defined in SAB No. 107, to estimate the expected term of stock options under certain circumstances. The simplified method for estimating expected term uses the mid-point between the vesting term and the contractual term of the stock option. The Company has analyzed the circumstances in which the use of the simplified method is allowed. The Company has opted to use the simplified method for stock options the Company granted in fiscal years 2019 and 2018 because management believes that the Company does not have sufficient historical exercise data to provide a reasonable basis upon which to estimate the expected term. See Note 14 for more information regarding the Company’s application of the simplified method for stock options the Company granted in fiscal year 2019.
Earnings (Loss) Per Common Share
Basic earnings (loss) per common share (“EPS”) attributable to the Company’s common stockholders is based upon net income (loss) attributable to the Company’s common stockholders divided by the weighted-average number of common shares outstanding during the period. Diluted EPS reflects the effect of the assumed vesting of restricted stock units and exercise of stock options (see Note 14) only in the periods in which such effect would have been dilutive. For the periods when a net loss is reported, the computation of diluted EPS equals the basic EPS calculation since common stock equivalents were antidilutive due to losses from continuing operations.
Cash and Cash Equivalents
The Company considers the balance of its investment in funds that substantially hold highly liquid securities that mature within three months or less from the date the fund purchases these securities to be cash equivalents. The carrying amount of cash and cash equivalents either approximates fair value due to the short-term maturity of these instruments or is at fair value. Checks outstanding in excess of related book balances are included in accounts payable in the accompanying consolidated balance sheets. The Company presents the change in these book cash overdrafts as cash flows from operating activities.
Restricted Cash
The Company’s restricted cash includes cash deposited in escrow accounts. For example, the Company has deposited cash in an interest-bearing escrow account as credit support and collateral to its workers compensation and general liability insurance obligations. Separately, cash is required to be withheld from player salaries and deposited in an escrow account which is in the name of the Company pursuant to the NHL CBA. That escrow account will be distributed subsequent to the end of the season to the players and NHL teams based on the provisions of the NHL CBA. The carrying amount of restricted cash approximates fair value due to the short-term maturity of these instruments. Changes in restricted cash are reflected in cash flows from either operating or investing activities, depending on the circumstances to which the changes in the underlying restricted cash relate.
Short-Term Investments
Short-term investments consist of investments that (i) have original maturities of greater than three months and (ii) the Company expects to convert into cash within one year. The Company currently has a British pound-denominated time deposit that has an original maturity date of six months from inception. The Company classified this investment at the time of purchase as “held-to-maturity” and re-evaluates its classification quarterly based on whether the Company has the intent and ability to hold until maturity. This investment, which is recorded at cost and adjusted for accrued interest, approximates fair value. Cash inflows and outflows related to the sale and purchase of short-term investments are classified as investing activities in the Company’s consolidated statements of cash flows.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Accounts Receivable
Accounts receivable is recorded at net realizable value. The Company maintains an allowance for doubtful accounts to reserve for potentially uncollectible receivables. The allowance for doubtful accounts is estimated based on the Company’s analysis of receivables aging, specific identification of certain receivables that are at risk of not being paid, past collection experience and other factors. The Company’s allowance for doubtful accounts was $1,814 and $777 as of June 30, 2019 and 2018, respectively.
Investments in and Loans to Nonconsolidated Affiliates
The Company’s investments in nonconsolidated affiliates are primarily accounted for using the equity method of accounting and are carried at cost, plus or minus the Company’s share of net earnings or losses of the investment, subject to certain other adjustments. The cost of equity method investments includes transaction costs of the acquisition. As required by GAAP, to the extent that there is a basis difference between the cost and the underlying equity in the net assets of an equity investment, companies are required to allocate such differences between tangible and intangible assets. The Company’s share of net earnings or losses of the investment, inclusive of amortization expense for intangible assets associated with the investment, is reflected in equity in earnings (loss) of nonconsolidated affiliates on the Company’s consolidated statements of operations. Dividends received from the investee reduce the carrying amount of the investment. Due to the timing of receiving financial information from its nonconsolidated affiliates, the Company records its share of net earnings or losses of such affiliates on a three-month lag basis, with the exception of the amortization expense of intangible assets which are recorded currently.
In addition to the equity method investments, the Company also has other equity investments without readily determinable fair values. Upon adoption of ASU No. 2016-01 effective July 1, 2018, the Company elected to measure such investments at cost, less any impairment, adjusted for observable price changes from orderly transactions for identical or similar investments of the same issuer. Changes in observable price are reflected within Miscellaneous income (expense), net in the accompanying consolidated statement of operations. Prior to adoption of ASU 2016-01, such investments were recorded at cost, less any impairment. See Recently Adopted Accounting Pronouncements below for further detail on the accounting policy related to accounting for equity investments after the adoption of ASU No. 2016-01.
The Company also provides revolving credit facilities to certain of its nonconsolidated affiliates. The outstanding loan balances, including accrued interest, are reflected in investments in and loans to nonconsolidated affiliates in the accompanying consolidated balance sheets. Interest income on the outstanding loan balances and related facility fees are recorded currently and are reflected in interest income in the accompanying consolidated statements of operations.
Impairment of Investments
The Company reviews its investments at least quarterly to determine whether a decline in fair value below the cost basis is other-than-temporary. The primary factors the Company considers in its determination are the length of time that the fair value of the investment is below the Company’s carrying value; future prospects of the investee; and the Company’s intent and ability to hold the security for a period of time sufficient to allow for any anticipated recovery in fair value. In addition, the Company considers other factors such as general market conditions, industry conditions, and analysts’ ratings. If the decline in fair value is deemed to be other-than-temporary, the cost basis of the investment is written down to fair value and the loss is realized as a component of net income. See Note 7 for further discussion of impairments of investments.
Long-Lived and Indefinite-Lived Assets
The Company’s long-lived and indefinite-lived assets consist of property and equipment, goodwill, indefinite-lived intangible assets and amortizable intangible assets.
Property and equipment is stated at cost. Depreciation is calculated on a straight-line basis over the estimated useful lives of the assets or, with respect to leasehold improvements, amortized over the shorter of the lease term or the asset’s estimated useful life. The useful lives of the Company’s long-lived assets are based on estimates of the period over which the Company expects the assets to be of economic benefit to the Company. In estimating the useful lives, the Company considers factors such as, but not limited to, risk of obsolescence, anticipated use, plans of the Company, and applicable laws and permit requirements. In July 2013, the permit for The Garden was renewed for ten years and these financial statements have been prepared assuming further renewal of that permit.
Identifiable intangible assets with finite useful lives are amortized on a straight-line basis over their respective estimated useful lives. Goodwill and identifiable intangible assets that have indefinite useful lives are not amortized.
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THE MADISON SQUARE GARDEN COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Impairment of Long-Lived and Indefinite-Lived Assets
In assessing the recoverability of the Company’s long-lived and indefinite-lived assets, the Company must make estimates and assumptions regarding future cash flows and other factors to determine the fair value of the respective assets. These estimates and assumptions could have a significant impact on whether an impairment charge is recognized as well as the magnitude of any such charge. Fair value estimates are made at a specific point in time, based on relevant information. These estimates are subjective in nature and involve significant uncertainties and judgments and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates. If these estimates or material related assumptions change in the future, the Company may be required to record impairment charges related to its long-lived and/or indefinite-lived assets.
Goodwill is tested annually for impairment as of August 31st and at any time upon the occurrence of certain events or changes in circumstances. The Company has the option to perform a qualitative assessment to determine if an impairment is more likely than not to have occurred. If the Company can support the conclusion that it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, the Company would not need to perform the two-step impairment test for that reporting unit. If the Company cannot support such a conclusion or the Company does not elect to perform the qualitative assessment then the first step of the goodwill impairment test is used to identify potential impairment by comparing the fair value of a reporting unit with its carrying amount, including goodwill. The Company generally determines the fair value of a reporting unit using an income approach, such as the discounted cash flow method, in instances when it does not perform the qualitative assessment of goodwill. If the carrying amount of a reporting unit exceeds its fair value, the second step of the goodwill impairment test is performed to measure the amount of impairment loss, if any. The second step of the goodwill impairment test compares the implied fair value of the reporting unit’s goodwill with the carrying amount of that goodwill. If the carrying amount of the reporting unit’s goodwill exceeds the implied fair value of that goodwill, an impairment loss is recognized in an amount equal to that excess. The implied fair value of goodwill is determined in the same manner as the amount of goodwill that would be recognized in a business combination.
The Company performs its goodwill impairment test at the reporting unit level, which is one level below the operating segment level. The Company has two operating and reportable segments, MSG Sports and MSG Entertainment, consistent with the way management makes decisions and allocates resources to the business. For the year ended June 30, 2019, the Company had three reporting units across its two operating segments for goodwill impairment testing purposes: MSG Sports, MSG Entertainment and TAO Group. During the first quarter of fiscal year 2019, the Company performed its annual impairment test of goodwill and determined that there were no impairments of goodwill identified for any of its reporting units as of the impairment test date.
Identifiable indefinite-lived intangible assets are tested annually for impairment as of August 31st and at any time upon the occurrence of certain events or substantive changes in circumstances. The Company has the option to perform a qualitative assessment to determine if an impairment is more likely than not to have occurred. In the qualitative assessment, the Company must evaluate the totality of qualitative factors, including any recent fair value measurements, that impact whether an indefinite-lived intangible asset other than goodwill has a carrying amount that more likely than not exceeds its fair value. The Company must proceed to conducting a quantitative analysis if the Company (i) determines that such an impairment is more likely than not to exist, or (ii) foregoes the qualitative assessment entirely. Under the quantitative assessment, the impairment test for identifiable indefinite-lived intangible assets consists of a comparison of the estimated fair value of the intangible asset with its carrying value. If the carrying value of the intangible asset exceeds its fair value, then an impairment loss is recognized in an amount equal to that excess. The Company generally determines the fair value of an indefinite-lived intangible asset using an income approach, such as the relief from royalty method, in instances when it does not perform the qualitative assessment of the intangible asset.
For other long-lived assets, including intangible assets that are amortized, the Company evaluates assets for recoverability when there is an indication of potential impairment. If the undiscounted cash flows from a group of assets being evaluated is less than the carrying value of that group of assets, the fair value of the asset group is determined and the carrying value of the asset group is written down to fair value. The Company generally determines the fair value of a finite-lived intangible asset using an income approach, such as the discounted cash flow method.
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THE MADISON SQUARE GARDEN COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Contingencies
Liabilities for loss contingencies arising from claims, assessments, litigation, fines and penalties and other sources are recorded when it is probable that a liability has been incurred and the amount of the assessment can be reasonably estimated.
Contingent Consideration
Some of the Company’s acquisition agreements include contingent earn-out arrangements, which are generally based on the achievement of future operating targets.
The fair values of these earn-out arrangements are included as part of the purchase price of the acquired companies on their respective acquisition dates. For each transaction, the Company estimates the fair value of contingent earn-out payments as part of the initial purchase price and records the estimated fair value of contingent consideration that the Company expects to pay to the former owners as a liability in “Other accrued liabilities” and “Other liabilities” on the consolidated balance sheets.
The Company measures its contingent earn-out liabilities at fair value on a recurring basis using significant unobservable inputs classified within Level III of the fair value hierarchy, which can result in a significantly higher or lower liability with a higher liability capped by the contractual maximum of the contingent earn-out obligation. Ultimately, the liability will be equivalent to the amount paid, and the difference between the fair value estimate and amount paid will be recorded in earnings as operating expense.
See Note 11 for more information regarding the fair value of the Company’s contingent consideration liabilities related to the acquisitions.
Defined Benefit Pension Plans and Other Postretirement Benefit Plan
As more fully described in Note 13, the Company has both funded and unfunded defined benefit plans, as well as a contributory other postretirement benefit plan, covering certain full-time employees and retirees. The expense recognized by the Company is determined using certain assumptions, including the expected long-term rate of return and discount rates, among others. The Company recognizes the funded status of its defined benefit pension and other postretirement plans (other than multiemployer plans) as an asset or liability in the consolidated balance sheets and recognizes changes in the funded status in the year in which the changes occur through other comprehensive income (loss).
Fair Value Measurements
The fair value hierarchy is based on inputs to valuation techniques that are used to measure fair value that are either observable or unobservable. Observable inputs reflect assumptions market participants would use in pricing an asset or liability based on market data obtained from independent sources while unobservable inputs reflect a reporting entity’s pricing based upon their own market assumptions. The fair value hierarchy consists of the following three levels:
• | Level I — Quoted prices for identical instruments in active markets. |
• | Level II — Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations whose inputs are observable or whose significant value drivers are observable. |
• | Level III — Instruments whose significant value drivers are unobservable. |
Foreign Currency Translations
The consolidated financial statements are presented in U.S. Dollars. Assets and liabilities of non-U.S. subsidiaries and the Company’s foreign-based equity method investments that operate in a local currency environment, where that local currency is the functional currency, are translated to U.S. Dollars at exchange rates in effect at the balance sheet date. Operating results of non-U.S. subsidiaries are translated at weighted-average exchange rates during the year which approximate the rates in effect at the transaction dates. For the Company’s foreign-based equity method investments, the proportionate share of the investee’s income is translated into U.S. dollars at the average exchange rate for the period and the investment is translated using the exchange rate as of the end of the reporting period. Foreign currency translation gains and losses are included as a component of accumulated other comprehensive income (loss) as changes in cumulative translation adjustments in the accompanying consolidated balance sheets.
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THE MADISON SQUARE GARDEN COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Recently Adopted Accounting Pronouncements
Adoption of ASC Topic 606
In May 2014, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606), which supersedes the revenue recognition requirements in ASC Topic 605, Revenue Recognition. Subsequently, the FASB issued various updates related to ASC Topic 606 including: (i) ASU No. 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date, (ii) ASU No. 2016-08, Revenue from Contracts with Customers (Topic 606), Principal versus Agent Considerations (Reporting Revenue versus Net), (iii) ASU No. 2016-10, Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing, (iv) ASU No. 2016-12, Revenue from Contracts with Customers (Topic 606) - Narrow-Scope Improvements and Practical Expedients, and (v) ASU No. 2016-20, Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers. The Company adopted ASC Topic 606 in the first quarter of fiscal year 2019 using the modified retrospective method for those contracts with customers which were not completed as of July 1, 2018. Results for reporting periods beginning after July 1, 2018 are presented under ASC Topic 606, while prior period amounts are not adjusted and continue to be reported in accordance with the historic accounting guidance under ASC Topic 605.
As a result of the adoption of ASC Topic 606, the Company now accounts for its performance obligations under suite license arrangements as a series and as a result, the related suite license fees for all years during the license term are aggregated for each license agreement and revenue is recognized proportionately when the underlying events at The Garden take place, as opposed to previously being recognized on a straight-line basis over the fiscal year under the prior standard.
In addition, the majority of the Company’s local media rights revenue is now recognized over the course of the teams’ regular seasons, which reflects the Company’s progress towards satisfaction of its performance obligations under such arrangements, as opposed to previously being recognized on a straight-line basis over the fiscal year under the prior standard.
The Company also enters into arrangements with multiple performance obligations, such as multi-year sponsorship agreements. To the extent these arrangements provide for performance obligations that are consistent over the multi-year contractual term, such performance obligations generally meet the definition of a series as provided for under the provisions of ASC Topic 606. As a result, the contractual fees for all years during the contract term are aggregated and the related revenue is recognized proportionately as the underlying performance obligations are satisfied. In general, sponsorship revenue was previously recognized by treating each year of the arrangement as a discrete contract year, and as such the stated contract price was recognized in each year.
Furthermore, the timing of certain fulfillment costs associated with performance obligations, primarily professional sports teams’ operating expenses, were also similarly impacted within the fiscal year.
The adoption of ASC Topic 606 had the following impact on revenues, operating expenses and operating income for the year ended June 30, 2019:
Year ended June 30, 2019 | ||||||||||||
As reported under ASC Topic 606 | Changes due to the adoption of ASC Topic 606 (a) | Amounts without adoption of ASC Topic 606 | ||||||||||
Revenues | $ | 1,631,068 | $ | 22,996 | $ | 1,654,064 | ||||||
Operating expenses: | ||||||||||||
Direct operating expenses | 997,077 | 26,239 | 1,023,316 | |||||||||
Selling, general and administrative expenses | 528,672 | — | 528,672 | |||||||||
Depreciation and amortization | 119,193 | — | 119,193 | |||||||||
Operating loss | $ | (13,874 | ) | $ | (3,243 | ) | $ | (17,117 | ) | |||
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(a) | The Company’s consolidated and segment operating results for the year ended June 30, 2019 were impacted by the adoption of ASC Topic 606. As a result, the Company’s revenues were lower by $22,996 and direct operating expenses were |
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lower by $26,239 for the year ended June 30, 2019. The impact of the adoption of ASC Topic 606 resulted in a net decrease in MSG Entertainment’s revenues and direct operating expenses of $24,347 and $24,545, respectively, for the year ended June 30, 2019, primarily due to the application of principal versus agent revenue recognition on event-related food, beverage and merchandise activities. MSG Sports’ revenues increased by $1,351 for the year ended June 30, 2019 as a result of the adoption of ASC Topic 606, which is primarily associated with professional sports teams’ sponsorship and signage revenues. In addition, the adoption of ASC Topic 606 resulted in a decrease in MSG Sports’ direct operating expenses of $1,694 for the year ended June 30, 2019, due to the application of principal versus agent revenue recognition on event-related food, beverage and merchandise activities.
In accordance with the new revenue recognition standard disclosure requirements, the following tables summarize the impact of adopting ASC Topic 606 on the Company’s consolidated balance sheet as of July 1, 2018.
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Consolidated Balance Sheet As of July 1, 2018 | ||||||||||||
Amounts without the adoption of ASC Topic 606 | Changes due to the adoption of ASC Topic 606 | Adjusted under ASC Topic 606 | ||||||||||
ASSETS | ||||||||||||
Current Assets: | ||||||||||||
Other current assets | $ | 28,996 | $ | 4,366 | $ | 33,362 | ||||||
Total current assets | 1,415,669 | 4,366 | 1,420,035 | |||||||||
Total assets | $ | 3,736,173 | $ | 4,366 | $ | 3,740,539 | ||||||
LIABILITIES, REDEEMABLE NONCONTROLLING INTERESTS AND EQUITY | ||||||||||||
Current Liabilities: | ||||||||||||
Employee related costs | $ | 123,992 | $ | 79 | $ | 124,071 | ||||||
Other accrued liabilities | 180,272 | 562 | 180,834 | |||||||||
Deferred revenue (a) | 324,749 | (30,480 | ) | 294,269 | ||||||||
Total current liabilities | 765,505 | (29,839 | ) | 735,666 | ||||||||
Total liabilities | 1,105,454 | (29,839 | ) | 1,075,615 | ||||||||
The Madison Square Garden Company Stockholders’ Equity: | ||||||||||||
Retained Earnings (Accumulated deficit) | (11,059 | ) | 34,205 | 23,146 | ||||||||
Total The Madison Square Garden Company stockholders’ equity | 2,536,483 | 34,205 | 2,570,688 | |||||||||
Total equity | 2,554,035 | 34,205 | 2,588,240 | |||||||||
Total liabilities, redeemable noncontrolling interests and equity | $ | 3,736,173 | $ | 4,366 | $ | 3,740,539 | ||||||
(a) | Amounts due to third-party promoters of $89,513, which were previously reported as Deferred revenue in the accompanying consolidated balance sheet as of June 30, 2018, are now reported as Collections due to promoters in the accompanying consolidated balance sheet. |
The Company enters into nonmonetary transactions that involve the exchange of goods or services, such as advertising and promotional benefits as well as tickets, for other goods or services. In accordance with the new revenue recognition standard, such transactions are measured and recorded at the fair value of the goods or services received unless the goods or services surrendered have a more readily determinable fair value. In addition, the Company enters into other monetary transactions in which nonmonetary consideration is also included and the entire transaction is recorded at fair value.
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Adoption of other Accounting Pronouncements
In January 2016, the FASB issued ASU No. 2016-01, Financial Instruments — Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities, which addresses certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. This standard, among other things, (i) requires equity investments, with certain exceptions, to be measured at fair value with changes in fair value recognized in net income and (ii) simplifies the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment. In February 2018, the FASB issued ASU No. 2018-03, Technical Corrections and Improvements to Financial Instruments Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities, which clarifies certain aspects of the guidance issued in ASU No. 2016-01. Among other things, the amendment clarifies that an entity that uses the measurement alternative for equity securities without readily determinable fair values can change its measurement approach to fair value. Once the election is made, the measurement approach is irrevocable and the entity is required to apply the selected approach to that security and all identical or similar investments of the same issuer. This change in accounting is expected to create greater volatility in the Company’s miscellaneous income (expense) in the future. The primary impact of the adoption of ASU No. 2016-01 and ASU No. 2018-03 relate to the Company’s available-for-sale equity investment and resulted in unrecognized gains and losses from such investment being reflected in the Company’s consolidated statements of operations beginning in fiscal year 2019. The Company adopted ASU No. 2016-01 and ASU No. 2018-03 in the first quarter of fiscal year 2019 and recorded a cumulative-effect adjustment to the balance sheet by reclassifying the balance of the Accumulated other comprehensive loss to Accumulated deficit of $5,570 including income tax expense effect of $3,104. See Notes 7 and 11 for more information on the Company’s equity investment with readily determinable fair value in Townsquare Media, Inc. (“Townsquare”).
In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230). ASU No. 2016-15 addresses eight specific cash flow issues and is intended to reduce diversity in how certain cash receipts and cash payments are presented and classified in the statement of cash flows. The Company adopted this standard in the first quarter of fiscal year 2019 retrospectively. The adoption of this standard did not have an impact on the Company’s consolidated financial statements.
In October 2016, the FASB issued ASU No. 2016-16, Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory. ASU No. 2016-16 requires the recognition of income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs. The Company adopted this standard in the first quarter of fiscal year 2019 on a modified retrospective basis. The adoption of this standard did not have an impact on the Company’s consolidated financial statements.
In November 2016, the FASB issued ASU No. 2016-18, Statement of Cash Flows: Restricted Cash. The primary purpose of ASU No. 2016-18 is to reduce diversity in the classification and presentation of changes in restricted cash on the statement of cash flows. This standard requires that a statement of cash flows explains the change during the period in total cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Therefore, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. The Company adopted this standard in the first quarter of fiscal year 2019 retrospectively and it resulted in a decrease to net cash flows provided by operating activities of $3,018 and an increase to net cash flows provided by operating activities of $6,909 for the years ended June 30, 2018 and 2017, respectively. See Note 6 for a reconciliation of the cash, cash equivalents and restricted cash reported in the Company’s consolidated balance sheets to the amounts as reported on the consolidated statements of cash flows.
In January 2017, the FASB issued ASU No. 2017-01, Business Combinations (Topic 805) Clarifying the Definition of a Business. The primary purpose of this ASU is to clarify the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses, which will affect many areas of accounting, including acquisitions, disposals, goodwill, and consolidation. The Company adopted this standard in the first quarter of fiscal year 2019. The adoption of this standard did not have an impact on the Company’s consolidated financial statements.
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In March 2017, the FASB issued ASU No. 2017-07, Compensation — Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost. ASU No. 2017-07 requires employers to disaggregate the service cost component from the other components of net benefit cost and disclose by line item the amount of net benefit cost that is included in the statement of operations or capitalized in assets. The standard requires employers to report the service cost component in the same line item(s) as other compensation costs arising from services rendered by the pertinent employees during the period and to report other components of net benefit cost separately and outside the subtotal of operating income (loss). The standard also allows only the service cost component to be eligible for capitalization. The guidance requires application on a retrospective basis for the presentation of the service cost component and the other components of net benefit cost in the statements of operations and on a prospective basis for the capitalization of the service cost component of net benefit cost in assets. The Company adopted this standard in the first quarter of fiscal year 2019 retrospectively and elected the practical expedient allowed by ASU No. 2017-07 to utilize amounts disclosed in the Company’s pension plans and other postretirement benefit plan (see Note 13) for the prior comparative period as the estimation basis for applying the retrospective presentation requirements. As a result, the Company recorded a prior period adjustment in the accompanying consolidated statements of operations for the year ended June 30, 2018 to decrease Direct operating expenses and Selling, general and administrative expenses by $1,152 and $3,029, respectively, which was related to the non-service cost components of net periodic pension and postretirement benefit cost, with a corresponding adjustment of $4,181 in Miscellaneous income (expense), net. For the year ended June 30, 2017, the Company recorded a similar prior period adjustment in the accompanying consolidated statements of operations to decrease Direct operating expenses and Selling, general and administrative expenses by $958 and $3,088, respectively, which was related to the non-service cost components of net periodic pension and postretirement benefit cost, with a corresponding adjustment of $4,046 in Miscellaneous income (expense), net. For the year ended June 30, 2019, the non-service cost components of net periodic pension and postretirement benefit cost included under Miscellaneous income (expense), net in the accompanying consolidated statements of operations was $2,730.
In June 2018, the FASB issued ASU No. 2018-07, Compensation — Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting, which expands the scope of ASC Topic 718 to include all share-based payment transactions for acquiring goods and services from nonemployees. ASU No. 2018-07 specifies that ASC Topic 718 applies to all share-based payment transactions in which the grantor acquires goods and services to be used or consumed in its own operations by issuing share-based payment awards. ASU No. 2018-07 also clarifies that ASC Topic 718 does not apply to share-based payments used to effectively provide (i) financing to the issuer or (ii) awards granted in conjunction with selling goods or services to customers as part of a contract accounted for under ASC Topic 606. The Company early adopted this standard in the third quarter of fiscal year 2019. The adoption of this standard did not have an impact on the Company’s consolidated financial statements.
Recently Issued Accounting Pronouncements Not Yet Adopted
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), which supersedes existing guidance on accounting for leases in ASC Topic 840, Leases. ASU No. 2016-02, among other things, (i) requires lessees to account for leases as either finance leases or operating leases and generally requires all leases to be recorded on the balance sheet, including those leases classified as operating leases under previous accounting guidance, through the recognition of right-of-use assets and corresponding lease liabilities, and (ii) requires extensive qualitative and quantitative disclosures about leasing activities. The accounting applied by a lessor is largely unchanged from that applied under previous accounting guidance. In January 2018, the FASB issued ASU No. 2018-01, Leases (Topic 842) — Land Easement Practical Expedient for Transition to Topic 842, which provides a lessee or lessor the option to not assess at transition whether existing land easements, not currently accounted for as leases under the current lease guidance, should be treated as leases under the new standard. In July 2018, the FASB issued ASU No. 2018-10, Codification Improvements to Topic 842, Leases and ASU No. 2018-11, Leases (Topic 842) Targeted improvements, which provides an additional (and optional) transition method whereby the new lease standard is applied at the adoption date and recognized as an adjustment to retained earnings. The effective date and transition requirements for ASU No. 2018-01, ASU No. 2018-10 and ASU No. 2018-11 are the same as ASU No. 2016-02. This standard, as amended, will be effective for the Company beginning in the first quarter of fiscal year 2020 and is required to be applied using the modified retrospective approach for all leases existing as of the effective date. The Company plans to adopt this standard using the optional transition method allowed by ASU No. 2018-11, whereby the Company will initially apply the new leases standard at July 1, 2019, and will recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. While the Company’s evaluation of the impact this standard will have on its consolidated financial statements is currently being finalized, the adoption of the standard will result in the recognition of significant right of use assets and lease liabilities related to the Company’s operating leases. The adoption of this standard will not impact operating income.
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In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments — Credit Losses. ASU No. 2016-13 replaces the incurred loss impairment methodology in current U.S. GAAP with a methodology that will require the reflection of expected credit losses and will also require consideration of a broader range of reasonable and supportable information to determine credit loss estimates. In May 2019, the FASB issued ASU No. 2019-05, Targeted Transition Relief, which amends ASC Topic 326 to provide an option to irrevocably elect to measure certain individual financial assets at fair value instead of amortized cost. For most financial instruments, the standard will require the use of a forward-looking expected loss model rather than the incurred loss model for recognizing credit losses, which will generally result in the earlier recognition of credit losses on financial instruments. This standard will be effective for the Company beginning in the first quarter of fiscal year 2021, with early adoption permitted. The Company is currently evaluating the impact this standard will have on its consolidated financial statements.
In January 2017, the FASB issued ASU No. 2017-04, Intangibles — Goodwill and Other (Topic 350): Simplifying the Accounting for Goodwill Impairment. ASU No. 2017-04 removes Step 2 of the goodwill impairment test, which requires a hypothetical purchase price allocation. A goodwill impairment will now be the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. This standard will be effective for the Company beginning in the first quarter of fiscal year 2021 and is required to be applied prospectively. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The adoption of this standard is not expected to have a material impact on the Company’s consolidated financial statements.
In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework — Changes to the Disclosure Requirements for Fair Value Measurement as part of the FASB’s broader disclosure framework project. ASU No. 2018-13 removes, modifies and adds certain disclosures providing greater focus on requirements that clearly communicate the most important information to the users of the financial statements with respect to fair value measurements. The standard is effective for the Company beginning in the first quarter of fiscal year 2021, with early adoption permitted. Most of the disclosure requirements in ASU No. 2018-13 would need to be applied on a retrospective basis except for the guidance related to (i) unrealized gains and loss included in other comprehensive income, (ii) disclosure related to range and weighted average Level 3 unobservable inputs and (iii) narrative disclosure requirements on measurement uncertainty, which are required to be applied on a prospective basis. The Company is currently evaluating the impact this standard will have on its consolidated financial statements.
In August 2018, the FASB issued ASU No. 2018-14, Compensation-Retirement Benefits-Defined Benefit Plans — General (Subtopic 715-20): Disclosure Framework-Changes to the Disclosure Requirements for Defined Benefit Plans. ASU No. 2018-14 removes certain disclosures that are not considered cost beneficial, clarifies certain required disclosures and adds additional disclosures. The standard will be effective for the Company in the fourth quarter of fiscal year 2021, with early adoption permitted. The amendments in ASU No. 2018-14 are required to be applied retrospectively. The Company is currently evaluating the impact this standard will have on its consolidated financial statements.
In August 2018, the FASB issued ASU No. 2018-15, Intangibles — Goodwill and Other-Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That is a Service Contract. ASU No. 2018-15 aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. The guidance also specifies that the balance sheet, income statement, and statement of cash flows presentation of capitalized implementation costs and the related amortization should align with the presentation of the hosting (service) element of the arrangement. The standard is effective for the Company in the first quarter of fiscal year 2021, with early adoption permitted. Entities have the option to apply the guidance prospectively to all implementation costs incurred after the date of adoption or retrospectively. The adoption of this standard is not expected to have a material impact on the Company’s consolidated financial statements.
In November 2018, the FASB issued ASU No. 2018-17, Targeted Improvements to Related Party Guidance for Variable Interest Entities. ASU No. 2018-17 amends the variable interest entities (“VIE”) guidance to align the evaluation of a decision maker’s or service provider’s fee in assessing a variable interest with the guidance in the primary beneficiary test. Specifically, indirect interests held by a related party that is under common control will now be considered on a proportionate basis, rather than in their entirety, when assessing whether the fee qualifies as a variable interest. The proportionate basis approach is consistent with the treatment of indirect interests held by a related party under common control when evaluating the primary beneficiary of a VIE. This effectively means that when a decision maker or service provider has an interest in a related party, regardless of whether they are under common control, it will consider that related party’s interest in a VIE on a proportionate basis throughout the VIE model, for both the assessment of a variable interest and the determination of a primary beneficiary.
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The standard will be effective for the Company in the first quarter of fiscal year 2021, with early adoption permitted. The amendments in ASU No. 2018-17 are required to be applied retrospectively. The Company is currently evaluating the impact this standard will have on its consolidated financial statements.
In November 2018, the FASB issued ASU No. 2018-18, Collaborative Arrangements (Topic 808): Clarifying the Interaction between Topic 808 and Topic 606. ASU No. 2018-18 clarifies that certain transactions between participants in a collaborative arrangement should be accounted for under ASC Topic 606 when the counterparty is a customer. In addition, ASU No. 2018-18 precludes an entity from presenting consideration from a transaction in a collaborative arrangement as revenue from contracts with customers if the counterparty is not a customer for that transaction. The standard will be effective for the Company in the first quarter of fiscal year 2021, with early adoption permitted. The amendments in ASU No. 2018-18 are required to be applied retrospectively to the date when the Company initially adopted ASC Topic 606. The Company is currently evaluating the impact this standard will have on its consolidated financial statements.
In April 2019, the FASB issued ASU No. 2019-04, Codification Improvements to Topic 326, Financial Instruments — Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825 — Financial Instruments. This ASU provides narrow-scope amendments to help apply these recent standards. The transition requirements and effective date of this ASU will be effective for the Company in the first quarter of fiscal year 2021 with early adoption permitted for certain amendments. The Company is currently evaluating the impact this standard will have on its consolidated financial statements.
Note 3. Revenue Recognition
Contracts with Customers
All revenue recognized in the consolidated statements of operations is considered to be revenue from contracts with customers in accordance with ASC Topic 606. For the year ended June 30, 2019, the Company did not have any impairment losses on receivables or contract assets arising from contracts with customers.
The Company recognizes revenue when, or as, performance obligations under the terms of a contract are satisfied, which generally occurs when, or as, control of promised goods or services are transferred to customers. Revenue is measured as the amount that reflects the consideration the Company expects to be entitled to in exchange for those goods or services (“transaction price”). To the extent the transaction price includes variable consideration, the Company estimates the amount of variable consideration that should be included in the transaction price utilizing the most likely amount to which the Company expects to be entitled. Variable consideration is included in the transaction price if, in the Company’s judgment, it is probable that a significant future reversal of cumulative revenue under the contract will not occur. Estimates of variable consideration and the determination of whether to include such estimated amounts in the transaction price are based largely on an assessment of the Company’s anticipated performance and all information that is reasonably available. The Company accounts for taxes collected from customers and remitted to governmental authorities on a net basis and excludes these amounts from revenues.
In addition, the Company defers certain costs to fulfill the Company’s contracts with customers to the extent such costs relate directly to the contracts, are expected to generate resources that will be used to satisfy the Company’s performance obligations under the contracts and are expected to be recovered through revenue generated under the contracts. Contract fulfillment costs are expensed as the Company satisfies the related performance obligations.
Arrangements with Multiple Performance Obligations
The Company has arrangements with multiple performance obligations, such as multi-year sponsorship agreements which may derive revenues for each of the Company’s segments within a single arrangement. Payment terms for such arrangements can vary by contract, but payments are generally due in installments throughout the contractual term. The performance obligations included in each sponsorship agreement vary and may include various advertising benefits such as, but not limited to, signage at The Garden and the Company’s other venues, digital advertising, event or property specific advertising, as well as non-advertising benefits such as suite licenses and event tickets. To the extent the Company’s multi-year arrangements provide for performance obligations that are consistent over the multi-year contractual term, such performance obligations generally meet the definition of a series as provided for under the accounting guidance. If performance obligations are concluded to meet the definition of a series, the contractual fees for all years during the contract term are aggregated and the related revenue is recognized proportionately as the underlying performance obligations are satisfied.
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(Continued)
The timing of revenue recognition for each performance obligation is dependent upon the facts and circumstances surrounding the Company’s satisfaction of its respective performance obligation. The Company allocates the transaction price for such arrangements to each performance obligation within the arrangement based on the estimated relative standalone selling price of the performance obligation. The Company’s process for determining its estimated standalone selling prices involves management’s judgment and considers multiple factors including company specific and market specific factors that may vary depending upon the unique facts and circumstances related to each performance obligation. Key factors considered by the Company in developing an estimated standalone selling price for its performance obligations include, but are not limited to, prices charged for similar performance obligations, the Company’s ongoing pricing strategy and policies, and consideration of pricing of similar performance obligations sold in other arrangements with multiple performance obligations.
The Company may incur costs such as commissions to obtain its multi-year sponsorship agreements. The Company assesses such costs for capitalization on a contract by contract basis. To the extent costs are capitalized, the Company estimates the useful life of the related contract asset which may be the underlying contract term or the estimated customer life depending on the facts and circumstances surrounding the contract. The contract asset is amortized over the estimated useful life.
Principal versus Agent Revenue Recognition
The Company reports revenue on a gross or net basis based on management’s assessment of whether the Company acts as a principal or agent in the transaction. The determination of whether the Company acts as a principal or an agent in a transaction is based on an evaluation of whether the Company controls the good or service before transfer to the customer. When the Company concludes that it controls the good or service before transfer to the customer, the Company is considered a principal in the transaction and records revenue on a gross basis. When the Company concludes that it does not control the good or service before transfer to the customer but arranges for another entity to provide the good or service, the Company acts as an agent and records revenue on a net basis in the amount it earns for its agency service.
In connection with the 2015 Distribution, the Company entered into an advertising sales representation agreement with MSG Networks. Pursuant to the agreement, the Company has the exclusive right and obligation to sell advertising on behalf of MSG Networks. The Company is entitled to and earns commission revenue as the advertisements are aired on MSG Networks. Since the Company acts as an agent, the Company recognizes the advertising commission revenue on a net basis.
The Company’s revenue recognition policies that summarize the nature, amount, timing and uncertainty associated with each of the Company’s revenue sources are discussed further in each respective segment discussion below.
MSG Entertainment
The Company’s MSG Entertainment segment earns event related revenues principally from the sale of tickets for events that the Company produces or promotes/co-promotes, and from venue license fees charged to third-party promoters for events held at the Company’s venues that MSG Entertainment does not produce or promote/co-promote. The Company’s performance obligations with respect to event-related revenues from the sale of tickets, venue license fees from third-party promoters, sponsorships, concessions and merchandise are satisfied at the point of sale or as the related event occurs.
MSG Entertainment’s revenues also include revenue from the license of The Garden’s suites. Suite license arrangements are generally multi-year fixed-fee arrangements that include annual fee increases. Payment terms for suite license arrangements can vary by contract, but payments are generally due in installments prior to each license year. The Company’s performance obligation under such arrangements is to provide the licensee with access to the suite when events occur at The Garden. The Company accounts for the performance obligation under these types of arrangements as a series and, as a result, the related suite license fees for all years during the license term are aggregated and revenue is recognized proportionately over the license period as the Company satisfies the related performance obligation. Progress toward satisfaction of the Company’s annual suite license performance obligations is measured as access to the suite is provided to the licensee for each event throughout the contractual term of the license.
The Company’s MSG Entertainment segment also earns revenues from the sale of advertising in the form of venue signage and other forms of sponsorship, which are not related to any specific event. The Company’s performance obligations with respect to this advertising are satisfied as the related benefits are delivered over the term of the respective agreements.
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Revenues from dining, nightlife and hospitality offerings through TAO Group are recognized when food, beverages and/or services are provided to the customer as that is the point in which the related performance obligation is satisfied. In addition, management fee revenues which are earned in accordance with specific venue management agreements are recorded over the period in which the management services are performed as such depicts the measure of progress toward satisfaction of the Company’s venue management performance obligations.
Amounts collected in advance of the Company’s satisfaction of its contractual performance obligations are recorded as a contract liability within deferred revenue and are recognized as the Company satisfies the related performance obligations. Amounts collected in advance of events for which the Company is not the promoter or co-promoter do not represent contract liabilities and are recorded as collections due to promoters on the balance sheet.
MSG Sports
The Company’s professional sports teams derive event-related revenues principally from ticket sales which are recognized as the related games occur. MSG Sports’ revenues also include revenue from the license of The Garden’s suites. Suite license arrangements are generally multi-year fixed fee arrangements that include annual fee increases. Payment terms for suite license arrangements can vary by contract, but payments are generally due in installments prior to each license year. The Company’s performance obligation under such arrangements is to provide the licensee with access to the suite when events occur at The Garden. The Company accounts for the performance obligation under these types of arrangements as a series and, as a result, the related suite license fees for all years during the license term are aggregated and revenue is recognized proportionately over the license period as the Company satisfies the related performance obligation. Progress toward satisfaction of the Company’s suite license performance obligations is measured as access to the suite is provided to the licensee for each event throughout the contractual term of the license.
In addition to event-related revenue, MSG Sports maintains local media rights arrangements which provide for the licensing of team-related programming to MSG Networks. MSG Sports, pursuant to the terms of the agreements, receives such rights fees in equal monthly installments throughout each license year. The transaction price under these arrangements is variable in nature as certain credit provisions exist to the extent that the teams’ games are unavailable for broadcast during an individual league season. The Company estimates the transaction price at the beginning of each fiscal year, which coincides with the annual contractual term. In estimating the transaction price, the Company considers the contractually agreed upon license fees as well as qualitative considerations with respect to the number of games expected to be available for broadcast by MSG Networks over the upcoming year. The resulting transaction price is allocated entirely to the rights provided for the related contract year and revenue is recognized using an output measure of progress toward satisfaction of the Company’s performance obligations within the contract year, as the underlying benefits are conveyed to the licensee.
The Company’s professional sports teams also derive revenue from the distribution of league-wide national and international television contracts and other league-wide revenue sources. The transaction price for each of these revenues is based upon the expected distribution values as communicated by the applicable league. The timing of revenue recognition is dependent on the nature of the underlying performance obligation, which is generally over time. Receipt of league-wide revenues generally occurs at the time of communication or according to a specified timeline.
MSG Sports also earns revenues from the sale of advertising in the form of venue signage and sponsorships, which are not related to any specific event. The Company’s performance obligations with respect to this advertising are satisfied as the related benefits are delivered over the term of the respective agreements.
The Company’s MSG Sports segment also derives revenue from live sporting events not related to the Company’s teams. The Company’s performance obligations with respect to event-related revenues from other live sporting events, including the sale of tickets, venue license fees earned in connection with other live sporting events that the Company does not produce or promote, sponsorships, concessions and merchandise are satisfied at the point of sale or as the related event occurs.
Amounts collected in advance of the Company’s satisfaction of its contractual performance obligations are recorded as a contract liability within deferred revenue and are recognized as the Company satisfies the related performance obligations. Amounts collected in advance of events for which the Company is not the promoter or co-promoter do not represent contract liabilities and are recorded as collections due to promoters on the balance sheet.
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THE MADISON SQUARE GARDEN COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Disaggregation of Revenue
The following table disaggregates the Company’s revenue by major source and reportable segment based upon the timing of transfer of goods or services to the customer for the year ended June 30, 2019:
Year ended June 30, 2019 | ||||||||||||||||
MSG Entertainment | MSG Sports | Eliminations | Total | |||||||||||||
Event-related (a) | $ | 712,556 | $ | 350,344 | $ | (852 | ) | $ | 1,062,048 | |||||||
Sponsorship, signage and suite licenses | 81,570 | 175,316 | (681 | ) | 256,205 | |||||||||||
League distributions | — | 119,640 | — | 119,640 | ||||||||||||
Local media rights fees from MSG Networks | — | 146,232 | — | 146,232 | ||||||||||||
Other (b) | 25,804 | 21,214 | (75 | ) | 46,943 | |||||||||||
Total revenues from contracts with customers | $ | 819,930 | $ | 812,746 | $ | (1,608 | ) | $ | 1,631,068 | |||||||
(a) | Consists of (i) ticket sales and other ticket-related revenues, (ii) TAO Group’s entertainment dining and nightlife offerings, (iii) venue license fees from third-party promoters, and (iv) food, beverage and merchandise sales. |
(b) | Primarily consists of (i) advertising commission revenue from MSG Networks, (ii) TAO Group’s managed venue revenues, and (iii) revenues from Obscura’s third-party production business. |
Contract Balances
The timing of revenue recognition, billings and cash collections results in billed receivables, contract assets and contract liabilities on the consolidated balance sheet. The following table provides information about contract balances from the Company’s contracts with customers as of June 30, 2019 and July 1, 2018.
June 30, | July 1, | |||||||
2019 | 2018 | |||||||
Receivables from contracts with customers, net (a) | $ | 96,982 | $ | 100,930 | ||||
Contract assets, current (b) | 7,314 | 4,366 | ||||||
Deferred revenue, including non-current portion (c) | 305,821 | 304,501 | ||||||
(a) | Receivables from contracts with customers, which are reported in Accounts receivable, net and Net related party receivables in the Company’s consolidated balance sheets, represent the Company’s unconditional rights to consideration under its contracts with customers. As of June 30, 2019 and July 1, 2018, the Company’s receivables from contracts with customers above included $126 and $205, respectively, related to various related parties. See Note 16 for further details on these related party arrangements. |
(b) | Contract assets, which are reported as Other current assets in the Company’s consolidated balance sheets, primarily relate to the Company’s rights to consideration for goods or services transferred to the customer, for which the Company does not have an unconditional right to bill as of the reporting date. Contract assets are transferred to accounts receivable once the Company’s right to consideration becomes unconditional. |
(c) | Deferred revenue primarily relates to the Company’s receipt of consideration from a customer in advance of the Company’s transfer of goods or services to that customer. Deferred revenue is reduced and the related revenue is recognized once the underlying goods or services are transferred to the customer. Revenue recognized for the year ended June 30, 2019 relating to the deferred revenue balance as of July 1, 2018 was $255,966. |
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THE MADISON SQUARE GARDEN COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Transaction Price Allocated to the Remaining Performance Obligations
The following table depicts the estimated revenue expected to be recognized in the future related to performance obligations that are unsatisfied (or partially unsatisfied) as of June 30, 2019. In developing the estimated revenue, the Company applies the allowable practical expedient and does not disclose information about remaining performance obligations that have original expected durations of one year or less. Additionally, the Company has elected to exclude variable consideration from its disclosure related to the remaining performance obligations under its local media rights arrangements with MSG Networks.
Fiscal year ending June 30, 2020 | $ | 215,291 | ||
Fiscal year ending June 30, 2021 | 178,792 | |||
Fiscal year ending June 30, 2022 | 135,532 | |||
Fiscal year ending June 30, 2023 | 79,219 | |||
Fiscal year ending June 30, 2024 | 54,078 | |||
Thereafter | 127,299 | |||
$ | 790,211 | |||
Note 4. Computation of Earnings (Loss) per Common Share
The following table presents a reconciliation of weighted-average shares used in the calculations of basic and diluted earnings (loss) per common share attributable to the Company’s stockholders (“EPS”).
Years Ended June 30, | |||||||||
2019 | 2018 | 2017 | |||||||
Weighted-average shares (denominator): | |||||||||
Weighted-average shares for basic EPS | 23,767 | 23,639 | 23,853 | ||||||
Dilutive effect of shares issuable under share-based compensation plans | 133 | 207 | — | ||||||
Weighted-average shares for diluted EPS | 23,900 | 23,846 | 23,853 | ||||||
Weighted-average anti-dilutive shares | 368 | 28 | — | ||||||
Note 5. Team Personnel Transactions
Direct operating and selling, general and administrative expenses in the accompanying consolidated statements of operations include net provisions for transactions relating to players and certain other team personnel on the Company’s sports teams for (i) waivers/contract termination costs, (ii) player trades and (iii) season-ending injuries (“Team Personnel Transactions”). Team Personnel Transactions amounted to $53,134, $27,514 and $42,337 for the years ended June 30, 2019, 2018 and 2017, respectively. Team personnel transactions for the year ended June 30, 2018 are reported net of insurance recoveries of $468. See Note 22 for details of a subsequent event related to Team Personnel Transactions in July 2019.
F- 33
THE MADISON SQUARE GARDEN COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Note 6. Cash, Cash Equivalent and Restricted Cash
The following table provides a summary of the amounts recorded as cash, cash equivalents and restricted cash.
As of | ||||||||||||||||
June 30, 2019 | June 30, 2018 | June 30, 2017 | June 30, 2016 | |||||||||||||
Captions on the consolidated balance sheets: | ||||||||||||||||
Cash and cash equivalents | $ | 1,086,372 | $ | 1,225,638 | $ | 1,238,114 | $ | 1,444,317 | ||||||||
Restricted cash (a) | 31,529 | 30,982 | 34,000 | 27,091 | ||||||||||||
Cash, cash equivalents and restricted cash on the consolidated statements of cash flows | $ | 1,117,901 | $ | 1,256,620 | $ | 1,272,114 | $ | 1,471,408 | ||||||||
_________________
(a) | See Note 2 for more information regarding the nature of restricted cash. |
Note 7. Investments and Loans to Nonconsolidated Affiliates
The Company’s investments and loans to nonconsolidated affiliates which are accounted for under the equity method of accounting, equity investments without readily determinable fair values, and cost method of accounting in accordance with ASC Topic 323, Investments - Equity Method and Joint Ventures, ASC Topic 321, Investments - Equity Securities, and ASC Topic 325, Investments - Other, respectively, consisted of the following:
_________________
Ownership Percentage | Investment | Loan | Total | |||||||||||
June 30, 2019 | ||||||||||||||
Equity method investments: | ||||||||||||||
SACO Technologies Inc. (“SACO”) | 30% | $ | 44,321 | $ | — | $ | 44,321 | |||||||
Tribeca Enterprises LLC (“Tribeca Enterprises”) | 50% | — | 18,000 | 18,000 | ||||||||||
Others | 8,372 | — | 8,372 | |||||||||||
Equity investments without readily determinable fair values (a) | 13,867 | — | 13,867 | |||||||||||
Total investments and loans to nonconsolidated affiliates | $ | 66,560 | $ | 18,000 | $ | 84,560 | ||||||||
June 30, 2018 | ||||||||||||||
Equity method investments: | ||||||||||||||
Azoff MSG Entertainment LLC (“AMSGE”) | 50% | $ | 101,369 | $ | 63,500 | $ | 164,869 | |||||||
Tribeca Enterprises LLC (“Tribeca Enterprises”) | 50% | 8,007 | 19,525 | 27,532 | ||||||||||
Others | 6,977 | — | 6,977 | |||||||||||
Cost method investments (a) | 10,573 | — | 10,573 | |||||||||||
Total investments and loans to nonconsolidated affiliates | $ | 126,926 | $ | 83,025 | $ | 209,951 | ||||||||
(a) | In accordance with the ASU No. 2016-01 and ASU No. 2018-03, which were adopted on July 1, 2018, the cost method accounting for equity investments was eliminated. Such investments are required to be presented at fair value. The Company has elected to account for its equity securities without readily determinable fair values at cost, adjusted for impairment and changes resulting from observable price fluctuations in orderly transactions for the identical or a similar investment of the same issuer (“Measurement Alternative”). The Company applies the Measurement Alternative, which is classified within Level III of the fair value hierarchy, to its equity investments without readily determinable fair values as of |
THE MADISON SQUARE GARDEN COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
June 30, 2019 and recorded a $3,738 increase in carrying value from observable price fluctuations and an impairment charge of $398. The Company did not identify any adjustments on July 1, 2018.
Equity Method Investments
The Company determined that these investments are not VIEs and therefore each was analyzed under the voting model. The Company determined that due to a lack of a voting majority and consistent with the accounting for partnership (or similar entities) interests, it does not control these entities. Accordingly, the Company accounts for these investments under the equity method of accounting in accordance with ASC Topic 323. In addition, for an investment in a limited liability company in which the Company has an ownership interest that exceeds 3-5%, the Company also accounts for such investment under the equity method of accounting.
In September 2013, the Company acquired a 50% interest in AMSGE for $125,000. AMSGE owns and operates businesses in the entertainment industry and focused on music management, performance rights, strategic marketing and venue management consulting services. The Company sold its interest in AMSGE (renamed The Azoff Company) to The Azoff Company Holdings (“Azoff Music”) on December 5, 2018 for $125,000. The Company recorded a gain on the sale of its interest in AMSGE of $3,219 (net of transaction costs of $2,290), which is reported in Earnings (loss) in equity method investments in the accompanying consolidated statement of operations for the year ended June 30, 2019. The $63,500 outstanding under the revolving credit facility previously extended by the Company to AMSGE was also converted to a subordinated term loan with a maturity date of September 20, 2021. This subordinated term loan was assumed by The Azoff Company Equity LLC, a newly-formed holding company that owns, directly or indirectly, the investments previously owned by AMSGE. The subordinated term loan to The Azoff Company Equity LLC bears interest at a floating rate, which at the option of The Azoff Company Equity LLC, is either (i) a base rate plus a margin of 1.25% per annum or (ii) six-month LIBOR plus a margin of 2.25% per annum. See Note 11 for more information on this subordinated term loan receivable. Azoff Music directly or through its affiliates will continue to provide consulting services to the Company, including with respect to the Forum and other venues (including MSG Spheres). In addition, in connection with the arrangement, until October 8, 2020, the Company has the right to participate in the proceeds of a sale of certain of Azoff Music’s businesses above a specified amount, and Azoff Music has the right to participate in the proceeds of a sale of the Forum above a specified amount.
In August 2013, the Company acquired an interest in Brooklyn Bowl Las Vegas, LLC (“BBLV”). In March 2014, BBLV opened a new bowling, dining and live music venue in Las Vegas. The equity investment in BBLV of $23,600 was fully written-off in fiscal year 2015. In May 2019, the Company sold its interest in BBLV for $750 and recorded a gain on the sale of its interest for the same amount, which is reported in Earnings (loss) in equity method investments in the accompanying consolidated statements of operations for the year ended June 30, 2019.
In March 2014, the Company acquired a 50% interest in Tribeca Enterprises for $22,500. Tribeca Enterprises owns and operates the Tribeca Film Festival and certain other businesses. As of the acquisition date the carrying amount of the investment was greater than the Company’s equity in the underlying assets of Tribeca Enterprises. As such, the Company allocated the difference to indefinite-lived and amortizable intangible assets of $5,750 and $5,350, respectively. The difference attributable to amortizable intangible assets is being amortized straight-line over 10 years, the expected useful life of the intangible asset. In connection with the Company’s investment in Tribeca Enterprises, the Company has provided a $17,500 revolving credit facility to Tribeca Enterprises as of June 30, 2019. The Tribeca Enterprises revolving credit facility was fully drawn as of June 30, 2019 and 2018 and the loan outstanding included payments-in-kind (“PIK”) interest of $3,516 and $2,025 as of June 30, 2019 and 2018, respectively. PIK interest owed does not reduce the availability under the revolving credit facility. During the three months ended June 30, 2019, the Company accepted an offer to sell its 50% ownership interest in Tribeca Enterprises, including the outstanding loan and PIK interest, for total consideration of $18,000. The company signed a letter of intent and, as a result, recorded an impairment charge of $8,133, which is reported as Earnings (loss) in equity method investments in the accompanying consolidated statement of operations for the year ended June 30, 2019. The impairment charge consisted of $3,016 in the carrying value of PIK interest and $5,117 in the carrying value of the equity method investment. On August 5, 2019, the Company contributed to Tribeca Enterprises the $18,000 of indebtedness under the Company’s revolving credit facility to the Company’s equity capital in Tribeca Enterprises immediately prior to the sale of the Company’s equity capital in Tribeca Enterprises for $18,000.
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THE MADISON SQUARE GARDEN COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
In July 2014, MSG Networks sold Fuse to Fuse Media, Inc., and as part of the transaction MSG Networks received a 15% equity interest in Fuse Media LLC (“Fuse Media”) which was transferred to the Company in connection with the 2015 Distribution. In the third quarter of fiscal year 2017, certain Fuse Media warrant holders notified Fuse Media of their intent to exercise certain put options (which Fuse Media disputed). The purported exercise of the put options triggered an assessment of Fuse Media’s fair value. This assessment, which was performed during the third quarter of fiscal year 2017, resulted in unfavorable fair value measurements of Fuse Media. As a result, the Company evaluated whether or not an other-than-temporary impairment of its investment had occurred as of the third quarter of fiscal year 2017. This evaluation resulted in the Company recording a pre-tax non-cash impairment charge of $20,613 to write off the carrying value of its equity investment in Fuse Media, which is reflected in loss in equity method investments in the accompanying consolidated statements of operations for the year ended June 30, 2017. Fuse Media filed for Chapter 11 bankruptcy protection in April 2019. Fuse Media emerged from bankruptcy on July 1, 2019 and the Company no longer has any ownership interest in Fuse Media.
In July 2018, the Company acquired a 30% interest in SACO, a global provider of high-performance LED video lighting and media solutions, for a total consideration of approximately $47,244. The Company is utilizing SACO as a preferred display technology provider for MSG Spheres and is benefiting from agreed upon commercial terms. The total consideration consisted of a $42,444 payment at closing and a $4,800 deferred payment, which was made in October 2018. As of the acquisition date, the carrying amount of the investment was greater than the Company’s equity interest in the underlying net assets of SACO. As such, the Company allocated the difference to amortizable intangible assets of $25,350 and is amortizing these intangible assets on a straight-line basis over the expected useful lives ranging from 6 years to 12 years.
Equity Investment with Readily Determinable Fair Value
In addition to the investments discussed above, the Company holds an investment of 3,208 shares of the common stock of Townsquare. Townsquare is a leading media, entertainment and digital marketing solutions company that is listed on the New York Stock Exchange (“NYSE”) under the symbol “TSQ.” In accordance with ASC Topic 321, Investments - Equity Securities, this investment is measured at readily determinable fair value and is reported under Other assets in the accompanying consolidated balance sheets as of June 30, 2019 and 2018. See Note 11 for more information on the fair value of the investment in Townsquare.
In addition, the Company also has other investments in various sports and entertainment companies and related technologies, accounted for either under the equity method or at fair value.
The following is summarized financial information for all of the Company’s equity method investments as required by the guidance in SEC Regulation S-X Rule 4-08(g). The amounts shown below represent 100% of these equity method investments’ financial position and results of operations. | ||||||||
Balance Sheet | June 30, 2019 (a) | June 30, 2018 | ||||||
Current assets | $ | 83,635 | $ | 149,054 | ||||
Noncurrent assets | 341,457 | 414,247 | ||||||
$ | 425,092 | $ | 563,301 | |||||
Current liabilities | $ | 335,533 | $ | 116,695 | ||||
Noncurrent liabilities | 33,588 | 384,580 | ||||||
Noncontrolling interests | 27,347 | 54,684 | ||||||
Shareholders’ equity | 28,624 | 7,342 | ||||||
$ | 425,092 | $ | 563,301 | |||||
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THE MADISON SQUARE GARDEN COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Years Ended June 30, | ||||||||||||
Results of Operations | 2019 (a) | 2018 | 2017 | |||||||||
Revenues | $ | 305,145 | $ | 308,070 | $ | 328,533 | ||||||
Income (loss) from continuing operations | 8,461 | (19,016 | ) | (16,923 | ) | |||||||
Net income (loss) | 8,816 | (19,016 | ) | (16,923 | ) | |||||||
Net income (loss) attributable to controlling interest | 5,281 | (21,845 | ) | (17,399 | ) | |||||||
(a) | Balance sheet information did not include equity method investees that were sold during the fiscal year 2019. For equity method investments that were sold in fiscal year 2019, the results of operations information included the activities for those equity method investees until the date of sale. |
Note 8. Goodwill and Intangible Assets
The carrying amounts of goodwill, by reportable segment, as of June 30, 2019 and 2018 are as follows:
June 30, 2019 | June 30, 2018 | |||||||
MSG Entertainment | $ | 165,558 | $ | 165,558 | ||||
MSG Sports | 226,955 | 226,955 | ||||||
$ | 392,513 | $ | 392,513 | |||||
During the first quarter of fiscal year 2019, the Company performed its annual impairment test of goodwill and determined that there were no impairments of goodwill identified for any of its reporting units as of the impairment test date.
The Company’s indefinite-lived intangible assets as of June 30, 2019 and 2018 are as follows:
June 30, 2019 | June 30, 2018 | |||||||
Sports franchises (MSG Sports segment) | $ | 111,064 | $ | 110,564 | ||||
Trademarks (MSG Entertainment segment) | 62,421 | 62,421 | ||||||
Photographic related rights (MSG Sports segment) | 3,000 | 3,000 | ||||||
$ | 176,485 | $ | 175,985 | |||||
During the first quarter of fiscal year 2019, the Company performed its annual impairment test of identifiable indefinite-lived intangible assets and determined that there were no impairments identified.
The Company’s intangible assets subject to amortization are as follows:
June 30, 2019 | Estimated Useful Lives | Gross | Accumulated Amortization | Net | ||||||||||||
Trade names | 5 years | to | 25 years | $ | 100,830 | $ | (12,228 | ) | $ | 88,602 | ||||||
Venue management contracts | 12 years | to | 25 years | 79,000 | (9,887 | ) | 69,113 | |||||||||
Favorable lease assets | 1.5 years | to | 16 years | 54,253 | (10,382 | ) | 43,871 | |||||||||
Season ticket holder relationships | 15 years | 50,032 | (47,541 | ) | 2,491 | |||||||||||
Non-compete agreements | 5 years | to | 5.75 years | 11,400 | (4,311 | ) | 7,089 | |||||||||
Festival rights | 15 years | 8,080 | (1,617 | ) | 6,463 | |||||||||||
Other intangibles | 3 months | to | 15 years | 10,064 | (6,987 | ) | 3,077 | |||||||||
$ | 313,659 | $ | (92,953 | ) | $ | 220,706 | ||||||||||
F- 37
THE MADISON SQUARE GARDEN COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
June 30, 2018 | Gross | Accumulated Amortization | Net | |||||||||||
Trade names | 101,830 | (6,658 | ) | $ | 95,172 | |||||||||
Venue management contracts | 79,000 | (5,324 | ) | 73,676 | ||||||||||
Favorable lease assets | 54,253 | (5,686 | ) | 48,567 | ||||||||||
Season ticket holder relationships | 50,032 | (44,206 | ) | 5,826 | ||||||||||
Non-compete agreements | 11,400 | (2,266 | ) | 9,134 | ||||||||||
Festival rights | 8,080 | (1,078 | ) | 7,002 | ||||||||||
Other intangibles | 10,064 | (5,635 | ) | 4,429 | ||||||||||
$ | 314,659 | $ | (70,853 | ) | $ | 243,806 | ||||||||
Amortization expense for intangible assets, excluding the amortization of favorable lease assets of $4,696, $4,874 and $812 for the years ended June 30, 2019, 2018 and 2017, respectively, which is reported in rent expense, was $18,404, $20,194, and $7,805 for the years ended June 30, 2019, 2018 and 2017, respectively.
The Company expects its aggregate annual amortization expense for existing intangible assets subject to amortization for each fiscal year from 2020 through 2024 to be as follows:
Fiscal year ending June 30, 2020 | $ | 20,570 | |
Fiscal year ending June 30, 2021 | $ | 18,038 | |
Fiscal year ending June 30, 2022 | $ | 17,888 | |
Fiscal year ending June 30, 2023 | $ | 15,923 | |
Fiscal year ending June 30, 2024 | $ | 14,685 | |
Note 9. Property and Equipment
As of June 30, 2019 and 2018, property and equipment consisted of the following assets:
June 30, 2019 | June 30, 2018 | Estimated Useful Lives | ||||||||||
Land | $ | 172,558 | $ | 175,731 | ||||||||
Buildings | 1,126,621 | 1,118,526 | Up to | 45 years | ||||||||
Equipment | 335,932 | 316,705 | 1 year | to | 20 years | |||||||
Aircraft | 38,090 | 38,090 | 20 years | |||||||||
Furniture and fixtures | 53,571 | 52,293 | 1 year | to | 10 years | |||||||
Leasehold improvements | 180,757 | 180,952 | Shorter of term of lease or life of improvement | |||||||||
Construction in progress | 238,928 | 84,731 | ||||||||||
2,146,457 | 1,967,028 | |||||||||||
Less accumulated depreciation and amortization | (766,065 | ) | (713,357 | ) | ||||||||
$ | 1,380,392 | $ | 1,253,671 | |||||||||
The increase in Construction in progress is primarily associated with the development and construction of MSG Spheres in Las Vegas and London.
Depreciation and amortization expense on property and equipment was $100,789, $102,292 and $99,583 for the years ended June 30, 2019, 2018 and 2017, respectively.
F- 38
THE MADISON SQUARE GARDEN COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Note 10. Commitments and Contingencies
Contractual Obligations and Off Balance Sheet Arrangements
The Company has various long-term noncancelable operating lease agreements, primarily for entertainment venues and office space expiring at various dates through 2038. Certain leases include renewal provisions at the Company’s option and provide for additional rent based on sales. The rent expense associated with such operating leases is recognized on a straight-line basis over the initial lease term. The difference between rent expense and rent paid is recorded as deferred rent. Rent expense including amortization of favorable lease assets and an unfavorable lease liability under these lease agreements totaled $57,627, $53,591 and $39,044 for the years ended June 30, 2019, 2018 and 2017, respectively.
In addition, the Company has certain future cash payments required under contracts entered into by the Company in the normal course of business and outstanding letters of credit.
As of June 30, 2019, future minimum rental payments under leases having noncancelable initial lease terms, other cash payments required under contracts entered into by the Company in the normal course of business in excess of one year and outstanding letters of credit are as follows:
Off-Balance Sheet Commitments | Contractual Obligations reflected on the Balance Sheet(e) | |||||||||||||||||||||||
Operating Leases(a) | Contractual Obligations(b) | Letters of Credits(c) | Total(d) | Total(f) | ||||||||||||||||||||
Fiscal year ending June 30, 2020 | $ | 55,078 | $ | 115,483 | $ | 12,512 | $ | 183,073 | $ | 79,064 | $ | 262,137 | ||||||||||||
Fiscal year ending June 30, 2021 | 54,600 | 71,288 | — | 125,888 | 9,379 | 135,267 | ||||||||||||||||||
Fiscal year ending June 30, 2022 | 54,465 | 39,688 | — | 94,153 | 8,800 | 102,953 | ||||||||||||||||||
Fiscal year ending June 30, 2023 | 50,594 | 14,648 | — | 65,242 | 4,808 | 70,050 | ||||||||||||||||||
Fiscal year ending June 30, 2024 | 39,053 | 9,646 | — | 48,699 | 3,234 | 51,933 | ||||||||||||||||||
Thereafter | 123,358 | 6,160 | — | 129,518 | 11,875 | 141,393 | ||||||||||||||||||
$ | 377,148 | $ | 256,913 | $ | 12,512 | $ | 646,573 | $ | 117,160 | $ | 763,733 | |||||||||||||
_________________
(a) | Includes contractually obligated minimum lease payments for operating leases having an initial noncancelable term in excess of one year for the Company’s venues, including the TAO Group venues, CLG facility, and various corporate offices. |
(b) | Consist principally of the MSG Sports segment’s obligations under employment agreements that the Company has with its professional sports teams’ personnel that are generally guaranteed regardless of employee injury or termination. |
(c) | Consist of letters of credit obtained by the Company as collateral for development of MSG Sphere in Las Vegas and lease agreements. |
(d) | Off balance sheet arrangements disclosed in the table above do not include MSG Sphere related commitments that are not reflected on the balance sheet of $1,049,781. Such arrangements are associated with the development and construction of MSG Sphere in Las Vegas. The timing of the future cash payments disclosed is uncertain and may change as the development and construction of MSG Sphere in Las Vegas progresses. |
(e) | Consist primarily of amounts earned under employment agreements that the Company has with certain of its professional sports teams’ personnel in the MSG Sports segment. In addition, the amount includes MSG Sphere related commitments of approximately $19,700, all due within fiscal year 2020. |
(f) | Pension obligations have been excluded from the table above as the timing of the future cash payments is uncertain. See Note 13 for information on the future funding requirements under our pension obligations. |
In addition, see Note 7 for information on the revolving credit facilities provided by the Company to Tribeca Enterprises.
In connection with the TAO Group and CLG acquisitions, the Company has accrued contingent consideration as part of the purchase price. See Note 11 for further details of the amount recorded in the accompanying consolidated balance sheet as of
F- 39
THE MADISON SQUARE GARDEN COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
June 30, 2019. In addition, see Note 12 for the principal repayments required under the long-term debt outstanding as of June 30, 2019.
Under the terms of lease agreements and related guaranties, subsidiaries of the Company have certain operating requirements, with one of these subsidiaries being also required to meet a certain net worth obligation. In the event that these subsidiaries were to fail to meet the required obligations and were unable to avail themselves of the cure options, the landlord could terminate the lease.
The Company and a subsidiary of the Las Vegas Sands Corp. (“Sands”) entered into a 50-year ground lease in Las Vegas pursuant to which the Company has agreed to construct a large-scale venue. The Company has announced plans to construct an MSG Sphere on that site. The ground lease will have no fixed rent; however, if certain return objectives are achieved, Sands will receive 25% of the after-tax cash flow in excess of such objectives.
The Company has the right to increase its equity interest in TAO Group through a call right on the equity of the other TAO Group equityholders after the fifth anniversary of the closing date (January 31, 2022) and prior to such date in certain events. The other TAO Group equityholders have the right to put their equity interests in TAO Group after the fifth anniversary of the closing and, in certain circumstances prior to the fifth anniversary. The put and call prices are at fair market value (or in certain circumstances, subject to a discount). Consideration paid upon exercise of such call right shall be, at MSG’s option, in cash, debt, or MSG Class A Common Stock, subject to certain limitations.
Legal Matters
The Company is a defendant in various lawsuits. Although the outcome of these lawsuits cannot be predicted with certainty (including the extent of available insurance, if any), management does not believe that resolution of these lawsuits will have a material adverse effect on the Company.
Note 11. Fair Value Measurements
The following table presents the Company’s assets that are measured at fair value on a recurring basis, which include cash equivalents, marketable securities and available-for-sale securities:
Fair Value Hierarchy | June 30, | |||||||||
2019 | 2018 | |||||||||
Assets: | ||||||||||
Commercial paper | I | $ | 169,707 | $ | 147,098 | |||||
Money market accounts | I | 101,517 | 151,887 | |||||||
Time deposits | I | 789,833 | 891,923 | |||||||
Equity investment with readily determinable fair value | I | 17,260 | 20,756 | |||||||
Total assets measured at fair value | $ | 1,078,317 | $ | 1,211,664 | ||||||
All assets listed above are classified within Level I of the fair value hierarchy as they are valued using observable inputs that reflect quoted prices for identical assets in active markets. The carrying amount of the Company’s commercial paper, money market accounts and time deposits approximates fair value due to their short-term maturities.
The carrying value and fair value of the Company’s financial instruments reported in the accompanying consolidated balance sheets are as follows:
F- 40
THE MADISON SQUARE GARDEN COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
June 30, 2019 | June 30, 2018 | |||||||||||||||
Carrying Value | Fair Value | Carrying Value | Fair Value | |||||||||||||
Assets | ||||||||||||||||
Notes receivable, including interest accruals | $ | 13,348 | $ | 13,348 | $ | 4,116 | $ | 4,116 | ||||||||
Short-term investments (a) | 108,416 | 108,416 | — | — | ||||||||||||
Equity investment with readily determinable fair value (b) | 17,260 | 17,260 | 20,756 | 20,756 | ||||||||||||
Subordinated term loan receivable (c) | 58,735 | 57,711 | — | — | ||||||||||||
Liabilities | ||||||||||||||||
Long-term debt, including current portion (d) | 55,000 | 54,883 | 109,313 | 111,588 | ||||||||||||
(a) | The Company’s short-term investment is an U.K. pounds sterling denominated time deposit with a banking institution in London that has an original six-month maturity date from inception. See Note 2 for more information on this short-term investment. |
(b) | Aggregate cost basis for the Company’s equity investment with readily determinable fair value in Townsquare, including transaction costs, was $23,222 as of June 30, 2019. The fair value of this investment is determined based on quoted market prices in an active market on the NYSE, which is classified within Level I of the fair value hierarchy. For the year ended June 30, 2019, the Company recorded an unrealized loss of $3,496 as a result of changes in the market value related to this investment. The unrealized loss is reported in Miscellaneous expense, net in the accompanying consolidated statement of operations. |
(c) | In connection with the sale of the Company’s joint venture interest in AMSGE in December 2018, the $63,500 outstanding balance under the revolving credit facility extended by the Company to AMSGE was converted to a subordinated term loan with a maturity date of September 20, 2021. The subordinated loan was assumed by an affiliate of AMSGE. During the year ended June 30, 2019, the Company received a $4,765 principal repayment. The Company’s subordinated term loan receivable is classified within Level II of the fair value hierarchy as it is valued using quoted indices of similar securities for which the inputs are readily observable. |
(d) | On May 23, 2019, TAO Group Intermediate Holdings LLC (“TAOIH”) and TAO Group Operating LLC (“TAOG”) entered into a $40,000 five-year term loan facility and a $25,000 five-year revolving facility. The Company’s long-term debt is classified within Level II of the fair value hierarchy as it is valued using quoted indices of similar securities for which the inputs are readily observable. See Note 12 for more information and outstanding balances on this long-term debt. |
Contingent Consideration Liabilities
In connection with the TAO Group acquisition on January 31, 2017, the Company may be required to pay an earn-out of up to approximately $25,500, if certain performance conditions based upon earnings growth are met during the first five years following the transaction. The Company recorded $7,900 as the initial fair value of contingent consideration liabilities as a part of the purchase price. The fair value was estimated using a Monte-Carlo simulation model which included significant unobservable Level III inputs such as projected financial performance over the earn-out period (five years) along with estimates for market volatility and the discount rate applicable to potential cash payouts.
In connection with the CLG acquisition on July 28, 2017, the Company may be required to make future payments for deferred and contingent consideration up to a total of $9,150 based upon the achievement of certain specified objectives during the three years following the transaction as defined under the membership interest purchase agreement. The Company recorded $6,586 as the initial fair value of deferred and contingent consideration liabilities as part of the preliminary purchase price allocation. The fair values of these deferred and contingent consideration liabilities were estimated using weighted probabilities of achievement for the possible objective and earn-out events and adjusted for a discount rate applicable to the deferred and potential cash payouts.
F- 41
THE MADISON SQUARE GARDEN COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
The following table provides a reconciliation of the deferred and contingent consideration liabilities in connection with the acquisitions discussed above:
_________________
Balance as of June 30, 2018 | $ | 8,195 | ||
Change in fair value of contingent consideration (a) | (4,846 | ) | ||
Balance as of June 30, 2019 | $ | 3,349 | ||
(a) | The change in fair value of contingent consideration was recorded within Selling, general and administrative expenses in the accompanying consolidated statement of operations for the year ended June 30, 2019. |
Note 12. Credit Facilities
Knicks Revolving Credit Facility
On September 30, 2016, New York Knicks, LLC (“Knicks LLC”), a wholly owned subsidiary of the Company, entered into a credit agreement (the “Knicks Credit Agreement”) with a syndicate of lenders providing for a senior secured revolving credit facility of up to $200,000 with a term of five years (the “Knicks Revolving Credit Facility”) to fund working capital needs and for general corporate purposes. Amounts borrowed may be distributed to the Company except during an event of default.
The Knicks Revolving Credit Facility requires Knicks LLC to comply with a debt service ratio of 1.5:1.0 over a trailing four quarter period. As of June 30, 2019, Knicks LLC was in compliance with this financial covenant.
All borrowings under the Knicks Revolving Credit Facility are subject to the satisfaction of certain customary conditions. Borrowings bear interest at a floating rate, which at the option of Knicks LLC may be either (i) a base rate plus a margin ranging from 0.00% to 0.125% per annum or (ii) LIBOR plus a margin ranging from 1.00% to 1.125% per annum. Knicks LLC is required to pay a commitment fee ranging from 0.20% to 0.25% per annum in respect of the average daily unused commitments under the Knicks Revolving Credit Facility. There was no borrowing under the Knicks Revolving Credit Facility as of June 30, 2019.
All obligations under the Knicks Revolving Credit Facility are secured by a first lien security interest in certain of Knicks LLC’s assets, including, but not limited to, (i) the Knicks LLC’s membership rights in the NBA and (ii) revenues to be paid to the Knicks LLC by the NBA pursuant to certain U.S. national broadcast agreements.
Subject to customary notice and minimum amount conditions, Knicks LLC may voluntarily prepay outstanding loans under the Knicks Revolving Credit Facility at any time, in whole or in part, without premium or penalty (except for customary breakage costs with respect to Eurocurrency loans). Knicks LLC is required to make mandatory prepayments in certain circumstances, including without limitation if the maximum available amount under the Knicks Revolving Credit Facility is greater than 350% of qualified revenues.
In addition to the financial covenant described above, the Knicks Credit Agreement and related security agreements contain certain customary representations and warranties, affirmative covenants and events of default. The Knicks Revolving Credit Facility contains certain restrictions on the ability of Knicks LLC to take certain actions as provided in (and subject to various exceptions and baskets set forth in) the Knicks Revolving Credit Facility, including the following: (i) incurring additional indebtedness and contingent liabilities; (ii) creating liens on certain assets; (iii) making restricted payments during the continuance of an event of default under the Knicks Revolving Credit Facility; (iv) engaging in sale and leaseback transactions; (v) merging or consolidating; and (vi) taking certain actions that would invalidate the secured lenders’ liens on any Knicks LLC’s collateral.
F- 42
THE MADISON SQUARE GARDEN COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Knicks Unsecured Credit Facility
On September 30, 2016, Knicks LLC entered into an unsecured revolving credit facility with a lender for an initial maximum credit amount of $15,000 and a 364-day term (the “Knicks Unsecured Credit Facility”). Knicks LLC renewed this facility with the lender on the same terms in successive years and the facility has been renewed for a new term effective as of September 27, 2019. There was no borrowing under the Knicks Unsecured Credit Facility as of June 30, 2019. This facility does not have financial covenants.
Rangers Revolving Credit Facility
On January 25, 2017, New York Rangers, LLC (“Rangers LLC”), a wholly owned subsidiary of the Company, entered into a credit agreement (the “Rangers Credit Agreement”) with a syndicate of lenders providing for a senior secured revolving credit facility of up to $150,000 with a term of five years (the “Rangers Revolving Credit Facility”) to fund working capital needs and for general corporate purposes. Amounts borrowed may be distributed to the Company except during an event of default.
The Rangers Revolving Credit Facility requires Rangers LLC to comply with a debt service ratio of 1.5:1.0 over a trailing four quarter period. As of June 30, 2019, Rangers LLC was in compliance with this financial covenant. All borrowings under the Rangers Revolving Credit Facility are subject to the satisfaction of certain customary conditions.
Borrowings bear interest at a floating rate, which at the option of Rangers LLC may be either (i) a base rate plus a margin ranging from 0.125% to 0.50% per annum or (ii) LIBOR plus a margin ranging from 1.125% to 1.50% per annum. Rangers LLC is required to pay a commitment fee ranging from 0.375% to 0.625% per annum in respect of the average daily unused commitments under the Rangers Revolving Credit Facility. There was no borrowing under the Rangers Revolving Credit Facility as of June 30, 2019.
All obligations under the Rangers Revolving Credit Facility are secured by a first lien security interest in certain of Rangers LLC’s assets, including, but not limited to, (i) Rangers LLC’s membership rights in the NHL, (ii) revenues to be paid to Rangers LLC by the NHL pursuant to certain U.S. and Canadian national broadcast agreements, and (iii) revenues to be paid to Rangers LLC pursuant to local media contracts.
Subject to customary notice and minimum amount conditions, Rangers LLC may voluntarily prepay outstanding loans under the Rangers Revolving Credit Facility at any time, in whole or in part, without premium or penalty (except for customary breakage costs with respect to Eurocurrency loans). Rangers LLC is required to make mandatory prepayments in certain circumstances, including without limitation if qualified revenues are less than 17% of the maximum available amount under the Rangers Revolving Credit Facility.
In addition to the financial covenant described above, the Rangers Credit Agreement and related security agreements contain certain customary representations and warranties, affirmative covenants and events of default. The Rangers Revolving Credit Facility contains certain restrictions on the ability of Rangers LLC to take certain actions as provided in (and subject to various exceptions and baskets set forth in) the Rangers Revolving Credit Facility, including the following: (i) incurring additional indebtedness and contingent liabilities; (ii) creating liens on certain assets; (iii) making restricted payments during the continuance of an event of default under the Rangers Revolving Credit Facility; (iv) engaging in sale and leaseback transactions; (v) merging or consolidating; and (vi) taking certain actions that would invalidate the secured lenders’ liens on any of Rangers LLC’s assets securing the obligations under the Rangers Revolving Credit Facility.
F- 43
THE MADISON SQUARE GARDEN COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
TAO Credit Facilities
On May 23, 2019, TAO Group Intermediate Holdings LLC (“TAOIH” or “Intermediate Holdings”) and TAO Group Operating LLC (“TAOG” or “Senior Borrower”), entered into a credit agreement (the “TAO Senior Credit Agreement”) with JPMorgan Chase Bank, N.A., as administrative agent, collateral agent and a letter of credit issuer, and the lenders party thereto. Together the TAO Senior Credit Agreement and a $49,000 intercompany subordinated credit agreement (the “TAO Subordinated Credit Agreement”) between the Company and TAO Group Sun-Holdings LLC, a subsidiary of TAO Group Holdings LLC, replace the Senior Borrower’s prior credit agreement dated January 31, 2017 (“2017 TAO Credit Agreement“), which was terminated on May 23, 2019 in its entirety in accordance with its terms in connection with the repayment of all obligations thereunder from the proceeds of the TAO Senior Credit Agreement and the TAO Subordinated Credit Agreement as well as cash on hand. The balances and interest-related activities pertaining the TAO Subordinated Credit Agreement have been eliminated in the consolidated financial statements in accordance with ASC Topic 810, Consolidation.
In connection with the early termination of the 2017 TAO Credit Agreement, the Company recorded $3,977 of loss on extinguishment of debt in the fourth quarter of fiscal year 2019, which is reported as Miscellaneous income (expense) in the accompanying consolidated statements of operations for the year ended June 30, 2019. The loss on extinguishment of debt consisted of a write off of deferred financing costs and prepayment penalties paid in connection with the 2017 TAO Credit Agreement.
The TAO Senior Credit Agreement provides TAOG with senior secured credit facilities (the “TAO Senior Secured Credit Facilities”) consisting of: (i) an initial $40,000 term loan facility with a term of five years (the “TAO Term Loan Facility”) and (ii) a $25,000 revolving credit facility with a term of five years (the “TAO Revolving Credit Facility”). Up to $5,000 of the TAO Revolving Credit Facility is available for the issuance of letters of credit. All borrowings under the TAO Revolving Credit Facility, including, without limitation, amounts drawn under the revolving line of credit are subject to the satisfaction of customary conditions, including absence of a default and accuracy of representations and warranties. The TAO Senior Secured Credit Facilities were obtained without recourse to the Company or any of its affiliates (other than TAOG, TAOIH and its subsidiaries as discussed below).
All obligations under the TAO Senior Credit Agreement are guaranteed by TAOIH and TAOIH’s existing and future direct and indirect domestic subsidiaries (other than (i) TAOG, (ii) domestic subsidiaries substantially all of whose assets consist of controlled foreign corporations and (iii) subsidiaries designated as immaterial subsidiaries or unrestricted subsidiaries) (the “TAO Subsidiary Guarantors ”, and together with TAOIH, the “TAO Guarantors”). All obligations under the TAO Senior Credit Agreement, including the guarantees of those obligations, are secured by substantially all of the assets of TAOG and each Guarantor (collectively, “TAO Collateral”), including, but not limited to, a pledge of the equity interests in TAOG held directly by TAOIH and the equity interests in each TAO Subsidiary Guarantor held directly or indirectly by TAOIH.
Borrowings under the TAO Senior Credit Agreement bear interest at a floating rate, which at the option of the Senior Borrower may be either (a) a base rate plus an additional rate ranging from 1.50% to 2.50% per annum (determined based on a total leverage ratio) (the “Base Rate”), or (b) a Eurocurrency rate plus an additional rate ranging from 2.50% to 3.50% per annum (determined based on a total leverage ratio) (the “Eurocurrency Rate”), provided that for the period following the closing date until the delivery of the compliance certificate for the fiscal quarter of TAOIH ending on or about June 30, 2019, the additional rate used in calculating the floating rate is (i) 1.50% per annum for borrowings bearing the Base Rate, and (ii) 2.50% per annum for borrowings bearing the Eurocurrency Rate. The TAO Senior Credit Agreement requires TAOG to pay a commitment fee of 0.50% in respect of the daily unused commitments under the TAO Revolving Credit Facility. TAOG is also required to pay customary letter of credit fees, as well as fronting fees, to banks that issue letters of credit pursuant to the TAO Senior Credit Agreement. The interest rate on the TAO Senior Credit Agreement as of June 30, 2019 was 4.89%
During the years ended June 30, 2019, 2018 and 2017, the Company made interest payments of $13,084, $11,278 and $775, respectively, under the TAO Senior Credit Agreement and 2017 TAO Credit Agreement.
F- 44
THE MADISON SQUARE GARDEN COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
The TAO Senior Credit Agreement contains certain restrictions on the ability of TAOIH, the TAOG and its restricted subsidiaries to take certain actions as provided in (and subject to various exceptions and baskets set forth in) the TAO Senior Credit Agreement, including, without limitation, the following: (i) incurring additional indebtedness and contingent liabilities; (ii) creating liens on certain assets; (iii) making investments, loans or advances in or to other persons; (iv) paying dividends and distributions or repurchasing capital stock; (v) engaging in certain transactions with affiliates; (vi) amending specified agreements; (vii) merging or consolidating; (viii) making certain dispositions; and (ix) entering into agreements that restrict the granting of liens. Intermediate Holdings is subject to a customary passive holding company covenant. The Senior Credit Agreement requires Intermediate Holdings to comply with a maximum total leverage ratio of 4.00:1.00 and a maximum senior leverage ratio of 3.00:1.00 from the closing date until December 31, 2021 and a maximum total leverage ratio of 3.50:1.00 and a maximum senior leverage ratio of 2.50:1.00 from and after December 31, 2021. In addition, there is a minimum fixed charge coverage ratio of 1.25:1.00 for TAOIH. TAOIH was in compliance with the financial covenants of the TAO Senior Credit Agreement as of June 30, 2019. In addition to the financial covenants described above, the TAO Senior Credit Agreement and the related security agreement contain certain customary representations and warranties, affirmative covenants and events of default. The outstanding amount drawn on the TAO Revolving Credit Facility was $15,000 as of June 30, 2019, which is reported under Long-term debt, net of deferred financing costs in the accompanying consolidated balance sheet.
Subject to customary notice and minimum amount conditions, TAOG may voluntarily prepay outstanding loans under the TAO Senior Credit Agreement at any time, in whole or in part, without premium or penalty (except for customary breakage costs with respect to Eurocurrency loans). The initial TAO Term Loan Facility will amortize quarterly in accordance with its terms from June 30, 2019 through March 31, 2024 with a final maturity date on May 23, 2024. TAOG is required to make mandatory prepayments of the TAO Term Loan Facility from the net cash proceeds of certain sales of assets (including TAO Collateral) or casualty insurance and/or condemnation recoveries (in each case, subject to certain reinvestment, repair or replacement rights) and the incurrence of certain indebtedness, subject to certain exceptions.
Long-term debt maturities over the next five years for the outstanding balance of $40,000 under the TAO Term Loan Facility(a) and the outstanding balance of $15,000 under the TAO Revolving Credit Facility (a) as of June 30, 2019 are:
_________________
Fiscal year ending June 30, 2020 | $ | 6,250 | |
Fiscal year ending June 30, 2021 (a) | 5,000 | ||
Fiscal year ending June 30, 2022 | 6,250 | ||
Fiscal year ending June 30, 2023 | 10,000 | ||
Fiscal year ending June 30, 2024 | 27,500 | ||
Thereafter | — | ||
(a) | With respect to the balances and activities associated with the TAO Term Loan Facility and TAO Revolving Credit Facility above, the Company has elected to report the maturities on a current basis consistent with the Company's consolidation policy. See Business Combinations and Noncontrolling Interests section under Note 2. Summary of Significant Accounting Policies for further discussion on consolidation of TAO Group. In addition, the long-term debt maturities reported above did not include $637 of a note with respect to a loan received by BCE from its noncontrolling interest holder that is due in April 2021. |
F- 45
THE MADISON SQUARE GARDEN COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Deferred Financing Costs
The following table summarizes the presentation of the TAO Senior Credit Agreement and the related deferred financing costs as of June 30, 2019 and the 2017 TAO Credit Agreement and the related deferred financing cost as of June 30, 2018 in the accompanying consolidated balance sheets.
June 30, 2019 | ||||||||||||
TAO Senior Secured Credit Facilities | Deferred Financing Costs (b) | Total | ||||||||||
Current portion of long-term debt, net of deferred financing costs | $ | 6,250 | $ | (208 | ) | $ | 6,042 | |||||
Long-term debt, net of deferred financing costs (a) | 33,750 | (831 | ) | 32,919 | ||||||||
Total | $ | 40,000 | $ | (1,039 | ) | $ | 38,961 | |||||
June 30, 2018 | ||||||||||||
2017 TAO Credit Agreement | Deferred Financing Costs | Total | ||||||||||
Current portion of long-term debt, net of deferred financing costs | $ | 5,304 | $ | (939 | ) | $ | 4,365 | |||||
Long-term debt, net of deferred financing costs | 104,009 | (2,674 | ) | 101,335 | ||||||||
Total | $ | 109,313 | $ | (3,613 | ) | $ | 105,700 | |||||
_________________
(a) | In addition to the outstanding balance associated with the TAO Senior Credit Agreement disclosed above, the Company’ s Long-term debt, net of deferred financing costs in the accompanying consolidated balance sheet as of June 30, 2019 also include $637 of a note with respect to a loan received by BCE from its noncontrolling interest holder and $15,000 outstanding balance under the TAO Revolving Credit Facility. |
(b) | With respect to the TAO Term Loan Facility, the deferred financing costs are amortized on a straight-line basis over the five-year term of the facility, which approximates the effective interest method. |
The following table summarizes deferred financing costs, net of amortization, related to the Knicks Revolving Credit Facility, Knicks Unsecured Credit Facility, Rangers Revolving Credit Facility, and TAO Revolving Credit Facility as reported on the accompanying consolidated balance sheet:
June 30, 2019 | June 30, 2018 | |||||||
Other current assets | $ | 760 | $ | 778 | ||||
Other assets | 1,273 | 1,906 | ||||||
Note 13. Pension Plans and Other Postretirement Benefit Plan
Defined Benefit Pension Plans and Postretirement Benefit Plans
The Company sponsors a non-contributory, qualified cash balance retirement plan covering its non-union employees (the “Cash Balance Pension Plan”) and an unfunded non-contributory, non-qualified excess cash balance plan covering certain employees who participate in the underlying qualified plan (collectively, the “Cash Balance Plans”). Since March 1, 2011, the Cash Balance Pension Plan has also included the assets and liabilities of a frozen (as of December 31, 2007) non-contributory qualified defined benefit pension plan covering non-union employees hired prior to January 1, 2001.
F- 46
THE MADISON SQUARE GARDEN COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
The Company also sponsors an unfunded non-contributory, non-qualified defined benefit pension plan for the benefit of certain employees who participate in an underlying qualified plan which was merged into the Cash Balance Pension Plan on March 1, 2011 (the “Excess Plan”). As of December 31, 2007, the Excess Plan was amended to freeze all benefits earned through December 31, 2007 and to eliminate the ability of participants to earn benefits for future service under these plans.
The Cash Balance Plans were amended to freeze participation and future benefit accruals effective December 31, 2015 for all employees. Therefore, after December 31, 2015, no employee of the Company who was not already a participant may become a participant in the plans and no further annual pay credits will be made for any future year. Existing account balances under the plans will continue to be credited with monthly interest in accordance with the terms of the plans.
Lastly, the Company sponsors a non-contributory, qualified defined benefit pension plan covering certain of its union employees (the “Union Plan”). Benefits payable to retirees under the Union Plan are based upon years of Benefit Service (as defined in the Union Plan document).
The Cash Balance Plans, Union Plan, and Excess Plan are collectively referred to as the “Pension Plans.”
MSG also sponsors a contributory welfare plan which provides certain postretirement healthcare benefits to certain employees hired prior to January 1, 2001 who are eligible to commence receipt of early or normal benefits under the Cash Balance Pension Plan and their dependents, as well as certain union employees (“Postretirement Plan”).
The following table summarizes the projected benefit obligations, assets, funded status and the amounts recorded on the Company’s consolidated balance sheets as of June 30, 2019 and 2018, associated with the Pension Plans and Postretirement Plan based upon actuarial valuations as of those measurement dates.
Pension Plans | Postretirement Plan | ||||||||||||||
June 30, | June 30, | ||||||||||||||
2019 | 2018 | 2019 | 2018 | ||||||||||||
Change in benefit obligation: | |||||||||||||||
Benefit obligation at beginning of period | $ | 161,236 | $ | 166,003 | $ | 6,750 | $ | 5,734 | |||||||
Service cost | 91 | 85 | 57 | 120 | |||||||||||
Interest cost | 5,895 | 5,231 | 150 | 215 | |||||||||||
Actuarial loss (gain) | 12,376 | (3,153 | ) | (572 | ) | 1,436 | |||||||||
Benefits paid | (5,686 | ) | (6,424 | ) | (565 | ) | (755 | ) | |||||||
Plan settlements paid | (343 | ) | (506 | ) | — | — | |||||||||
Other | — | — | (1,513 | ) | — | ||||||||||
Benefit obligation at end of period | 173,569 | 161,236 | 4,307 | 6,750 | |||||||||||
Change in plan assets: | |||||||||||||||
Fair value of plan assets at beginning of period | 115,054 | 114,722 | — | — | |||||||||||
Actual return on plan assets | 12,372 | (2,498 | ) | — | — | ||||||||||
Employer contributions | 11,568 | 9,760 | — | — | |||||||||||
Benefits paid | (5,686 | ) | (6,424 | ) | — | — | |||||||||
Plan settlements paid | (343 | ) | (506 | ) | — | — | |||||||||
Fair value of plan assets at end of period | 132,965 | 115,054 | — | — | |||||||||||
Funded status at end of period | $ | (40,604 | ) | $ | (46,182 | ) | $ | (4,307 | ) | $ | (6,750 | ) | |||
F- 47
THE MADISON SQUARE GARDEN COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Amounts recognized in the consolidated balance sheets as of June 30, 2019 and 2018 consist of:
Pension Plans | Postretirement Plan | ||||||||||||||
June 30, | June 30, | ||||||||||||||
2019 | 2018 | 2019 | 2018 | ||||||||||||
Current liabilities (included in accrued employee related costs) | $ | (3,248 | ) | $ | (3,319 | ) | $ | (345 | ) | $ | (373 | ) | |||
Non-current liabilities (included in defined benefit and other postretirement obligations) | (37,356 | ) | (42,863 | ) | (3,962 | ) | (6,377 | ) | |||||||
$ | (40,604 | ) | $ | (46,182 | ) | $ | (4,307 | ) | $ | (6,750 | ) | ||||
Accumulated other comprehensive loss, before income tax, as of June 30, 2019 and 2018 consists of the following amounts that have not yet been recognized in net periodic benefit cost:
Pension Plans | Postretirement Plan | ||||||||||||||
June 30, | June 30, | ||||||||||||||
2019 | 2018 | 2019 | 2018 | ||||||||||||
Actuarial loss | $ | (39,793 | ) | $ | (37,989 | ) | $ | (754 | ) | $ | (1,331 | ) | |||
Prior service credit | — | — | — | 7 | |||||||||||
$ | (39,793 | ) | $ | (37,989 | ) | $ | (754 | ) | $ | (1,324 | ) | ||||
The following table presents components of net periodic benefit cost for the Pension Plans and Postretirement Plan included in the accompanying consolidated statements of operations for the years ended June 30, 2019, 2018 and 2017. Service cost is recognized in direct operating expenses and selling, general and administrative expenses. All other components of net periodic benefit cost are reported in Miscellaneous income (expense), net.
Pension Plans | Postretirement Plan | |||||||||||||||||||||||
Years Ended June 30, | Years Ended June 30, | |||||||||||||||||||||||
2019 | 2018 | 2017 | 2019 | 2018 | 2017 | |||||||||||||||||||
Service cost | $ | 91 | $ | 85 | $ | 85 | $ | 57 | $ | 120 | $ | 122 | ||||||||||||
Interest cost | 5,895 | 5,231 | 4,956 | 150 | 215 | 156 | ||||||||||||||||||
Expected return on plan assets | (3,133 | ) | (2,634 | ) | (2,383 | ) | — | — | — | |||||||||||||||
Recognized actuarial loss | 1,281 | 1,219 | 1,365 | 5 | 100 | — | ||||||||||||||||||
Amortization of unrecognized prior service cost (credit) | — | — | — | (7 | ) | (37 | ) | (48 | ) | |||||||||||||||
Settlement loss recognized (a) | 52 | 87 | — | — | — | — | ||||||||||||||||||
Other | — | — | — | (1,513 | ) | — | — | |||||||||||||||||
Net periodic benefit cost | $ | 4,186 | $ | 3,988 | $ | 4,023 | $ | (1,308 | ) | $ | 398 | $ | 230 | |||||||||||
_________________
(a) | For the years ended June 30, 2019 and 2018, lump-sum payments totaling $343 and $506, respectively, were distributed to vested participants of the non-qualified excess cash balance plan, triggering the recognition of settlement losses in accordance with ASC Topic 715. Due to these pension settlements, the Company was required to remeasure its pension plan liability as of June 30, 2019 and March 31, 2018 for the years ended June 30, 2019 and 2018, respectively. Discount rates used for the projected benefit obligation and interest cost were 3.75% and 3.18% as of June 30, 2019, respectively, and 3.53% and 2.16% as of March 31, 2018, respectively. Additionally, settlement charges of $52 and $87 were recognized in Miscellaneous income (expense), net for the years ended June 30, 2019 and 2018. |
F- 48
THE MADISON SQUARE GARDEN COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Other pre-tax changes in plan assets and benefit obligations recognized in other comprehensive income (loss) for the years ended June 30, 2019, 2018 and 2017 are as follows:
Pension Plans | Postretirement Plan | ||||||||||||||||||||||
Years Ended June 30, | Years Ended June 30, | ||||||||||||||||||||||
2019 | 2018 | 2017 | 2019 | 2018 | 2017 | ||||||||||||||||||
Actuarial gain (loss), net | $ | (3,137 | ) | $ | (1,978 | ) | $ | 3,438 | $ | 572 | $ | (1,437 | ) | $ | 589 | ||||||||
Recognized actuarial loss | 1,281 | 1,219 | 1,365 | 5 | 100 | — | |||||||||||||||||
Recognized prior service credit | — | — | — | (7 | ) | (37 | ) | (48 | ) | ||||||||||||||
Settlement loss recognized | 52 | 87 | — | — | — | — | |||||||||||||||||
Total recognized in other comprehensive income (loss) | $ | (1,804 | ) | $ | (672 | ) | $ | 4,803 | $ | 570 | $ | (1,374 | ) | $ | 541 | ||||||||
The estimated net loss for the Pension Plans and Postretirement Plan expected to be amortized from accumulated other comprehensive income (loss) and recognized as a component of net periodic benefit cost over the next fiscal year is $1,342 and $50, respectively.
Funded Status
The accumulated benefit obligation for the Pension Plans aggregated to $173,569 and $161,236 at June 30, 2019 and 2018, respectively. As of June 30, 2019 and 2018, each of the Pension Plans had accumulated benefit obligations and projected benefit obligations in excess of plan assets.
Pension Plans and Postretirement Plan Assumptions
Weighted-average assumptions used to determine benefit obligations (made at the end of the period) as of June 30, 2019 and 2018 are as follows:
Pension Plans | Postretirement Plan | ||||||||||
June 30, | June 30, | ||||||||||
2019 | 2018 | 2019 | 2018 | ||||||||
Discount rate | 3.58 | % | 4.19 | % | 3.18 | % | 4.06 | % | |||
Healthcare cost trend rate assumed for next year | n/a | n/a | 6.75 | % | 7.00 | % | |||||
Rate to which the cost trend rate is assumed to decline (the ultimate trend rate) | n/a | n/a | 5.00 | % | 5.00 | % | |||||
Year that the rate reaches the ultimate trend rate | n/a | n/a | 2027 | 2027 | |||||||
Weighted-average assumptions used to determine net periodic benefit cost (made at the beginning of the period) for the years ended June 30, 2019, 2018 and 2017 are as follows:
Pension Plans | Postretirement Plan | ||||||||||||||||
Years Ended June 30, | Years Ended June 30, | ||||||||||||||||
2019 | 2018 | 2017 | 2019 | 2018 | 2017 | ||||||||||||
Discount rate - projected benefit obligation | 4.19 | % | 3.81 | % | 3.61 | % | 4.06 | % | 3.54 | % | 3.27 | % | |||||
Discount rate - service cost | 4.25 | % | 3.93 | % | 3.74 | % | 4.25 | % | 3.83 | % | 3.53 | % | |||||
Discount rate - interest cost | 3.90 | % | 3.32 | % | 2.99 | % | 3.67 | % | 3.05 | % | 2.72 | % | |||||
Expected long-term return on plan assets | 3.72 | % | 3.46 | % | 3.38 | % | n/a | n/a | n/a | ||||||||
Healthcare cost trend rate assumed for next year | n/a | n/a | n/a | 7.00 | % | 7.25 | % | 7.25 | % | ||||||||
Rate to which the cost trend rate is assumed to decline (the ultimate trend rate) | n/a | n/a | n/a | 5.00 | % | 5.00 | % | 5.00 | % | ||||||||
Year that the rate reaches the ultimate trend rate | n/a | n/a | n/a | 2027 | 2027 | 2026 | |||||||||||
F- 49
THE MADISON SQUARE GARDEN COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
The discount rates were determined (based on the expected duration of the benefit payments for the plans) from the Willis Towers Watson U.S. Rate Link: 40-90 Discount Rate Model as of June 30, 2019 and 2018 to select a rate at which the Company believed the plans’ benefits could be effectively settled. This model was developed by examining the yields on selected highly rated corporate bonds. The expected long-term return on plan assets is based on a periodic review and modeling of the plans’ asset allocation structures over a long-term horizon. Expectations of returns for each asset class are the most important of the assumptions used in the review and modeling and are based on comprehensive reviews of historical data, forward-looking economic outlook, and economic/financial market theory. The expected long-term rate of return was selected from within the reasonable range of rates determined by (a) historical real returns, net of inflation, for the asset classes covered by the investment policy and (b) projections of inflation over the long-term period during which benefits are payable to plan participants.
Assumed healthcare cost trend rates are a key assumption used for the amounts reported for the Postretirement Plan. A one percentage point change in assumed healthcare cost trend rates would have the following effects:
Increase (Decrease) in Total of Service and Interest Cost Components for the | Increase (Decrease) in Benefit Obligation at | ||||||||||||||||||
Years Ended June 30, | June 30, | ||||||||||||||||||
2019 | 2018 | 2017 | 2019 | 2018 | |||||||||||||||
One percentage point increase | $ | 19 | $ | 37 | $ | 34 | $ | 335 | $ | 597 | |||||||||
One percentage point decrease | (17 | ) | (33 | ) | (30 | ) | (303 | ) | (537 | ) | |||||||||
Plan Assets and Investment Policy
The weighted-average asset allocation of the Pension Plans’ assets at June 30, 2019 and 2018 was as follows:
_____________________
June 30, | |||||
Asset Classes (a): | 2019 | 2018 | |||
Fixed income securities | 81 | % | 81 | % | |
Cash equivalents | 19 | % | 19 | % | |
100 | % | 100 | % | ||
(a) | The Company’s target allocation for pension plan assets is 80% fixed income securities and 20% cash equivalents as of June 30, 2019. |
Investment allocation decisions have been made by the Company’s Investment and Benefits Committee, which considers investment advice provided by the Company’s external investment consultant. The investment consultant takes into account expected long-term risks, returns, correlation, and other prudent investment assumptions when recommending asset classes and investment managers to the Company’s Investment and Benefits Committee. The investment consultant also considers the pension plans’ liabilities when making investment allocation recommendations. The Company’s Investment and Benefits Committee’s decisions are influenced by asset/liability studies conducted by the external investment consultant who combines actuarial considerations and strategic investment advice. The major investment categories of the pension plan assets are in cash equivalents and long duration fixed income securities that are marked-to-market on a daily basis. As a result, the pension plan assets are subjected to interest-rate risk, specifically to a rising interest rate environment, as the majority of the pension plan assets are invested in long duration fixed income securities. However, the pension plan assets are structured in an asset/liability framework, and consequently, an increase in interest rates would cause a corresponding decrease to the overall liability of the pension plans, thus creating a hedge against rising interest rates. Additional risks involving the asset/liability framework include earning insufficient investment returns to cover future pension plan liabilities and imperfect hedging of such liabilities. In addition, a portion of the long duration fixed income securities portfolio is invested in non-government securities that are subject to credit risk of the issuers who might default on interest and/or principal payments.
F- 50
THE MADISON SQUARE GARDEN COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Investments at Estimated Fair Value
The cumulative fair values of the individual plan assets at June 30, 2019 and 2018 by asset class are as follows:
Fair Value Hierarchy | June 30, | |||||||||
2019 | 2018 | |||||||||
Fixed income securities: | ||||||||||
U.S. Treasury Securities | I | $ | 26,238 | $ | 20,130 | |||||
U.S. corporate bonds | II | 68,968 | 61,381 | |||||||
Foreign issued corporate bonds | II | 11,436 | 11,055 | |||||||
Municipal bonds | II | 396 | 353 | |||||||
Money market accounts | I | 25,927 | 22,135 | |||||||
Total investments measured at fair value | $ | 132,965 | $ | 115,054 | ||||||
Contributions for Qualified Defined Benefit Pension Plans
During the year ended June 30, 2019, the Company contributed $11,000 to the Cash Balance Pension Plan and $225 to the Union Plan. The Company expects to contribute $7,000 and $260 to the Cash Balance Pension Plan and Union Plan, respectively, in fiscal year 2020.
Estimated Future Benefit Payments
The following table presents estimated future fiscal year benefit payments for the Pension Plans and Postretirement Plan:
Pension Plans | Postretirement Plan | ||||||
Fiscal year ending June 30, 2020 | $ | 14,050 | $ | 350 | |||
Fiscal year ending June 30, 2021 | 7,970 | 390 | |||||
Fiscal year ending June 30, 2022 | 8,000 | 370 | |||||
Fiscal year ending June 30, 2023 | 8,360 | 370 | |||||
Fiscal year ending June 30, 2024 | 8,430 | 350 | |||||
Fiscal years ending June 30, 2025 – 2029 | 44,680 | 1,820 | |||||
Defined Contribution Pension Plans
The Company sponsors The Madison Square Garden 401(k) Savings Plan (the “401(k) Plan”) and the MSG S&E, LLC Excess Savings Plan (collectively referred to as the “Savings Plans”). The 401(k) Plan is a multiple employer plan. For the years ended June 30, 2019, 2018 and 2017, expenses related to the Savings Plans that are included in the accompanying consolidated statements of operations were $10,637, $8,571 and $8,374, respectively.
In addition, the Company sponsors The Madison Square Garden 401(k) Union Plan (the “Union Savings Plan”). The Union Savings Plan is a multiple employer plan. For the years ended June 30, 2019, 2018 and 2017, expenses related to the Union Savings Plan included in the accompanying consolidated statements of operations were $521, $533 and $646, respectively.
Multiemployer Plans
The Company contributes to a number of multiemployer defined benefit pension plans, multiemployer defined contribution pension plans, and multiemployer health and welfare plans that provide benefits to retired union-represented employees under the terms of CBAs.
F- 51
THE MADISON SQUARE GARDEN COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Multiemployer Defined Benefit Pension Plans
The multiemployer defined benefit pension plans to which the Company contributes generally provide for retirement and death benefits for eligible union-represented employees based on specific eligibility/participant requirements, vesting periods and benefit formulas. The risks to the Company of participating in these multiemployer defined benefit pension plans are different from single-employer defined benefit pension plans in the following aspects:
• | Assets contributed to a multiemployer defined benefit pension plan by one employer may be used to provide benefits to employees of other participating employers. |
• | If a participating employer stops contributing to a multiemployer defined benefit pension plan, the unfunded obligations of the plan may be borne by the remaining participating employers. |
• | If the Company chooses to stop participating in some of these multiemployer defined benefit pension plans, the Company may be required to pay those plans an amount based on the Company’s proportion of the underfunded status of the plan, referred to as a withdrawal liability. However, cessation of participation in a multiemployer defined benefit pension plan and subsequent payment of any withdrawal liability is subject to the collective bargaining process. |
The following table outlines the Company’s participation in multiemployer defined benefit pension plans for the years ended June 30, 2019, 2018 and 2017, and summarizes the contributions that the Company has made during each period. The “EIN” and “Pension Plan Number” columns provide the Employer Identification Number and the three-digit plan number for each applicable plan. The most recent Pension Protection Act zone status available as of June 30, 2019 and 2018 relates to the plan’s two most recent years ended which are indicated. Among other factors, plans in the red zone are generally less than 65% funded, plans in the orange zone are both less than 80% funded and have an accumulated funding deficiency or are expected to have a deficiency in any of the next six plan years, plans in the yellow zone are less than 80% funded, and plans in the green zone are at least 80% funded. The “FIP/RP Status Pending/Implemented” column indicates whether a funding improvement plan (“FIP”) for yellow/orange zone plans or a rehabilitation plan (“RP”) for red zone plans is either pending or has been implemented by the trustees of such plan. The zone status and any FIP or RP information is based on information that the Company received from the plan, and the zone status is as certified by the plan’s actuary. The last column lists the expiration date(s) or a range of expiration dates of the CBA to which the plans are subject. There are no other significant changes that affect such comparability.
PPA Zone Status | FIP/RP Status Pending / Implemented | Madison Square Garden Contributions | |||||||||||||||||||||||
As of June 30, | Years Ended June 30, | ||||||||||||||||||||||||
Plan Name | EIN | Pension Plan Number | 2019 | 2018 | 2019 | 2018 | 2017 | Surcharge Imposed | Expiration Date of CBA | ||||||||||||||||
National Basketball Association Players’ Pension Plan | 83-2172122 | 001 | Yellow | Yellow | Implemented | $ | 3,217 | $ | 1,932 | $ | 1,830 | No | 6/2024 (with certain termination rights becoming effective 6/2023) | ||||||||||||
as of | as of | ||||||||||||||||||||||||
2/1/2018 | 2/1/2017 | ||||||||||||||||||||||||
Pension Fund of Local No. 1 of I.A.T.S.E. | 13-6414973 | 001 | Green | Green | No | 2,529 | 2,377 | 2,325 | No | 6/30/2020 - 5/1/2023 | |||||||||||||||
as of | as of | ||||||||||||||||||||||||
12/31/2017 | 12/31/2016 | ||||||||||||||||||||||||
National Hockey League Players’ Retirement Benefit Plan | 46-2555356 | 001 | Green | Green | No | 1,197 | 1,200 | 1,364 | No | 9/2022 (with certain termination rights becoming effective 9/2020) | |||||||||||||||
as of | as of | ||||||||||||||||||||||||
4/30/2018 | 4/30/2017 | ||||||||||||||||||||||||
All Other Multiemployer Defined Benefit Pension Plans | 3,615 | 3,457 | 3,397 | ||||||||||||||||||||||
$ | 10,558 | $ | 8,966 | $ | 8,916 | ||||||||||||||||||||
F- 52
THE MADISON SQUARE GARDEN COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
The Company was listed in the following plans’ Form 5500’s as providing more than 5 percent of the total contributions for the following plans and plan years:
Fund Name | Year Contributions to Plan Exceeded 5 Percent of Total Contributions (As of Plan’s Year-End) |
Pension Fund of Local No. 1 of I.A.T.S.E | December 31, 2017, 2016 and 2015 |
Pension Fund of Wardrobe Attendants Union Local 764 | December 31, 2015 |
32BJ/Broadway League Pension Fund | December 31, 2017, 2016 and 2015 |
Treasurers and Ticket Sellers Local 751 Pension Fund | August 31, 2018, 2017 and 2016 |
I.A.T.S.E Local No. 33 Pension Trust Fund | December 31, 2017 and 2016 |
Multiemployer Defined Contribution Pension Plans and Multiemployer Plans That Provide Health and Welfare Benefits
The Company contributed $7,765, $7,286 and $6,838 for the years ended June 30, 2019, 2018 and 2017, respectively, to multiemployer defined contribution pension plans. In addition, the Company contributed $2,466, $2,198 and $1,763 for the years ended June 30, 2019, 2018 and 2017, respectively, to multiemployer plans that provide health and welfare benefits to retired employees.
Note 14. Share-based Compensation
In connection with the 2015 Distribution, the Company adopted its 2015 Employee Stock Plan (the “Employee Stock Plan”) and its 2015 Stock Plan for Non-Employee Directors (the “Non-Employee Director Plan”).
Under the Employee Stock Plan, the Company is authorized to grant incentive stock options, non-qualified stock options, restricted shares, restricted stock units (“RSUs”), stock appreciation rights and other equity-based awards. The Company may grant awards for up to 2,650 shares of Madison Square Garden Class A Common Stock (subject to certain adjustments). Options and stock appreciation rights under the Employee Stock Plan must be granted with an exercise price of not less than the fair market value of a share of Madison Square Garden Class A Common Stock on the date of grant and must expire no later than 10 years from the date of grant (or up to one additional year in the case of the death of a holder). The terms and conditions of awards granted under the Employee Stock Plan, including vesting and exercisability, are determined by the Compensation Committee of the Board of Directors (“Compensation Committee”) and may include terms or conditions based upon performance criteria. RSUs that were awarded under the Employee Stock Plan are generally subject to three-year cliff vesting, or vest ratably over three years, with some RSUs being subject to certain performance conditions. RSUs that were awarded by the Company to its employees will settle in shares of the Company’s Class A Common Stock (either from treasury or with newly issued shares), or, at the option of the Compensation Committee, in cash.
Under the Non-Employee Director Plan, the Company is authorized to grant non-qualified stock options, restricted shares, restricted stock units, stock appreciation rights and other equity-based awards. The Company may grant awards for up to 160 shares of Madison Square Garden Class A Common Stock (subject to certain adjustments). Options under the Non-Employee Director Plan must be granted with an exercise price of not less than the fair market value of a share of the Company’s Class A Common Stock on the date of grant and must expire no later than 10 years from the date of grant (or up to one additional year in the case of the death of a holder). The terms and conditions of awards granted under the Non-Employee Director Plan, including vesting and exercisability, are determined by the Compensation Committee. Unless otherwise provided in an applicable award agreement, options granted under this plan will be fully vested and exercisable, and restricted stock units granted under this plan will be fully vested, upon the date of grant and will settle in shares of the Company’s Class A Common Stock (either from treasury or with newly issued shares), or, at the option of the Compensation Committee, in cash, on the first business day after ninety days from the date the director’s service on the Board of Directors ceases or, if earlier, upon the director’s death.
F- 53
THE MADISON SQUARE GARDEN COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Share-based Compensation Expense
Share-based compensation expense is generally recognized straight-line over the vesting term of the award, which typically provides for three-year cliff or graded vesting subject to continued employment. For awards that are graded vesting and subject to performance conditions to satisfy tax deductibility for executive officers, in addition to continued employment, the Company uses the graded-vesting method to recognize share-based compensation expense.
Share-based compensation expense was recognized in the consolidated statements of operations as a component of direct operating expenses or selling, general and administrative expenses. The following table presents the share-based compensation expense recorded during the years ended June 30, 2019, 2018 and 2017.
Years Ended June 30, | ||||||||||||
2019 | 2018 | 2017 | ||||||||||
Company RSUs and PSUs | $ | 52,196 | $ | 46,307 | $ | 39,960 | ||||||
Company stock options | 7,278 | 899 | — | |||||||||
MSG Networks RSUs | — | 357 | 1,169 | |||||||||
Total share-based compensation expense | $ | 59,474 | $ | 47,563 | $ | 41,129 | ||||||
As of June 30, 2019, there was $83,969 of unrecognized compensation cost related to unvested RSUs and PSUs held by the Company’s employees. The cost is expected to be recognized over a weighted-average period of approximately 2.2 years for unvested RSUs and PSUs. In addition, the Company had $26,823 of unrecognized compensation cost related to unvested stock options, which is expected to be recognized over approximately 3.1 years as of June 30, 2019. For the year ended June 30, 2019, the company capitalized $3,946 of share-based compensation expense. There were no costs related to share-based compensation that were capitalized for the years ended June 30, 2018 and 2017.
Restricted Stock Units Award Activity
The following table summarizes activity related to the Company’s RSUs and PSUs for the year ended June 30, 2019:
Number of | Weighted-Average Fair Value Per Share At Date of Grant | ||||||||
Nonperformance Based Vesting RSUs | PSUs and Performance Based Vesting RSUs | ||||||||
Unvested award balance as of June 30, 2018 | 212 | 271 | $ | 192.41 | |||||
Granted | 157 | 160 | $ | 304.53 | |||||
Vested | (124 | ) | (46 | ) | $ | 184.75 | |||
Forfeited | (16 | ) | (26 | ) | $ | 236.21 | |||
Unvested award balance as of June 30, 2019 | 229 | 359 | $ | 252.02 | |||||
The fair value of RSUs and PSUs that vested during the year ended June 30, 2019 was $51,350. Upon delivery, RSUs and PSUs granted under the MSG Employee Stock Plan were net share-settled to cover the required statutory tax withholding obligations. To fulfill the employees’ statutory minimum tax withholding obligations for the applicable income and other employment taxes, 64 of these RSUs and PSUs, with an aggregate value of $19,525 were retained by the Company and the taxes paid are reflected as financing activity in the accompanying consolidated statement of cash flows for the year ended June 30, 2019.
The fair value of RSUs and PSUs that vested during the years ended June 30, 2018 and 2017 was $76,226 and $16,315, respectively. The weighted-average fair value per share at grant date of RSUs and PSUs granted during the years ended June 30, 2018 and 2017 was $214.08 and $172.10, respectively.
F- 54
THE MADISON SQUARE GARDEN COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Stock Options Award Activity
The following table summarizes activity related to the Company’s stock options for the year ended June 30, 2019:
Number of | Weighted-Average Exercise Price Per Share | Weighted-Average Remaining Contractual Term (In Years) | Aggregate Intrinsic Value | |||||||||
Time Vesting Options | ||||||||||||
Balance as of June 30, 2018 | 94 | $ | 210.13 | |||||||||
Granted | 449 | $ | 349.57 | |||||||||
Balance as of June 30, 2019 | 543 | $ | 325.47 | 7.06 | $ | 6,550 | ||||||
Exercisable as of June 30, 2019 | 31 | $ | 210.13 | 8.47 | $ | 2,183 | ||||||
During the year ended June 30, 2019, the Company granted 449 stock options that consisted of market priced stock options and premium priced stock options. The exercise prices of the premium priced stock options were set at a 10% and a 25% premium from the closing stock price at the date of grant. These stock options vest ratably over four years and are being expensed on a straight-line basis over the vesting period. The maximum contractual term is 7.5 years. The Company calculated the fair value of the market priced options on the date of grant using the Black-Scholes option pricing model and the premium priced options using the Monte Carlo Simulation. The following are key assumptions used to calculate the weighted-average grant date fair value of the stock options:
Market Price | 10% Premium | 25% Premium | |||||||||
Weighted-average grant date fair value | $ | 79.99 | $ | 69.33 | $ | 55.64 | |||||
Expected term | 4.98 years | 5.10 years | 5.29 years | ||||||||
Expected volatility | 22.11 | % | 22.11 | % | 22.11 | % | |||||
Risk-free interest rate | 3.02 | % | 3.11 | % | 3.11 | % | |||||
The expected terms of the premium priced options were estimated using the simplified method but takes into account that the options are out-of-the-money at grant date and therefore likely to be exercised later. The risk-free interest rate for the premium priced options was determined using a 7.50 year rate, different from the 4.98 year rate used to determine the market priced stock options.
Note 15. Stock Repurchase Program
On September 11, 2015, the Company’s board of directors authorized the repurchase of up to $525,000 of the Company’s Class A Common Stock once the shares of the Company’s Class A Common Stock began “regular way” trading on October 1, 2015. Under the authorization, shares of Class A Common Stock may be purchased from time to time in accordance with applicable insider trading and other securities laws and regulations. The timing and amount of purchases will depend on market conditions and other factors.
During the year ended June 30, 2019, the Company did not engage in any share repurchase activities under its share repurchase program. As of June 30, 2019, the Company had $259,639 of availability remaining under its stock repurchase authorization.
F- 55
THE MADISON SQUARE GARDEN COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Note 16. Related Party Transactions
As of June 30, 2019, members of the Dolan family including trusts for members of the Dolan family (collectively, the “Dolan Family Group”), for purposes of Section 13(d) of the Securities Exchange Act of 1934, as amended, collectively beneficially own all of the Company’s outstanding Class B Common Stock and own approximately 2.9% of the Company’s outstanding Class A Common Stock. Such shares of the Company’s Class A Common Stock and Class B Common Stock, collectively, represent approximately 71.1% of the aggregate voting power of the Company’s outstanding common stock. Members of the Dolan family are also the controlling stockholders of MSG Networks and AMC Networks Inc. (“AMC Networks”).
The Company has various agreements with MSG Networks, including media rights agreements covering the Knicks and the Rangers games, an advertising sales representation agreement, and a services agreement (“Services Agreement”). Pursuant to the Services Agreement, effective July 1, 2018, the Company provides certain services to MSG Networks, such as information technology, accounts payable and payroll, human resources, and other corporate functions, as well as the executive support services described below, in exchange for service fees. MSG Networks similarly provides certain services to the Company, in exchange for service fees. In connection with the expiration of the Services Agreement on June 30, 2019, the Company entered into an interim agreement with MSG Networks, pursuant to which the parties are providing the same services on the same terms. We expect to enter into a new services agreement this calendar year, which will be retroactive July 1, 2019.
The Company shares certain executive support costs, including office space, executive assistants, security and transportation costs, for (i) the Company’s Executive Chairman with MSG Networks and (ii) the Company’s Vice Chairman with MSG Networks and AMC Networks.
On June 16, 2016, the Company entered into an arrangement with the Dolan Family Office, LLC (“DFO”), AMC Networks and MSG Networks providing for the sharing of certain expenses associated with executive office space which is available to James L. Dolan (the Executive Chairman, Chief Executive Officer and a director of the Company, the Executive Chairman and a director of MSG Networks, and a director of AMC Networks), Charles F. Dolan (the Executive Chairman and a director of AMC Networks and a director of the Company and MSG Networks), and the DFO which is controlled by Charles F. Dolan. Effective September 2018, the Company is no longer party to this arrangement.
The Company is a party to various Aircraft Support Services Agreements (the “Support Agreements”), pursuant to which the Company provides certain aircraft support services to entities controlled by (i) the Company’s Executive Chairman, Chief Executive Officer and a director, (ii) Charles F. Dolan, a director of the Company, and (iii) Patrick Dolan, the son of Charles F. Dolan and brother of James L. Dolan. On December 17, 2018, the Company terminated the agreement providing services to the entity controlled by Charles F. Dolan, and entered into a new agreement with Charles F. Dolan and certain of his children, specifically: Thomas C. Dolan (a director of the Company), Deborah Dolan-Sweeney, Patrick F. Dolan, Marianne Dolan Weber (a director of the Company), and Kathleen Dolan, which provides substantially the same services as the prior agreement for a new aircraft.
In connection with the Support Agreements, the Company entered into reciprocal time sharing/dry lease agreements with each of (i) Quart 2C, LLC (“Q2C”), a company controlled by the Company’s Executive Chairman, Chief Executive Officer and a director, and Kristin A. Dolan, his wife and a director of the Company, and (ii) Charles F. Dolan, a director of the Company, and Sterling Aviation, LLC, a company controlled by Charles F. Dolan (collectively, “CFD”), pursuant to which the Company has agreed from time to time to make its aircraft available to each of Q2C and CFD, and Q2C and CFD have agreed from time to time to make their aircraft available to the Company. Pursuant to the terms of the agreements, Q2C and/or CFD may lease on a non-exclusive, “time sharing” basis, the Company’s Gulfstream Aerospace G550 aircraft (the “G550 Aircraft”). On December 17, 2018, in connection with the purchase of a new aircraft (as noted above), the Company replaced the dry lease agreement with CFD with a new dry lease agreement with Sterling2k LLC, an entity owned and controlled by Deborah Dolan-Sweeney, the daughter of CFD and the sister of the Company’s Executive Chairman and Chief Executive Officer, which provides for the Company’s usage of the new aircraft.
F- 56
THE MADISON SQUARE GARDEN COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
On May 6, 2019 the Company entered into a dry lease agreement with Brighid Air, LLC (“Brighid Air”), a company owned and controlled by Patrick Dolan, the son of Charles F. Dolan and the brother of James L. Dolan, pursuant to which the Company may lease on a non-exclusive basis Brighid Air’s Bombardier BD100-1A10 Challenger 350 aircraft (the “Challenger”). In connection with the dry lease agreement, on May 6, 2019 the Company also entered into a Flight Crew Services Agreement (the “Flight Crew Agreement”) with Dolan Family Office, LLC (“DFO”), an entity owned and controlled by Charles F. Dolan, pursuant to which the Company may utilize pilots employed by DFO for purposes of flying the Challenger when the Company is leasing such aircraft under the Company’s dry lease agreement with Brighid Air.
The Company and each of MSG Networks and AMC Networks are party to certain aircraft time sharing agreements, pursuant to which the Company has agreed from time to time to make aircraft available to MSG Networks and/or AMC Networks for lease on a “time sharing” basis. Additionally, the Company, MSG Networks and AMC Networks have agreed on an allocation of the costs of certain helicopter use by its shared executives.
In addition to the aircraft arrangements described above, certain executives of the Company are party to aircraft time sharing agreements, pursuant to which the Company has agreed from time to time to make certain aircraft available for lease on a “time sharing” basis for personal use in exchange for payment of actual expenses of the flight (as listed in the agreement).
From time to time the Company enters into arrangements with 605, LLC. Kristin Dolan is the Chief Executive Officer of 605, LLC. 605, LLC provides audience measurement and data analytics services to the Company and its subsidiaries in the ordinary course of business.
As of June 30, 2019, BCE had $637 of notes payable. See Note 12 for further information.
The Company also has certain arrangements with its nonconsolidated affiliates. See Note 7 for information on outstanding loans provided by the Company to its nonconsolidated affiliates. Additionally, the Company entered into certain commercial agreements with its nonconsolidated affiliates in connection with MSG Sphere. As of June 30, 2019, the Company recorded approximately $14,000 of capital expenditures in connection with services provided to the Company under these agreements.
Revenues and Operating Expenses
The following table summarizes the composition and amounts of the transactions with the Company’s affiliates, primarily with MSG Networks. These amounts are reflected in revenues and operating expenses in the accompanying consolidated statements of operations for the years ended June 30, 2019, 2018 and 2017:
Years Ended June 30, | ||||||||||||
2019 | 2018 | 2017 | ||||||||||
Revenues | $ | 164,406 | $ | 156,368 | $ | 150,534 | ||||||
Operating expenses (credits): | ||||||||||||
Corporate general and administrative expenses, net — MSG Networks | $ | (10,362 | ) | $ | (9,961 | ) | $ | (9,832 | ) | |||
Consulting fees | 1,792 | 3,929 | 3,943 | |||||||||
Advertising expenses | 1,037 | 993 | 1,249 | |||||||||
Other operating expenses, net | 20 | 933 | 72 | |||||||||
Revenues
Revenues from related parties primarily consist of local media rights recognized by the Company’s Sports segment from the licensing of team-related programming to MSG Networks under the media rights agreements covering the Knicks and Rangers, which provide MSG Networks with exclusive media rights to team games in their local markets, as well as commissions earned in connection with the advertising sales representation agreement pursuant to which the Company has the exclusive right and obligation to sell MSG Networks’ advertising availabilities.
In addition, the Company and Tribeca Enterprises have a service agreement pursuant to which the Company provides marketing inventory, advertising sales and consulting services to Tribeca Enterprises for a fee. The Company is also a party to certain commercial arrangements with AMC Networks and its subsidiaries.
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THE MADISON SQUARE GARDEN COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Corporate General and Administrative Expenses, net - MSG Networks
The Company’s corporate overhead expenses that are charged to MSG Networks are primarily related to centralized functions, including executive compensation, finance, treasury, tax, internal audit, legal, information technology, human resources and risk management functions.
For the years ended June 30, 2019 and 2018, Corporate general and administrative expense, net - MSG Networks reflects charges from the Company to MSG Networks under the Services Agreement of $10,467 and $9,969. Furthermore, for the year ended June 30, 2017, Corporate general and administrative expense, net - MSG Networks reflects charges from the Company to MSG Networks under a transition services agreement (“TSA”) of $8,507, net of general and administrative costs charged to the Company by MSG Networks, under the TSA, which was replaced by the Services Agreement effective July 1, 2017.
Consulting Fees
On December 5, 2018, the Company’s joint venture interest in AMSGE was sold to Azoff Music, which resulted in the Company no longer being an owner of AMSGE (renamed The Azoff Company). Accordingly, The Azoff Company is not a related party of the Company, and thus the related party transactions disclosed herein that relate to AMSGE were recognized prior to December 5, 2018. Prior to the sale of AMSGE, the Company paid AMSGE and its nonconsolidated affiliates for advisory and consulting services that AMSGE and its nonconsolidated affiliates provided to the Company, and for the reimbursement of certain expenses in connection with such services. In the fourth quarter of fiscal year 2016, the Company paid $5,000 to AMSGE for work performed towards securing the right to lease property to be developed in Las Vegas. The Company began amortizing this cost during the three months ended September 30, 2018. That carrying amount is included in other assets in the accompanying consolidated balance sheets as of June 30, 2019 and 2018.
Advertising Expenses
The Company incurs advertising expenses for services rendered by its related parties, primarily MSG Networks, most of which are related to the utilization of advertising and promotional benefits by the Company.
Other Operating Expenses, net
The Company and its related parties enter into transactions with each other in the ordinary course of business. Amounts charged to the Company for other transactions with its related parties are net of amounts charged by the Company to the Knickerbocker Group, LLC, an entity owned by James L. Dolan, the Executive Chairman, Chief Executive Officer and a director of the Company, for office space equal to the allocated cost of such space and the cost of certain technology services. In addition, other operating expenses include net charges relating to (i) reciprocal aircraft arrangements between the Company and each of Q2C and CFD and (ii) time sharing agreements with MSG Networks and AMC Networks.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Note 17. Accumulated Other Comprehensive Loss
The following table details the components of accumulated other comprehensive loss:
Pension Plans and Postretirement Plan | Cumulative Translation Adjustments | Unrealized Gain (Loss) on Available-for-sale Securities | Accumulated Other Comprehensive Loss | ||||||||||||
Balance as of June 30, 2018 | $ | (40,846 | ) | $ | (502 | ) | $ | (5,570 | ) | $ | (46,918 | ) | |||
Reclassification of unrealized loss on available-for-sale securities (a) | — | — | 5,570 | 5,570 | |||||||||||
Other comprehensive loss before reclassifications | (2,565 | ) | (4,341 | ) | — | (6,906 | ) | ||||||||
Amounts reclassified from accumulated other comprehensive loss (b) | 1,331 | — | — | 1,331 | |||||||||||
Other comprehensive loss | (1,234 | ) | (4,341 | ) | — | (5,575 | ) | ||||||||
Balance as of June 30, 2019 | $ | (42,080 | ) | $ | (4,843 | ) | $ | — | $ | (46,923 | ) | ||||
Pension Plans and Postretirement Plan | Cumulative Translation Adjustments | Unrealized Gain (Loss) on Available-for-sale Securities | Accumulated Other Comprehensive Loss | ||||||||||||
Balance as of June 30, 2017 | $ | (39,408 | ) | $ | — | $ | 5,293 | $ | (34,115 | ) | |||||
Reclassification of stranded tax effects (c) | 608 | — | 1,232 | 1,840 | |||||||||||
Other comprehensive loss before reclassifications | (3,415 | ) | (502 | ) | (12,095 | ) | (16,012 | ) | |||||||
Amounts reclassified from accumulated other comprehensive loss (b) | 1,369 | — | — | 1,369 | |||||||||||
Other comprehensive loss | (2,046 | ) | (502 | ) | (12,095 | ) | (14,643 | ) | |||||||
Balance as of June 30, 2018 | $ | (40,846 | ) | $ | (502 | ) | $ | (5,570 | ) | $ | (46,918 | ) | |||
Pension Plans and Postretirement Plan | Cumulative Translation Adjustments | Unrealized Gain (Loss) on Available-for-sale Securities | Accumulated Other Comprehensive Loss | ||||||||||||
Balance as of June 30, 2016 | $ | (42,611 | ) | $ | — | $ | — | $ | (42,611 | ) | |||||
Other comprehensive income before reclassifications, before income taxes | 4,027 | — | 9,629 | 13,656 | |||||||||||
Amounts reclassified from accumulated other comprehensive loss, before income taxes (b) | 1,317 | — | — | 1,317 | |||||||||||
Income tax expense | (2,141 | ) | — | (4,336 | ) | (6,477 | ) | ||||||||
Other comprehensive income | 3,203 | — | 5,293 | 8,496 | |||||||||||
Balance as of June 30, 2017 | $ | (39,408 | ) | $ | — | $ | 5,293 | $ | (34,115 | ) | |||||
(a) | As of July 1, 2018, upon adoption of ASU No. 2016-01, the Company recorded a transition adjustment to reclassify accumulated other comprehensive loss associated with its investment in Townsquare in the amount of $2,466 pre-tax ($5,570, net of tax) to accumulated deficit. See Notes 2 and 11 for more information on the Company’s adoption of ASU No. 2016-01 related to its investment in Townsquare and its impact on the Company’s operating results for the year ended June 30, 2019. |
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THE MADISON SQUARE GARDEN COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(b) | Amounts reclassified from accumulated other comprehensive loss represent the amortization of net actuarial loss and net unrecognized prior service credit included in net periodic benefit cost, which is reflected in Miscellaneous income (expense), net in the accompanying consolidated statements of operations (see Note 13). |
(c) | During the fourth quarter of 2018, the Company elected to early adopt ASU No. 2018-02, Income Statement - Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income, which allowed the Company to reclassify the stranded income tax effects resulting from the Tax Cuts and Jobs Act from accumulated other comprehensive income (loss) to retained earnings (accumulated deficit). |
Note 18. Income Taxes
On December 22, 2017, new tax legislation, commonly referred to as the Tax Cuts and Jobs Act (“TCJA”), was enacted, which significantly changed the existing U.S. tax laws, including a reduction in the corporate federal income tax rate from 35% to 21% effective January 1, 2018. During the second quarter of fiscal year 2018, the Company was required to recognize the effect of tax law changes in the period of enactment even though certain key aspects of the new law became effective January 1, 2018.
For the fiscal year ended June 30, 2019, the Company used the federal income tax rate of 21% per the enactment of TCJA to calculate its most recent effective tax rate. For the fiscal year ended June 30, 2018, the Company used a blended statutory federal income tax rate of 28% based upon the number of days that it will be taxed at the former rate of 35% and the number of days it will be taxed at the new rate of 21% to calculate its effective tax rate.
Income tax expense (benefit) is comprised of the following components:
Years Ended June 30, | ||||||||||||
2019 | 2018 | 2017 | ||||||||||
Current expense: | ||||||||||||
State and other | $ | 1,198 | $ | 439 | $ | — | ||||||
1,198 | 439 | — | ||||||||||
Deferred expense (benefit): | ||||||||||||
Federal | 1,233 | (114,211 | ) | (3,382 | ) | |||||||
State and other | (1,083 | ) | (3,100 | ) | (1,022 | ) | ||||||
150 | (117,311 | ) | (4,404 | ) | ||||||||
Income tax expense (benefit) | $ | 1,348 | $ | (116,872 | ) | $ | (4,404 | ) | ||||
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THE MADISON SQUARE GARDEN COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
The income tax expense (benefits) differs from the amount derived by applying the statutory federal rate to pre-tax income (loss) principally due to the effect of the following items:
_________________
Years Ended June 30, | ||||||||||||
2019 | 2018 | 2017 | ||||||||||
Federal tax expense (benefit) at statutory federal rate | $ | (371 | ) | $ | 4,933 | $ | (28,418 | ) | ||||
State income taxes, net of federal benefit | 5,175 | 1,800 | (6,716 | ) | ||||||||
Change in the estimated applicable tax rate used to determine deferred taxes | (1,055 | ) | (50,169 | ) | 672 | |||||||
Nondeductible disability insurance premiums expense | 482 | 1,436 | 1,983 | |||||||||
Federal tax credits | (1,900 | ) | — | (354 | ) | |||||||
Gains in other comprehensive income | — | — | (6,477 | ) | ||||||||
GAAP income of consolidated partnership attributable to non-controlling interests | 3,054 | 2,006 | 1,414 | |||||||||
Tax effect of indefinite-lived intangible amortization | 1,183 | 1,236 | 1,329 | |||||||||
Change in valuation allowance (a) | (9,421 | ) | (76,925 | ) | 30,697 | |||||||
Nondeductible officers’ compensation (b) | 8,651 | — | — | |||||||||
Nondeductible expenses | 1,114 | — | — | |||||||||
Excess tax benefit related to shared based-payments awards | (5,736 | ) | (1,974 | ) | — | |||||||
Other | 172 | 785 | 1,466 | |||||||||
Income tax expense (benefit) | $ | 1,348 | $ | (116,872 | ) | $ | (4,404 | ) | ||||
(a) | For the year ended June 30, 2018, the valuation allowance was revalued under provisions contained in the new tax legislation, comprised of the following: (i) $62,479 was due to a reduction in the valuation allowance attributable to the new rules, which provide that future Federal net operating losses have an unlimited carry-forward period and (ii) $14,446, reduction in valuation allowance relating to current operations. |
(b) | The TCJA included changes to Internal Revenue Code Section 162(m), including elimination of the exception for qualified performance-based compensation over the $1,000 annual limit. Accordingly, effective January 1, 2018, all compensation for certain officers in excess of $1,000 is generally nondeductible. |
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THE MADISON SQUARE GARDEN COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
The tax effects of temporary differences which give rise to significant portions of the deferred tax assets and liabilities at June 30, 2019 and 2018 are as follows:
June 30, | |||||||
2019 | 2018 | ||||||
Deferred tax asset: | |||||||
Net operating loss carryforwards | $ | 61,278 | $ | 73,599 | |||
Tax credit carryforwards | 6,189 | 784 | |||||
Accrued employee benefits | 63,276 | 66,147 | |||||
Accrued expenses | 20,590 | 20,053 | |||||
Restricted stock units and stock options | 18,442 | 13,879 | |||||
Other | 3,803 | 7,445 | |||||
Total deferred tax assets | $ | 173,578 | $ | 181,907 | |||
Less valuation allowance | (75,701 | ) | (88,246 | ) | |||
Net deferred tax assets | $ | 97,877 | $ | 93,661 | |||
Deferred tax liabilities: | |||||||
Intangible and other assets | $ | (140,901 | ) | $ | (141,676 | ) | |
Property and equipment | (16,312 | ) | (10,579 | ) | |||
Prepaid expenses | (10,901 | ) | (7,178 | ) | |||
Investments | (8,861 | ) | (13,196 | ) | |||
Total deferred tax liabilities | $ | (176,975 | ) | $ | (172,629 | ) | |
Net deferred tax liability | $ | (79,098 | ) | $ | (78,968 | ) | |
In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax asset will not be realized. The Company’s ability to realize its deferred tax assets depends upon the generation of sufficient future taxable income to allow for the utilization of its net operating loss carryforwards (“NOL”) and future deductible temporary differences. At this time, based on current facts and circumstances, management believes that it is more likely than not that the Company will not realize the benefit for a portion of its deferred tax asset. Accordingly. a partial valuation allowance has been recorded.
The federal NOL as of June 30, 2019 is approximately $155,000 which will primarily expire in 2036. The state NOL as of June 30, 2019 is approximately $198,000 which will primarily expire in 2036.
The Company does not have any recorded unrecognized tax benefit for uncertain tax positions as of June 30, 2019 and 2018.
The Company was notified during the third quarter of fiscal year 2018 that the Internal Revenue Service was commencing an examination of our federal income tax returns as filed for the tax year ended June 30, 2016. The Company does not expect the audit to result in any material changes.
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THE MADISON SQUARE GARDEN COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Note 19. Segment Information
The Company is comprised of two reportable segments: MSG Entertainment and MSG Sports. In determining its reportable segments, the Company assessed the guidance of ASC 280-10-50-1, which provides the definition of a reportable segment. In accordance with the FASB’s guidance, the Company takes into account whether two or more operating segments can be aggregated together as one reportable segment as well as the type of discrete financial information that is available and regularly reviewed by its chief operating decision maker. The Company has evaluated this guidance and determined that there are two reportable segments. The Company allocates certain corporate costs and its performance venue operating expenses to each of its reportable segments. Allocated venue operating expenses include the non-event related costs of operating the Company’s venues, and include such costs as rent for the Company’s leased venues, real estate taxes, insurance, utilities, repairs and maintenance, and labor related to the overall management of the venues. Depreciation and amortization expense related to The Garden, Hulu Theater at Madison Square Garden, the Forum, and certain corporate property, equipment and leasehold improvements not allocated to the reportable segments is reported in “Corporate and Other.” Additionally, the Company does not allocate any purchase accounting adjustments to the reporting segments.
The Company evaluates segment performance based on several factors, of which the key financial measure is operating income (loss) before (i) depreciation, amortization and impairments of property and equipment and intangible assets, (ii) share-based compensation expense or benefit, (iii) restructuring charges or credits, and (iv) gains or losses on sales or dispositions of businesses, which is referred to as adjusted operating income (loss), a non-GAAP measure. In addition to excluding the impact of the items discussed above, the impact of purchase accounting adjustments related to business acquisitions is also excluded in evaluating the Company’s consolidated adjusted operating income (loss). Because it is based upon operating income (loss), adjusted operating income (loss) also excludes interest expense (including cash interest expense) and other non-operating income and expense items. Management believes that the exclusion of share-based compensation expense or benefit allows investors to better track the performance of the various operating units of the Company’s business without regard to the settlement of an obligation that is not expected to be made in cash. The Company believes adjusted operating income (loss) is an appropriate measure for evaluating the operating performance of its business segments and the Company on a consolidated basis. Adjusted operating income (loss) and similar measures with similar titles are common performance measures used by investors and analysts to analyze the Company’s performance. The Company uses revenues and adjusted operating income (loss) measures as the most important indicators of its business performance, and evaluates management’s effectiveness with specific reference to these indicators.
Adjusted operating income (loss) should be viewed as a supplement to and not a substitute for operating income (loss), net income (loss), cash flows from operating activities, and other measures of performance and/or liquidity presented in accordance with GAAP. Since adjusted operating income (loss) is not a measure of performance calculated in accordance with GAAP, this measure may not be comparable to similar measures with similar titles used by other companies. The Company has presented the components that reconcile operating income (loss), the most directly comparable GAAP financial measure, to adjusted operating income (loss). In addition, the retrospective adoption of ASU No. 2017-07 resulted in an immaterial improvement in operating income (loss) and adjusted operating income (loss) for the years ended June 30, 2018 and 2017 (see Note 2 for further detail).
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THE MADISON SQUARE GARDEN COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Information as to the operations of the Company’s reportable segments is set forth below.
Year ended June 30, 2019 | ||||||||||||||||||||||||
MSG Entertainment | MSG Sports | Corporate and Other | Purchase accounting adjustments | Inter-segment eliminations | Total | |||||||||||||||||||
Revenues | $ | 819,930 | $ | 812,746 | $ | — | $ | — | $ | (1,608 | ) | $ | 1,631,068 | |||||||||||
Direct operating expenses | 507,091 | 485,899 | 531 | 4,240 | (684 | ) | 997,077 | |||||||||||||||||
Selling, general and administrative expenses | (a) | 208,577 | 196,548 | 123,347 | 725 | (525 | ) | 528,672 | ||||||||||||||||
Depreciation and amortization | (b) | 18,170 | 7,778 | 75,714 | 17,531 | — | 119,193 | |||||||||||||||||
Operating income (loss) | 86,092 | 122,521 | (199,592 | ) | (22,496 | ) | (399 | ) | (13,874 | ) | ||||||||||||||
Equity in earnings of equity method investments | 7,062 | |||||||||||||||||||||||
Interest income | 30,205 | |||||||||||||||||||||||
Interest expense | (20,410 | ) | ||||||||||||||||||||||
Miscellaneous expense, net | (4,752 | ) | ||||||||||||||||||||||
Loss from operations before income taxes | $ | (1,769 | ) | |||||||||||||||||||||
Reconciliation of operating income (loss) to adjusted operating income (loss): | ||||||||||||||||||||||||
Operating income (loss) | 86,092 | 122,521 | (199,592 | ) | (22,496 | ) | (399 | ) | (13,874 | ) | ||||||||||||||
Add back: | ||||||||||||||||||||||||
Share-based compensation expense | 14,086 | 16,373 | 29,015 | — | — | 59,474 | ||||||||||||||||||
Depreciation and amortization | 18,170 | 7,778 | 75,714 | 17,531 | — | 119,193 | ||||||||||||||||||
Other purchase accounting adjustments | — | — | — | 4,965 | — | 4,965 | ||||||||||||||||||
Adjusted operating income (loss) | $ | 118,348 | $ | 146,672 | $ | (94,863 | ) | $ | — | $ | (399 | ) | $ | 169,758 | ||||||||||
Other information: | ||||||||||||||||||||||||
Capital expenditures | (c) | $ | 18,719 | $ | 4,832 | $ | 165,283 | $ | — | $ | — | $ | 188,834 | |||||||||||
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Year ended June 30, 2018 | ||||||||||||||||||||||||
MSG Entertainment | MSG Sports | Corporate and Other | Purchase accounting adjustments | Inter-segment eliminations | Total | |||||||||||||||||||
Revenues | $ | 780,726 | $ | 778,653 | $ | — | $ | — | $ | (284 | ) | $ | 1,559,095 | |||||||||||
Direct operating expenses | 482,873 | 456,932 | 120 | 4,635 | (284 | ) | 944,276 | |||||||||||||||||
Selling, general and administrative expenses | (a) | 192,001 | 185,139 | 91,840 | 223 | 73 | 469,276 | |||||||||||||||||
Depreciation and amortization | (b) | 18,515 | 7,481 | 78,356 | 18,134 | — | 122,486 | |||||||||||||||||
Operating income (loss) | 87,337 | 129,101 | (170,316 | ) | (22,992 | ) | (73 | ) | 23,057 | |||||||||||||||
Loss in equity method investments | (7,770 | ) | ||||||||||||||||||||||
Interest income | 21,582 | |||||||||||||||||||||||
Interest expense | (15,415 | ) | ||||||||||||||||||||||
Miscellaneous expense, net | (3,878 | ) | ||||||||||||||||||||||
Income from operations before income taxes | $ | 17,576 | ||||||||||||||||||||||
Reconciliation of operating income (loss) to adjusted operating income (loss): | ||||||||||||||||||||||||
Operating income (loss) | 87,337 | 129,101 | (170,316 | ) | (22,992 | ) | (73 | ) | 23,057 | |||||||||||||||
Add back: | ||||||||||||||||||||||||
Share-based compensation expense | 12,500 | 15,498 | 19,565 | — | — | 47,563 | ||||||||||||||||||
Depreciation and amortization | 18,515 | 7,481 | 78,356 | 18,134 | — | 122,486 | ||||||||||||||||||
Other purchase accounting adjustments | — | — | — | 4,858 | — | 4,858 | ||||||||||||||||||
Adjusted operating income (loss) | $ | 118,352 | $ | 152,080 | $ | (72,395 | ) | $ | — | $ | (73 | ) | $ | 197,964 | ||||||||||
Other information: | ||||||||||||||||||||||||
Capital expenditures | (c) | $ | 24,403 | $ | 4,552 | $ | 162,959 | $ | — | $ | — | $ | 191,914 | |||||||||||
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THE MADISON SQUARE GARDEN COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Year ended June 30, 2017 | ||||||||||||||||||||
MSG Entertainment | MSG Sports | Corporate and Other | Purchase accounting adjustments | Total | ||||||||||||||||
Revenues | $ | 506,468 | $ | 811,984 | $ | — | $ | — | $ | 1,318,452 | ||||||||||
Direct operating expenses | (d) | 377,962 | 472,995 | — | 9,466 | 860,423 | ||||||||||||||
Selling, general and administrative expenses | (a) | 119,552 | 207,959 | 79,440 | — | 406,951 | ||||||||||||||
Depreciation and amortization | (b) | 11,339 | 9,319 | 83,578 | 3,152 | 107,388 | ||||||||||||||
Operating income (loss) | (2,385 | ) | 121,711 | (163,018 | ) | (12,618 | ) | (56,310 | ) | |||||||||||
Loss in equity method investments | (e) | (29,976 | ) | |||||||||||||||||
Interest income | 11,836 | |||||||||||||||||||
Interest expense | (4,189 | ) | ||||||||||||||||||
Miscellaneous expense, net | (2,554 | ) | ||||||||||||||||||
Loss from operations before income taxes | $ | (81,193 | ) | |||||||||||||||||
Reconciliation of operating income (loss) to adjusted operating income (loss): | ||||||||||||||||||||
Operating income (loss) | (2,385 | ) | 121,711 | (163,018 | ) | (12,618 | ) | (56,310 | ) | |||||||||||
Add back: | ||||||||||||||||||||
Share-based compensation expense | 14,323 | 14,548 | 12,258 | — | 41,129 | |||||||||||||||
Depreciation and amortization | 11,339 | 9,319 | 83,578 | 3,152 | 107,388 | |||||||||||||||
Other purchase accounting adjustments | — | — | — | 9,466 | 9,466 | |||||||||||||||
Adjusted operating income (loss) | $ | 23,277 | $ | 145,578 | $ | (67,182 | ) | $ | — | $ | 101,673 | |||||||||
Other information: | ||||||||||||||||||||
Capital expenditures | $ | 11,460 | $ | 2,393 | $ | 30,371 | $ | — | $ | 44,224 | ||||||||||
_________________
(a) | Corporate and Other’s selling, general and administrative expenses primarily consist of unallocated corporate general and administrative costs, including expenses associated with the Company’s business development initiatives, as well as costs associated with the development of MSG Sphere, including technology and content development costs. |
(b) | Corporate and Other principally includes depreciation and amortization on The Garden, Hulu Theater at Madison Square Garden, the Forum, and certain corporate property, equipment and leasehold improvement assets not allocated to the Company’s reportable segments. |
(c) | Significant majority of Corporate and Other’s capital expenditures for the years ended June 30, 2019 and 2018 are related to the Company’s planned MSG Spheres in Las Vegas and London including the purchase of land in London in fiscal year 2018. MSG Entertainment’s capital expenditures for the years ended June 30, 2019 and 2018 are primarily associated with the opening of a new TAO Group venue including certain investments with respect to Radio City Music Hall in fiscal year 2018. |
(d) | MSG Entertainment’s direct operating expenses for the years ended June 30, 2017 include $33,629, of write-offs of deferred production costs associated with the New York Spectacular production (see Note 2). |
(e) | Loss in equity method investments for the year ended June 30, 2017 reflects a pre-tax non-cash impairment charge of $20,613 to write off the carrying value of its equity investment in Fuse Media (see Note 7). |
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
The table below sets forth, for the periods presented, the Company’s consolidated revenues for the years ended June 30, 2019, 2018 and 2017 by component.
Years Ended June 30, | ||||||||||||
2019 | 2018 | 2017 | ||||||||||
Revenues | ||||||||||||
Event-related revenues (a) | $ | 1,046,178 | $ | 980,726 | $ | 908,941 | ||||||
Media rights revenues (b) | 239,140 | 229,646 | 220,021 | |||||||||
Advertising sales commission, sponsorship and signage revenues (c) | 88,771 | 76,831 | 74,685 | |||||||||
All other revenues (d) | 256,979 | 271,892 | 114,805 | |||||||||
$ | 1,631,068 | $ | 1,559,095 | $ | 1,318,452 | |||||||
_________________
(a) | Primarily consists of professional sports teams’, entertainment and other live sporting events revenues. These amounts include (i) ticket sales, (ii) other ticket-related revenue, (iii) food, beverage and merchandise sales, (iv) venue license fees, and (v) event-related sponsorship and signage revenues. |
(b) | Primarily consists of telecast rights fees from MSG Networks and the Company’s share of league distributions. |
(c) | Amounts exclude event-related sponsorship and signage revenues. |
(d) | Primarily consists of (i) nonevent-related food and beverage revenues, including TAO Group’s entertainment dining and nightlife offerings, (ii) playoff revenue, which includes ticket sales, food, beverage and merchandise sales, and suite rental fees, and (iii) other non-media rights related league distributions. |
Substantially all revenues and a significant majority of assets of the Company’s reportable segments are attributed to or located in the United States and are primarily concentrated in the New York metropolitan area.
Note 20. Concentrations of Risk
Financial instruments that may potentially subject the Company to a concentration of credit risk consist primarily of cash and cash equivalents and accounts receivable. Cash and cash equivalents are invested in commercial paper, money market accounts and time deposits. The Company monitors the financial institutions and money market funds where it invests its cash and cash equivalents with diversification among counterparties to mitigate exposure to any single financial institution. The Company’s emphasis is primarily on safety of principal and liquidity and secondarily on maximizing the yield on its investments.
The following individual non-affiliated customers accounted for the following percentages of the Company’s consolidated accounts receivable balances:
_________________
June 30, | |||||
2019 | 2018 | ||||
Customer A | 13 | % | 10 | % | |
Customer B (a) | 12 | % | 3 | % | |
(a) | A receivable from Customer B as of June 30, 2019 is primarily due to timing of cash receipts. |
The Company did not have any non-affiliated customer that represented 10% or more of its consolidated revenues for the years ended June 30, 2019, 2018 and 2017. Revenues from MSG Networks amounted to $162,555, $154,893 and $149,197 for the years ended June 30, 2019, 2018 and 2017, which represent 10%, 10% and 11%, respectively, of the Company’s consolidated revenues (see Note 16).
As of June 30, 2019, approximately 6,700 full-time and part-time employees, who represent approximately 52% of the Company’s workforce, are subject to CBAs. Approximately 13% are subject to CBAs that expired as of June 30, 2019 and approximately 36% are subject to CBAs that will expire by June 30, 2020 if they are not extended prior thereto.
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THE MADISON SQUARE GARDEN COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Note 21. Interim Financial Information (Unaudited)
The Company adopted ASC Topic 606 in the first quarter of fiscal year 2019 using the modified retrospective method for those contracts with customers which were not completed as of July 1, 2018. Results for reporting periods beginning after July 1, 2018 are presented under ASC Topic 606, while prior period amounts are not adjusted and continue to be reported in accordance with the historic accounting guidance under ASC Topic 605.
The following is a summary of the Company’s selected quarterly financial data for the years ended June 30, 2019 and 2018:
Three Months Ended | Year ended June 30, 2019 | ||||||||||||||||||
September 30, | December 31, | March 31, | June 30, | ||||||||||||||||
2018 | 2018 | 2019 | 2019 | ||||||||||||||||
Revenues | $ | 218,135 | $ | 632,187 | $ | 517,190 | $ | 263,556 | $ | 1,631,068 | |||||||||
Operating expenses | 268,920 | 553,910 | 478,677 | 343,435 | 1,644,942 | ||||||||||||||
Operating income (loss) | $ | (50,785 | ) | $ | 78,277 | $ | 38,513 | $ | (79,879 | ) | $ | (13,874 | ) | ||||||
Net income (loss) | $ | (34,048 | ) | $ | 75,968 | $ | 34,163 | $ | (79,200 | ) | $ | (3,117 | ) | ||||||
Net income (loss) attributable to The Madison Square Garden Company’s stockholders | $ | (32,212 | ) | $ | 81,599 | $ | 35,271 | $ | (73,231 | ) | $ | 11,427 | |||||||
Basic earnings (loss) per common share attributable to The Madison Square Garden Company’s stockholders | $ | (1.36 | ) | $ | 3.43 | $ | 1.48 | $ | (3.08 | ) | $ | 0.48 | |||||||
Diluted earnings (loss) per common share attributable to The Madison Square Garden Company’s stockholders | $ | (1.36 | ) | $ | 3.42 | $ | 1.48 | $ | (3.08 | ) | $ | 0.48 | |||||||
Three Months Ended | Year ended June 30, 2018 | ||||||||||||||||||
September 30, | December 31, | March 31, | June 30, | ||||||||||||||||
2017 | 2017 | 2018 | 2018 | ||||||||||||||||
Revenues | $ | 245,215 | $ | 536,302 | $ | 459,621 | $ | 317,957 | $ | 1,559,095 | |||||||||
Operating expenses | 259,710 | 462,887 | 451,296 | 362,145 | 1,536,038 | ||||||||||||||
Operating income (loss) | $ | (14,495 | ) | $ | 73,415 | $ | 8,325 | $ | (44,188 | ) | $ | 23,057 | |||||||
Net income (loss) | $ | (10,867 | ) | $ | 187,991 | $ | 7,814 | $ | (50,490 | ) | $ | 134,448 | |||||||
Net income (loss) attributable to The Madison Square Garden Company’s stockholders | $ | (11,107 | ) | $ | 189,613 | $ | 9,141 | $ | (46,053 | ) | $ | 141,594 | |||||||
Basic earnings (loss) per common share attributable to The Madison Square Garden Company’s stockholders | $ | (0.47 | ) | $ | 8.03 | $ | 0.39 | $ | (1.94 | ) | $ | 5.99 | |||||||
Diluted earnings (loss) per common share attributable to The Madison Square Garden Company’s stockholders | $ | (0.47 | ) | $ | 7.96 | $ | 0.38 | $ | (1.94 | ) | $ | 5.94 | |||||||
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THE MADISON SQUARE GARDEN COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Note 22. Subsequent Events
Sale of Interest in Tribeca Enterprises
On August 5, 2019, the Company contributed to Tribeca Enterprises the $18,000 of indebtedness under the Company’s revolving credit facility to the Company’s equity capital in Tribeca Enterprises immediately prior to the sale of the Company’s equity capital in Tribeca Enterprises for $18,000. See Note 7 for more information.
Team Personnel Transactions
On August 1, 2019, the Company recorded a pre-tax charge of approximately $10,200 related to the waiver of a player. This charge will be reflected in direct operating expenses in the Company’s consolidated statements of operations for the three months ending September 30, 2019.
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