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MADISON SQUARE GARDEN CO - 10-K - Management's Discussion and Analysis of Financial Condition and Results of Operations(Edgar Glimpses Via Acquire Media NewsEdge) This Management's Discussion and Analysis of Financial Condition and Results of Operations, or MD&A, contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. In this MD&A, there are statements concerning the future operating and future financial performance of the Company and its segments, including the expected debut of the Company's new large-scale theatrical production, the benefit of the Madison Square Garden Arena (which we also refer to as "The Garden"), The Theater at Madison Square Garden and the Forum being available for events for a full fiscal year, expected growth in suite rental revenue and sponsorship and signage revenues, and increases in affiliation fee revenue. Words such as "expects," "anticipates," "believes," "estimates," "may," "will," "should," "could," "potential," "continue," "intends," "plans," and similar words and terms used in the discussion of future operating and future financial performance identify forward-looking statements. Investors are cautioned that such forward-looking statements are not guarantees of future performance or results and involve risks and uncertainties and that actual results or developments may differ materially from the forward-looking statements as a result of various factors. Factors that may cause such differences to occur include, but are not limited to: • the level of our revenues, which depends in part on the popularity and competitiveness of our sports teams and the level and popularity of the Radio City Christmas Spectacular and other entertainment events which are presented in our venues; • costs associated with player injuries, and waivers or contract terminations of players and other team personnel; • changes in professional sports teams' compensation, including the impact of signing of free agents and trades, subject to league salary caps; • the demand for our programming among cable television systems and satellite, telephone and other multichannel video programming distributors ("Distributors"), and our ability to renew affiliation agreements with them, as well as the impact of consolidation among cable television systems and satellite providers; • general economic conditions especially in the New York City metropolitan area where we conduct the majority of our operations; • the demand for sponsorship arrangements and for advertising and viewer ratings for our programming; • competition, for example, from other regional sports networks, other teams, other venues and other entertainment options; • changes in laws, 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 with their players' associations, salary caps, revenue sharing and NBA luxury tax thresholds) or other regulations under which we operate; • the relocation or insolvency of professional sports teams with which we have a rights agreement; • our ability to maintain, obtain or produce content for our MSG Media segment, together with the cost of such content; • the successful development of new live productions or enhancements to existing productions and the investments associated with such development or enhancements • the disposition of assets and/or the impact of, and our ability to, successfully pursue acquisitions or other strategic transactions; • the costs associated with, and the outcome of, litigation and other proceedings to the extent uninsured; • the impact of governmental regulations or laws, including the continued benefit of certain tax exemptions and the ability to maintain necessary permits or licenses; • financial community and rating agency perceptions of our business, operations, financial condition and the industry in which we operate; and • our ownership of professional sports franchises in the NBA and NHL and certain transfer restrictions on our common stock. 37-------------------------------------------------------------------------------- Table of Contents We disclaim any obligation to update or revise the forward-looking statements contained herein, except as otherwise required by applicable federal securities laws. All dollar amounts included in the following MD&A are presented in thousands, except as otherwise noted. Introduction MD&A is provided as a supplement to, and should be read in conjunction with, the audited consolidated financial statements and footnotes thereto included in this Annual Report on Form 10-K to help provide an understanding of our financial condition, changes in financial condition and results of 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, 2014, 2013 and 2012 on both a consolidated and segment basis. Our segments are MSG Media, MSG Entertainment and MSG Sports. Liquidity and Capital Resources. This section provides a discussion of our financial condition, as well as an analysis of our cash flows for the years ended June 30, 2014, 2013 and 2012. 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, 2014. Seasonality of Our Business. This section discusses the seasonal performance of our MSG Sports and MSG Entertainment segments. Recently Issued Accounting Pronouncements and Critical Accounting Policies. This section includes a discussion of accounting policies considered to be important to our financial condition and results of operations and which require significant judgment and estimates on the part of management in their application. In addition, all of our significant accounting policies, including our critical accounting policies, are discussed in the notes to our consolidated financial statements included in Item 8 of this Annual Report on Form 10-K. Business Overview The Company is a fully-integrated sports, entertainment and media business comprised of dynamic and powerful assets and brands. The Company is comprised of three business segments: MSG Media, MSG Entertainment and MSG Sports, which are strategically aligned to work together to drive our overall business, which is built on a foundation of iconic venues and compelling content, including live sports and entertainment events that we create, produce, present and/or distribute through our programming networks and other media assets. 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 Garden and The 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, and has a booking agreement with respect to the Wang Theatre in Boston. A description of our segments follows: MSG Media MSG Media, which represented approximately 46% of our consolidated revenues for the year ended June 30, 2014, is a leader in production and content development for multiple distribution platforms, including content originating from the Company's venues. MSG Media is comprised of the Company's regional sports networks, MSG Network and MSG+, collectively the "MSG Networks." For all periods presented, MSG Media also included Fuse, a national television network dedicated to music. On July 1, 2014, the Company completed the sale of Fuse to SiTV Media, Inc. for $226 million, subject to a working capital adjustment, and a 15 percent equity interest in SiTV Media, Inc., which interest is subject to potential reduction based on certain performance goals. MSG Networks are home to seven professional sports teams: the New York Knicks (the "Knicks"), the New York Rangers (the "Rangers"), the New York Liberty (the "Liberty"), the New York Islanders (the "Islanders"), the New Jersey Devils (the "Devils"), the Buffalo Sabres (the "Sabres") and the New York Red Bulls (the "Red Bulls"), as well as to our critically acclaimed original and other programming. 38-------------------------------------------------------------------------------- Table of Contents Revenue Sources Our MSG Media segment earns revenues from two primary sources: affiliation fees and advertising. Affiliation fees, which are the fees we earn from Distributors that carry our programming, constitute the significant majority of the MSG Media segment revenues. Advertising revenue makes up a smaller portion of MSG Media segment overall revenues. Affiliation Fee Revenue Our MSG Media segment earns affiliation fee revenue from Distributors that carry our programming services. The fees we receive depend largely on the demand from subscribers for our programming. Affiliation fees from Cablevision accounted for more than 10% of the Company's consolidated revenues during the years ended June 30, 2014, 2013 and 2012. Advertising Revenue Our MSG Media segment earns revenues through the sale of commercial time to advertisers during our programming or through the sale of program sponsorship rights. We typically sell advertising time through our in-house staff and, to a lesser extent, through agencies. Expenses The principal expenses of our MSG Media segment are professional team rights fees, as well as rights fees to carry other programming content, other direct programming costs, as well as marketing and advertising costs. We also allocate a portion of our corporate expenses to the MSG Media segment. Programming Acquisition Costs (Rights Fees) In addition to the Company's ownership of Knicks, Rangers and Liberty rights, MSG Networks have multi-year rights agreements with the Islanders, Devils, Sabres and Red Bulls. The professional team rights acquired under license agreements to telecast various sporting events and other programming for exhibition on its networks are typically expensed on a straight-line basis over the term of the applicable contract or license period. We negotiate directly with the teams to determine the fee and other provisions of the rights arrangements. Rights fees for sports programming are influenced by, among other things, the size and demographics of the geographic area in which the programming is distributed, and the popularity and/or the on-court or on-ice competitiveness of a team. For purposes of reporting our segment information, the MSG Media segment recognizes rights expense for the licensing of team-related programming from the Company's MSG Sports segment. These inter-segment charges are generally recognized on a straight-line basis over the fiscal year and are eliminated in consolidation. In addition to professional team rights, the MSG Media segment also acquires the rights to carry and/or produce other events or programming, such as other sporting events, movies, concerts or specials. The costs of this programming are amortized over the license period or projected useful life of the programming as the economic benefits are received. Other Direct Programming Costs Other direct programming costs include, but are not limited to the salaries of our on-air personalities, producers, directors, technicians, writers and other creative and technical staff, as well as expenses associated with location costs and maintaining studios and transmission facilities. Certain owned original programming is produced for the Company's networks by independent production companies. Owned original programming costs are expensed as incurred and included in the other direct programming costs described above. Marketing and Advertising Costs We incur costs to market our media business and our programs through outdoor and newspaper advertisements, television and radio advertising and online marketing. Factors Affecting Operating Results The financial performance of our MSG Media segment is affected by the affiliation agreements we are able to negotiate with Distributors and also by the advertising rates we can charge advertisers. These factors in turn depend on the popularity and/or on-court and on-ice competitiveness of the professional sports teams carried on MSG Networks as well as the cost and the attractiveness of our programming content. Due largely to our ownership of rights, multi-year rights agreements and the generally recurring nature of our affiliation agreements, the MSG Networks have consistently produced operating profits over a number of years. See "Part I - Item 1A. 39-------------------------------------------------------------------------------- Table of Contents Risk Factors - Risks Relating to Our Media Business - The Success of Our Media Business Also Depends on Affiliation Fees We Receive Under our Affiliation Agreements, the Loss of Which or Renewal of Which on Less Favorable Terms May Have a Material Negative Effect on Our Business and Results of Operations" for a discussion of risks associated with our affiliation agreements. Advertising revenues are less predictable and can vary based upon a number of factors, including general economic conditions. Our MSG Media segment's future performance is also dependent on the U.S. and global economies, the impact of direct competition, and the relative strength of our current and future advertising customers. Weak economic conditions may lead to lower demand for television advertising. An economic downturn could adversely affect our business and results of operations. See "Part I - Item 1. Business - Regulation - Regulation of Our Media Business" for other factors that may affect operating results. MSG Entertainment Our MSG Entertainment segment, which represented approximately 19% of our consolidated revenues for the year ended June 30, 2014, is one of the country's leaders in live entertainment. MSG Entertainment presents or hosts live entertainment events, including concerts, family shows, performing arts and special events in our diverse collection of venues. Those venues include The Garden, The Theater at Madison Square Garden, Radio City Music Hall, the Beacon Theatre, The Chicago Theatre and the Wang Theatre. After purchasing the Forum in Inglewood, CA in 2012, the Company completed a successful renovation of the famed arena, which re-opened its doors in January 2014, adding yet another world-class venue to our portfolio. The scope of our collection of venues enables us to showcase acts that cover a wide spectrum of genres and popular appeal. Over the last several years, our venues have hosted artists such as Billy Joel, the Eagles, Madonna, Phish, Elton John, Eric Clapton, The Allman Brothers Band, Bruce Springsteen, Maroon 5, Taylor Swift, Justin Timberlake, Ed Sheeran, Armin Van Buuren, Sting and Paul Simon, Coldplay, One Direction, Jerry Seinfeld and Dave Chappelle; family shows such as Sesame Street Live, Yo Gabba Gabba Live and Disney Junior Live; special events such as the Tony Awards, America's Got Talent and appearances by His Holiness the Dalai Lama, along with graduations, upfronts and product launches; and theatrical productions such as A Christmas Story, How The Grinch Stole Christmas! and Cirque du Soleil's Zarkana. 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 currently does not promote or co-promote events outside of our venues other than our productions discussed below. MSG Entertainment also creates, produces and/or presents live productions, including the Radio City Christmas Spectacular, featuring the Rockettes, that are performed in the Company's and other venues. The Radio City Christmas Spectacular has been performed at Radio City Music Hall for 81 years and more than one million tickets were sold for performances during the 2013 holiday season. In addition, during the 2013 holiday season the Company presented the theater version of the show in Atlanta, West Palm Beach, Tampa and, for the 12th year, at the Grand Ole Opry House in Nashville. Revenue Sources Our primary sources of revenue in our MSG Entertainment segment are ticket sales to our live audiences for 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 derive 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 of our venues. The levels of revenue and expense we record in our MSG Entertainment segment for a given event depends to a significant extent on whether we are promoting or co-promoting the event or are licensing our venue to a third party. Ticket Sales and Suite Licenses For our productions and for entertainment events in our venues that we promote, we recognize revenues from the sale of tickets to our audiences. We sell tickets to the public through our box office, 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 seating capacity of the venue used, the extent to which we can sell to our seating capacity and our ticket prices. The Garden has 21 Event Level suites, 58 Madison Level suites, and 18 9th floor 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 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. 40-------------------------------------------------------------------------------- Table of Contents Venue License Fees For entertainment events held at our venues that we do not produce, promote or co-promote, we earn venue license fees from the third-party promoter of the event. The amount of license fees we charge varies by venue, as well as by the size of the production and the number of days of the event, among other factors. Our fees include both the cost of renting space in our venues and costs for providing production services, such as front-of-house and back-of-house staffs, including stagehands, box office staff, ushers, security, staging, lighting and sound, and building services. Whether we are promoting an event or licensing our venues to a third-party promoter has a significant impact on the level of revenues and the costs that we record in our MSG Entertainment segment. Facility and Ticketing Fees For all public and ticketed entertainment events held in our venues, we also earn additional revenues on substantially all tickets sold, whether we promote or co-promote the event or license the venue to a third party. These revenues are earned in the form of certain fees and assessments, including the facility fee we charge, on tickets we sell, and vary by venue. Concessions We sell food and beverages during substantially all entertainment events held at our venues. In addition to concession-style sales of food and beverages, which represent the majority of our concession revenues, we also provide catering for our suites at The Garden. Merchandise We earn revenues from the sale of merchandise relating to our proprietary productions and other live entertainment events that take place at our venues. The majority of our merchandise revenues are generated through on-site sales during performances of our productions and other live events. We also generate revenues from the sales of our Radio City Christmas Spectacular merchandise, such as 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. Venue Signage and Sponsorship We earn revenues through the sale of signage space and sponsorship rights in connection with our venues, productions and other live entertainment events. Signage revenues generally involve the sale of advertising space at The Garden during entertainment events and otherwise in our venues. Sponsorship rights may require us to use the name, logos and other trademarks of a sponsor in our advertising and in promotions for our venues, productions and other live entertainment events. Sponsorship arrangements may be exclusive within a particular sponsorship category or non-exclusive and generally permit a sponsor to use the name, logos and other trademarks of our productions, events and venues in connection with their own advertising and in promotions in our venues or in the community. Expenses Our MSG Entertainment segment's principal expenses are payments made to performers and promoters, staging costs and day-of-event costs associated with events, and advertising costs. We charge a portion of our actual expenses associated with the ownership, lease, maintenance and operation of our venues, along with a portion of our corporate expenses to our MSG Entertainment segment. However, the operating results of our MSG Entertainment segment benefit from the fact that no rent is charged to the segment for use of the Company's owned venues. We do not allocate to our segments any depreciation expense on property and equipment related to The Garden, The Theater at Madison Square Garden and 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 both with their abilities and with demand for their services from other entertainment companies. Our productions, including the Radio City Christmas Spectacular, typically feature ensemble casts (such as the Rockettes), where there is no single "headline" performer. As a result, most of our performers are paid based on a standard "scale," pursuant to collective bargaining agreements we negotiate with the performers' unions. 41-------------------------------------------------------------------------------- Table of Contents Staging Costs Staging costs for our proprietary events as well as others that we promote include the costs of sets, lighting, display technologies, special effects, sound and all of the other technical aspects involved in presenting a live entertainment event. These costs vary substantially depending on the nature of the particular show, but tend to be highest for large-scale theatrical productions, such as the Radio City Christmas Spectacular. For concerts we promote, the performer usually provides a fully-produced show. As with performer salaries, the staging costs associated with a given production are an important factor in the determination of ticket prices. Day-of-event Costs For days on which MSG Entertainment stages its productions, promotes an event or provides one of our venues to a third-party promoter under a license fee arrangement, the event is charged the variable costs associated with such event, including box office personnel, stagehands, ticket takers, ushers, security, and other similar expenses. In situations where we provide our venues to a third-party promoter under a license fee arrangement, day-of-event costs are typically included in the license fees charged to the promoter. Marketing and Advertising Costs We incur significant costs promoting our productions and other events through outdoor and newspaper advertisements, television and radio advertising and social, digital and search advertising. In light of the intense competition for entertainment events, especially in the New York City metropolitan area, such expenditures are a necessity to drive interest in our productions and encourage members of the public to purchase tickets to our shows. Touring Expenses For productions that we take on the road, we must pay the logistical costs associated with travel and equipment, as well as fees and expenses, including the costs of venue staff, for the use of third-party venues. Factors Affecting Operating Results The operating results of our MSG Entertainment segment are largely dependent on our ability to attract concerts, family shows and other events to our venues, as well as the continuing popularity of the Radio City Christmas Spectacular at Radio City Music Hall. Our MSG Entertainment segment recognized operating losses during the years ended June 30, 2014, 2013 and 2012. These results reflect the impact of The Garden and the Theater at Madison Square Garden being shut down for the off-season following the Knicks' and Rangers' playoffs during these fiscal years. 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 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 is investing in a large-scale theatrical production for Radio City Music Hall, which is expected to debut in the Spring of 2015, and continues to explore additional opportunities to expand our presence in the entertainment industry. Any new investment may not initially contribute to operating income, but will be expected 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, net of inter-segment revenues, represented approximately 35% of our consolidated revenues for the year ended June 30, 2014, owns and operates sports franchises, including the Knicks, a founding member of the NBA, and the Rangers, one of the "original six" franchises of the NHL. MSG Sports also owns and operates the Liberty of the Women's National Basketball Association (the "WNBA"), one of the league's founding franchises, and 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. In March 2014, the Company acquired the rights to own and operate an NBA Development League (the "NBADL") team, named the Westchester Knicks, which will begin operations for the 2014-15 season and will play their home games at the Westchester County Center in White Plains, New York. The Knicks and Rangers play their home games at The Garden. The Liberty have historically played 17 regular season home games at The Garden. However, due to the final phase of the comprehensive transformation of The Garden into a state-of-the-art arena (the "Transformation"), they played their 2013 and 2012 seasons at the Prudential Center in Newark, New Jersey before returning to 42-------------------------------------------------------------------------------- Table of Contents The Garden for their 2014 season. Our sports business also features other sports properties, including the presentation of a wide variety of live sporting events including professional boxing, college basketball, professional bull riding, tennis and college wrestling. Revenue Sources We earn revenue in our MSG Sports segment from several primary sources: ticket sales and a portion of suite license 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. We also earn venue license fees, primarily from the rental of The Garden to third-party promoters holding their sports 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 professional sports teams and general economic conditions. Our MSG Sports segment also earns substantial fees from our MSG Media segment for the right to telecast the games of our professional sports teams. These inter-segment revenues are eliminated in our consolidated financial statements. Ticket Sales, Suite Licenses, Venue Licenses, Facility and Ticketing Fees Ticket sales constitute 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. We also earn revenue from the sale of tickets to live sporting events that we promote other than Knicks, Rangers and Liberty games. Revenues from the sale of suite licenses are shared between our MSG Entertainment and MSG Sports segments. See "- Business Overview - MSG Entertainment - Revenue Sources" for further discussion. In addition to Knicks and Rangers home games, we also present or host other live sporting events at our venues. When the Company acts as the promoter of such events, the Company earns revenues from ticket sales and incurs expenses associated with the event. When these events are promoted by third-party promoters, the Company 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 union laborers, box office staff, ushers, security and building services, which we pass along to the promoter. The mix of live sporting events, including whether we are the promoter of an event or license our venues to a third-party promoter, has a significant impact on the level of revenues and event related costs that we record in our MSG Sports segment. Our MSG Sports segment also earns revenues in the form of certain fees and assessments added to ticket prices for events held at our venues, regardless of whether we act as 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 team season tickets and certain other limited exceptions. Telecast Rights We earn revenue from the sale of telecast rights for our sports teams' home and away games and also through the receipt of our share of fees paid for league-wide telecast rights, which are awarded under contracts negotiated and administered by each league. Telecast rights for the Knicks and Rangers are held by MSG Networks, pursuant to inter-segment arrangements between our MSG Sports and MSG Media segments. The financial success of our MSG Sports segment is largely dependent on the rights fees we receive from our MSG Media segment in connection with the telecast of our Knicks and Rangers games. These inter-segment fees are eliminated in our consolidated financial statements. 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 We earn revenues through the sale of signage space and sponsorship rights at The Garden in connection with our sports 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 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 and Liberty games, or on the various scoreboards and display panels at The Garden. We offer both television camera-visible and non-camera-visible signage space. 43-------------------------------------------------------------------------------- Table of Contents Sponsorship rights generally require us to use the name, logos and other trademarks of a sponsor in our advertising and in promotions for our sports 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 sports teams and venues in connection with their own advertising and in promotions on-court, on-ice or in the community. 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 and catering for suites at The Garden. Merchandise We earn revenues from the sale of our sports teams' merchandise both through the in-venue (and in some cases, online) sale of items bearing the logos or other marks of our sports teams and through our share of league distributions of royalty and other revenues from the league's licensing of team and league trademarks, which revenues are generally shared equally among the teams in the leagues. By agreement among the teams, each of the leagues in which we operate acts as agent for the 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. 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 any depreciation expense on property and equipment related to The Garden, The Theater at Madison Square Garden and the Forum. Player Salaries, Escrow System/Revenue Sharing and NBA Luxury Tax The amount we pay an individual player is determined by negotiation between the player (typically represented by an agent) and us, and is generally influenced by the player's individual playing statistics, by the amounts paid to players with comparable playing statistics by other sports teams and by restrictions in the collective bargaining agreements ("CBAs"), including the salary caps. 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. Our most significant player expenses generally come from signing unrestricted free agents because players are generally able to negotiate the highest salary when they become unrestricted free agents. The NBA CBA was last negotiated in 2011 and expires after the 2020-21 season (although the NBA and the National Basketball Players Association ("NBPA") each have the right to terminate the CBA following the 2016-17 season). The NBA CBA contains 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). 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). A team's luxury tax for the 2011-12 and 2012-13 seasons generally equaled the amount by which the team's aggregate player salaries exceeded such threshold. Beginning with the 2013-14 season, the 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 four of any five seasons beginning in 2011-12, the above tax rates are increased by $1.00 for each increment. Beginning with the 2012-13 season, 50% of the aggregate luxury tax payments are to be used as a funding source for the revenue sharing plan and the remaining 50% of such payments will be distributed in equal shares to non-taxpaying teams. The Knicks were a NBA luxury tax payer with respect to the 2012-13 and 2013-14 seasons, and we expect to be an NBA luxury tax payer in the 2014-15 season. Subsequent years beyond the 2014-15 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 44-------------------------------------------------------------------------------- Table of Contents operating expenses. Our provision for the year ended June 30, 2014, including luxury tax provisions related to team personnel transactions, was approximately $38,100. 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 50%), 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 portion 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 instituted 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, 2014 was approximately $23,100. The actual amounts for the 2013-14 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 National Hockey League Players' Association ("NHLPA") each have the right to terminate the CBA effective following the 2019-20 season). The NHL CBA provides for a "hard" salary cap (i.e., teams may not exceed a stated maximum that has been negotiated for the 2012-13 and 2013-14 seasons and is 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, excluding the impact of agreed-upon aggregate transition payments of $300,000 to be paid on a deferred basis over three years beginning in 2014. Because the percentage 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 portion 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. For the shortened 2012-13 season, any such excess funds will be utilized or distributed by the NHL in its sole discretion. Beginning with the 2013-14 season, any such excess funds will be distributed to all teams in equal shares. The NHL CBA 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 preseason 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 provision for these items for the year ended June 30, 2014 was approximately $14,200 (including approximately $12,100 related to the playoffs). The actual amounts for the 2013-14 season 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. Other Team Operating Expenses Our sports 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 staffs, including union laborers, box office staff, ushers, security, and event production are charged to our MSG Sports segment. Operating costs of the Company's training facility in Greenburgh, New York and the operating and maintenance costs of the aircraft that the Company owns are also charged to our MSG Sports segment. The operation of the Hartford Wolf Pack is also a net Ranger player development expense for our MSG Sports segment. 45-------------------------------------------------------------------------------- Table of Contents 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 NBA imposes on each team a 6% assessment on regular season ticket revenue and an assessment of 45% or 52.5% (plus an additional 5% to fund the discretionary revenue sharing payment described above) on playoff ticket revenue, depending on the number of home games played. Our MSG Sports segment also incurs costs associated with VIP amenities, which have come online as a result of the Transformation, 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) 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 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 $54,225 and $18,715 for fiscal years 2014 and 2013, 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 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 lower 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. Corporate Expenses and Venue Operating Costs The Company allocates certain corporate costs to all of its reportable segments. In addition, the Company allocates its venue operating expenses to its MSG Entertainment and MSG Sports 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 expense on property and equipment related to The Garden, The Theater at Madison Square Garden, and the Forum is not allocated to the reportable segments. Investments in Nonconsolidated Affiliates The Company's equity method investments include investments in Azoff MSG Entertainment LLC ("Azoff-MSG"), Brooklyn Bowl Las Vegas, LLC ("BBLV") and Tribeca Enterprises LLC ("Tribeca Enterprises"). In September 2013, the Company acquired a 50% interest in Azoff-MSG. The Azoff-MSG entity owns and operates businesses in the entertainment industry and is currently focused on music management, performance rights, comedy and productions, and strategic marketing. As of June 30, 2014, the Company's investment in Azoff-MSG was $125,677, inclusive of transaction costs related to the acquisition. In addition, as of June 30, 2014, Azoff-MSG had outstanding loans, including accrued interest, of $50,300 under the unsecured credit facility with the Company. 46-------------------------------------------------------------------------------- Table of Contents In August 2013, the Company acquired an interest in BBLV. In March 2014, BBLV opened a new venue in Las Vegas which brings together live music, bowling and a restaurant, and was modeled after the successful Brooklyn Bowl destination in New York. As of June 30, 2014 the Company's preferred equity investment in BBLV, together with transaction costs related to the acquisition, was $25,725. In addition, as of June 30, 2014, outstanding loans of $1,334 had been advanced by the Company to BBLV. In March 2014, the Company acquired a 50% interest in Tribeca Enterprises. Tribeca Enterprises owns and operates the Tribeca Film Festival and certain other businesses. Tribeca Enterprises' businesses also include Tribeca Digital Studios, a branded entertainment content business; Tribeca Cinemas, a unique event space; and Tribeca Film, an independent film distribution label. As of June 30, 2014, the Company's investment in Tribeca Enterprises was $22,582, inclusive of transaction costs related to the acquisition. Impact of Current Economic Conditions The future performance of our business segments and our Company as a whole is dependent, to a large extent, on general U.S. and global economic conditions, including the degree to which audiences and fans are willing to attend events hosted at our venues, our relative strength of position in the marketplace with both suppliers and customers, the impact of direct competition, our ability to manage our businesses effectively, and capital market circumstances that may influence our pursuit of strategic initiatives. Challenges to U.S. and global economic performance may lead to lower attendance at the games of our sports teams and at our live productions, lower demand for suite licenses, fewer sponsorship transactions, fewer event bookings at our venues and lower television advertising revenues. An economic downturn could adversely affect our business and results of operations. 47-------------------------------------------------------------------------------- Table of Contents Results of Operations Comparison of the Year Ended June 30, 2014 versus the Year Ended June 30, 2013 Consolidated Results of Operations The table below sets forth, for the periods presented, certain historical financial information and the percentage that those items bear to revenues. STATEMENT OF OPERATIONS DATA Years Ended June 30, Increase 2014 2013 (Decrease) % of % of in Net Amount Revenues Amount Revenues Income Revenues $ 1,555,594 100 % $ 1,340,818 100 % $ 214,776 Operating expenses: Direct operating 899,383 58 % 691,029 52 % (208,354 ) Selling, general and administrative 365,148 23 % 309,568 23 % (55,580 ) Depreciation and amortization 106,950 7 % 89,132 7 % (17,818 ) Operating income 184,113 12 % 251,089 19 % (66,976 ) Other income (expense): Equity in loss of nonconsolidated affiliates (1,323 ) NM - NM (1,323 ) Interest expense, net (4,898 ) NM (5,722 ) NM 824 Miscellaneous (1,346 ) NM 3,497 NM (4,843 ) Income from operations before income taxes 176,546 11 % 248,864 19 % (72,318 ) Income tax expense (61,478 ) (4 )% (106,482 ) (8 )% 45,004 Net income $ 115,068 7 % $ 142,382 11 % $ (27,314 ) ___________________________________ NM - Percentage is not meaningful The comparability of the results of operations of the Company and the MSG Media and MSG Sports segments for the year ended June 30, 2014 to the prior year was impacted by the prior year's NHL work stoppage, which delayed the start of the 2012-13 regular season by approximately three months until January 19, 2013 and led to a shortened 48 game regular season. As a result, the Rangers (as well as other NHL teams whose games are telecast on MSG Networks) played fewer regular season home and away games during the prior year as compared to the current year. During the year ended June 30, 2014, the Rangers played 82 regular season games, of which 41 were home games and 41 were away games, as compared to 48 regular season games in the prior year, of which 24 were home games and 24 were away games. In addition, the results for the year ended June 30, 2014 reflect the waiver of a Rangers player, which was the second and final compliance buyout allowed under the terms of the NHL CBA. See "Business Segment Results" within each presented comparative financial period for a more detailed discussion relating to the operating results of our segments. The business segment results do not reflect inter-segment eliminations. 48-------------------------------------------------------------------------------- Table of Contents Revenues Revenues for the year ended June 30, 2014 increased $214,776, or 16%, to $1,555,594 as compared to the prior year. The net increase is attributable to the following: Increase in MSG Media segment revenues $ 36,781 Increase in MSG Entertainment segment revenues 48,803 Increase in MSG Sports segment revenues 141,781 Increase in other revenues 88 Inter-segment eliminations (12,677 ) $ 214,776 See above for a discussion of the NHL work stoppage during the 2012-13 season. Direct operating expenses primarily include: • compensation expense for the Company's professional sports teams' players and certain other team personnel; • cost of team personnel transactions for career- and 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; • cost of professional team rights acquired under license agreements to telecast various sporting events on our networks; • other programming and production costs of our networks; • event costs related to the presentation and production of our live entertainment and sporting events; • venue lease, maintenance and other operating expenses; and • the cost of concessions and merchandise sold. Direct operating expenses for the year ended June 30, 2014 increased $208,354, or 30%, to $899,383 as compared to the prior year. The net increase is attributable to the following: Increase in MSG Media segment expenses $ 40,769 Increase in MSG Entertainment segment expenses 32,839 Increase in MSG Sports segment expenses 147,793 Decrease in other expenses (4 ) Inter-segment eliminations (13,043 ) $ 208,354 Selling, general and administrative expenses Selling, general and administrative expenses primarily consist of administrative costs, including compensation, separation-related costs, professional fees, as well as sales and marketing costs, including non-event related advertising expenses. Selling, general and administrative expenses for the year ended June 30, 2014 increased $55,580, or 18%, to $365,148 as compared to the prior year. The net increase is attributable to the following: Increase in MSG Media segment expenses $ 2,212 Increase in MSG Entertainment segment expenses 10,604 Increase in MSG Sports segment expenses 19,151 Increase in other expenses 23,247 Inter-segment eliminations 366 $ 55,580 49-------------------------------------------------------------------------------- Table of Contents The increase in other expenses was primarily due to executive management transition costs recorded during the third quarter of the current year. Depreciation and amortization Depreciation and amortization for the year ended June 30, 2014 increased $17,818, or 20%, to $106,950 as compared to the prior year primarily due to higher depreciation expense on property and equipment placed into service associated with the Transformation of The Garden and, to a lesser extent, assets placed in service as a result of the re-opening of the Forum. Equity in loss of nonconsolidated affiliates Equity in loss of nonconsolidated affiliates for the year ended June 30, 2014 reflects the Company's share of the net loss of nonconsolidated affiliates, inclusive of amortization expense for intangible assets associated with these investments. The Company's share of the earnings (loss) of its equity investments in Azoff-MSG, BBLV and Tribeca Enterprises are recorded on a three-month lag basis. Miscellaneous income (expense) Miscellaneous expense for the year ended June 30, 2014 primarily includes transaction costs related to the sale of Fuse, which was completed on July 1, 2014 (see Note 23 to the consolidated financial statements included in Item 8 of this Annual Report on Form 10-K). Miscellaneous income for the year ended June 30, 2013 includes a pre-tax gain of approximately $3,100 from the sale of all of the Company's holdings of Live Nation common stock (see Note 15 to the consolidated financial statements included in Item 8 of this Annual Report on Form 10-K). Income taxes Income tax expense for the year ended June 30, 2014 was $61,478. The effective tax rate of 34.8% differs from the statutory federal rate of 35% due principally to the benefit of the federal rehabilitation credit, the impact of the domestic production activities deduction, decreases in state tax rates enacted during the year, and the tax return to book provision adjustment in connection with the filing of the Company's 2012 federal and state income tax returns. These benefits are mostly offset by state and local income taxes and the impact of non-deductible expenses. The amount of the rehabilitation tax credit benefit recognized in income tax expense was approximately $8,498. This federal rehabilitation credit is based on eligible expenditures incurred as a result of the renovation of the Forum. Income tax expense for the year ended June 30, 2013 was $106,482. The effective tax rate of 42.8% differs from the statutory federal rate of 35% due principally to state and local income taxes, nondeductible expenses and an increase in federal income tax expense recorded in connection with the filing of the Company's 2011 income tax returns, reflecting a lower domestic production activity deduction, offset by the tax benefit resulting from the domestic production activities deduction in fiscal year 2013. AOCF 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 and (iii) restructuring charges or credits, which is referred to as adjusted operating cash flow ("AOCF"). The Company has presented the components that reconcile AOCF to operating income (loss), an accepted GAAP measure. The following is a reconciliation of operating income to AOCF: Years Ended June 30, Increase (Decrease) 2014 2013 in AOCF Operating income $ 184,113 $ 251,089 $ (66,976 ) Share-based compensation 21,750 15,340 6,410 Depreciation and amortization 106,950 89,132 17,818 AOCF $ 312,813 $ 355,561 $ (42,748 ) 50-------------------------------------------------------------------------------- Table of Contents AOCF for the year ended June 30, 2014 decreased $42,748, or 12%, to $312,813 as compared to the prior year. The net decrease is attributable to the following: Decrease in AOCF of the MSG Media segment $ (6,009 ) Increase in AOCF of the MSG Entertainment segment 5,921 Decrease in AOCF of the MSG Sports segment (23,439 ) Other net decreases (19,221 ) $ (42,748 ) Other net decreases were primarily due to executive management transition costs recorded during the third quarter of the current year. See above for a discussion of the NHL work stoppage during the 2012-13 season. Business Segment Results MSG Media The table below sets forth, for the periods presented, certain historical financial information and the percentage that those items bear to revenues for the Company's MSG Media segment. Years Ended June 30, Increase 2014 2013 (Decrease) % of % of in Operating Amount Revenues Amount Revenues Income Revenues $ 714,514 100 % $ 677,733 100 % $ 36,781 Direct operating expenses 259,434 36 % 218,665 32 % (40,769 ) Selling, general and administrative expenses 116,353 16 % 114,141 17 % (2,212 ) Depreciation and amortization 15,559 2 % 16,358 2 % 799 Operating income $ 323,168 45 % $ 328,569 48 % $ (5,401 ) The following is a reconciliation of operating income to AOCF: Years Ended June 30, Increase (Decrease) 2014 2013 in AOCF Operating income $ 323,168 $ 328,569 $ (5,401 ) Share-based compensation 4,770 4,579 191 Depreciation and amortization 15,559 16,358 (799 ) AOCF $ 343,497 $ 349,506 $ (6,009 ) Revenues Revenues for the year ended June 30, 2014 increased $36,781, or 5%, to $714,514 as compared to the prior year. The net increase is attributable to the following: Increase in affiliation fee revenue $ 47,293 Increase in advertising revenue 2,947 Other net decreases (13,459 ) $ 36,781 The increase in affiliation fee revenue was primarily attributable to higher affiliation rates and, to a lesser extent, the return to a full NHL regular season schedule partially offset by the impact of a small decrease in MSG Networks subscribers versus the prior year. The Company believes the decrease in subscribers is due to a small migration of subscribers to lower-priced distributor tiers that do not include MSG Networks. 51-------------------------------------------------------------------------------- Table of Contents The increase in advertising revenue was primarily due to higher revenues generated from the telecast of NHL games (largely due to the return to a full NHL regular season schedule) partially offset by lower Knicks-related advertising revenues (including the absence of the playoffs in the current year) and, to a lesser extent, lower Fuse advertising revenues. Other net decreases primarily reflect revenues recognized in the prior year related to a short-term programming licensing agreement, which expired in April 2013 and, as expected, was not renewed. See "- Comparison of the Year Ended June 30, 2014 versus the Year Ended June 30, 2013 - Consolidated Results of Operations" for a discussion of the NHL work stoppage during the 2012-13 season. Direct operating expenses Direct operating expenses for the year ended June 30, 2014 increased $40,769, or 19%, to $259,434 as compared to the prior year primarily due to higher programming acquisition costs (rights fees) and other programming costs due to the return to a full NHL regular season schedule. Programming acquisition costs include rights fees from the licensing of team related programming to MSG Media from the MSG Sports segment. Selling, general and administrative expenses Selling, general and administrative expenses for the year ended June 30, 2014 increased $2,212, or 2%, to $116,353 as compared to the prior year primarily due to higher allocated corporate general and administrative costs and employee compensation and related benefits partially offset by decreases in other expenses, including professional fees and marketing costs. Depreciation and amortization Depreciation and amortization for the year ended June 30, 2014 decreased $799, or 5%, to $15,559 as compared to the prior year primarily driven by lower amortization of intangible assets resulting from certain intangible assets becoming fully amortized during fiscal year 2013. AOCF AOCF for the year ended June 30, 2014 decreased $6,009, or 2%, to $343,497 as compared to the prior year primarily driven by an increase in direct operating expenses and, to a lesser extent, higher selling, general and administrative expenses, largely offset by an increase in revenues as discussed above. See "- Comparison of the Year Ended June 30, 2014 versus the Year Ended June 30, 2013 - Consolidated Results of Operations" for a discussion of the NHL work stoppage during the 2012-13 season. With respect to fiscal year 2015, year-over-year comparisons will be impacted by the sale of Fuse, with MSG Media results on a go-forward basis solely reflecting the results of MSG Networks. Fuse generated meaningful revenues in fiscal 2014 but did not have a material impact on MSG Media or total Company AOCF. In terms of MSG Networks, the Company expects continued revenue and AOCF growth, led by increases in affiliation fee revenue. MSG Entertainment The table below sets forth, for the periods presented, certain historical financial information and the percentage that those items bear to revenues for the Company's MSG Entertainment segment. Years Ended June 30, Decrease 2014 2013 (Increase) in % of % of Operating Amount Revenues Amount Revenues Loss Revenues $ 300,998 100 % $ 252,195 100 % $ 48,803 Direct operating expenses 232,297 77 % 199,458 79 % (32,839 ) Selling, general and administrative expenses 78,551 26 % 67,947 27 % (10,604 ) Depreciation and amortization 9,900 3 % 9,522 4 % (378 ) Operating loss $ (19,750 ) (7 )% $ (24,732 ) (10 )% $ 4,982 52-------------------------------------------------------------------------------- Table of Contents The following is a reconciliation of operating loss to AOCF: Years Ended June 30, Increase (Decrease) 2014 2013 in AOCF Operating loss $ (19,750 ) $ (24,732 ) $ 4,982 Share-based compensation 5,566 5,005 561 Depreciation and amortization 9,900 9,522 378 AOCF $ (4,284 ) $ (10,205 ) $ 5,921 Revenues Revenues for the year ended June 30, 2014 increased $48,803, or 19%, to $300,998 as compared to the prior year. The net increase is attributable to the following: Increase in event-related revenues at The Garden $ 15,679 Increase in event-related revenues at the Forum which re-opened in January 2014 10,405 Increase in event-related revenues at The Theater at Madison Square Garden 8,326 Increase in venue-related sponsorship and signage and suite rental fee revenues 7,451 Increase in revenues from the presentation of the Radio City Christmas Spectacular franchise 6,425 Increase in event-related revenues at The Chicago Theatre 2,748 Decrease in event-related revenues at Radio City Music Hall, excluding Radio City Christmas Spectacular (5,158 ) Other net increases 2,927 $ 48,803 The increase in event-related revenues at The Garden was primarily due to the change in the mix of events including additional MSG Entertainment promoted events, as well as the overall increase in the number of events held at the venue during the year ended June 30, 2014 as compared to the prior year. The increase in event-related revenues at The Theater at Madison Square Garden was primarily due to the increase in the number of events held at the venue during the year ended June 30, 2014 as compared to the prior year. The increase in venue-related sponsorship and signage and suite rental fee revenues was primarily due to higher suite rental fee revenue as a result of new suite products which were unavailable for portions of the prior year combined with the impact of expanded inventory and new sponsor relationships as a result of the Transformation of The Garden and the re-opening of the Forum. These increases were partially offset by the planned reduction in certain suite products due to the Transformation and the impact of the off-season shutdowns. The increase in revenues from the presentation of the Radio City Christmas Spectacular franchise was primarily due to higher attendance at the Radio City Music Hall production of the show and an increase in both average ticket price and attendance at the theatrical productions presented outside of New York. These increases were partially offset by a lower average ticket price at the Radio City Music Hall production. The Radio City Music Hall production of the show in the prior year was negatively impacted by Superstorm Sandy. During the 2013 holiday season more than one million tickets were sold for the Radio City Music Hall production, which represents a mid-single digit percentage increase as compared to the prior year. The increase in event-related revenues at The Chicago Theatre was primarily due to the increase in the number of events held at the venue during the year ended June 30, 2014 as compared to the prior year. The decrease in event-related revenues at Radio City Music Hall, excluding Radio City Christmas Spectacular, was primarily driven by the impact of the venue being utilized during the majority of the third quarter of the current year for the load-in and rehearsals of the Company's new large-scale theatrical production designed for Radio City Music Hall (the debut of which has been postponed from its original planned date of March 27, 2014 until the Spring of 2015). To a lesser extent this decrease also reflects the net impact from the absence of Cirque du Soleil's Zarkana which was presented at the venue during the prior year largely offset by the impact associated with NBC's America's Got Talent which was broadcast live from the venue during the current year. 53-------------------------------------------------------------------------------- Table of Contents Direct operating expenses Direct operating expenses for the year ended June 30, 2014 increased $32,839, or 16%, to $232,297 as compared to the prior year. The net increase is attributable to the following: Increase in event-related direct operating expenses at The Garden $ 12,466 Increase in direct operating expenses associated with the Company's new large-scale theatrical production designed for Radio City Music Hall which was postponed until the Spring of 2015 8,568 Increase in event-related direct operating expenses at the Forum 6,679 Increase in event-related direct operating expenses at The Theater at Madison Square Garden 3,805 Increase in venue operating costs 2,100 Increase in event-related direct operating expenses at The Chicago Theatre 1,653 Decrease in direct operating expenses associated with the presentation of the Radio City Christmas Spectacular franchise (3,144 ) Decrease in event-related direct operating expenses at Radio City Music Hall, excluding Radio City Christmas Spectacular (2,096 ) Other net increases 2,808 $ 32,839 The decrease in direct operating expenses associated with the presentation of the Radio City Christmas Spectacular franchise was primarily due to the absence of a pre-tax impairment charge of $4,982 which was recorded during the prior year related to a theatrical production of the show presented outside of New York. This decline was partially offset by a write-off of deferred production costs of approximately $2,200 recorded during the current year related to the planned replacement of certain elements of a scene in the Radio City Music Hall production of the show. Selling, general and administrative expenses Selling, general and administrative expenses for the year ended June 30, 2014 increased $10,604, or 16%, to $78,551 as compared to the prior year primarily due to higher employee compensation and related benefits, including separation-related costs, and, to a lesser extent, increased costs associated with the re-opening of the Forum and the debut of the fully transformed Madison Square Garden Arena. AOCF AOCF loss improved for the year ended June 30, 2014 by $5,921, or 58%, to a loss of $4,284 as compared to the prior year primarily attributable to an increase in revenues which were largely offset by an increase in direct operating expenses and, to a lesser extent, higher selling, general and administrative expenses, as discussed above. With respect to fiscal year 2015, the Company expects MSG Entertainment to benefit from The Garden, The Theater at Madison Square Garden and the Forum all being available for events for the full fiscal year, and to also reflect the results of the Company's new large-scale theatrical production at Radio City Music Hall. MSG Sports The table below sets forth, for the periods presented, certain historical financial information and the percentage that those items bear to revenues for the Company's MSG Sports segment. Years Ended June 30, Increase 2014 2013 (Decrease) in % of % of Operating Amount Revenues Amount Revenues Income Revenues $ 612,071 100 % $ 470,290 100 % $ 141,781 Direct operating expenses 480,191 78 % 332,398 71 % (147,793 ) Selling, general and administrative expenses 133,118 22 % 113,967 24 % (19,151 ) Depreciation and amortization 12,225 2 % 10,451 2 % (1,774 ) Operating income (loss) $ (13,463 ) 2 % $ 13,474 3 % $ (26,937 ) 54-------------------------------------------------------------------------------- Table of Contents The following is a reconciliation of operating income (loss) to AOCF: Years Ended June 30, Increase (Decrease) in 2014 2013 AOCF Operating income (loss) $ (13,463 ) $ 13,474 $ (26,937 ) Share-based compensation 4,813 3,089 1,724 Depreciation and amortization 12,225 10,451 1,774 AOCF $ 3,575 $ 27,014 $ (23,439 ) Revenues Revenues for the year ended June 30, 2014 increased $141,781, or 30%, to $612,071 as compared to the prior year. The net increase is attributable to the following: Increase in professional sports teams' pre/regular season ticket-related revenue $ 56,634 Increase in suite rental fee revenue 18,554 Increase in broadcast rights fees from MSG Media 13,043 Increase in event-related revenues from other live sporting events 12,566 Increase in professional sports teams' sponsorship and signage revenues 12,519 Increase in professional sports teams' pre/regular season food, beverage and merchandise sales 10,306 Increase in revenues from league distributions 9,182 Increase in professional sports teams' playoff related revenues 7,254 Other net increases 1,723 $ 141,781 The increase in professional sports teams' pre/regular season ticket-related revenue was primarily driven by the return to a full Rangers regular season schedule as well as higher average per-game revenue for all of the Company's professional sports teams, inclusive of the impact of the return to pre-Transformation seating capacity. The increase in suite rental fee revenue was primarily due to the impact of new suite products which were unavailable for portions of the prior year and, to a lesser extent, the return to a full Rangers regular season schedule partially offset by the planned reduction in certain suite products due to the Transformation and the impact of the off-season shutdowns. The increase in broadcast rights fees from MSG Media was primarily due to the return to a full Rangers regular season schedule. The increase in event-related revenues from other live sporting events was primarily due to a change in the mix of events, as well as more events during the year ended June 30, 2014 as compared to the prior year. Event-related revenues from other live sporting events include ticket-related revenues, venue license fees we charge to promoters for the use of our venues, single night suite rental fees, and food, beverage and merchandise sales. The increase in professional sports teams' sponsorship and signage revenues primarily reflects expanded inventory and new sponsor relationships as a result of the Transformation and the return to a full Rangers regular season schedule. The increase in professional sports teams' pre/regular season food, beverage and merchandise sales was primarily due to the return to a full Rangers regular season schedule. The increase in revenues from league distributions was primarily due to the return to a full NHL regular season schedule and, to a lesser extent, other league related increases. The increase in professional sports teams' playoff related revenues was primarily due to seven additional Rangers home games, as the team advanced to the Stanley Cup Finals in the current year partially offset by the impact of the Knicks not making the playoffs in the current year versus playing six home games in the prior year. See "- Comparison of the Year Ended June 30, 2014 versus the Year Ended June 30, 2013 - Consolidated Results of Operations" for a discussion of the NHL work stoppage during the 2012-13 season. 55-------------------------------------------------------------------------------- Table of Contents Direct operating expenses Direct operating expenses for the year ended June 30, 2014 increased $147,793, or 44%, to $480,191 as compared to the prior year. The net increase is attributable to the following: Increase in team personnel compensation $ 43,065 Increase in net provisions for certain team personnel transactions (including the impact of NBA luxury tax) 34,953 Increase in net provisions for NBA luxury tax (excluding the impact of team personnel transactions) and NBA and NHL revenue sharing expense (excluding playoffs) 32,672 Increase in other team operating expenses 23,676 Increase in event-related expenses associated with other live sporting events 5,914 Increase in professional sports teams' pre/regular season expense associated with food, beverage and merchandise sales 4,895 Decrease in professional sports teams' playoff related expenses (1,250 ) Other net increases 3,868 $ 147,793 The increase in team personnel compensation was primarily due to the return to a full Rangers regular season schedule and overall salary increases, inclusive of the impact of roster changes at the Company's sports teams. Net provisions for certain team personnel transactions (including the impact of NBA luxury tax) and for NBA luxury tax (excluding the impact of team personnel transactions) and NBA and NHL revenue sharing expense (excluding playoffs) were as follows: Years Ended June 30, 2014 2013 Increase Net provisions for certain team personnel transactions (including the impact of NBA luxury tax) $ 53,394 $ 18,441 $ 34,953 Net provisions for NBA luxury tax (excluding the impact of team personnel transactions) and NBA and NHL revenue sharing expense (excluding playoffs) 53,510 20,838 32,672 Team personnel transactions for the year ended June 30, 2014 reflect provisions recorded for player waivers/contract terminations and season-ending player injuries of $41,276 and $6,978, respectively, and player trades of $5,140. Team personnel transactions for the year ended June 30, 2013 reflect provisions recorded for player waivers/contract terminations and season-ending player injuries of $10,434 and $7,159, respectively, and player trades of $848. The increase in net provisions for NBA luxury tax (excluding the impact of team personnel transactions) and NBA and NHL revenue sharing expense (excluding playoffs) reflects higher NBA luxury tax of $22,147 and higher net provisions for both NBA and NHL revenue sharing expense of $10,525. The increase in provisions for NBA luxury tax for the year ended June 30, 2014 was primarily due to the change in the luxury tax rate structure beginning with the 2013-14 season and, to a lesser extent, higher aggregate player salaries. The increase in net provisions for NBA and NHL revenue sharing expense (excluding playoffs) was primarily attributable to higher estimated NBA revenue sharing expense for the 2013-2014 season and, to a lesser extent, higher estimated NHL revenue sharing expense due to the return to a full Rangers regular season schedule which was partially offset by the impact of final assessments of prior seasons' revenue sharing expense recorded in the current year. The actual amounts for net provisions for NBA and NHL revenue sharing expense for the 2013-14 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 increase in other team operating expenses was primarily due to higher professional fees, the return to a full Rangers regular season schedule and, to a lesser extent, the absence of a league expense recoupment which was recorded during the prior year. The decrease in professional sports teams' playoff related expenses was primarily due to the impact of the Knicks not making the playoffs in the current year versus playing six home games in the prior year largely offset by the impact of seven additional Rangers home games in the current year as compared to the prior year. 56-------------------------------------------------------------------------------- Table of Contents Selling, general and administrative expenses Selling, general and administrative expenses for the year ended June 30, 2014 increased $19,151, or 17%, to $133,118, as compared to the prior year. The increase was primarily driven by higher employee compensation and related benefits, increased marketing costs (primarily related to the impact of the playoffs), and higher allocated corporate general and administrative costs. Depreciation and amortization Depreciation and amortization for the year ended June 30, 2014 increased $1,774, or 17%, to $12,225, as compared to the prior year primarily driven by depreciation that was accelerated due to a change in the anticipated planned use of assets utilized by certain of the Company's professional sports teams. AOCF AOCF for the year ended June 30, 2014 decreased $23,439, or 87%, to $3,575, as compared to the prior year primarily driven by an increase in direct operating expenses and, to a lesser extent, higher selling, general and administrative expenses, largely offset by an increase in revenues as discussed above. See "- Comparison of the Year Ended June 30, 2014 versus the Year Ended June 30, 2013 - Consolidated Results of Operations" for a discussion of the NHL work stoppage during the 2012-13 season. With respect to fiscal year 2015, as the Transformation is complete and The Garden is open year-round for events, it will host a full slate of Knicks and Rangers preseason home games this year. The Company also expects MSG Sports to benefit from continued growth in other key revenue categories such as suite rental fee revenue and sponsorship and signage revenues. In addition, MSG Sports benefited in fiscal 2014 from hosting a large-scale other live sporting event which is not returning in fiscal 2015 as the event rotates sites each year. Comparison of the Year Ended June 30, 2013 versus the Year Ended June 30, 2012 Consolidated Results of Operations The table below sets forth, for the periods presented, certain historical financial information and the percentage that those items bear to revenues. STATEMENT OF OPERATIONS DATA Years Ended June 30, Increase 2013 2012 (Decrease) % of % of in Net Amount Revenues Amount Revenues Income Revenues $ 1,340,818 100 % $ 1,284,016 100 % $ 56,802 Operating expenses: Direct operating 691,029 52 % 714,362 56 % 23,333 Selling, general and administrative 309,568 23 % 304,624 24 % (4,944 ) Depreciation and amortization (including impairments) 89,132 7 % 87,503 7 % (1,629 ) Operating income 251,089 19 % 177,527 14 % 73,562 Other income (expense): Interest expense, net (5,722 ) NM (4,752 ) NM (970 ) Miscellaneous 3,497 NM 7,072 1 % (3,575 ) Income from operations before income taxes 248,864 19 % 179,847 14 % 69,017 Income tax expense (106,482 ) (8 )% (73,302 ) (6 )% (33,180 ) Net income $ 142,382 11 % $ 106,545 8 % $ 35,837 ________________________________ NM - Percentage is not meaningful 57-------------------------------------------------------------------------------- Table of Contents The NHL CBA expired on September 15, 2012, and effective September 16, 2012, the NHL declared a lockout of NHL players. The delay in reaching an agreement with the NHLPA on the terms of a new CBA delayed the start of the 2012-13 NHL regular season by approximately three months until January 19, 2013. In addition to the delayed start, the resolution of the NHL work stoppage resulted in the 2012-13 regular season being shortened by 34 games, or approximately 41%, to a 48 game season. As a result, the Rangers (as well as other NHL teams whose games are telecast on MSG Networks) played fewer regular season home and away games during the year ended June 30, 2013 as compared to the comparable period of the prior year. During fiscal year 2013, the Rangers played 48 regular season games, of which 24 were home games and 24 were away games, as compared to 82 regular season games in the prior year, of which 41 were home games and 41 were away games. While the NHL work stoppage and the waiver of a Rangers player which was allowed under the terms of the new NHL CBA, together, negatively impacted the Company's and the MSG Sports and MSG Media segments' revenues and the Company's and MSG Sports segment's AOCF, a non-GAAP measure, and operating income during fiscal year 2013, the NHL work stoppage contributed to an increase in AOCF and operating income in the MSG Media segment as compared to the prior year. In addition, the comparability of the results of operations of the Company and the MSG Media and MSG Sports segments for the year ended June 30, 2013 as compared to the prior year was impacted by last year's NBA work stoppage, which resulted in a shortened 66-game 2011-12 regular season. As a result, the Knicks played more regular season home and away games during fiscal year 2013 as compared to the prior year. During fiscal year 2013, the Knicks played 82 regular season games, of which 41 were home games and 41 were away games, as compared to 66 regular season games in the prior year, of which 33 were home games and 33 were away games. Revenues Revenues for the year ended June 30, 2013 increased $56,802, or 4%, to $1,340,818 as compared to the prior year. The net increase is attributable to the following: Increase in MSG Media segment revenues $ 63,565 Decrease in MSG Entertainment segment revenues (11,781 ) Increase in MSG Sports segment revenues 5,564 Increase in other revenues 293 Inter-segment eliminations (839 ) $ 56,802 See above for a discussion of the NHL work stoppage during the 2012-13 season and the NBA work stoppage during the 2011-12 season. Direct operating expenses Direct operating expenses for the year ended June 30, 2013 decreased $23,333, or 3%, to $691,029 as compared to the prior year. The net decrease is attributable to the following: Decrease in MSG Media segment expenses $ (26,016 ) Increase in MSG Entertainment segment expenses 809 Increase in MSG Sports segment expenses 2,767 Increase in other expenses 4 Inter-segment eliminations (897 ) $ (23,333 ) 58-------------------------------------------------------------------------------- Table of Contents Selling, general and administrative expenses Selling, general and administrative expenses for the year ended June 30, 2013 increased $4,944, or 2%, to $309,568 as compared to the prior year. The net increase is attributable to the following: Decrease in MSG Media segment expenses $ (2,384 ) Increase in MSG Entertainment segment expenses 2,971 Increase in MSG Sports segment expenses 2,944 Increase in other expenses 1,355 Inter-segment eliminations 58 $ 4,944 The increase in other expenses was primarily driven by higher charitable contributions. Depreciation and amortization (including impairments) Depreciation and amortization (including impairments) for the year ended June 30, 2013 increased $1,629, or 2%, to $89,132 as compared to the prior year due to higher depreciation and amortization expense on property and equipment significantly offset by lower amortization of intangible assets. The increase in depreciation and amortization expense on property and equipment was primarily due to the ongoing Transformation, which resulted in higher depreciation expense on property and equipment placed into service partially offset by lower depreciation expense of capitalized costs associated with asset retirement obligations (see Note 9 to the consolidated financial statements included in Item 8 of this Annual Report on Form 10-K). The decrease in amortization of intangible assets was due to lower amortization resulting from certain intangible assets becoming fully amortized and the absence of an impairment charge of $3,112 which was recorded during the year ended June 30, 2012 to write-off the remaining carrying value of certain intangible assets (see Note 5 to the consolidated financial statements included in Item 8 of this Annual Report on Form 10-K). Miscellaneous income Miscellaneous income for the year ended June 30, 2013 includes a pre-tax gain of approximately $3,100 from the sale of all of the Company's holdings of Live Nation common stock (see Note 15 to the consolidated financial statements included in Item 8 of this Annual Report on Form 10-K). Miscellaneous income for the year ended June 30, 2012 reflects approximately $7,000 related to the recovery of certain claims in connection with a third party bankruptcy proceeding. Income taxes Income tax expense for the year ended June 30, 2013 was $106,482. The effective tax rate of 42.8% differs from the statutory federal rate of 35% due principally to state and local income taxes, nondeductible expenses and an increase in federal income tax expense recorded in connection with the filing of the Company's 2011 income tax returns, reflecting a lower domestic production activity deduction, offset by the tax benefit resulting from the domestic production activities deduction in the current fiscal year. Income tax expense for the year ended June 30, 2012 was $73,302. The effective tax rate of 40.8% differs from the statutory federal rate of 35% due to state income taxes and, to a lesser extent, the impact of nondeductible expenses partially offset by the impact of lower state tax rates on deferred tax liabilities, the reduction in the state income tax expense recorded in connection with the filing of the Company's 2010 income tax returns and the tax benefit resulting from the domestic production activities deduction. AOCF The following is a reconciliation of operating income to AOCF: Years Ended June 30, Increase (Decrease) 2013 2012 in AOCF Operating income $ 251,089 $ 177,527 $ 73,562 Share-based compensation 15,340 18,205 (2,865 ) Depreciation and amortization (including impairments) 89,132 87,503 1,629 AOCF $ 355,561 $ 283,235 $ 72,326 59-------------------------------------------------------------------------------- Table of Contents AOCF for the year ended June 30, 2013 increased $72,326, or 26%, to $355,561 as compared to the prior year. The net increase is attributable to the following: Increase in AOCF of the MSG Media segment $ 90,907 Decrease in AOCF of the MSG Entertainment segment (15,500 ) Decrease in AOCF of the MSG Sports segment (1,703 ) Other net decreases (1,378 ) $ 72,326 Other net decreases were primarily driven by higher charitable contributions. See above for a discussion of the NHL work stoppage during the 2012-13 season and the NBA work stoppage during the 2011-12 season. Business Segment Results MSG Media The table below sets forth, for the periods presented, certain historical financial information and the percentage that those items bear to revenues for the Company's MSG Media segment. Years Ended June 30, 2013 2012 Increase % of % of in Operating Amount Revenues Amount Revenues Income Revenues $ 677,733 100 % $ 614,168 100 % $ 63,565 Direct operating expenses 218,665 32 % 244,681 40 % 26,016 Selling, general and administrative expenses 114,141 17 % 116,525 19 % 2,384 Depreciation and amortization(including impairments) 16,358 2 % 24,616 4 % 8,258 Operating income $ 328,569 48 % $ 228,346 37 % $ 100,223 The following is a reconciliation of operating income to AOCF: Years Ended June 30, Increase (Decrease) 2013 2012 in AOCF Operating income $ 328,569 $ 228,346 $ 100,223 Share-based compensation 4,579 5,637 (1,058 ) Depreciation and amortization (including impairments) 16,358 24,616 (8,258 ) AOCF $ 349,506 $ 258,599 $ 90,907 Revenues Revenues for the year ended June 30, 2013 increased $63,565, or 10%, to $677,733 as compared to the prior year. The net increase is attributable to the following: Increase in affiliation fee revenue $ 46,041 Increase in advertising revenue 12,388 Other net increases 5,136 $ 63,565 The increase in affiliation fee revenue was primarily due to higher affiliation rates and, to a lesser extent, the impact of MSG Networks being carried by Time Warner Cable ("TWC") for the entire fiscal year 2013 versus not being carried from January 1st through February 16th of fiscal year 2012, with the overall increase being partially offset by the net impact of recorded 60-------------------------------------------------------------------------------- Table of Contents provisions, principally related to the NHL work stoppage, and the impact of revenue recognized in fiscal year 2012 related to TWC's carriage of Fuse during calendar 2011 in connection with the TWC carriage agreement entered into in February 2012. The increase in advertising revenue was primarily driven by higher advertising sales at both MSG Networks and Fuse. The increase at MSG Networks reflects higher Knicks per-game advertising revenue and more NBA telecasts as the Knicks returned to a full regular season schedule partially offset by the fewer NHL telecasts as a result of the NHL work stoppage. Other net increases were primarily due to a short-term programming licensing agreement entered into during the third quarter of fiscal year 2012 for which revenue was recognized until the agreement expired in April 2013 and was not renewed. See "- Comparison of the Year Ended June 30, 2013 versus the Year Ended June 30, 2012 - Consolidated Results of Operations" for a discussion of the NHL work stoppage during the 2012-13 season and the NBA work stoppage during the 2011-12 season. Direct operating expenses Direct operating expenses for the year ended June 30, 2013 decreased $26,016, or 11%, to $218,665 as compared to the prior year primarily driven by a decrease in programming acquisition costs (rights fees) and other programming costs due to the NHL work stoppage partially offset by the Knicks' return to a full regular season schedule. Programming acquisition costs include rights fees from the licensing of team related programming to MSG Media from the MSG Sports segment. Selling, general and administrative expenses Selling, general and administrative expenses for the year ended June 30, 2013 decreased $2,384, or 2%, to $114,141 as compared to the prior year primarily due to a decrease in marketing costs and lower employee compensation and related benefits partially offset by an increase in allocated corporate general and administrative costs. The decrease in marketing costs was primarily driven by the absence of certain marketing expenses related to an affiliate dispute which were incurred during the prior year period partially offset by higher marketing of programming initiatives. Depreciation and amortization (including impairments) Depreciation and amortization (including impairments) for the year ended June 30, 2013 decreased $8,258, or 34%, to $16,358 as compared to the prior year primarily due to lower amortization of intangible assets resulting from certain intangible assets becoming fully amortized and the absence of an impairment charge of $3,112 recorded during fiscal year 2012 to write-off the remaining carrying value of certain intangible assets (see Note 5 to the consolidated financial statements included in Item 8 of this Annual Report on Form 10-K. AOCF AOCF for the year ended June 30, 2013 increased $90,907, or 35%, to $349,506 as compared to the prior year primarily driven by an increase in revenues and lower direct operating expenses, as discussed above. See "- Comparison of the Year Ended June 30, 2013 versus the Year Ended June 30, 2012 - Consolidated Results of Operations" for a discussion of the NHL work stoppage during the 2012-13 season and the NBA work stoppage during the 2011-12 season. MSG Entertainment The table below sets forth, for the periods presented, certain historical financial information and the percentage that those items bear to revenues for the Company's MSG Entertainment segment. Years Ended June 30, (Increase) 2013 2012 Decrease in % of % of Operating Amount Revenues Amount Revenues Loss Revenues $ 252,195 100 % $ 263,976 100 % $ (11,781 ) Direct operating expenses 199,458 79 % 198,649 75 % (809 ) Selling, general and administrative expenses 67,947 27 % 64,976 25 % (2,971 ) Depreciation and amortization 9,522 4 % 9,653 4 % 131 Operating loss $ (24,732 ) (10 )% $ (9,302 ) (4 )% $ (15,430 ) 61-------------------------------------------------------------------------------- Table of Contents The following is a reconciliation of operating loss to AOCF: Years Ended June 30, Increase (Decrease) 2013 2012 in AOCF Operating loss $ (24,732 ) $ (9,302 ) $ (15,430 ) Share-based compensation 5,005 4,944 61 Depreciation and amortization 9,522 9,653 (131 ) AOCF $ (10,205 ) $ 5,295 $ (15,500 ) Revenues Revenues for the year ended June 30, 2013 decreased $11,781, or 4%, to $252,195 as compared to the prior year. The net decrease is attributable to the following: Decrease in event-related revenues at Radio City Music Hall, excluding Radio City Christmas Spectacular $ (13,710 ) Decrease in revenues from the presentation of the Radio City Christmas Spectacular franchise (5,815 ) Decrease in event-related revenues at the Beacon Theatre (2,883 ) Decrease in event-related revenues at The Garden (1,808 ) Decrease in event-related revenues at The Chicago Theatre (1,216 ) Increase in event-related revenues at The Theater at Madison Square Garden 6,474 Increase in venue-related sponsorship and signage and suite rental fee revenues 5,937 Other net increases 1,240 $ (11,781 ) The decrease in event-related revenues at Radio City Music Hall, excluding Radio City Christmas Spectacular, was primarily due to fewer scheduled performances of Cirque du Soleil's Zarkana partially offset by an increase in revenues associated with other events. The decrease in revenues from the presentation of the Radio City Christmas Spectacular franchise, which reflects the Radio City Music Hall production of the show as well as the theatrical productions presented outside of New York, was primarily due to lower attendance partially offset by a higher average ticket price at the Radio City Music Hall. The Radio City Music Hall production of the show was significantly impacted by Superstorm Sandy, which occurred in late October 2012, about ten days prior to the start of the show's run. Nearly one million tickets were sold for the Radio City Music Hall production during the 2012 holiday season as compared to nearly one million one hundred thousand tickets during the 2011 holiday season. The decrease in event-related revenues at the Beacon Theatre was primarily driven by the decrease in the number of events held at the venue during the year ended June 30, 2013 as compared to the prior year. The decrease in event-related revenues at The Garden was primarily driven by a change in the mix of events held at the venue during the year ended June 30, 2013 as compared to the prior year. The decrease in event-related revenues at The Chicago Theatre was primarily driven by the decrease in the number of events held at the venue during the year ended June 30, 2013 as compared to the prior year. The increase in event-related revenues at The Theater at Madison Square Garden was primarily due to the increase in the number of events held at the venue during the year ended June 30, 2013 as compared to the prior year. The increase in venue-related sponsorship and signage and suite rental fee revenues primarily reflects higher suite rental fee revenue as a result of new suite/club products which have come online combined with the impact of more sponsor relationships partially offset by the impact of the planned reduction in certain suite products as a result of the Transformation. 62-------------------------------------------------------------------------------- Table of Contents Direct operating expenses Direct operating expenses for the year ended June 30, 2013 increased $809, less than 1%, to $199,458 as compared to the prior year. The net increase is attributable to the following: Decrease in event-related direct operating expenses at Radio City Music Hall, excluding Radio City Christmas Spectacular $ (8,902 ) Decrease in event-related direct operating expenses at The Garden (1,994 ) Decrease in event-related direct operating expenses at the Beacon Theatre (1,066 ) Decrease in event-related direct operating expenses at The Chicago Theatre (734 ) Increase in venue operating costs, primarily associated with the Forum (which the Company acquired in June 2012) and Radio City Music Hall 4,629 Increase in event-related direct operating expenses at The Theater at Madison Square Garden 4,291 Increase in direct operating expenses associated with the presentation of the Radio City Christmas Spectacular franchise 1,304 Other net increases, including higher costs associated with MSG Entertainment business development initiatives 3,281 $ 809 The increase in direct operating expenses associated with the presentation of the Radio City Christmas Spectacular franchise was primarily due to a pre-tax impairment charge of $4,982 recorded during the year ended June 30, 2013 related to a theatrical production of the show that played in three markets outside of New York during the 2012 holiday season. As a result of the financial performance of these markets, the Company recorded a pre-tax impairment charge for the remaining unamortized deferred costs of assets related to this theatrical production outside of New York. The impact of the impairment charge was largely offset by a decrease in direct operating expenses associated with the Radio City Music Hall production and the theatrical production of the show outside of New York. Selling, general and administrative expenses Selling, general and administrative expenses for the year ended June 30, 2013 increased $2,971, or 5%, to $67,947 as compared to the prior year primarily due to an increase in employee compensation and related benefits, which includes costs associated with MSG Entertainment business development initiatives. AOCF AOCF for the year ended June 30, 2013 decreased by $15,500, or 293%, to a loss of $10,205 as compared to the prior year primarily attributable to a decrease in revenues and higher selling, general and administrative expenses and direct operating expenses, as discussed above. MSG Sports The table below sets forth, for the periods presented, certain historical financial information and the percentage that those items bear to revenues for the Company's MSG Sports segment. Years Ended June 30, Increase 2013 2012 (Decrease) in % of % of Operating Amount Revenues Amount Revenues Income Revenues $ 470,290 100 % $ 464,726 100 % $ 5,564 Direct operating expenses 332,398 71 % 329,631 71 % (2,767 ) Selling, general and administrative expenses 113,967 24 % 111,023 24 % (2,944 ) Depreciation and amortization 10,451 2 % 11,003 2 % 552 Operating income $ 13,474 3 % $ 13,069 3 % $ 405 63-------------------------------------------------------------------------------- Table of Contents The following is a reconciliation of operating income to AOCF: Years Ended June 30, Increase (Decrease) in 2013 2012 AOCF Operating income $ 13,474 $ 13,069 $ 405 Share-based compensation 3,089 4,645 (1,556 ) Depreciation and amortization 10,451 11,003 (552 ) AOCF $ 27,014 $ 28,717 $ (1,703 ) Revenues Revenues for the year ended June 30, 2013 increased $5,564, or 1%, to $470,290 as compared to the prior year. The net increase is attributable to the following: Increase in suite rental fee revenue $ 14,591 Increase in professional sports teams' sponsorship and signage revenues 4,971 Increase in broadcast rights fees from MSG Media 896 Increase in revenues from NHL and NBA distributions 641 Decrease in professional sports teams' pre/regular season ticket-related revenue (6,185 ) Decrease in event-related revenues from other live sporting events (4,964 ) Decrease in professional sports teams' pre/regular season food, beverage and merchandise sales (2,283 ) Decrease in professional sports teams' playoff related revenues (536 ) Other net decreases (1,567 ) $ 5,564 The increase in suite rental fee revenue was primarily due to new suite/club products which have come online partially offset by the impact of the planned reduction in certain suite products as a result of the Transformation and the NHL work stoppage. The increase in professional sports teams' sponsorship and signage revenues primarily reflects expanded inventory and new sponsor relationships as a result of the Transformation and the Knicks' return to a full regular season schedule. These increases were partially offset by the impact of the NHL work stoppage. The increase in broadcast rights fees from MSG Media was primarily due to the impact of the Knicks' return to a full regular season schedule offset by the impact of the NHL work stoppage. The increase in revenues from NHL and NBA distributions was primarily due to the league related increases and the Knicks' return to a full regular season schedule largely offset by the impact of the NHL work stoppage. The decrease in professional sports teams' pre/regular season ticket-related revenue was primarily driven by the impact of the NHL work stoppage. This decrease was largely offset by the Knicks' return to a full regular season schedule which resulted in more Knicks games played during the year ended June 30, 2013 as compared to the prior year and, to a lesser extent, higher average per-game revenue for our professional sports teams, inclusive of the impact of the temporary reduction in seating capacity due to the Transformation. The decrease in event-related revenues from other live sporting events was primarily due to fewer events and a change in the mix of events during the year ended June 30, 2013 as compared to the prior year. The decrease in professional sports teams' pre/regular season food, beverage and merchandise sales was primarily due to fewer NHL home games played, partially offset by more NBA home games played during the year ended June 30, 2013 as compared to the prior year, and, to a lesser extent, higher average spending per patron (per caps). See "- Comparison of the Year Ended June 30, 2013 versus the Year Ended June 30, 2012 - Consolidated Results of Operations" for a discussion of the NHL work stoppage during the 2012-13 season and the NBA work stoppage during the 2011-12 season. 64-------------------------------------------------------------------------------- Table of Contents Direct operating expenses Direct operating expenses for the year ended June 30, 2013 increased $2,767, or 1%, to $332,398 as compared to the prior year. The net increase is attributable to the following: Increase in net provisions for NBA luxury tax and NBA and NHL revenue sharing expense (excluding playoffs) $ 3,846 Increase in net provisions for certain team personnel transactions (including the impact of NBA luxury tax) 2,127 Increase in team personnel compensation 1,759 Decrease in event-related expenses associated with other live sporting events (3,221 ) Decrease in professional sports teams' pre/regular season expense associated with food, beverage and merchandise sales (671 ) Decrease in professional sports teams' playoff related expenses (513 ) Other net decreases (560 ) $ 2,767 Net provisions for NBA luxury tax, NBA and NHL revenue sharing expense (excluding playoffs) and certain team personnel transactions (including the impact of NBA luxury tax) were as follows: Years Ended June 30, 2013 2012 Increase Net provisions for NBA luxury tax and NBA and NHL revenue sharing expense (excluding playoffs) $ 20,838 $ 16,992 $ 3,846 Net provisions for certain team personnel transactions (including the impact of NBA luxury tax) 18,441 16,314 2,127 The increase in net provisions for NBA luxury tax (excluding the impact of team personnel transactions) and NBA and NHL revenue sharing expense (excluding playoffs) reflects higher NBA luxury tax of $6,103 partially offset by lower net provisions for NBA and NHL revenue sharing expense of $2,257. The increase in provisions for NBA luxury tax for the year ended June 30, 2013 was due to the Knicks not being a gross luxury tax payer for the 2011-12 season whereas the Knicks were a luxury tax payer for the 2012-13 season. The decrease in net provisions for NBA and NHL revenue sharing expense (excluding playoffs) was primarily attributable to the impact of the NHL work stoppage and an adjustment to the 2011-12 season revenue sharing expense partially offset by higher estimated NBA revenue sharing for the 2012-13 season as a result of the Knicks' return to a full regular season schedule. Team personnel transactions for the year ended June 30, 2013 reflect provisions recorded for player waivers/contract terminations and season-ending player injuries of $10,434 and $7,159, respectively, and player trades of $848. Team personnel transactions for the year ended June 30, 2012 primarily reflect provisions recorded for player waivers/contract terminations and season-ending player injuries of $15,832 and $407, respectively. The increase in team personnel compensation was primarily due to the impact of the Knicks' return to a full regular season schedule, and overall salary increases and the impact of roster changes largely offset by the NHL work stoppage. Other net decreases include the impact on team operating expenses from the NHL work stoppage and, to a lesser extent, a league expense recoupment, which was recorded during the year ended June 30, 2013 that is not expected to be recurring offset by the impact of the Knicks' return to a full regular season schedule, as well as other team operating expense increases. Selling, general and administrative expenses Selling, general and administrative expenses for the year ended June 30, 2013 increased $2,944, or 3%, to $113,967, as compared to the prior year. This increase is primarily attributable to higher professional fees and employee compensation and related benefits, including separation-related costs, partially offset by a decrease in marketing costs. AOCF AOCF for the year ended June 30, 2013 decreased $1,703, or 6%, to $27,014, as compared to the prior year primarily due to higher revenues largely offset by an increase in selling, general and administrative expenses and direct operating expenses, as discussed above. 65-------------------------------------------------------------------------------- Table of Contents See "- Comparison of the Year Ended June 30, 2013 versus the Year Ended June 30, 2012 - Consolidated Results of Operations" for a discussion of the NHL work stoppage during the 2012-13 season and the NBA work stoppage during the 2011-12 season. Liquidity and Capital Resources Overview Our primary sources of liquidity are cash and cash equivalents on hand, cash flows from the operations of our businesses and available borrowing capacity under our $500,000 credit agreement with a syndicate of lenders, providing for a senior secured revolving credit facility (see "Financing Agreements - Revolving Credit Facility" below). Our principal uses of cash include working capital-related items, capital spending, and investments that we may fund from time to time. 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. We believe we have sufficient liquidity, including approximately $90,000 in cash and cash equivalents as of June 30, 2014, along with available borrowing capacity under our Revolving Credit Facility combined with cash flows from the operations of our businesses that may fluctuate from time to time, to operate our businesses, pursue new opportunities and our other initiatives. We constantly assess capital and credit markets activity and conditions against our ability to meet our net funding and investing requirements over the next twelve months and we believe that the combination of cash and cash equivalents on hand, cash generated from operating activities and borrowing availability under our Revolving Credit Facility should provide us with sufficient liquidity to fund such requirements. However, U.S. and global economic conditions may lead to lower demand for our offerings, such as lower levels of attendance or advertising. The consequences of such conditions could adversely impact our business and results of operations and might require that we seek alternative sources of funding through the capital and credit markets that may or may not be available to us. Financing Agreements Revolving Credit Facility On May 6, 2014, MSG L.P. and certain of its subsidiaries entered into a credit agreement with a syndicate of lenders providing for a senior secured revolving credit facility of up to $500,000 with a term of five years (the "Revolving Credit Facility"). Simultaneously with MSG L.P. entering into the Revolving Credit Facility, MSG L.P. terminated its previously existing $375,000 revolving credit facility with a syndicate of lenders, which facility had been effective since January 28, 2010. Subject to the satisfaction of certain conditions and limitations, the Revolving Credit Facility allows for the addition of incremental term and/or revolving loan commitments and incremental term and/or revolving loans. Borrowings under the Revolving Credit Facility, which proceeds are available for working capital, capital expenditures and for general corporate purposes, bear interest at a floating rate which, at the option of MSG L.P., may be either 2.25% over the applicable period LIBOR rate, or 1.25% plus the higher of: (1) the U.S. Federal Funds Rate plus 0.50%; (ii) the U.S. Prime Rate; or (iii) the one-month LIBOR rate plus 1.00%. Accordingly, we will be subject to interest rate risk with respect to any borrowings we may make under that facility. In appropriate circumstances, we may seek to reduce this exposure through the use of interest rate swaps or similar instruments. Upon a payment default in respect of principal, interest or other amounts due and payable under the Revolving Credit Facility or related loan documents, default interest will accrue on all overdue amounts at an additional rate of 2.00% per annum. MSG L.P. is also required to pay a commitment fee of 0.40% in respect of the average daily unused commitments thereunder and pay customary letter of credit fees, as well as fronting fees, to banks that issue letters of credit pursuant to the Revolving Credit Facility. The Revolving Credit Facility contains certain customary representations and warranties, affirmative covenants and events of default. It also requires MSG L.P. to comply with the following financial covenants: (i) a maximum total secured leverage ratio of 3.50:1.00 and (ii) a maximum total leverage ratio of 6.00:1.00 subject to upward adjustment during the continuance of certain events. In addition, there is a minimum interest coverage ratio of 2.00:1.00 for the Company. As of June 30, 2014, MSG L.P. was in compliance with the financial covenants in the Revolving Credit Facility. All borrowings under the Revolving Credit Facility are subject to the satisfaction of customary conditions, including covenant compliance, absence of a default and accuracy of representations and warranties. As of June 30, 2014, there was $7,460 in letters of credit issued and outstanding under the Revolving Credit Facility with available borrowing capacity of $492,540. 66-------------------------------------------------------------------------------- Table of Contents All obligations under the Revolving Credit Facility are guaranteed by MSG L.P.'s existing and future direct and indirect domestic subsidiaries that are not designated as excluded subsidiaries or unrestricted subsidiaries in accordance with the facility (the "Guarantors"). All obligations under the Credit Agreement, including the guarantees of those obligations, are secured by certain of the assets of MSG L.P. and each Guarantor, (collectively, "Collateral") including, but not limited to, a pledge of the equity interests held directly or indirectly by MSG L.P. in each Guarantor. The Collateral, however, does not include, among other things, our sports franchises or other assets of any of MSG L.P.'s teams, including of the Knicks and Rangers, or any interests in real property of MSG L.P. or the Guarantors, including the Madison Square Garden Complex (which includes both The Garden and The Theater at Madison Square Garden), the leasehold interest in Radio City Music Hall and MSG L.P.'s real property interest in other venues. Subject to customary notice and minimum amount conditions, MSG L.P. may voluntarily prepay outstanding loans under the Revolving Credit Facility at any time, in whole or in part, without premium or penalty (except for customary breakage costs with respect to LIBOR loans). With certain exceptions, MSG L.P. is required to make mandatory prepayments on loans outstanding, in certain circumstances, including without limitation from the net cash proceeds of certain sales of assets (including Collateral) or casualty insurance and/or condemnation recoveries (subject to certain reinvestment, repair or replacement rights), and the incurrence of certain indebtedness. In addition to the financial covenants previously discussed, the Revolving Credit Facility and the related security agreement contain certain customary representations and warranties, affirmative covenants and events of default. The Revolving Credit Facility contains certain restrictions on the ability of MSG L.P. and its restricted subsidiaries to take certain actions as provided in (and subject to various exceptions and baskets set forth in) the Revolving Credit Facility, including the following: (i) incur additional indebtedness and contingent liabilities; (ii) create liens on certain assets; (iii) make investments, loans or advances in or to other persons; (iv) pay dividends and distributions or repurchase capital stock; (v) repay, redeem or repurchase certain indebtedness; (vi) change its lines of business; (vii) engage in certain transactions with affiliates; (viii) amend specified material agreements; (ix) merge or consolidate; and (x) make certain dispositions. Additionally there is a limitation on the ability of the Company to incur indebtedness if (a) the Company, MSG L.P. and any of its restricted subsidiaries collectively would not comply with a total leverage ratio of 4.00:1.00 and (b) the Company on a consolidated basis would not comply with the minimum interest coverage ratio of 2.00:1.00. Revolving Credit Agreement with Nonconsolidated Affiliate In September 2013, the Company acquired a 50% interest in Azoff-MSG. The Company provides a $50,000 revolving credit facility to the entity, which amount was fully borrowed as of June 30, 2014. Cash Flow Discussion Operating Activities Net cash provided by operating activities for the year ended June 30, 2014 increased by $79,500 to $342,555 as compared to the prior year primarily driven by an increase of $80,825 from changes in assets and liabilities, slightly offset by a decrease in net income and other non-cash items. The increase resulting from changes in assets and liabilities was primarily due to (i) an increase during the year ended June 30, 2014 in accrued and other liabilities of $80,991 as compared to an increase of $29,564 during the prior year, (ii) an increase during the year ended June 30, 2014 in deferred revenue of $64,092 as compared to an increase of $24,920 during the prior year and (iii) an increase during the year ended June 30, 2014 in accounts payable of $704 as compared to a decrease of $14,743 during the prior year. These increases were partially offset by a decrease during the year ended June 30, 2014 in deferred income taxes of $15,568 as compared to an increase of $5,523 during the prior year and an increase during the year ended June 30, 2014 in net related party receivables of $7,182 as compared to a decrease of $8,712 during the prior year. Net cash provided by operating activities for the year ended June 30, 2013 decreased by $70,318 to $263,055 as compared to the prior year. This decrease was driven by a decrease of $104,501 resulting from changes in assets and liabilities, partially offset by a $34,183 increase in net income and other non-cash items. The decrease resulting from changes in assets and liabilities was primarily due to (i) a decrease during the year ended June 30, 2013 in accounts payable of $14,743 as compared to an increase of $17,339 during the prior year, (ii) an increase during the year ended June 30, 2013 in deferred revenue of $24,920 as compared to an increase of $55,592 during the prior year, (iii) an increase during the year ended June 30, 2013 in deferred income taxes of $5,523 as compared to an increase of $21,781 during the prior year and (iv) an increase during the year ended June 30, 2013 in accrued and other liabilities of $29,564 as compared to an increase of $45,073 during the prior year. 67-------------------------------------------------------------------------------- Table of Contents Investing Activities Net cash used in investing activities for the year ended June 30, 2014 increased by $331,037 to $516,398 as compared to the prior year. This increase is primarily due to $226,510 of cash used during the current year for the Company's investments in and loans to its nonconsolidated affiliates, Azoff-MSG, BBLV and Tribeca Enterprises. In addition, capital expenditures for the year ended June 30, 2014 increased by $76,892 as compared to the prior year primarily due to the renovation of the Forum during the current year partially offset by lower capital expenditures associated with the Transformation. Investing activities during the prior year included proceeds of $44,136 from the sale of all of the Company's holdings of Live Nation common stock. These contributors to the higher net cash used in investing activities during the current year were partially offset by an $18,000 loan provided to the Company (which we expect to be forgiven based on our satisfaction of certain conditions) during the year ended June 30, 2014 from the City of Inglewood in connection with the Company's renovation of the Forum. Net cash used in investing activities for the year ended June 30, 2013 decreased by $243,720 to $185,361 as compared to the prior year primarily driven by lower capital expenditures associated with the Transformation and, to a lesser extent, proceeds from the March 2013 sale of all the Company's holdings of Live Nation common stock as well as the Company's June 2012 acquisition of the Forum. These decreases were slightly offset by higher capital expenditures for MSG Entertainment. Financing Activities Net cash used in financing activities for the year ended June 30, 2014 increased by $5,538 to $11,819 as compared to the prior year. This increase is primarily due to $6,718 of cash used for deferred financing costs during the year ended June 30, 2014 as a result of entering into the Revolving Credit Facility and lower proceeds from stock option exercises as compared to the prior year. These increases were largely offset by lower taxes paid in lieu of shares issued for equity-based compensation during the year ended June 30, 2014 as compared to the prior year. Net cash used in financing activities for the year ended June 30, 2013 increased by $3,613 to $6,281 as compared to the prior year. During the year ended June 30, 2013, taxes paid in lieu of shares issued for equity-based compensation amounted to $21,148. During the year ended June 30, 2012, the Company paid $11,768 for the acquisition of restricted shares. The impact of these items was partially offset by higher proceeds from stock option exercises and an increase in the excess tax benefit on share-based awards as compared to the prior year. Contractual Obligations and Off Balance Sheet Arrangements Future cash payments required under contracts entered into by the Company in the normal course of business, outstanding letters of credit and capital leases as of June 30, 2014 are summarized in the following table: Payments Due by Period Year Years Years More Than Total 1 2-3 4-5 5 Years Off balance sheet arrangements: Contractual obligations (a) $ 1,236,772 $ 199,823 $ 273,754 $ 208,111 $ 555,084 Operating lease obligations (b) 389,281 41,005 82,641 74,630 191,005 Letters of credit (c) 7,460 7,460 - - - 1,633,513 248,288 356,395 282,741 746,089 Contractual obligations reflected on the balance sheet: Capital lease obligations (d) 2,564 462 924 924 254 Contractual obligations (e) 91,293 41,220 18,736 10,933 20,404 93,857 41,682 19,660 11,857 20,658 Total $ 1,727,370 $ 289,970 $ 376,055 $ 294,598 $ 766,747 ___________________________________ (a) Contractual obligations not reflected on the balance sheet consist primarily of (i) the MSG Media segment's obligations related to professional team rights, acquired under license agreements, to telecast certain live sporting events, (ii) 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, and (iii) minimum purchase requirements incurred in the normal course of the Company's operations. 68-------------------------------------------------------------------------------- Table of Contents (b) Operating lease obligations represent future minimum rental payments on various long-term, noncancelable leases for office and storage space, and lease commitments for Radio City Music Hall and the Beacon Theatre. (c) Consists of letters of credit obtained by the Company under the Revolving Credit Facility as collateral for certain insurance policies and for a lease agreement. (d) Reflects the face amount of capital lease obligations, including related interest. (e) Consists principally of amounts earned under employment agreements that the Company has with certain of its professional sports teams' personnel in the MSG Sports segment. The future cash payments reflected above do not include the impact of potential insurance recoveries or amounts which may be due for NBA luxury tax payments or NBA or NHL revenue sharing. The future cash payments reflected above include amounts related to Fuse (see Note 23 to the consolidated financial statements included in Item 8 of this Annual Report on Form 10-K). See "Financing Agreements - Revolving Credit Agreement with Nonconsolidated Affiliate" above for discussion of the revolving credit agreement provided by the Company to Azoff-MSG. 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 our fiscal year. The dependence of the MSG Entertainment segment on revenues from the Radio City Christmas Spectacular generally means it earns a disproportionate share of its revenues and operating income in the second quarter of our fiscal year. Recently Issued Accounting Pronouncements and Critical Accounting Policies Recently Adopted Accounting Pronouncements In December 2011, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2011-11, Disclosures about Offsetting Assets and Liabilities, which creates new disclosure requirements regarding the nature of an entity's rights of offset and related arrangements associated with its financial instruments and derivative instruments. In January 2013, the FASB issued ASU No. 2013-01, Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities, which clarifies the scope of transactions that are subject to disclosures required by FASB Accounting Standards Codification ("ASC") 210-20-50, Balance Sheet - Offsetting - Disclosure, concerning offsetting. In particular ASU No. 2013-01 addresses implementation issues about the scope of ASU No. 2011-11 and clarifies that the scope of the disclosure is limited to derivatives, repurchase agreements, and securities borrowing and securities lending transactions that are either offset in the financial statements or are subject to a master netting arrangement or similar arrangement. These standards were adopted by the Company in the first quarter of fiscal year 2014. The adoption of these standards did not have an impact on the Company's financial position, results of operations, or cash flows. In February 2013, the FASB issued ASU No. 2013-02, Comprehensive Income (Topic 220) - Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income, which requires an entity to provide information about amounts reclassified out of accumulated other comprehensive income by component. In addition, an entity is required to present, either on the face of the statement where net income is presented or in the notes, significant amounts reclassified out of accumulated other comprehensive income by the respective line items of net income but only if the amount reclassified is required under GAAP to be reclassified to net income in its entirety in the same reporting period. For other amounts that are not required under GAAP to be reclassified in their entirety to net income, an entity is required to cross-reference to other disclosures required under GAAP that provide additional detail about those amounts. This standard was adopted by the Company in the first quarter of fiscal year 2014. The adoption of this standard impacted the Company's disclosures only and did not have any impact on the Company's financial position, results of operations, or cash flows. In April 2014, the FASB issued ASU No. 2014-08, Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity, which revises the definition of a discontinued operation to limit the circumstances under which a disposal or classification as held for sale qualifies for presentation as a discontinued operation. Expanded disclosures are required concerning a discontinued operation and the disposal of a significant component of an entity not qualifying as a discontinued operation. The revised standard is effective for any new disposals and new classifications of assets held for sale in annual and interim periods beginning after December 15, 2014. Early adoption is permitted. The Company elected to early adopt this guidance in the 69-------------------------------------------------------------------------------- Table of Contents fourth quarter of fiscal year 2014. The adoption of this standard did not have any impact on the Company's financial position, results of operations, or cash flows. Recently Issued Accounting Pronouncements Not Yet Adopted In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606), which supersedes the revenue recognition requirements in FASB ASC Topic 605, Revenue Recognition. This ASU is based on the principle that revenue is recognized to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The ASU also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. This standard will be effective for the Company beginning in the first quarter of fiscal year 2018 using one of two retrospective application methods. The Company is currently evaluating the impact this standard will have on its consolidated financial statements. 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: Multiple-Deliverable Transactions The Company has various types of multiple-deliverable arrangements, including multi-year sponsorship agreements. The deliverables included in each sponsorship agreement vary and may include suite licenses, event tickets and various media and advertising benefits, which include items such as, but not limited to, signage at The Garden and the Company's other venues. The timing of revenue recognition for each deliverable is dependent upon meeting the revenue recognition criteria for the respective deliverable. The Company allocates revenue to each deliverable within the arrangement based on its relative selling price. For many deliverables in an arrangement, such as event tickets and certain advertising benefits, the Company has vendor specific objective evidence ("VSOE") of selling price as it typically sells the same or similar deliverables regularly on a stand-alone basis. Absent VSOE the Company considers whether third party evidence ("TPE") is available; however, in most instances TPE is not available. The Company's process for determining its estimated selling prices for deliverables without VSOE or TPE 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 deliverable. Key factors considered by the Company in developing a best estimate of selling price for deliverables include, but are not limited to, prices charged for similar deliverables, the Company's ongoing pricing strategy and policies, and consideration of pricing of similar deliverables sold in other multiple-deliverable agreements. Impairment of Long-Lived and Indefinite-Lived Assets The Company's long-lived and indefinite-lived assets accounted for approximately 75% of the Company's consolidated total assets as of June 30, 2014 and consist of the following: Goodwill $ 701,674 Indefinite-lived intangible assets 163,850 Amortizable intangible assets, net 80,306 Property and equipment, net 1,252,467 $ 2,198,297 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 uncertainties and matters of significant judgments and therefore cannot be determined with 70-------------------------------------------------------------------------------- Table of Contents precision. Changes in assumptions could significantly affect the estimates. If these estimates or material related assumptions change in the future, we may be required to record impairment charges related to our 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 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. 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, we 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. 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's three reporting units for evaluating goodwill impairment are the same as its reportable segments, and all of them have 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. For all periods presented the Company elected to perform the qualitative assessment of impairment for the Sports and Media reporting units. 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. For all periods presented, the Company performed the quantitative assessment of impairment for the MSG Entertainment reporting unit. For MSG Entertainment, these valuations of the reporting unit include assumptions for the number and expected financial performance of live entertainment events and productions, which includes, but is not limited to, the level of ticket sales, concessions and sponsorships. Significant judgments inherent in a discounted cash flow valuation include the selection of appropriate discount rates, estimating the amount and timing of estimated 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 generated by the respective intangible assets. The goodwill balance reported on the Company's balance sheet as of June 30, 2014 by reportable segment is as follows: MSG Media $ 424,508 MSG Entertainment 58,979 MSG Sports 218,187 $ 701,674 During the first quarter of fiscal year 2014, the Company performed its annual impairment test of goodwill, and there was no impairment of goodwill identified for any of its reportable segments. Based on this impairment test, the Company's reporting units had sufficient safety margins, representing the excess of the estimated fair value of each reporting unit less its respective carrying value (including goodwill allocated to each respective reporting unit). In addition, the Company performed an impairment test of MSG Media as required pursuant to the Fuse sale (see Note 23 to the consolidated financial statements included in Item 8 of this Annual Report on Form 10-K), and there was no impairment of goodwill identified as a result of this test. 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 Company has the option to perform a qualitative 71-------------------------------------------------------------------------------- Table of Contents 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, according to which an impairment charge is recognized for the amount of the asset's carrying amount exceeding the fair value, if the Company (1) determines that such an impairment is more likely than not to exist, or (2) forgoes the qualitative assessment entirely. 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. 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, 2014 by reportable segment: Sports franchises (MSG Sports segment) $ 101,429 Trademarks (MSG Entertainment segment) 62,421 $ 163,850 In March 2014, the Company acquired an NBA Development League franchise, which will begin operations for the 2014-15 season. The purchase was accounted for as the acquisition of an indefinite-lived franchise intangible asset. When the Company performs the qualitative assessment the Company considers 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. When the quantitative assessment is performed the Company determines the fair value of the intangible asset. During the first quarter of fiscal year 2014, the Company performed its annual impairment test of identifiable indefinite-lived intangible assets, and there was no impairment identified. Based on this impairment test, 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. 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 Company has recognized intangible assets for affiliate relationships, season ticket holder relationships, suite holder relationships, and other intangibles as a result of purchase accounting. The Company has determined that certain of such intangible assets have finite lives. The estimated useful lives and net carrying values of these intangibles at June 30, 2014 are as follows: Net Carrying Estimated Value Useful Lives Affiliate relationships $ 51,043 24 years Season ticket holder relationships 24,464 12 to 15 years Suite holder relationships 2,454 11 years Other intangibles 2,345 15 years $ 80,306 The useful lives for the affiliate relationships, season ticket holder relationships and suite holder relationships were determined based upon an estimate for renewals of existing agreements the Company had in place with its major customers in April 2005 72-------------------------------------------------------------------------------- Table of Contents (the time that purchase accounting was applied). The Company has renewed its major affiliation agreements and maintained customer relationships in the past and believes it will be able to renew its major affiliation agreements and maintain those customer relationships in the future. Furthermore, the Company has been successful in maintaining its relationships with its season ticket holders and suite holders in the past and believes it will be able to significantly renew its season ticket and suite holder relationships and maintain those relationships in the future. However, it is possible that the Company will not successfully renew such agreements as they expire or that if it does, the net revenue earned may not equal or exceed the net revenue currently being earned, which could have a material negative effect on our business. In light of these facts and circumstances, the Company has determined that its estimated useful lives are appropriate. There have been periods when an existing affiliation agreement has expired and the parties have not finalized negotiations of either a renewal of that agreement or a new agreement for certain periods of time. In certain of these circumstances, the affiliate may continue to carry the service(s) until execution of definitive renewal or replacement agreements (or until we or the affiliate determine that carriage should cease). See "Part I - Item 1A. Risk Factors - Risks Relating to Our Media Business - The Success of Our Media Business Also Depends on Affiliation Fees We Receive Under our Affiliation Agreements, the Loss of Which or Renewal of Which on Less Favorable Terms May Have a Material Negative Effect on Our Business and Results of Operations." If an affiliate ceases to carry the service on an other than temporary basis, the Company records an impairment charge for the then remaining carrying value of the affiliate relationship intangible asset associated with that affiliate. If the Company were to renew an affiliation agreement at rates that produced materially less net revenue compared to the net revenue produced under the previous agreement, the Company would evaluate the impact on its cash flows and, if necessary, would further evaluate such indication of potential impairment by following the policy described above for the asset or asset group containing that intangible asset. The Company also would evaluate whether the remaining useful life of the affiliate relationship remained appropriate. Based on the carrying value of the affiliate relationships recorded as of June 30, 2014, if the estimated life of these affiliate relationships were shortened by 10%, the effect on amortization for the year ended June 30, 2014 would be an increase of approximately $384. 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. Two key assumptions, the discount rate 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 judgment regarding future expectations. Accumulated and projected benefit obligations reflect the present value of future cash payments for benefits. We use the 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. 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, 2014 for the Company's pension plans and postretirement plan were 4.32% and 4.00%, respectively. A 25 basis point decrease in these assumed discount rates would increase the projected benefit obligations for the Company's pension plans and postretirement plan at June 30, 2014 by $6,550 and $240, respectively. The weighted-average discount rates used to determine net periodic benefit cost for the year ended June 30, 2014 for the Company's pension plans and postretirement plan were 4.80% and 4.50%, respectively. 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 $550 and decrease net periodic benefit cost for the postretirement plan by $13 for the year ended June 30, 2014. 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 4.57% for the year ended June 30, 2014. 73-------------------------------------------------------------------------------- Table of Contents 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 $254 for the year ended June 30, 2014. 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 benefit obligation and net periodic benefit cost for our postretirement plan as of and for the year ended June 30, 2014 are as follows: Net Periodic Benefit Cost Benefit Obligation Healthcare cost trend rate assumed for next year 7.75 % 7.25 % 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 2020 2020 A one percentage point change in assumed healthcare cost trend rates would have the following effects on the benefit obligation for our postretirement plan and net periodic postretirement benefit cost as of and for the year ended June 30, 2014: Increase (Decrease) on Total of Service Increase and Interest Cost (Decrease) on Components Benefit Obligation One percentage point increase $ 76 $ 1,031 One percentage point decrease (66 ) (906 ) 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 16 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 analyses and other information regarding market risks we face in connection with our pension and postretirement plans, 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. Our market risk exposure to interest rate risk relates to any borrowing we may incur. Borrowings under our Revolving Credit Facility incur interest, based 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. Accordingly, we are subject to interest rate risk with respect to the tenor of any borrowings we may incur under the Revolving Credit Facility. If appropriate, we may seek to reduce such exposure through the use of interest rate swaps or similar instruments that qualify for hedge accounting treatment. See "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources - Financing Agreements" for more information on our Revolving Credit Facility. We have de minimis foreign currency risk exposure as our businesses operate almost entirely in U.S. Dollars. We do not have any meaningful commodity risk exposures associated with the operation of our venues. 74-------------------------------------------------------------------------------- Table of Contents |