Form 10-Q MSG NETWORKS INC. For: Sep 30
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E-mailUNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
____________________
FORM 10-Q
________________________
(Mark One)
þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
For the quarterly period ended September 30, 2015
OR
¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
For the transition period from to
Commission File Number: 1-34434
________________________
MSG Networks Inc.
(Exact name of registrant as specified in its charter)
Delaware | 27-0624498 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |
_______________________
11 Pennsylvania Plaza
New York, NY 10001
(212) 465-6400
(Address, including zip code, and telephone number, including area code, of registrant's principal executive offices)
_______________________
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer þ | Accelerated filer o | Non-accelerated filer o | Smaller reporting company o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ
Number of shares of common stock outstanding as of October 30, 2015:
Class A Common Stock par value $0.01 per share | — | 61,145,088 |
Class B Common Stock par value $0.01 per share | — | 13,588,555 |
MSG NETWORKS INC.
INDEX TO FORM 10-Q
Page | |
PART I – FINANCIAL INFORMATION
Item 1. Financial Statements
MSG NETWORKS INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited) (in thousands, except per share data)
September 30, 2015 | June 30, 2015 | |||||||
ASSETS | ||||||||
Current Assets: | ||||||||
Cash and cash equivalents | $ | 213,357 | $ | 203,768 | ||||
Restricted cash | — | 9,003 | ||||||
Accounts receivable, net | 77,032 | 85,610 | ||||||
Net related party receivables | 26,034 | 27,324 | ||||||
Prepaid expenses | 12,073 | 43,238 | ||||||
Other current assets | 2,278 | 3,514 | ||||||
Current assets of discontinued operations | — | 125,896 | ||||||
Total current assets | 330,774 | 498,353 | ||||||
Property and equipment, net | 17,845 | 19,514 | ||||||
Amortizable intangible assets, net | 46,718 | 47,583 | ||||||
Goodwill | 424,508 | 424,508 | ||||||
Other assets | 43,289 | 46,274 | ||||||
Non-current assets of discontinued operations | — | 1,983,597 | ||||||
Total assets | $ | 863,134 | $ | 3,019,829 | ||||
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY) | ||||||||
Current Liabilities: | ||||||||
Accounts payable | $ | 6,558 | $ | 11,359 | ||||
Net related party payables | 35,036 | 420 | ||||||
Current portion of long-term debt | 69,914 | — | ||||||
Income taxes payable | 101,694 | — | ||||||
Accrued liabilities: | ||||||||
Employee related costs | 5,312 | 19,504 | ||||||
Other accrued liabilities | 27,822 | 18,101 | ||||||
Deferred revenue | 5,637 | 4,971 | ||||||
Current liabilities of discontinued operations | — | 520,179 | ||||||
Total current liabilities | 251,973 | 574,534 | ||||||
Long-term debt, net of current portion | 1,467,156 | — | ||||||
Defined benefit and other postretirement obligations | 28,416 | 28,476 | ||||||
Other employee related costs | 4,390 | 5,318 | ||||||
Related party payable | 1,652 | — | ||||||
Other liabilities | 4,253 | 5,951 | ||||||
Deferred tax liability | 351,631 | 351,734 | ||||||
Non-current liabilities of discontinued operations | — | 330,294 | ||||||
Total liabilities | 2,109,471 | 1,296,307 | ||||||
Commitments and contingencies (see Note 9) | ||||||||
Stockholders' Equity (Deficiency): | ||||||||
Class A Common stock, par value $0.01, 360,000 shares authorized; 61,141 and 62,207 shares outstanding as of September 30, 2015 and June 30, 2015, respectively | 643 | 643 | ||||||
Class B Common stock, par value $0.01, 90,000 shares authorized; 13,589 shares outstanding as of September 30, 2015 and June 30, 2015 | 136 | 136 | ||||||
Preferred stock, par value $0.01, 45,000 shares authorized; none outstanding | — | — | ||||||
Additional paid-in capital | — | 1,084,002 | ||||||
Treasury stock, at cost, 3,118 and 2,052 shares as of September 30, 2015 and June 30, 2015, respectively | (223,915 | ) | (143,250 | ) | ||||
Retained earnings (accumulated deficit) | (1,017,312 | ) | 807,563 | |||||
Accumulated other comprehensive loss | (5,889 | ) | (25,572 | ) | ||||
Total stockholders' equity (deficiency) | (1,246,337 | ) | 1,723,522 | |||||
Total liabilities and stockholders' equity (deficiency) | $ | 863,134 | $ | 3,019,829 | ||||
See accompanying notes to consolidated financial statements.
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MSG NETWORKS INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(in thousands, except per share data)
Three Months Ended | ||||||||
September 30, | ||||||||
2015 | 2014 | |||||||
Revenues (including related party revenues of $40,449 and $40,215, respectively) | $ | 148,147 | $ | 142,670 | ||||
Direct operating expenses (including related party expenses of $33,654 and $21,141, respectively) | 60,102 | 45,651 | ||||||
Selling, general and administrative expenses (including related party expenses of $907 and $1,625, respectively) | 41,118 | 37,793 | ||||||
Depreciation and amortization | 4,679 | 4,285 | ||||||
Gain on sale of Fuse (see Note 5) | — | (162,414 | ) | |||||
Operating income | 42,248 | 217,355 | ||||||
Other income (expense): | ||||||||
Interest income | 536 | 485 | ||||||
Interest expense | (1,857 | ) | (1,006 | ) | ||||
(1,321 | ) | (521 | ) | |||||
Income from continuing operations before income taxes | 40,927 | 216,834 | ||||||
Income tax benefit (expense) | 404 | (96,412 | ) | |||||
Income from continuing operations | 41,331 | 120,422 | ||||||
Loss from discontinued operations, net of taxes | (161,017 | ) | (12,349 | ) | ||||
Net income (loss) | $ | (119,686 | ) | $ | 108,073 | |||
Earnings (loss) per share: | ||||||||
Basic | ||||||||
Income from continuing operations | $ | 0.55 | $ | 1.55 | ||||
Loss from discontinued operations | (2.13 | ) | (0.16 | ) | ||||
Net income (loss) | $ | (1.58 | ) | $ | 1.39 | |||
Diluted | ||||||||
Income from continuing operations | $ | 0.54 | $ | 1.54 | ||||
Loss from discontinued operations | (2.12 | ) | (0.16 | ) | ||||
Net income (loss) | $ | (1.58 | ) | $ | 1.38 | |||
Weighted-average number of common shares outstanding: | ||||||||
Basic | 75,521 | 77,496 | ||||||
Diluted | 75,902 | 78,290 | ||||||
See accompanying notes to consolidated financial statements.
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MSG NETWORKS INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Unaudited)
(in thousands)
Three Months Ended | ||||||||
September 30, | ||||||||
2015 | 2014 | |||||||
Net income (loss) | $ | (119,686 | ) | $ | 108,073 | |||
Other comprehensive income (loss), before income taxes: | ||||||||
Pension plans and postretirement plan: | ||||||||
Net unamortized losses arising during the period | $ | (602 | ) | $ | — | |||
Amounts reclassified from accumulated other comprehensive loss: | ||||||||
Amortization of net actuarial loss included in net periodic benefit cost | 376 | 571 | ||||||
Amortization of net prior service credit included in net periodic benefit cost | (17 | ) | (29 | ) | ||||
Other comprehensive income (loss) before income taxes | (243 | ) | 542 | |||||
Income tax expense related to items of other comprehensive income (loss) | (480 | ) | (231 | ) | ||||
Other comprehensive income (loss) | (723 | ) | 311 | |||||
Comprehensive income (loss) | $ | (120,409 | ) | $ | 108,384 | |||
See accompanying notes to consolidated financial statements.
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MSG NETWORKS INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited) (in thousands)
Three Months Ended | ||||||||
September 30, | ||||||||
2015 | 2014 | |||||||
Cash flows from operating activities from continuing operations: | ||||||||
Net income (loss) | $ | (119,686 | ) | $ | 108,073 | |||
Loss from discontinued operations, net of taxes | 161,017 | 12,349 | ||||||
Income from continuing operations | 41,331 | 120,422 | ||||||
Adjustments to reconcile net income to net cash provided by operating activities from continuing operations: | ||||||||
Depreciation and amortization | 4,679 | 4,285 | ||||||
Amortization of deferred financing costs | 981 | 400 | ||||||
Share-based compensation expense | 4,247 | 2,376 | ||||||
Excess tax benefit on share-based awards | (8,586 | ) | (10,180 | ) | ||||
Gain on sale of Fuse, before income taxes | — | (162,414 | ) | |||||
Change in income taxes payable and deferred income taxes related to the sale of Fuse | — | 70,770 | ||||||
Provision for doubtful accounts | 270 | 140 | ||||||
Change in assets and liabilities: | ||||||||
Accounts receivable, net | 8,308 | 12,094 | ||||||
Net related party receivables | 1,921 | 127 | ||||||
Prepaid expenses and other assets | 12,006 | 3,341 | ||||||
Accounts payable | (4,801 | ) | (2,081 | ) | ||||
Net related party payables, including payable to MSG | 35,680 | 461 | ||||||
Income taxes payable, excluding the impact of the change in income taxes payable related to the sale of Fuse | 16,636 | (10,210 | ) | |||||
Accrued and other liabilities | (16,965 | ) | (19,355 | ) | ||||
Deferred revenue | 666 | (509 | ) | |||||
Deferred income taxes, excluding the impact of the change in deferred income taxes related to the sale of Fuse | (17,524 | ) | 4,205 | |||||
Net cash provided by operating activities from continuing operations | 78,849 | 13,872 | ||||||
Cash flows from investing activities from continuing operations: | ||||||||
Capital expenditures | (1,450 | ) | (1,040 | ) | ||||
Proceeds from sale of Fuse, net of transaction costs (see Note 5) | — | 228,556 | ||||||
Net cash provided by (used in) investing activities from continuing operations | (1,450 | ) | 227,516 | |||||
Cash flows from financing activities from continuing operations: | ||||||||
Proceeds from Term Loan Facility (see Note 8) | 1,550,000 | — | ||||||
Cash distributed with MSG | (1,467,093 | ) | — | |||||
Payments for financing costs | (9,635 | ) | (67 | ) | ||||
Proceeds from stock option exercises | 78 | 270 | ||||||
Repurchases of common stock | (100,027 | ) | — | |||||
Taxes paid in lieu of shares issued for equity-based compensation | (11,096 | ) | (16,416 | ) | ||||
Excess tax benefit on share-based awards | 8,586 | 10,180 | ||||||
Net cash used in financing activities from continuing operations | (29,187 | ) | (6,033 | ) | ||||
Net cash provided by continuing operations | 48,212 | 235,355 | ||||||
Cash flows of discontinued operations | ||||||||
Net cash provided by operating activities | 14,870 | 2,091 | ||||||
Net cash used in investing activities | (68,410 | ) | (8,934 | ) | ||||
Net cash used in financing activities | — | — | ||||||
Net cash used in discontinued operations | (53,540 | ) | (6,843 | ) | ||||
Cash and cash equivalents at beginning of period, including cash in both continuing operations and discontinued operations | 218,685 | 92,251 | ||||||
Cash and cash equivalents at end of period | $ | 213,357 | $ | 320,763 | ||||
Supplemental Data: | ||||||||
Income taxes paid, net | $ | — | $ | 31,567 | ||||
Non-cash investing and financing activities: | ||||||||
Capital expenditures incurred but not yet paid for continuing operations | $ | 411 | $ | 1,597 | ||||
Non-cash net assets of MSG transferred in connection with the Distribution | 1,285,658 | — | ||||||
See accompanying notes to consolidated financial statements.
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MSG NETWORKS INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY)
(Unaudited)
(in thousands)
Common Stock Issued | Additional Paid-In Capital | Treasury Stock | Retained Earnings (Accumulated Deficit) | Accumulated Other Comprehensive Income (Loss) | Total | |||||||||||||||||||
Balance as of June 30, 2015 | $ | 779 | $ | 1,084,002 | $ | (143,250 | ) | $ | 807,563 | $ | (25,572 | ) | $ | 1,723,522 | ||||||||||
Net loss | — | — | — | (119,686 | ) | — | (119,686 | ) | ||||||||||||||||
Other comprehensive loss | — | — | — | — | (723 | ) | (723 | ) | ||||||||||||||||
Comprehensive loss | (120,409 | ) | ||||||||||||||||||||||
Exercise of stock options | — | (4,162 | ) | 4,899 | — | — | 737 | |||||||||||||||||
Share-based compensation | — | 5,101 | — | — | — | 5,101 | ||||||||||||||||||
Tax withholding associated with shares issued for equity-based compensation | — | (11,096 | ) | — | — | — | (11,096 | ) | ||||||||||||||||
Excess tax benefit on share-based awards | — | 8,586 | — | — | — | 8,586 | ||||||||||||||||||
Repurchases of common stock | — | — | (100,027 | ) | — | — | (100,027 | ) | ||||||||||||||||
Shares issued upon distribution of Restricted Stock Units | — | (14,463 | ) | 14,463 | — | — | — | |||||||||||||||||
Distribution of The Madison Square Garden Company | — | (1,067,968 | ) | — | (1,705,189 | ) | 20,406 | (2,752,751 | ) | |||||||||||||||
Balance as of September 30, 2015 | $ | 779 | $ | — | $ | (223,915 | ) | $ | (1,017,312 | ) | $ | (5,889 | ) | $ | (1,246,337 | ) | ||||||||
Common Stock Issued | Additional Paid-In Capital | Treasury Stock | Retained Earnings | Accumulated Other Comprehensive Income (Loss) | Total | |||||||||||||||||||
Balance as of June 30, 2014 | $ | 775 | $ | 1,081,055 | $ | (7,537 | ) | $ | 552,862 | $ | (22,711 | ) | $ | 1,604,444 | ||||||||||
Net income | — | — | — | 108,073 | — | 108,073 | ||||||||||||||||||
Other comprehensive income | — | — | — | — | 311 | 311 | ||||||||||||||||||
Comprehensive income | 108,384 | |||||||||||||||||||||||
Exercise of stock options | — | 249 | — | — | — | 249 | ||||||||||||||||||
Share-based compensation | — | 3,617 | — | — | — | 3,617 | ||||||||||||||||||
Tax withholding associated with shares issued for equity-based compensation | — | (16,416 | ) | — | — | — | (16,416 | ) | ||||||||||||||||
Excess tax benefit on share-based awards | — | 10,180 | — | — | — | 10,180 | ||||||||||||||||||
Shares issued upon distribution of Restricted Stock Units | 3 | (406 | ) | 403 | — | — | — | |||||||||||||||||
Balance as of September 30, 2014 | $ | 778 | $ | 1,078,279 | $ | (7,134 | ) | $ | 660,935 | $ | (22,400 | ) | $ | 1,710,458 | ||||||||||
See accompanying notes to consolidated financial statements.
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MSG NETWORKS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
All amounts included in the following Notes to Consolidated Financial Statements are presented in thousands, except per share data or as otherwise noted.
Note 1. Description of Business and Basis of Presentation
Description of Business
MSG Networks Inc. (together with its subsidiaries, the “Company”) produces, develops and acquires content for multiple distribution platforms and is comprised principally of the Company's regional sports and entertainment networks, MSG Network and MSG+, collectively the “MSG Networks.”
On September 30, 2015 (the “Distribution Date”), the Company distributed to its stockholders all of the outstanding common stock of The Madison Square Garden Company (formerly MSG Spinco, Inc., and referred to herein as “MSG”) (the “Distribution”). MSG owns, directly or indirectly, the sports and entertainment businesses previously owned and operated by the Company's Sports and Entertainment segments, owns, leases or operates the arenas and other venues previously owned, leased or operated by the Company and owns the joint venture interests previously owned by the Company. In the Distribution, each holder of the Company’s Class A common stock, par value $0.01 per share, of record as of the close of business, New York City time, on September 21, 2015 (the “Record Date”), received one share of MSG Class A common stock, par value $0.01 per share, for every three shares of the Company’s Class A common stock held on the Record Date. Each record holder of the Company’s Class B common stock, par value $0.01 per share, received one share of MSG Class B common stock, par value $0.01 per share, for every three shares of the Company's Class B common stock held on the Record Date. Subsequent to the Distribution, the Company no longer consolidates the financial results of MSG for the purpose of its own financial reporting and the historical financial results of MSG have been reflected in the Company's consolidated financial statements as discontinued operations for all periods presented through the Distribution Date.
After giving effect to the Distribution, the Company operates and reports financial information in one segment.
Unaudited Interim Financial Statements
The accompanying interim consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States (“GAAP”) for interim financial information and the instructions to Rule 10-01 of Regulation S-X, and should be read in conjunction with the Company's Annual Report on Form 10-K for the year ended June 30, 2015. The financial statements as of September 30, 2015 and for the three months ended September 30, 2015 and 2014 presented in this Quarterly Report on Form 10-Q are unaudited; however, in the opinion of management such financial statements reflect all adjustments, consisting solely of normal recurring adjustments, necessary for a fair presentation of the results for the interim periods presented. The results of operations for the periods presented are not necessarily indicative of the results that might be expected for future interim periods or for the full year.
Reclassifications
Certain amounts reported for the prior period in the accompanying unaudited financial statements have been reclassified in order to conform to the current period’s presentation. Assets and liabilities related to the Distribution on the Company's consolidated balance sheet as of June 30, 2015 have been reclassified as assets and liabilities of discontinued operations (See Note 3 for further details). All assets and liabilities related to discontinued operations are excluded from the footnotes unless otherwise noted. In addition, the historical results of MSG have been reflected in the accompanying statement of operations for the three months ended September 30, 2014 as discontinued operations.
Note 2. Accounting Policies
Principles of Consolidation
The consolidated financial statements of the Company include the accounts of MSG Networks Inc. and its subsidiaries. All significant intercompany transactions and balances have been eliminated in consolidation. See Note 3 for a discussion of media rights recognized as revenues by MSG from the licensing of team-related programming to the Company.
Use of Estimates
The preparation of the accompanying 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. Such estimates include the valuation of accounts receivable, goodwill, intangible assets, other long-lived assets, tax accruals and other liabilities. In addition, estimates are used in revenue recognition, income tax expense, performance and share-based compensation,
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depreciation and amortization, litigation matters and other matters. Management believes its use of estimates in the consolidated financial statements to be reasonable.
Management evaluates its estimates on an ongoing basis using historical experience and other factors, including the general economic environment and actions it may take in the future. The Company adjusts such estimates when facts and circumstances dictate. However, these estimates may involve significant uncertainties and judgments and cannot be determined with precision. In addition, these estimates are based on management's best judgment at a point in time and as such these estimates may ultimately differ from actual results. Changes in estimates resulting from weakness in the economic environment or other factors beyond the Company's control could be material and would be reflected in the Company's financial statements in future periods.
Recently Adopted Accounting Pronouncements
In April 2015, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2015-03, Interest-Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs, which amends the FASB Accounting Standards Codification (“ASC”) to require that debt issuance costs be presented in the balance sheet as a direct deduction from the carrying amount of the related liability. In August 2015, the FASB issued ASU No. 2015-15, "Interest-Imputation of Interest (Subtopic 835-30): Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements-Amendments to SEC Paragraphs Pursuant to Staff Announcement at June 18, 2015 EITF Meeting," to clarify that an entity may elect to present debt issuance costs related to a line-of-credit arrangement as an asset, regardless of whether or not there are any outstanding borrowings on the line-of-credit arrangement. These standards were adopted by the Company in the first quarter of fiscal year 2016. See Note 8 for the presentation of the Company's deferred financing costs in accordance with these standards. There was no impact to the prior year consolidated financial statements as the Company's historical deferred financing costs pertaining to its revolving credit facility were presented as assets as permitted under ASU No. 2015-15.
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. In August 2015, the FASB issued ASU No. 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date, which defers the effective date of ASU No. 2014-09 for all entities by one year. Early adoption is permitted and the Company can early adopt ASU No. 2014-09 beginning in the first quarter of fiscal year 2018. If the Company does not apply the early adoption provision, ASU No. 2014-09 will be effective for the Company beginning in the first quarter of fiscal year 2019 using one of two retrospective application methods. The Company is currently evaluating the impact this standard will have on its consolidated financial statements.
In April 2015, the FASB issued ASU No. 2015-05, Intangibles-Goodwill and Other-Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement, which provides guidance to customers about whether a cloud computing arrangement includes a software license. If a cloud computing arrangement includes a software license, the customer should account for the software license element of the arrangement consistent with the acquisition of other software licenses. If a cloud computing arrangement does not include a software license, the customer should account for the arrangement as a service contract and expense the cost as the services are received. This standard will be effective for the Company beginning in the first quarter of fiscal year 2017. Early adoption is permitted. This standard may be adopted retrospectively or prospectively to arrangements entered into, or materially modified, after the effective date. The Company is currently evaluating the impact this standard will have on its consolidated financial statements.
Note 3. Discontinued Operations
As a result of the Distribution, the results of the Company’s MSG operations through the Distribution Date, as well as transaction costs related to the Distribution, have been classified in the consolidated statements of operations as discontinued operations for all periods presented. No gain or loss was recognized in connection with the Distribution. Operating results of discontinued operations for the three months ended September 30, 2015 and 2014 are summarized below:
7
Three Months Ended | ||||||||
September 30, | ||||||||
2015 | 2014 | |||||||
Revenues (1) | $ | 150,381 | $ | 118,916 | ||||
Direct operating expenses | 71,320 | 67,876 | ||||||
Selling, general and administrative expenses | 57,687 | 37,093 | ||||||
Depreciation and amortization | 23,772 | 33,316 | ||||||
Operating loss | (2,398 | ) | (19,369 | ) | ||||
Equity in earnings (loss) of equity-method investments | 2,679 | (2,604 | ) | |||||
Interest income | 635 | 449 | ||||||
Interest expense | (540 | ) | (656 | ) | ||||
Miscellaneous income | — | 80 | ||||||
Income (loss) from discontinued operations before income taxes | 376 | (22,100 | ) | |||||
Income tax (expense) benefit | (161,393 | ) | 9,751 | |||||
Loss from discontinued operations, net of taxes | $ | (161,017 | ) | $ | (12,349 | ) | ||
(1) | Revenues for the three months ended September 30, 2015 and 2014 include $32,500 and $19,846, respectively, of media rights recognized as revenues by MSG from the licensing of team-related programming to the Company. Prior to the Distribution, these amounts were eliminated in consolidation; however, these amounts are now reflected as revenues in the Loss from Discontinued Operations line with the offsetting expense in Direct Operating Expenses, within continuing operations, in the accompanying statements of operations. |
Amounts for the three months ended September 30, 2014 presented above differ from historically reported results for the Company's Sports and Entertainment segments due to certain reclassifications and adjustments made to corporate overhead costs for purposes of discontinued operations reporting.
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The assets and liabilities of MSG have been classified in the consolidated balance sheet as of June 30, 2015 as assets and liabilities of discontinued operations and consist of the following, by major class:
June 30, 2015 | ||||
Cash and cash equivalents | $ | 14,917 | ||
Accounts receivable, net | 51,133 | |||
Other current assets | 59,846 | |||
Current assets of discontinued operations | 125,896 | |||
Investments and loans to nonconsolidated affiliates | 249,394 | |||
Property and equipment, net | 1,188,705 | |||
Goodwill | 277,166 | |||
Intangible assets | 189,174 | |||
Other non-current assets | 79,158 | |||
Non-current assets of discontinued operations | 1,983,597 | |||
Accounts payable and accrued liabilities | 196,423 | |||
Deferred revenue | 323,756 | |||
Current liabilities of discontinued operations | 520,179 | |||
Defined benefits and other postretirement obligations | 56,740 | |||
Other employee related costs | 51,687 | |||
Deferred tax liability | 171,928 | |||
Other non-current liabilities | 49,939 | |||
Non-current liabilities of discontinued operations | 330,294 | |||
Net assets of discontinued operations | $ | 1,259,020 | ||
The following table summarizes the net impact of the Distribution to Company's stockholders' equity (deficiency): | ||||
Decrease in additional paid-in capital | $ | (1,067,968 | ) | |
Decrease in retained earnings | (1,705,189 | ) | ||
Decrease in accumulated other comprehensive loss | 20,406 | |||
$ | (2,752,751 | ) | ||
Note 4. Computation of Earnings per Common Share
Basic earnings per common share (“EPS”) is based upon net income available to common stockholders divided by the weighted-average number of common shares outstanding during the period. Diluted EPS reflects the effect of the assumed vesting of restricted stock units (“RSUs”) and exercise of stock options only in the periods in which such effect would have been dilutive.
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The following table presents a reconciliation of the weighted-average number of shares used in the calculations of basic and diluted EPS.
Three Months Ended | ||||||
September 30, | ||||||
2015 | 2014 | |||||
Weighted-average number of shares for basic EPS | 75,521 | 77,496 | ||||
Dilutive effect of shares issuable under share-based compensation plans | 381 | 794 | ||||
Weighted-average number of shares for diluted EPS | 75,902 | 78,290 | ||||
Anti-dilutive shares | — | 14 | ||||
Note 5. Disposition
On July 1, 2014, the Company completed its sale of Fuse, a national music television network, to Fuse Media, Inc. for a cash purchase price of $231,995 and a 15% equity interest in Fuse Media, LLC (“Fuse Media”). Upon satisfaction of certain performance goals, the Company recognized its interest in Fuse Media, and finalized a working capital adjustment during the second quarter of fiscal year 2015. The Company recorded a pre-tax gain on the sale of Fuse, which is reflected in operating income in the accompanying consolidated statement of operations for the three months ended September 30, 2014, of $162,414 (net of transaction costs of $3,932).
The equity interest in Fuse Media was transferred to MSG in connection with the Distribution.
Note 6. Goodwill and Intangible Assets
The goodwill balance reported on the Company's balance sheet as of September 30, 2015 and June 30, 2015 is $424,508. During the first quarter of fiscal year 2016, the Company performed its annual impairment test of goodwill, and there was no impairment of goodwill identified, including the goodwill of the MSG Entertainment and MSG Sports reporting units that was transferred to MSG as a part of Distribution.
During the quarter ended September 30, 2015, the Company performed its annual impairment test of identifiable indefinite-lived intangible assets, all of which were transferred to MSG in connection with the Distribution, and there was no impairment identified.
The Company's intangible assets subject to amortization are as follows:
September 30, 2015 | June 30, 2015 | |||||||
Affiliate relationships | $ | 83,044 | $ | 83,044 | ||||
Less accumulated amortization | (36,326 | ) | (35,461 | ) | ||||
$ | 46,718 | $ | 47,583 | |||||
Amortization expense for intangible assets was $865 for the three months ended September 30, 2015 and 2014.
Note 7. Property and Equipment
As of September 30, 2015 and June 30, 2015, property and equipment consisted of the following assets:
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September 30, 2015 | June 30, 2015 | |||||||
Equipment | $ | 46,494 | $ | 43,277 | ||||
Furniture and fixtures | 1,740 | 1,723 | ||||||
Leasehold improvements | 19,644 | 19,645 | ||||||
Construction in progress | 544 | 3,103 | ||||||
68,422 | 67,748 | |||||||
Less accumulated depreciation and amortization | (50,577 | ) | (48,234 | ) | ||||
$ | 17,845 | $ | 19,514 | |||||
Depreciation and amortization expense on property and equipment was $3,814 and $3,420 for the three months ended September 30, 2015 and 2014, respectively, which includes depreciation expense on certain corporate property and equipment that was transferred to MSG in connection with the Distribution, but which did not qualify for discontinued operations reporting.
Note 8. Debt
Former Revolving Credit Facility
On May 6, 2014, MSGN Holdings, L.P., formerly MSG Holdings, L.P., (“MSGN 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 $500,000 with a term of five years (the “Former Revolving Credit Facility”). In connection with the Distribution, MSGN L.P. terminated the Former Revolving Credit Facility effective on September 28, 2015.
Senior Secured Credit Facilities
On September 28, 2015, MSGN L.P., MSGN Eden, LLC, an indirect subsidiary of the Company and the general partner of MSGN L.P. (“MSGN Eden”), Regional MSGN Holdings LLC, a direct subsidiary of the Company and the limited partner of MSGN L.P. (collectively with MSGN Eden, the “Holdings Entities”), and certain subsidiaries of MSGN L.P. entered into a credit agreement (the “Credit Agreement”) with a syndicate of lenders.
The Credit Agreement provides MSGN L.P. with senior secured credit facilities (the “Senior Secured Credit Facilities”) consisting of: (a) an initial $1,550,000 term loan facility (the “Term Loan Facility”) and (b) a $250,000 revolving credit facility (the “Revolving Credit Facility”), each with a term of five years. In connection with the Distribution, $1,450,000 of the proceeds from the Term Loan Facility was contributed to MSG immediately following the closing of the Senior Secured Credit Facilities. Up to $35,000 of the Revolving Credit Facility is available for the issuance of letters of credit.
Subject to the satisfaction of certain conditions and limitations, the Credit Agreement allows for the addition of incremental term and/or revolving loan commitments and incremental term and/or revolving loans. Borrowings under the Credit Agreement bear interest at a floating rate, which at the option of MSGN L.P. may be either (a) base rate, representing the higher of: (i) 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%, plus an additional rate ranging from 0.50% to 1.25% per annum (determined based on a total leverage ratio) (the “Base Rate”), or (b) a Eurodollar rate plus an additional rate ranging from 1.50% to 2.25% per annum (determined based on a total leverage ratio) (the “Eurodollar Rate”), provided that for the period until the delivery of the compliance certificate for the period ending March 31, 2016, the additional rate used in calculating both floating rates will be (i) 1.00% per annum for borrowings bearing interest at the Base Rate, and (ii) 2.00% per annum for borrowings bearing interest at the Eurodollar Rate. Upon a payment default in respect of principal, interest or other amounts due and payable under the Credit Agreement or related loan documents, default interest will accrue on all overdue amounts at an additional rate of 2.00% per annum. The Credit Agreement requires MSGN L.P. pay a commitment fee of 0.30% in respect of the average daily unused commitments, as well as fronting fees, to banks that issue letters of credit pursuant to the Revolving Credit Facility.
The Credit Agreement generally requires MSGN L.P. to comply with a maximum total leverage ratio of 6.00:1.00 from the closing date until September 30, 2016 and a maximum total leverage ratio of 5.50:1.00 from and after October 1, 2016 until maturity, subject, in each case, 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 Holdings Entities, MSGN L.P. and the restricted subsidiaries of MSGN L.P. As of September 30, 2015, MSGN L.P. was in compliance with the financial covenants of the Credit Agreement. All borrowings under the Credit Agreement are subject to the satisfaction of customary conditions, including absence of a default and accuracy of representations and warranties. As of September 30, 2015, there were no letters of credit issued and outstanding under the Revolving Credit Facility, which provides full borrowing capacity of $250,000.
As of September 30, 2015, the principal repayments required for the next five years under the Term Loan Facility are as follows:
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Year 1 | $ | 72,500 | ||
Year 2 | 75,000 | |||
Year 3 | 75,000 | |||
Year 4 | 75,000 | |||
Year 5 | 1,252,500 | |||
$ | 1,550,000 | |||
All obligations under the Credit Agreement will be guaranteed by the Holdings Entities and MSGN L.P.’s existing and future direct and indirect domestic subsidiaries that are not designated as excluded subsidiaries or unrestricted subsidiaries (the “Subsidiary Guarantors”, and together with the Holdings Entities, the “Guarantors”). All obligations under the Credit Agreement, including the guarantees of those obligations, will be secured by certain of the assets of MSGN L.P. and each Guarantor (collectively, “Collateral”), including, but not limited to, a pledge of the equity interests in MSGN L.P. held directly by the Holdings Entities and the equity interests in each Subsidiary Guarantor held directly or indirectly by MSGN L.P. Subject to customary notice and minimum amount conditions, MSGN L.P. may voluntarily prepay outstanding loans under the Credit Agreement at any time, in whole or in part, without premium or penalty (except for customary breakage costs with respect to Eurodollar loans). MSGN L.P. is required to make mandatory prepayments 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, subject to certain exceptions.
In addition to the financial covenants previously discussed, the Credit Agreement and the related security agreement contain certain customary representations and warranties, affirmative covenants and events of default. The Credit Agreement contains certain restrictions on the ability of MSGN L.P. and its restricted subsidiaries to take certain actions as provided in (and subject to various exceptions and baskets set forth in) the Credit Agreement, including the following: (i) incurring additional indebtedness and contingent liabilities; (ii) creating liens on certain assets; (iii) making investments, loans or advances in or to other persons; (iv) paying dividends and distributions or repurchases of capital stock; (v) changing its lines of business; (vi) engaging in certain transactions with affiliates; (vii) amending specified material agreements; (viii) merging or consolidating; (ix) making certain dispositions; and (x) entering into agreements that restrict the granting of liens. The Holdings Entities are subject to customary passive holding company covenants.
The Company is amortizing its deferred financing costs on a straight-line basis over the five-year term of the Senior Secured Credit Facilities which approximates the effective interest method. The following table summarizes the presentation of the Term Loan Facility and the deferred financing costs in accordance with ASU No. 2015-03 and ASU No. 2015-15 (see note 2) in the accompanying consolidated balance sheet as of September 30, 2015:
Reported in | Term Loan Facility | Deferred Financing Costs | Total | |||||||||
Other current assets | $ | — | $ | 417 | $ | 417 | ||||||
Other assets | — | 1,668 | 1,668 | |||||||||
Current portion of long-term debt (1) | 72,500 | 2,586 | 69,914 | |||||||||
Long-term debt, net of current portion (1) | 1,477,500 | 10,344 | 1,467,156 | |||||||||
Total | $ | 1,550,000 | $ | 15,016 | $ | 1,539,155 | ||||||
(1) Amount presented in the Total column is on a net basis.
Note 9. Commitments and Contingencies
Commitments
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As of September 30, 2015, future cash payments required under contracts entered into by the Company in the normal course of business, including future minimum rental payments under leases having noncancelable initial lease terms in excess of one year, are as follows:
Total | Remainder of the current fiscal year | Fiscal years 2-3 | Fiscal years 4-5 | Thereafter | |||||||||||||||
Contractual Obligations | $ | 4,699,810 | $ | 199,304 | $ | 416,633 | $ | 432,999 | $ | 3,650,874 | |||||||||
Contractual obligations above consist primarily of the Company's obligations related to professional team rights, which were acquired under license agreements, to telecast certain live sporting events.
In connection with the Distribution, certain contractual obligations, principally those that the Company had under employment agreements with its professional sports teams' personnel and long-term noncancelable operating lease agreements for entertainment venues and certain office and storage space, were transferred to MSG.
In addition, see note 8 for the principal repayments required under the Company's Term Loan Facility.
Legal Matters
In March 2012, the Company was named as a defendant in two purported class action antitrust lawsuits brought in the United States District Court for the Southern District of New York against the NHL and certain NHL member clubs, regional sports networks and cable and satellite distributors. The second complaint, which was substantially identical to the first, was dismissed after its named plaintiff was named as a co-plaintiff in the first complaint. The operative complaint primarily asserted that certain of the NHL's current rules and agreements entered into by defendants, which are alleged by the plaintiffs to provide certain territorial and other exclusivities with respect to the television and online distribution of live hockey games, violated Sections 1 and 2 of the Sherman Antitrust Act. The plaintiffs sought injunctive relief against the defendants' continued violation of the antitrust laws, treble damages, attorneys' fees and pre- and post-judgment interest. On July 27, 2012, the Company and the other defendants filed a motion to dismiss. On December 5, 2012, the court issued an opinion and order largely denying the motion to dismiss. On April 8, 2014, following the conclusion of fact discovery, all defendants filed motions for summary judgment seeking dismissal of the case in its entirety. On August 8, 2014, the Court denied the motions for summary judgment. On May 14, 2015, the court denied plaintiffs’ class certification motion with respect to damages but granted it with respect to injunctive relief. Both plaintiffs and defendants filed petitions with the Court of Appeals seeking pretrial review of these rulings. On June 10, 2015, the parties entered into a proposed settlement (the “Settlement”) of the lawsuit and the Settlement was filed with the Court on June 11, 2015. The Settlement was subject to Court approval. On June 15, 2015, the Court granted preliminary approval of the Settlement and directed that notice of the proposed Settlement be sent to the putative class. On August 31, 2015, the Court held a final fairness hearing on the Settlement. On September 1, 2015, the Court found that the Settlement's terms were fair, reasonable and adequate and issued an order approving the Settlement, which became effective on September 16, 2015. As a result of the Court's order, the lawsuit was dismissed and all appeals were withdrawn with prejudice. The time to appeal the court's order has expired. The Settlement did not result in any changes to the distribution of NHL games on the MSG Networks or in any Company payment obligations.
The Company is a defendant in various other lawsuits. Although the outcome of these other lawsuits cannot be predicted with certainty, management does not believe that resolution of these other lawsuits will have a material adverse effect on the Company.
Note 10. Fair Value Measurements
The fair value hierarchy is based on inputs to valuation techniques that are used to measure fair value that are either observable or unobservable. Observable inputs reflect assumptions market participants would use in pricing an asset or liability based on market data obtained from independent sources while unobservable inputs reflect a reporting entity's pricing based upon their own market assumptions. The fair value hierarchy consists of the following three levels:
• | Level I — Quoted prices for identical instruments in active markets. |
• | Level II — Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations whose inputs are observable or whose significant value drivers are observable. |
• | Level III — Instruments whose significant value drivers are unobservable. |
The following table presents for each of these hierarchy levels, the Company's assets that are measured at fair value on a recurring basis, which include cash equivalents:
Level I | Level II | Level III | Total | |||||||||||||
September 30, 2015 | ||||||||||||||||
Assets: | ||||||||||||||||
Money market accounts | $ | 100,082 | $ | — | $ | — | $ | 100,082 | ||||||||
Time deposits | 113,275 | — | — | 113,275 | ||||||||||||
Total assets measured at fair value | $ | 213,357 | $ | — | $ | — | $ | 213,357 | ||||||||
June 30, 2015 | ||||||||||||||||
Assets: | ||||||||||||||||
Money market accounts | $ | 89,062 | $ | — | $ | — | $ | 89,062 | ||||||||
Time deposits | 113,227 | — | — | 113,227 | ||||||||||||
Total assets measured at fair value | $ | 202,289 | $ | — | $ | — | $ | 202,289 | ||||||||
Money market accounts and time deposits are classified within Level 1 of the fair value hierarchy as they are valued using observable inputs that reflect quoted prices for identical assets in active markets. The carrying amount of the Company's money market accounts and time deposits approximates fair value due to their short-term maturities.
Other Financial Instruments
The carrying value of the Company's long-term debt (see note 8) approximates fair value as the Term Loan Facility bears a variable interest rate and was issued on September 28, 2015. The Company's long-term debt is classified within level 2 of the fair value hierarchy.
Note 11. Pension Plans and Other Postretirement Benefit Plan
Prior to the Distribution, the Company sponsored a non-contributory qualified cash balance retirement plan covering its non-union employees (the “MSG Cash Balance Pension Plan”) and an unfunded non-contributory, non-qualified excess cash balance plan covering certain employees who participate in the underlying qualified plan (collectively, the “Cash Balance Plans”). Since March 1, 2011, the Cash Balance Plans have also included the assets and liabilities of a frozen (as of December 31, 2007) non-contributory qualified defined pension plan covering non-union employees hired prior to January 1, 2001.
Also, the Company historically sponsored an unfunded non-contributory non-qualified defined benefit pension plan for the benefit of certain employees who participate in the underlying qualified plan, which was merged into the Cash Balance Pension Plan on March 1, 2011 (the “Excess Plan”). As of December 31, 2007, the Excess Plan was amended to freeze all benefits earned through December 31, 2007 and to eliminate the ability of participants to earn benefits for future service under these plans.
In addition, prior to the Distribution, the Company sponsored two non-contributory qualified defined benefit pension plans covering certain of its union employees (“Union Plans”). Benefits payable to retirees under the Union Plans are based upon years of service and, for one plan, participants’ compensation.
The Cash Balance Plans (which now include the Retirement Plan), Union Plans, and Excess Plan are collectively referred to as the “Pension Plans.”
The Company also sponsors a contributory welfare plan which provides certain postretirement healthcare benefits to certain employees hired prior to January 1, 2001 who are eligible to commence receipt of early or normal Retirement Plan benefits under the MSG Cash Balance Pension Plan and their dependents, as well as certain union employees (“Postretirement Plan”).
As a result of the Distribution, the assets and liabilities of the MSG Cash Balance Pension Plan and one of the Union Plans have been transferred to MSG. In addition, the following have been transferred to MSG: Liabilities related to current or former MSG
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employees who are (1) active participants in the unfunded non-contributory non-qualified excess cash balance plan, (2) active participants in the Excess Plan, (3) active participants in the Postretirement Plan, and (4) retired participants in the Postretirement Plan. The Company has retained liabilities related to its current or former employees who are (1) active participants in the unfunded non-contributory non-qualified excess cash balance plan, (2) active participants in the Excess Plan, (3) active participants in the Postretirement Plan, and (4) retired participants in the Postretirement Plan.
Components of net periodic benefit cost for the Company's Pension Plans and Postretirement Plan recognized in direct operating expenses, selling, general and administrative expenses, and income from discontinued operations in the accompanying consolidated statements of operations for the three months ended September 30, 2015 and 2014 are as follows:
Pension Plans | Postretirement Plan | |||||||||||||||
Three Months Ended | Three Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2015 | 2014 | 2015 | 2014 | |||||||||||||
Service cost | $ | 1,621 | $ | 1,738 | $ | 50 | $ | 61 | ||||||||
Interest cost | 2,125 | 1,979 | 91 | 93 | ||||||||||||
Expected return on plan assets | (850 | ) | (916 | ) | — | — | ||||||||||
Recognized actuarial loss (a) | 376 | 565 | — | 6 | ||||||||||||
Amortization of unrecognized prior service cost (credit) (a) | 14 | 6 | (31 | ) | (35 | ) | ||||||||||
Net periodic benefit cost | $ | 3,286 | $ | 3,372 | $ | 110 | $ | 125 | ||||||||
(a) Reflects amounts reclassified from accumulated other comprehensive loss.
Amounts presented in the table above include net periodic benefit cost related to continued operations of $1,391 and $1,433 for the three months ended September 30, 2015 and 2014, respectively, and net periodic benefit cost related to discontinued operations of $1,895 and $1,939 for the three months ended September 30, 2015 and 2014, respectively.
In addition, prior to the Distribution, the Company sponsored the MSG Holdings, L.P. 401(k) Savings Plan (the "MSG Savings Plan") and the MSG Holdings, L.P. Excess Savings Plan (collectively, the "Savings Plans"). Expenses related to the Savings Plans included in the accompanying consolidated statements of operations were $986 and $897 for the three months ended September 30, 2015 and 2014, respectively.
Expenses related to the Savings Plans for continued operations was $334 and $327 for the three months ended September 30, 2015 and 2014, respectively, and expenses related to the Savings Plans for discontinued operations was $652 and $570 for the three months ended September 30, 2015 and 2014, respectively.
As a result of the Distribution, liabilities relating to current MSG employees who were active participants in the Company's Excess Savings Plan have been transferred to MSG.
In addition, prior to the Distribution, the Company sponsored the MSG Holdings, L.P. 401(k) Union Plan (the "MSG Union Savings Plan"). Expenses related to the MSG Union Plan included in the accompanying consolidated statements of operations were $18 and $12 for the three months ended September 30, 2015 and 2014, respectively. These amounts have been classified in the consolidated statements of operations as discontinued operations for all periods presented.
As a result of the Distribution, the MSG Savings Plan and MSG Union Savings Plan were each amended to a) transfer sponsorship of the plans to MSG, and b) become a multiple employer plan in which both MSG and the Company will continue to participate.
Note 12. Share-based Compensation
See Note 17 to the consolidated financial statements included in the Company's Annual Report on Form 10-K for the year ended June 30, 2015 for more information regarding the Company's 2010 Employee Stock Plan (the "Employee Stock Plan") and 2010 Stock Plan For Non-Employee Directors (the "Non-Employee Director Plan"), as well as certain share-based payment awards initially granted under Cablevision Systems Corporation ("Cablevision") equity award programs.
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In connection with the Distribution, each holder of an employee restricted stock unit ("RSU") that was granted prior to July 1, 2015 received one MSG RSU in respect of every three RSUs owned on the Record Date and continues to be entitled to a share of the Company's Class A Common Stock (or cash or other property) for each RSU in accordance with the existing award agreement. In connection with the Distribution, each employee RSU that was granted after July 1, 2015 was adjusted in accordance with its terms, such that (1) each holder who remained employed by the Company following the Distribution continued to hold Company RSUs, with the number of RSUs adjusted to reflect the Distribution to maintain the value of the RSUs, and (2) each holder who MSG employed following the Distribution received MSG RSUs of the same value as the Company RSUs, and the original Company RSUs were canceled. Any holder of MSG RSUs granted after July 1, 2015 who was employed by both MSG and the Company following the Distribution continues to hold the Company's RSUs, adjusted to reflect the Distribution, and received MSG RSUs in connection with the Distribution, so that the Company's RSUs represent 30% of the value of the original awards and MSG RSUs represent 70% of the value of the original RSU award.
Also in connection with the Distribution, one share of MSG Class A Common Stock was issued under the MSG 2015 Non-Employee Director Plan in respect of every three RSUs issued under the Company’s Non-Employee Director Plan.
In connection with the Distribution, each option to purchase the Company's Class A Common Stock became two options: one option to acquire MSG Class A Common Stock and one option to acquire the Company's Class A Common Stock. The existing exercise price was allocated between the existing options and the new MSG options based upon the volume-weighted average prices of the MSG Class A Common Stock and the Company's Class A Common Stock over the ten trading days immediately following the Distribution as reported by Bloomberg Business, and the underlying share amount took into account the one-to-three distribution ratio (i.e., one share of MSG Class A Common Stock was issued for every three shares of the Company's Class A Common Stock). Other than the split of the options and the allocation of the existing exercise price, there were no additional adjustments to the existing options in connection with the Distribution and the terms of each employee’s applicable option award agreement will continue to govern our options.
The Company's stock options/RSUs held by MSG, Cablevision and AMC Networks Inc. (“AMC Networks”) employees will not be expensed by the Company; however, such stock options/RSUs do have a dilutive effect on net income per share attributable to the Company's stockholders.
Share-based compensation expense reduced for estimated forfeitures for continuing operations was $4,247 and $2,376 for the three months ended September 30, 2015 and 2014, respectively. Share-based compensation expense for continuing operations is presented within selling, general and administrative expenses and direct operating expenses. Share-based compensation expense for discontinued operations was $808 and $1,241 for the three months ended September 30, 2015 and 2014, respectively.
Stock Options Award Activity
The following table summarizes activity relating to holders (including Company, MSG, Cablevision and AMC Networks employees and directors) of the Company's stock options, all of which were exercisable, for the three months ended September 30, 2015:
Number of | Weighted- Average Exercise Price Per Share (1) | Weighted- Average Remaining Contractual Term (In Years) | Aggregate Intrinsic Value | ||||||||||||
Nonperformance Based Vesting Options | Performance Based Vesting Options | ||||||||||||||
Balance as of June 30, 2015 | 128 | 17 | $ | 12.44 | 0.64 | $ | 10,293 | ||||||||
Exercised | (51 | ) | (17 | ) | 10.78 | ||||||||||
Balance as of September 30, 2015 | 77 | — | $ | 13.93 | 0.64 | $ | 4,463 | ||||||||
(1) | Weighted-average exercise price per share is prior to any adjustments associated with the Distribution. |
The aggregate intrinsic value is calculated as the difference between (i) the exercise price of the underlying award and (ii) the quoted price of the Company's Class A Common Stock for all options outstanding (and all exercisable) which were all in-the-
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money at September 30, 2015 and June 30, 2015, as applicable. For the three months ended September 30, 2015 the aggregate intrinsic value of the Company's stock options exercised was $4,116, determined as of the date of option exercise.
Restricted Share Units Award Activity
The following table summarizes activity relating to the Company's RSUs for the three months ended September 30, 2015:
Number of | |||||||||
Nonperformance Based Vesting RSUs | Performance Based Vesting RSUs | Weighted-Average Fair Value Per Share At Date of Grant (1) | |||||||
Unvested award balance, June 30, 2015 | 489 | 98 | $ | 56.51 | |||||
Granted | 147 | 599 | 77.67 | ||||||
Vested | (174 | ) | (42 | ) | 42.10 | ||||
Forfeited | (4 | ) | — | 64.49 | |||||
Unvested award balance, September 30, 2015 | 458 | 655 | $ | 73.23 | |||||
(1) | Weighted-average fair value per share at date of grant is prior to any adjustments associated with the Distribution. |
During the three months ended September 30, 2015, the Company granted 746 time-vesting RSUs (the “FY2016 RSUs”) that are generally subject to three-year ratable vesting (and are also, in the case of RSUs granted to executive officers, subject to certain performance conditions), and 244 performance-vesting RSUs (the “FY2016 PSUs”) that will vest in September 2018 subject to the achievement of certain performance conditions which, as of September 30, 2015, had not yet been determined. These FY2016 PSUs were excluded from the summary table above and were not treated as grants for accounting purpose in accordance with ASC 718-10-25-5. See above for a discussion of the treatment of FY2016 RSUs and FY2016 PSUs in connection with the Distribution.
The fair value of RSUs that vested during the three months ended September 30, 2015 was $15,723. Upon delivery, RSUs granted under the Employee Stock Plan were net share-settled to cover the required statutory tax withholding obligations and the remaining number of shares were issued from the Company's treasury shares. To fulfill the employees' statutory minimum tax withholding obligations for the applicable income and other employment taxes, 149 of these RSUs, with an aggregate value of $11,096, were retained by the Company and reflected as financing activity in the accompanying consolidated statement of cash flows for the three months ended September 30, 2015.
Note 13. Stock Repurchase Program
On October 27, 2014, the Company's Board of Directors authorized the repurchase of up to $500,000 of the Company's Class A Common Stock. Under the authorization, shares of Class A Common Stock were able to be purchased from time to time in open market or private transactions, in accordance with applicable insider trading and other securities laws and regulations. On September 11, 2015, the Company's Board of Directors terminated such authorization effective as of the Distribution Date.
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For the three months ended September 30, 2015, the Company has repurchased 1,336 shares, which are determined based on the settlement date of such trades, for a total cost of $100,027, including commissions and fees. These acquired shares have been classified as treasury stock in the accompanying consolidated balance sheet as of September 30, 2015.
Note 14. Related Party Transactions
As of September 30, 2015, members of the Dolan family group, for purposes of Section 13(d) of the Securities Exchange Act of 1934, as amended, including trusts for the benefit of the Dolan family group, collectively beneficially own all of the Company's outstanding Class B Common Stock and own approximately 2.5% of the Company's outstanding Class A Common Stock. Such shares of the Company's Class A Common Stock and Class B Common Stock, collectively, represent approximately 69.8% of the aggregate voting power of the Company's outstanding common stock. Members of the Dolan family are also the controlling stockholders of MSG, Cablevision and AMC Networks.
In connection with the Distribution, the Company has entered into various agreements with MSG, including media rights agreements covering the New York Knicks ("Knicks") and New York Rangers ("Rangers") games, an advertising sales representation agreement, a trademark license agreement and a transition services agreement.
The Company has entered into various agreements with Cablevision and AMC Networks in connection with, and subsequent to, the distribution on February 10, 2010, when Cablevision distributed all of the outstanding common stock of the Company to Cablevision stockholders. These agreements include arrangements with respect to a number of ongoing commercial relationships including affiliation agreements for carriage by Cablevision of MSG Networks.
Revenues and Operating Expenses
The following table summarizes the composition and amounts of related party transactions that are reflected in revenues and operating expenses of continuing operations in the accompanying consolidated statements of operations for the three months ended September 30, 2015 and 2014:
Three Months Ended September 30, | ||||||||
2015 | 2014 | |||||||
Revenues | $ | 40,449 | $ | 40,215 | ||||
Operating expenses: | ||||||||
Rights fees | $ | 32,500 | $ | 19,846 | ||||
Origination, master control and technical services | 1,417 | 1,336 | ||||||
Advertising | 1,177 | 1,594 | ||||||
Other | (533 | ) | (10 | ) | ||||
Revenues
Revenues from related parties primarily consist of revenues recognized from the distribution of programming services to subsidiaries of Cablevision and include sponsorship revenue as well as advertising and promotional benefits received by the Company which is recognized as the benefits are realized.
Rights fees
In connection with the Distribution, the Company has entered into media rights agreements with the Knicks and the Rangers, which provide the Company with exclusive media rights to team games in their local markets. These agreements are retroactively effective to July 1, 2015. Prior to the Distribution, these amounts were eliminated in consolidation; however these amounts are now reflected as revenues in the Loss from Discontinued Operations line with the offsetting expense in Direct Operating Expenses within continuing operations in the accompanying statements of operations.
Origination, Master Control and Technical Services
AMC Networks provides certain origination, master control and technical services to the Company.
Advertising
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The Company incurs advertising expenses for services rendered by its related parties, primarily Cablevision, most of which are related to the utilization of advertising and promotional benefits by the Company, with an equal amount being recognized as revenue when the benefits are realized.
Other Operating Expenses
The Company and its related parties enter into transactions with each other in the ordinary course of business.
Discontinued operations
Related party transactions included in loss from discontinued operations in the accompanying consolidated statements of operations include the following (i) revenues from related parties of $33,559 and $20,799 for the three months ended September 30, 2015 and 2014, respectively, (ii) operating expenses charged by related parties of $827 and $889 for the three months ended September 30, 2015 and 2014, respectively, (iii) interest income from nonconsolidated affiliates of $635 and $449 for the three months ended September 30, 2015 and 2014, respectively and (iv) equity in earnings (loss) of equity-method investments of $2,679 and $(2,604) for the three months ended September 30, 2015 and 2014, respectively.
Note 15. Income Taxes
Income tax benefit attributable to continuing operations for the three months ended September 30, 2015 of $404 differs from the income tax expense derived from applying the statutory federal rate to pretax income due principally to a reduction in state tax rates used to value deferred taxes resulting from the Distribution of $16,941 and the tax benefits of the domestic production activities deduction of $1,049. These decreases were partially offset by state and local income taxes of $2,798 (net of federal benefit), and other items of $464.
Prior to the Distribution, the Company's collection for ticket sales, sponsorships and suite rentals in advance were recorded as deferred revenue and were recognized as revenues when earned for both accounting and tax purposes. In connection with the reorganization transactions related to the Distribution, the tax recognition on most of these deferred revenues was accelerated to the date of the reorganization. The estimated amount of additional tax on the acceleration of such deferred revenue is approximately $152,000 and is reflected in income tax expense of discontinued operations for the three months ended September 30, 2015. However, as the related tax will be paid by the Company, and will not be reimbursed by MSG, it is reflected in income taxes payable in the accompanying consolidated balance sheet as of September 30, 2015.
Income tax expense attributable to continuing operations for the three months ended September 30, 2014 of $96,412 differs from the income tax expense derived from applying the statutory federal rate to pretax income due principally to the impact of state and local income taxes (net of federal benefit) of $17,872, increases in state tax rates used to value deferred taxes due to the sale of Fuse of $4,133, and other items of $45. These increases were partially offset by the impact of the tax benefits of the domestic production activities deduction of $1,481 and tax return to book provision adjustment in connection with the filing of the Company's federal income tax return of $48.
During the third quarter of fiscal year 2015, the Internal Revenue Service notified the Company of its intent to review the federal income tax returns as filed for the tax year ended December 31, 2013. Fieldwork is ongoing. The Company does not expect the examination, when finalized, to result in material changes to the tax returns as filed.
During the fourth quarter of fiscal year 2014, the State of New York commenced an examination of the Company's State of New York income tax returns as filed for the tax years ended December 31, 2010, 2011, and 2012. The examination is currently in fieldwork. The Company does not expect the examination, when finalized, to result in material changes to the tax returns as filed.
During the fourth quarter of fiscal year 2015, the State of Connecticut commenced an examination of the Company's State of Connecticut income tax returns as filed for the tax years ended December 31, 2011, 2012, and 2013. The examination is currently nearing completion. The Company does not expect the examination, when finalized, to result in material changes to the tax returns as filed.
Note 16. Concentration of Risk
Accounts receivable, net on the accompanying consolidated balance sheets as of September 30, 2015 and June 30, 2015 include amounts due from the following individual non-affiliated customers, which accounted for the noted percentages of the gross
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balance:
September 30, 2015 | June 30, 2015 | ||||
Customer A | 32 | % | 29 | % | |
Customer B | 28 | % | 25 | % | |
Customer C | 19 | % | 17 | % | |
Customer D | 12 | % | 11 | % | |
Revenues from continuing operations in the accompanying consolidated statements of operations for the three months ended September 30, 2015 and 2014 include amounts from the following individual non-affiliated customers, which accounted for the noted percentages of the total:
September 30, | |||||
2015 | 2014 | ||||
Customer A | 25 | % | 24 | % | |
Customer B | 22 | % | 22 | % | |
Customer C | 12 | % | 11 | % | |
Revenues from continuing operations in the accompanying consolidated statements of operations include revenues from Cablevision of $39,778 and $40,199 for the three months September 30, 2015 and 2014, which represent 27% and 28%, respectively, of the total.
The accompanying consolidated balance sheets as of September 30, 2015 and June 30, 2015 include the following approximate amounts that are recorded in connection with the Company's license agreement with the New Jersey Devils:
Reported in | September 30, 2015 | June 30, 2015 | |||||
Prepaid expenses | $ | 1,000 | $ | 1,000 | |||
Other current assets | 2,000 | 2,000 | |||||
Other assets | 41,000 | 41,000 | |||||
$ | 44,000 | $ | 44,000 | ||||
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Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
This Management's Discussion and Analysis of Financial Condition and Results of Operations, or MD&A, may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. 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 financial performance and plans identify forward-looking statements. Investors are cautioned that such forward-looking statements are not guarantees of future performance, results or events and involve risks and uncertainties and that actual results or developments may differ materially from the forward-looking statements as a result of various factors. Factors that may cause such differences to occur include, but are not limited to:
• | the demand for our programming among cable television systems and satellite, telephone and other multichannel video programming distributors (“Distributors”) and the subscribers thereto, and our ability to renew affiliation agreements with Distributors, as well as the impact of consolidation among Distributors; |
• | the level of our revenues, which depends in part on the popularity and competitiveness of the sports teams whose games are broadcast on our networks and the popularity of other content aired on our networks; |
• | the ability of Distributors to maintain subscriber levels; |
• | the impact of subscribers downgrading their programming packages to levels that do not include our programming services; |
• | the security of our program signal and electronic data; |
• | 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; |
• | the relocation or insolvency of professional sports teams with which we have a rights agreement; |
• | our ability to maintain, obtain or produce content, together with the cost of such content; |
• | the acquisition or disposition of assets and/or the impact of, and our ability to, successfully pursue acquisitions or other strategic transactions, and the operating and financial performance thereof (including those that we do not control); |
• | the costs associated with, and the outcome of, litigation and other proceedings to the extent uninsured; |
• | the impact of governmental regulations or laws and changes in such regulations or laws; |
• | the impact of league rules, league regulations and/ or league agreements and changes thereto; |
• | our substantial debt and high leverage; |
• | reduced access to capital markets or significant increases in costs to borrow; |
• | financial community perceptions of our business, operations, financial condition and the industry in which we operate; |
• | the tax-free treatment of the Distribution; and |
• | the factors described under "Risk Factors" in the Company's Annual Report on Form 10-K for the year ended June 30, 2015. |
We disclaim any obligation to update or revise the forward-looking statements contained herein, except as otherwise required by applicable federal securities laws.
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All dollar amounts included in the following MD&A are presented in thousands, except as otherwise noted.
Introduction
MD&A is provided as a supplement to, and should be read in conjunction with, the Company's unaudited consolidated financial statements and accompanying notes thereto included in this Quarterly Report on Form 10-Q, as well as our Annual Report on Form 10-K for the year ended June 30, 2015 to help provide an understanding of our financial condition, changes in financial condition and results of operations. Unless the context otherwise requires, all references to “we,” “us,” “our,” “MSG Networks” or the “Company” refer collectively to MSG Networks Inc., a holding company, and its direct and indirect subsidiaries through which substantially all of our operations are actually conducted. The Company produces, develops and acquires content for multiple distribution platforms and is comprised principally of the Company's regional sports and entertainment networks, MSG Network and MSG+, collectively the “MSG Networks.”
On September 30, 2015 (the “Distribution Date”), the Company distributed to its stockholders all of the outstanding common stock of The Madison Square Garden Company (formerly MSG Spinco, Inc., and referred to herein as “MSG”) (the “Distribution”). MSG owns, directly or indirectly, the sports and entertainment businesses previously owned and operated by the Company's Sports and Entertainment segments, owns, leases or operates the arenas and other venues previously owned, leased or operated by the Company and owns the joint venture interests previously owned by the Company. In the Distribution, each holder of the Company’s Class A common stock, par value $0.01 per share, of record as of the close of business, New York City time, on September 21, 2015 (the “Record Date”), received one share of MSG Class A common stock, par value $0.01 per share, for every three shares of the Company’s Class A common stock held on the Record Date. Each record holder of the Company’s Class B common stock, par value $0.01 per share, received one share of MSG Class B common stock, par value $0.01 per share, for every three shares of the Company's Class B common stock held on the Record Date. Subsequent to the Distribution, the Company no longer consolidates the financial results of MSG for the purpose of its own financial reporting and the historical financial results of MSG have been reflected in the Company's consolidated financial statements as discontinued operations for all periods presented through the Distribution Date.
After giving effect to the Distribution, the Company operates and reports financial information in one segment.
This MD&A is organized as follows:
Results of Operations. This section provides an analysis of our unaudited results of operations for the three months ended September 30, 2015 as compared with the three months ended September 30, 2014.
Liquidity and Capital Resources. This section provides a discussion of our financial condition and liquidity, an analysis of our cash flows for the three months ended September 30, 2015 as compared with the three months ended September 30, 2014, as well as certain contractual obligations.
Recently Issued Accounting Pronouncements and Critical Accounting Policies. This section discusses recently issued accounting pronouncements, as well as the results of the Company's annual impairment testing of goodwill and identifiable indefinite-lived intangible assets performed during the first quarter of fiscal year 2016. This section should be read together with our critical accounting policies, which are discussed in our Annual Report on Form 10-K for the year ended June 30, 2015 under “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” and in the notes to the consolidated financial statements of the Company included therein.
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Results of Operations
Comparison of the Three Months Ended September 30, 2015 versus the Three Months Ended September 30, 2014
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.
Three Months Ended September 30, | Increase (Decrease) in Net Income | |||||||||||||||||
2015 | 2014 | |||||||||||||||||
Amount | % of Revenues | Amount | % of Revenues | |||||||||||||||
Revenues | $ | 148,147 | 100 | % | $ | 142,670 | 100 | % | $ | 5,477 | ||||||||
Direct operating expenses | 60,102 | 41 | % | 45,651 | 32 | % | (14,451 | ) | ||||||||||
Selling, general and administrative expenses | 41,118 | 28 | % | 37,793 | 26 | % | (3,325 | ) | ||||||||||
Depreciation and amortization | 4,679 | 3 | % | 4,285 | 3 | % | (394 | ) | ||||||||||
Gain on sale of Fuse | — | NM | (162,414 | ) | (114 | )% | (162,414 | ) | ||||||||||
Operating income | 42,248 | 29 | % | 217,355 | 152 | % | (175,107 | ) | ||||||||||
Other income (expense): | ||||||||||||||||||
Interest expense, net | (1,321 | ) | (1 | )% | (521 | ) | NM | (800 | ) | |||||||||
Income from continuing operations before income taxes | 40,927 | 28 | % | 216,834 | 152 | % | (175,907 | ) | ||||||||||
Income tax benefit (expense) | 404 | NM | (96,412 | ) | (68 | )% | 96,816 | |||||||||||
Income from continuing operations | 41,331 | 28 | % | 120,422 | 84 | % | (79,091 | ) | ||||||||||
Loss from discontinued operations, net of taxes | (161,017 | ) | (109 | )% | (12,349 | ) | (9 | )% | (148,668 | ) | ||||||||
Net income (loss) | $ | (119,686 | ) | (81 | )% | $ | 108,073 | 76 | % | $ | (227,759 | ) | ||||||
_________________
NM – Percentage is not meaningful
Operating income for the quarters ended September 30, 2015 and 2014 reflect certain corporate overhead expenses that MSG Networks Inc. does not expect to incur in future periods, but do not meet the criteria for inclusion in discontinued operations. MSG Networks Inc. believes that had it operated as a standalone public company for the quarter ended September 30, 2015, that these expenses would have been lower by an estimated $27,000, including a total of $5,000 in share-based compensation and depreciation and amortization expenses.
Revenues
Revenues for the three months ended September 30, 2015 increased $5,477, or 4%, to $148,147 as compared with the prior year period. The net increase is attributable to the following:
Increase in affiliation fee revenue | $ | 4,829 | |
Decrease in advertising revenue | (83 | ) | |
Other net increases | 731 | ||
$ | 5,477 | ||
The increase in affiliation fee revenue was primarily due to higher affiliation rates, partially offset by the impact of a low single digit percentage decrease in subscribers as compared with the prior year period.
Other net increases were primarily attributable to the recognition of revenue associated with certain services provided to Fuse Media, Inc.
Direct operating expenses
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Direct operating expenses for the three months ended September 30, 2015 increased $14,451, or 32%, to $60,102 as compared with the prior year period due to higher rights fees expense of $14,019 and other programming-related cost increases of $432. The higher rights fees expense includes a $12,654 increase related to the new long-term media rights agreements with the New York Knicks ("Knicks") and New York Rangers ("Rangers"). In connection with the Distribution, the Company has entered into media rights agreements with the Knicks and the Rangers, which provide the Company with exclusive media rights to team games in their local markets. The Company expects to incur rights expense of approximately $130,000 under these media rights agreements for the year ending June 30, 2016, which will be approximately $49,000 more than the intercompany rights fee expense reflected in the Company's financial statements for the year ended June 30, 2015. See Note 3 to the consolidated financial statements included in "Part I - Item 1. Financial Statements" of this Quarterly Report on Form 10-Q.
Selling, general and administrative expenses
Selling, general and administrative expenses for the three months ended September 30, 2015 increased $3,325, or 9%, to $41,118 as compared with the prior year period primarily due to higher corporate overhead costs. As discussed above, selling, general and administrative expenses include certain corporate overhead expenses that are not expected to be incurred by MSG Networks Inc. as a standalone public company going forward.
Depreciation and amortization
Depreciation and amortization for the three months ended September 30, 2015 increased $394, or 9%, to $4,679 as compared with the prior year period which includes higher depreciation expense on certain corporate property and equipment that was transferred to MSG in connection with the Distribution; but which did not meet the criteria for inclusion in discontinued operations.
Gain on sale of Fuse
Gain on sale of Fuse for the three months ended September 30, 2014 represents the Company's gain, net of transaction costs, from the sale which was completed on July 1, 2014 (see Note 5 to the consolidated financial statements included in "Part I - Item 1. Financial Statements" of this Quarterly Report on Form 10-Q).
Interest expense, net
Net interest expense for the three months ended September 30, 2015 increased $800, or 154%, to $1,321 as compared with the prior year period primarily due to the write-off of a portion of the deferred financing costs associated with the Company's Former Revolving Credit Facility and, to a lesser extent, interest expense, from September 28, 2015, incurred under the new Senior Secured Credit Facility.
Income taxes
Income tax benefit attributable to continuing operations for the three months ended September 30, 2015 of $404 differs from the income tax expense derived from applying the statutory federal rate to pretax income due principally to a reduction in state tax rates used to value deferred taxes resulting from the Distribution of $16,941 and the tax benefits of the domestic production activities deduction of $1,049. These decreases were partially offset by state and local income taxes of $2,798 (net of federal benefit), and other items of $464.
Income tax expense attributable to continuing operations for the three months ended September 30, 2014 of $96,412 differs from the income tax expense derived from applying the statutory federal rate to pretax income due principally to the impact of state and local income taxes (net of federal benefit) of $17,872, increases in state tax rates used to value deferred taxes due to the sale of Fuse of $4,133, and other items of $45. These increases were partially offset by the impact of the tax benefits of the domestic production activities deduction of $1,481 and tax return to book provision adjustment in connection with the filing of the Company's federal income tax return of $48.
Adjusted operating cash flow ("AOCF")
The Company evaluates its performance based on several factors, of which the key financial measure is operating income (loss) before (i) depreciation, amortization and impairments of property and equipment and intangible assets, (ii) share-based compensation expense or benefit, (iii) restructuring charges or credits and (iv) gains or losses on sales or dispositions of businesses, which is referred to as AOCF, a non-GAAP measure. The Company has presented the components that reconcile AOCF to operating income (loss), an accepted GAAP measure.
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The following is a reconciliation of operating income to AOCF:
Three Months Ended | Increase (Decrease) in AOCF | |||||||||||
September 30, | ||||||||||||
2015 | 2014 | |||||||||||
Operating income | $ | 42,248 | $ | 217,355 | $ | (175,107 | ) | |||||
Share-based compensation | 4,247 | 2,376 | 1,871 | |||||||||
Depreciation and amortization | 4,679 | 4,285 | 394 | |||||||||
Gain on sale of Fuse | — | (162,414 | ) | 162,414 | ||||||||
AOCF | $ | 51,174 | $ | 61,602 | $ | (10,428 | ) | |||||
AOCF for the three months ended September 30, 2015 decreased $10,428, or 17%, to $51,174 as compared with the prior year period primarily driven by a increase in direct operating expenses partially offset by an increase in revenues, as discussed above.
As discussed above, results from continuing operations for the quarters ended September 30, 2015 and 2014 reflect a higher level of corporate overhead expenses than MSG Networks Inc. expects to incur going forward. MSG Networks Inc. believes that had it operated as a standalone public company for the quarter ended September 30, 2015, operating expenses would have been lower by an estimated $27,000, including a total of $5,000 in share-based compensation and depreciation and amortization expenses.
Liquidity and Capital Resources
Overview
Our primary sources of liquidity are cash and cash equivalents, cash flows from the operations of our business and available borrowing capacity under our $250,000 revolving credit facility with a syndicate of lenders (see “Financing Agreements - Senior Secured Credit Facilities” below). Our principal uses of cash include working capital-related items, capital spending, taxes and debt service. 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. Also in connection with the Distribution, the Company expects to make a one-time tax payment of approximately $152,000 in the third quarter of fiscal 2016 related to certain historical activities of its former subsidiary, The Madison Square Garden Company.
We believe we have sufficient liquidity, including approximately $213,000 in cash and cash equivalents as of September 30, 2015, along with available borrowing capacity under our revolving credit facility combined with operating cash flows to fund our business operations and service our term loans outstanding (see “Financing Agreements - Senior Secured Credit Facility - Term Loan Facility” below) over the next twelve months. However, potential subscriber reductions at affiliates who distribute our networks and changes in the demand for our programming, advertising revenues, our ability to maintain, obtain or produce content and other factors could adversely impact our business and results of operations, which might require that we seek alternative sources of funding through the capital and credit markets that may or may not be available to us.
On October 27, 2014, the Company's Board of Directors authorized the repurchase of up to $500,000 of the Company's Class A Common Stock. Under the authorization, shares of Class A Common Stock were able to be purchased from time to time in open market or private transactions, in accordance with applicable insider trading and other securities laws and regulations. Since the authorization of the repurchase program through September 30, 2015, the Company repurchased 3,159,027 shares, which are determined based on the settlement date of such trades, for a total cost of $240,744, including commissions and fees. These acquired shares have been classified as treasury stock in the Company's consolidated balance sheet. On September 11, 2015, the Company's Board of Directors terminated the repurchase authorization effective as of the Distribution Date.
Financing Agreements
Former Revolving Credit Facility
On May 6, 2014, MSGN Holdings, L.P., formerly MSG Holdings, L.P., (“MSGN 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 $500,000 with a term of five years (the “Former Revolving Credit Facility”). In connection with the Distribution, MSGN L.P. terminated the Former
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Revolving Credit Facility effective on September 28, 2015.
Senior Secured Credit Facilities
On September 28, 2015, MSGN L.P., MSGN Eden, LLC, an indirect subsidiary of the Company and the general partner of MSGN L.P. (“MSGN Eden”), Regional MSGN Holdings LLC, a direct subsidiary of the Company and the limited partner of MSGN L.P. (collectively with MSGN Eden, the “Holdings Entities”), and certain subsidiaries of MSGN L.P. entered into a credit agreement (the “Credit Agreement”) with a syndicate of lenders.
The Credit Agreement provides MSGN L.P. with senior secured credit facilities (the “Senior Secured Credit Facilities”) consisting of: (a) an initial $1,550,000 term loan facility (the “Term Loan Facility”) and (b) a $250,000 revolving credit facility (the “Revolving Credit Facility”), each with a term of five years. In connection with the Distribution, $1,450,000 of the proceeds from the Term Loan Facility was contributed to MSG immediately following the closing of the Senior Secured Credit Facilities. The remainder of the proceeds from the Term Loan Facility were used by MSGN L.P. to pay for certain fees and expenses associated with the Distribution and the Senior Secured Credit Facilities and will be used to fund working capital needs and other general corporate purposes of MSGN L.P. The Revolving Credit Facility was undrawn as of September 30, 2015 and will be available to fund working capital needs and other general corporate purposes of MSGN L.P. Up to $35,000 of the Revolving Credit Facility is available for the issuance of letters of credit.
The Credit Agreement generally requires MSGN L.P. to comply with a maximum total leverage ratio of 6.00:1.00 from the closing date until September 30, 2016 and a maximum total leverage ratio of 5.50:1.00 from and after October 1, 2016 until maturity, subject, in each case, 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 Holdings Entities, MSGN L.P. and the restricted subsidiaries of MSGN L.P. As of September 30, 2015, MSGN L.P. was in compliance with the financial covenants of the Credit Agreement. All borrowings under the Credit Agreement are subject to the satisfaction of customary conditions, including absence of a default and accuracy of representations and warranties. As of September 30, 2015, there were no letters of credit issued and outstanding under the Revolving Credit Facility, which provides full borrowing capacity of $250,000. MSGN L.P. will be required to make its first principal payment of $50,000 on or before March 31, 2016, which will reduce the principal amount of the initial Term Loan Facility for subsequent amortization. The initial Term Loan Facility will amortize quarterly in accordance with their terms from June 30, 2016 through June 30, 2020 with a final maturity date on September 28, 2020.
See Note 8 to the consolidated financial statements included in "Part I - Item 1. Financial Statements" of this Quarterly Report on Form 10-Q for more information on the Credit Agreement.
Contractual Obligations
As of September 30, 2015, future cash payments required under contracts entered into by the Company in the normal course of business, including future minimum rental payments under leases having noncancelable initial lease terms in excess of one year, are as follows:
Total | Remainder of the current fiscal year | Fiscal years 2-3 | Fiscal years 4-5 | Thereafter | |||||||||||||||
Contractual Obligations | $ | 4,699,810 | $ | 199,304 | $ | 416,633 | $ | 432,999 | $ | 3,650,874 | |||||||||
Contractual obligations above consist primarily of the Company's obligations related to professional team rights, which were acquired under license agreements, to telecast certain live sporting events.
In connection with the Distribution, certain contractual obligations, principally those that the Company had under employment agreements with its professional sports teams' personnel and long-term noncancelable operating lease agreements for entertainment venues and certain office and storage space, were transferred to MSG.
In addition, see Note 8 to the consolidated financial statements included in "Part I - Item 1. Financial Statements" of this Quarterly Report on Form 10-Q for the principal repayments required under the Company's Term Loan Facility.
Cash Flow Discussion
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Operating Activities from continuing operations
Net cash provided by operating activities from continuing operations for the three months ended September 30, 2015 increased by $64,977 to $78,849 as compared with the prior year period primarily driven by lower income taxes paid and a positive working capital contribution of $32,500 relating to the timing of the current year’s rights payments to MSG under the new Knicks and Rangers media rights agreements.
Investing Activities from continuing operations
Net cash used in investing activities from continuing operations for the three months ended September 30, 2015 was $1,450 as compared with net cash provided by investing activities from continuing operations in the prior year period of $227,516. This change is primarily due to proceeds received during the prior year period from the sale of Fuse.
Financing Activities from continuing operations
Net cash used in financing activities from continuing operations for the three months ended September 30, 2015 increased by $23,154 to $29,187 as compared with the prior year period primarily due the cash contribution to MSG and the repurchases of the Company's Class A Common Stock in the current year period largely offset by the proceeds from the Term Loan Facility received in the current year period.
Recently Issued Accounting Pronouncements and Critical Accounting Policies
Recently Adopted Accounting Pronouncements
In April 2015, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2015-03, Interest-Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs, which amends the FASB Accounting Standards Codification (“ASC”) to require that debt issuance costs be presented in the balance sheet as a direct deduction from the carrying amount of the related liability. In August 2015, the FASB issued ASU No. 2015-15, "Interest-Imputation of Interest (Subtopic 835-30): Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements-Amendments to SEC Paragraphs Pursuant to Staff Announcement at June 18, 2015 EITF Meeting," to clarify that an entity may elect to present debt issuance costs related to a line-of-credit arrangement as an asset, regardless of whether or not there are any outstanding borrowings on the line-of-credit arrangement. These standards were adopted by the Company in the first quarter of fiscal year 2016. See Note 8 to the consolidated financial statements included in "Part I - Item 1. Financial Statements" of this Quarterly Report on Form 10-Q for the presentation of the Company's deferred financing costs in accordance with these standards. There was no impact to the prior year consolidated financial statements as the Company's historical deferred financing costs pertaining to its revolving credit facility were presented as assets as permitted under ASU No. 2015-15.
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. In August 2015, the FASB issued ASU No. 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date, which defers the effective date of ASU No. 2014-09 for all entities by one year. Early adoption is permitted and the Company can early adopt ASU No. 2014-09 beginning in the first quarter of fiscal year 2018. If the Company does not apply the early adoption provision, ASU No. 2014-09 will be effective for the Company beginning in the first quarter of fiscal year 2019 using one of two retrospective application methods. The Company is currently evaluating the impact this standard will have on its consolidated financial statements.
In April 2015, the FASB issued ASU No. 2015-05, Intangibles-Goodwill and Other-Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement , which provides guidance to customers about
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whether a cloud computing arrangement includes a software license. If a cloud computing arrangement includes a software license, the customer should account for the software license element of the arrangement consistent with the acquisition of other software licenses. If a cloud computing arrangement does not include a software license, the customer should account for the arrangement as a service contract and expense the cost as the services are received. This standard will be effective for the Company beginning in the first quarter of fiscal year 2017. Early adoption is permitted. This standard may be adopted retrospectively or prospectively to arrangements entered into, or materially modified, after the effective date. The Company is currently evaluating the impact this standard will have on its consolidated financial statements.
Critical Accounting Policies
The following discussion has been included only to provide the results of our annual impairment testing of goodwill and identifiable indefinite-lived intangible assets performed during the first quarter of fiscal year 2016. Accordingly, we have not repeated herein a discussion of the Company's critical accounting policies as set forth in our Annual Report on Form 10-K for the year ended June 30, 2015.
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. After giving effect to the Distribution, the Company has one reporting unit for evaluating goodwill impairment. The goodwill balance reported on the Company's balance sheet as of September 30, 2015 is $424,508.
During the quarter ended September 30, 2015, the Company performed its annual impairment test of goodwill, and there was no impairment of goodwill identified, including the goodwill of the MSG Entertainment and MSG Sports reporting units that was transferred to MSG as a part of Distribution. Based on these impairment tests, there was 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). The Company believes that if the fair value of a reporting unit exceeds its carrying value by greater than 10%, a sufficient safety margin has been realized.
The Company elected to perform the qualitative assessment of impairment for the Media and Sports reporting units. This assessment considered factors such as:
• | Macroeconomic conditions; |
• | Industry and market considerations; |
• | Cost factors; |
• | Overall financial performance of the reporting unit; |
• | Other relevant company-specific factors such as changes in management, strategy or customers; and |
• | Relevant reporting unit specific events such as changes in the carrying amount of net assets. |
The Company performed the quantitative assessment of impairment for the Company's former MSG Entertainment reporting unit. The estimate of the fair value of the MSG Entertainment reporting unit was primarily determined using discounted projected future cash flows. For MSG Entertainment, this valuation includes 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.
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. During the quarter ended September 30, 2015, the Company performed its annual impairment test of identifiable indefinite-lived intangible assets, all of which were transferred to MSG in connection with the Distribution, and there was no impairment identified.
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Item 3. Quantitative and Qualitative Disclosures About Market Risk
There were no material changes to the disclosures on this matter made in the Company's Annual Report on Form 10-K for the year ended June 30, 2015 except the following:
Our market risk exposure to interest rate risk relates to any borrowing we may incur.
Borrowings under our Credit Agreement bear 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, an additional rate which is fixed for an initial period of time and thereafter dependent upon our total leverage ratio at the time, and thus principal values outstanding approximate fair value. Accordingly, we are subject to interest rate risk with respect to the tenor of any borrowings we may incur under the Credit Agreement. The effect of a hypothetical 100 basis point increase in floating interest rates prevailing at September 30, 2015 and continuing for a full year would increase interest expense of our Term Loan Facility amount outstanding by $15,162. 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 2. Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources - Financing Agreements” for more information on our Credit Agreement.
We have de minimis foreign currency risk exposure as our businesses operate almost entirely in U.S. Dollars, nor do we have any meaningful commodity risk exposures associated with our operations.
Item 4. Controls and Procedures
The Company's principal executive officer and principal financial officer have concluded that the Company's disclosure controls and procedures (as defined in Rules 13a-15(e) or 15d-15(e) of the Securities Exchange Act of 1934, as amended (“Exchange Act”)) were effective as of September 30, 2015, based on the evaluation of these controls and procedures required by Rule 13a-15(b) or 15d-15(b) of the Exchange Act.
Changes in Internal Control Over Financial Reporting
Following the Distribution, the Company pursuant to a transition services arrangement began outsourcing to The Madison Square Garden Company certain business functions that were previously performed by internal resources. These included activities related to information technology, accounting, accounts payable, payroll, tax, legal, human resources, treasury, insurance and risk management, investor relations, corporate communications, benefit plan administration and reporting, and internal audit. The Company continues to review and document its internal controls over financial reporting, and may, from time to time, make changes aimed at enhancing their effectiveness.
Other than those noted above, there were no changes in the Company’s internal control over financial reporting during the fiscal quarter ended September 30, 2015 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
28
PART II—OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
The following table presents information about the Company's repurchases of stock that were made during the three months ended September 30, 2015 (amounts are presented in thousands except per share data):
Period | Total Number of Shares Purchased (a) | Average Price Paid per Share (b) | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | Approximate Dollar Value of Shares That May Yet Be Purchased Under the Plans or Programs | ||||||||||
July 1, 2015 - July 31, 2015 | — | $ | — | — | $ | 359,319 | ||||||||
August 1, 2015 - August 31, 2015 | 1,336 | $ | 74.86 | 1,336 | $ | 259,319 | ||||||||
September 1, 2015 - September 30, 2015 | — | $ | — | — | $ | — | ||||||||
Total | 1,336 | $ | 74.86 | 1,336 | ||||||||||
_________________
(a) | The Company first announced its stock repurchase program on October 27, 2014 authorized by the Company's Board of Directors for Class A Common Stock repurchases up to $500,000. Under the authorization, shares of Class A Common Stock were able to be purchased from time to time in open market or private transactions, in accordance with applicable insider trading and other securities laws and regulations, with the timing and amount of purchases depending on market conditions and other factors. On September 11, 2015, the Company's Board of Directors terminated its share repurchase program authorization effective as of the Distribution Date. Total number of shares purchased are based on the settlement date of such trades. |
(b) | The amounts do not give effect to any fees, commissions or other costs associated with repurchases of shares. |
29
Item 6. Exhibits
(a) | Index to Exhibits |
EXHIBIT NO. | DESCRIPTION | |
10.1 | MSG Networks Inc. Policy Concerning Certain Matters Relating to The Madison Square Garden Company (Formerly MSG Spinco, Inc.) and AMC Networks Inc. Including Responsibilities of Overlapping Directors and Officers. | |
10.2 | Employment Agreement dated September 11, 2015 between The Madison Square Garden Company (to be renamed MSG Networks Inc.) and Dawn Darino-Gorski. | |
31.1 | Certification by the Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
31.2 | Certification by the Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
32.1 | Certification by the Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |
32.2 | Certification by the Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |
101.INS | XBRL Instance Document. | |
101.SCH | XBRL Taxonomy Extension Schema. | |
101.CAL | XBRL Taxonomy Extension Calculation Linkbase. | |
101.DEF | XBRL Taxonomy Extension Definition Linkbase. | |
101.LAB | XBRL Taxonomy Extension Label Linkbase. | |
101.PRE | XBRL Taxonomy Extension Presentation Linkbase. | |
30
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on the 5th day of November, 2015.
MSG Networks Inc. | ||
By: | /S/ BRET RICHTER | |
Name: | Bret Richter | |
Title: | Executive Vice President and | |
Chief Financial Officer | ||
31
Exhibit 10.1
MSG Networks Inc.
(Formerly The Madison Square Garden Company)
Policy Concerning Certain Matters Relating to The Madison Square Garden Company (Formerly MSG Spinco, Inc.) and AMC Networks Inc. Including Responsibilities of Overlapping Directors and Officers
A. | Certain Acknowledgements; Definitions. |
MSG Networks Inc. (the “Corporation”) recognizes that (a) certain directors and officers of the Corporation and its subsidiaries (the “ Overlap Persons ”) have served and may serve as directors, officers, employees and agents of The Madison Square Garden Company (“MSG Spinco”), AMC Networks Inc. (“AMC Networks”), and their respective subsidiaries and successors (each of the foregoing is an “ Other Entity ”), (b) the Corporation and its subsidiaries, directly or indirectly, may engage in the same, similar or related lines of business as those engaged in by any Other Entity and other business activities that overlap with or compete with those in which such Other Entity may engage, (c) the Corporation or its subsidiaries may have an interest in the same areas of business opportunity as an Other Entity, (d) the Corporation will derive substantial benefits from the service as directors or officers of the Corporation and its subsidiaries of Overlap Persons, and (e) it is in the best interests of the Corporation that the rights of the Corporation, and the duties of any Overlap Persons, be determined and delineated as provided in this Policy in respect of any Potential Business Opportunities (as defined below) and in respect of the agreements and transactions referred to herein. The provisions of this Policy will, to the fullest extent permitted by law, regulate and define the conduct of the business and affairs of the Corporation and its officers and directors who are Overlap Persons in connection with any Potential Business Opportunities and in connection with any agreements and transactions referred to herein. Any person purchasing or otherwise acquiring any shares of capital stock of the Corporation, or any interest therein, will be deemed to have notice of and to have consented to the provisions of this Policy. References in this Policy to “directors,” “officers,” “employees” and “agents” of any person will be deemed to include those persons who hold similar positions or exercise similar powers and authority with respect to any other entity that is a limited liability company, partnership, joint venture or other non-corporate entity.
B. | Duties of Directors and Officers Regarding Potential Business Opportunities; Renunciation of Interest in Potential Business Opportunities. |
If a director or officer of the Corporation who is an Overlap Person is presented or offered, or otherwise acquires knowledge of, a potential transaction or matter that may constitute or present a business opportunity for the Corporation or any of its subsidiaries, in which the Corporation or any of its subsidiaries could, but for the provisions of this Policy, have an interest or expectancy (any such transaction or matter, and any such actual or potential business opportunity, a “ Potential Business Opportunity ”), (i) such Overlap Person will, to the fullest extent permitted by law, have no duty or obligation to refrain from referring such Potential Business Opportunity to any Other Entity and, if such Overlap Person refers such Potential Business Opportunity to an Other Entity, such Overlap Person shall have no duty or obligation to refer such Potential Business Opportunity to the Corporation or to any of its subsidiaries or to give any notice to the Corporation or to any of its subsidiaries regarding such Potential Business Opportunity (or any matter related thereto), (ii) if such Overlap Person refers a Potential Business Opportunity to an Other Entity, such Overlap Person, to the fullest extent permitted by law, will not be liable to the Corporation as a director, officer, stockholder or otherwise, for any failure to refer such Potential Business Opportunity to the Corporation, or for referring such Potential Business Opportunity to any Other Entity, or for any failure to give any notice to the Corporation regarding such Potential Business Opportunity or any matter relating thereto; (iii) any Other Entity may participate, engage or invest in any such Potential Business Opportunity notwithstanding that such Potential Business Opportunity may have been referred to such Other Entity by an Overlap Person, and (iv) if a director or officer who is an Overlap Person refers a Potential Business Opportunity to
an Other Entity, then, as between the Corporation and its subsidiaries, on the one hand, and such Other Entity, on the other hand, the Corporation and its subsidiaries shall be deemed to have renounced any interest, expectancy or right in or to such Potential Business Opportunity or to receive any income or proceeds derived therefrom solely as a result of such Overlap Person having been presented or offered, or otherwise acquiring knowledge of, such Potential Business Opportunity, unless in each case referred to in clause (i), (ii), (iii) or (iv), such Potential Business Opportunity satisfies all of the following conditions (any Potential Business Opportunity that satisfies all of such conditions, a " Restricted Potential Business Opportunity”): (A) such Potential Business Opportunity was expressly presented or offered to the Overlap Person solely in his or her capacity as a director or officer of the Corporation; (B) the Overlap Person believed that the Corporation possessed, or would reasonably be expected to be able to possess, the resources necessary to exploit such Potential Business Opportunity; and (C) such opportunity relates exclusively to the business of owning and operating a regional professional sports programming service that features the live carriage of games of teams that compete in the National Hockey League, the National Basketball Association or Major League Baseball and that is targeted to, and made available to, multichannel video programming distributors in the New York, New Jersey and Connecticut tri-state area; provided, that the Corporation or any of its subsidiaries is directly engaged in such business at the time the Potential Business Opportunity is presented or offered to the Overlap Person. In the event the Corporation's board of directors declines to pursue a Restricted Potential Business Opportunity, Overlap Persons shall be free to refer such Restricted Potential Business Opportunity to an Other Entity.
C. | Certain Agreements and Transactions Permitted. |
No contract, agreement, arrangement or transaction (or any amendment, modification or termination thereof) entered into between the Corporation and/or any of its subsidiaries, on the one hand, and an Other Entity, on the other hand, before the Other Entity ceased to be an indirect, wholly-owned subsidiary of Cablevision, in the case of AMC Networks, or the Corporation, in the case of MSG Spinco shall be void or voidable or be considered unfair to the Corporation or any of its subsidiaries solely because AMC Networks or MSG Spinco or any of their respective subsidiaries is a party thereto, or because any directors, officers or employees of such Other Entity were present at or participated in any meeting of the board of directors, or a committee thereof, of the Corporation, or the board of directors, or committee thereof, of any subsidiary of the Corporation, that authorized the contract, agreement, arrangement or transaction (or any amendment, modification or termination thereof), or because his, her or their votes were counted for such purpose. The Corporation may from time to time enter into and perform, and cause or permit any of its subsidiaries to enter into and perform, one or more contracts, agreements, arrangements or transactions (or amendments, modifications or supplements thereto) with an Other Entity. To the fullest extent permitted by law, no such contract, agreement, arrangement or transaction (nor any such amendments, modifications or supplements), nor the performance thereof by the Corporation or any subsidiary of the Corporation or an Other Entity, shall be considered contrary to any fiduciary duty owed to the Corporation (or to any subsidiary of the Corporation, or to any stockholder of the Corporation or any of its subsidiaries) by any director or officer of the Corporation (or by any director or officer of any subsidiary of the Corporation) who is an Overlap Person. To the fullest extent permitted by law, no director or officer of the Corporation or any subsidiary of the Corporation who is an Overlap Person thereof shall have or be under any fiduciary duty to the Corporation (or to any subsidiary of the Corporation, or to any stockholder of the Corporation or any of its subsidiaries) to refrain from acting on behalf of the Corporation, MSG Spinco, AMC Networks, or any of their respective subsidiaries, in respect of any such contract, agreement, arrangement or transaction or performing any such contract, agreement, arrangement or transaction in accordance with its terms and each such director or officer of the Corporation or any subsidiary of the Corporation who is an Overlap Person shall be deemed to have acted in good faith and in a manner such person reasonably believed to be in or not opposed to the best interests of the Corporation and its subsidiaries, and shall be deemed not to have breached his or her duties of loyalty to the Corporation or any of its subsidiaries or any of their respective stockholders, and not to have derived an improper personal benefit therefrom.
- 2 -
D. | Amendment of this Policy. |
No alteration, amendment or repeal of, or adoption of any provision inconsistent with, any provision of this Policy will have any effect upon (a) any agreement between the Corporation or a subsidiary thereof and any Other Entity, that was entered into before the time of such alteration, amendment or repeal or adoption of any such inconsistent provision (the “Amendment Time”), or any transaction entered into in connection with the performance of any such agreement, whether such transaction is entered into before or after the Amendment Time, (b) any transaction entered into between the Corporation or a subsidiary thereof and any Other Entity, before the Amendment Time, (c) the allocation of any business opportunity between the Corporation or any subsidiary thereof and any Other Entity before the Amendment Time, or (d) any duty or obligation owed by any director or officer of the Corporation or any subsidiary of the Corporation (or the absence of any such duty or obligation) with respect to any Potential Business Opportunity which such director or officer was offered, or of which such director or officer otherwise became aware, before the Amendment Time (regardless of whether any proceeding relating to any of the above is commenced before or after the Amendment Time).
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Exhibit 10.2
September 11, 2015
Ms. Dawn Darino-Gorski
c/o The Madison Square Garden Company (to be renamed MSG Networks Inc.)
Eleven Pennsylvania Plaza
New York, NY 10121
Dear Dawn:
This Agreement (the “Agreement”), effective as of the distribution (the “Distribution”) of the common stock of MSG Spinco, Inc. (to be renamed The Madison Square Garden Company, “Spinco”) to the shareholders of The Madison Square Garden Company (to be renamed MSG Networks Inc., the “Company”) (the “Effective Date”), will confirm the terms of your continued employment by the Company.
The term of your employment under this Agreement (the “Term”) shall commence as of the Effective Date and, unless terminated earlier in accordance with this Agreement, will expire on the third anniversary of the Effective Date (the “Expiration Date”).
Your title will be Senior Vice President, Controller and Principal Accounting Officer. Throughout the Term, you agree to devote substantially all of your business time and attention to the business and affairs of the Company and to perform your duties in a diligent, competent, professional and skillful manner and in accordance with applicable law and the Company’s policies and procedures.
Your annual base salary will be a minimum of $350,000 paid no less frequently than monthly, subject to annual review and potential increase by the Compensation Committee of the Board of Directors of the Company (the “Compensation Committee”) in its sole discretion. You will also be eligible to participate in our discretionary annual cash bonus program with an annual target bonus opportunity equal to at least 35% of salary. Bonus payments are based on actual salary dollars paid during the year and depend on a number of factors including Company, unit and individual performance. Except as provided below, the decision whether or not to pay a bonus, and the amount of that bonus, if any, shall be made by the Compensation Committee in its sole discretion. Bonuses are typically paid early in the subsequent fiscal year. Except as provided below, in order to receive a bonus, you must be employed by the Company at the time bonuses are being paid. Your annual base salary and annual bonus target (as each may be increased from time to time in the Compensation Committee’s sole discretion) will not be reduced during the Term.
You will be eligible to participate in such long-term incentive programs as are made available to similarly situated executives at the Company. It is expected that such awards will consist of annual grants of cash and/or equity awards with an annual target value of not less than $330,000, as determined by the Compensation Committee. With respect to the Company’s current fiscal year, if awards are granted by the
THE MADISON SQUARE GARDEN COMPANY
TWO PENNSYLVANIA PLAZA, NEW YORK, NY 10121-0091
TEL 212-465-6000
Ms. Dawn Darino-Gorski
Page 2
Compensation Committee to Company executives prior to the Effective Date, then at such time you will be recommended to the Compensation Committee for a grant of awards at your new LTIP target ($330,000); provided, however that the terms of the award(s) will provide for automatic forfeiture to your existing target ($170,000) if the spin-off is not consummated by December 31, 2015. Any such awards would be subject to actual grant to you by the Compensation Committee in its sole discretion, would be pursuant to the applicable plan document and would be subject to terms and conditions established by the Compensation Committee in its sole discretion that would be detailed in separate agreements you would receive after any award is actually made. Long term incentive awards are currently expected to be subject to three-year vesting.
You will also be eligible for our standard benefits programs at the levels that are made available to similarly situated executives at the Company. Participation in our benefits programs is subject to meeting the relevant eligibility requirements, payment of the required premiums and the terms of the plans themselves. You will also be entitled to four (4) weeks of vacation per year to be accrued and used in accordance with Company policy.
Upon commencement of the Term, you agree to be bound by the additional covenants and provisions that are set forth in Annex I and Annex II hereto, which Annexes shall be deemed to be a part of the Agreement.
If your employment with the Company hereunder is terminated prior to the Expiration Date by the Company (other than for “Cause”) then, subject to your execution, delivery and non-revocation (within any applicable revocation period) of the severance agreement described below, the Company will provide you with the following:
(1) | Severance in an amount to be determined by the Compensation Committee (the “Severance Amount”), but in no event less than the sum of your annual base salary and your annual target bonus, each as in effect at the time your employment terminates. Sixty percent (60%) of the Severance Amount will be payable to you on the six-month anniversary of the date your employment so terminates (the “Termination Date”) and the remaining forty percent (40%) of the Severance Amount will be payable to you on the twelve-month anniversary of the Termination Date; and |
(2) | Any unpaid annual bonus for the Company’s fiscal year prior to the fiscal year which includes your Termination Date, and a pro rated bonus based on the amount of your base salary actually earned by you during the Company’s fiscal year through the Termination Date, each of which will be paid to you when such bonuses are generally paid to similarly situated active executives and will be based on your then current annual target bonus as well as Company and your business unit performance for the applicable fiscal year as determined by the Company in its sole discretion, but without adjustment for your individual performance. |
Your entitlement to the severance benefits describing in clauses (1) and (2) above will be subject to your prior execution, delivery and non-revocation (within any applicable revocation period) of a reasonable severance agreement no later than the six-month anniversary of the Termination Date. This
THE MADISON SQUARE GARDEN COMPANY
TWO PENNSYLVANIA PLAZA, NEW YORK, NY 10121-0091
TEL 212-465-6000
Ms. Dawn Darino-Gorski
Page 3
severance agreement shall be delivered to you by the Company as soon as reasonably practicable after the Termination Date and will include, without limitation, (x) a full and complete general release in favor of the Company and its affiliates (and their respective directors, officers and employees), (y) non-solicitation, non-disparagement, confidentiality and further cooperation provisions substantially similar to those set forth in Annex I hereto and (z) non-compete provisions no more restrictive than those set forth in Annex II hereto (but limited to the one-year period from the Termination Date).
In connection with any termination of your employment, any outstanding equity and cash incentive awards shall be treated in accordance with their terms.
For purposes of this Agreement, “Cause” means your (i) commission of an act of fraud, embezzlement, misappropriation, willful misconduct, gross negligence or breach of fiduciary duty against the Company or an affiliate thereof, or (ii) commission of any act or omission that results in a conviction, plea of no contest, plea of nolo contendere, or imposition of unadjudicated probation for any crime involving moral turpitude or any felony.
This Agreement does not constitute a guarantee of employment for any definite period. Your employment is at will and may be terminated by you or the Company at any time, with or without notice or reason.
The Company may withhold from any payment due to you any taxes required to be withheld under any law, rule or regulation. If any payment otherwise due to you hereunder would result in the imposition of the excise tax imposed by Section 4999 of the Internal Revenue Code, the Company will instead pay you either (i) such amount or (ii) the maximum amount that could be paid to you without the imposition of the excise tax, depending on whichever amount results in your receiving the greater amount of after-tax proceeds. In the event that the payments and benefits payable to you would be reduced as provided in the previous sentence, then such reduction will be determined in a manner which has the least economic cost to you and, to the extent the economic cost is equivalent, such payments or benefits will be reduced in the inverse order of when the payments or benefits would have been made to you until the reduction specified is achieved.
If and to the extent that any payment or benefit under this Agreement, or any plan, award or arrangement of the Company or its affiliates, is determined by the Company to constitute “non-qualified deferred compensation” subject to Section 409A of the Internal Revenue Code (“Section 409A”) and is payable to you by reason of your termination of employment, then (a) such payment or benefit shall be made or provided to you only upon a “separation from service” as defined for purposes of Section 409A under applicable regulations and (b) if you are a “specified employee” (within the meaning of Section 409A as determined by the Company), such payment or benefit shall not be made or provided before the date that is six months after the date of your separation from service (or, if earlier than the expiration of such six month period, the date of death). Any amount not paid or benefit not provided in respect of the six month period specified in the preceding sentence will be paid to you in a lump sum or provided to you as soon as practicable after the expiration of such six month period.
To the extent you are entitled to any expense reimbursement from the Company that is subject to Section 409A, (i) the amount of any such expenses eligible for reimbursement in one calendar year shall
THE MADISON SQUARE GARDEN COMPANY
TWO PENNSYLVANIA PLAZA, NEW YORK, NY 10121-0091
TEL 212-465-6000
Ms. Dawn Darino-Gorski
Page 4
not affect the expenses eligible for reimbursement in any other taxable year (except under any lifetime limit applicable to expenses for medical care), (ii) in no event shall any such expense be reimbursed after the last day of the calendar year following the calendar year in which you incurred such expense, and (iii) in no event shall any right to reimbursement be subject to liquidation or exchange for another benefit.
This Agreement is personal to you and without the prior written consent of the Company shall not be assignable by you otherwise than by will or the laws of descent and distribution. This Agreement shall inure to the benefit of and be enforceable by your legal representatives. This Agreement shall inure to the benefit of and be binding upon the Company and its successors and assigns.
To the extent permitted by law, you and the Company waive any and all rights to a jury trial with respect to any matter relating to this Agreement.
This Agreement will be governed by and construed in accordance with the law of the State of New York applicable to contracts made and to be performed entirely within that State.
Both the Company and you hereby irrevocably submit to the jurisdiction of the courts of the State of New York and the federal courts of the United States of America located in Manhattan solely in respect of the interpretation and enforcement of the provisions of this Agreement, and each of us hereby waives, and agrees not to assert, as a defense that either of us, as appropriate, is not subject thereto or that the venue thereof may not be appropriate. We each hereby agree that mailing of process or other papers in connection with any such action or proceeding in any manner as may be permitted by law shall be valid and sufficient service thereof.
This Agreement may not be amended or modified otherwise than by a written agreement executed by the parties hereto or their respective successors and legal representatives. The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement. The Company and you have participated jointly in the negotiation and drafting of this Agreement. In the event an ambiguity or question of intent or interpretation arises, this Agreement shall be construed as if drafted jointly by the Company and you and no presumption or burden of proof shall arise favoring or disfavoring any party by virtue of the authorship of any of the provisions of this Agreement.
You agree to keep this Agreement and its terms strictly confidential (unless it is made public by the Company); provided that (1) you are authorized to make any disclosure required of you by any federal, state or local laws or judicial proceedings, after providing the Company with prior written notice and an opportunity to respond to such disclosure (unless such notice is prohibited by law) and (2) you are authorized to disclose this Agreement and its terms to your legal, financial and tax advisors and your representatives may disclose to any and all persons, without limitation of any kind, the tax treatment and tax structure of this Agreement and all materials of any kind (including opinions or other tax analyses) that are provided to you relating to such tax treatment or structure.
This Agreement reflects the entire understanding and agreement of you and the Company with respect to the subject matter hereof and supersedes all prior understandings and agreements.
THE MADISON SQUARE GARDEN COMPANY
TWO PENNSYLVANIA PLAZA, NEW YORK, NY 10121-0091
TEL 212-465-6000
Ms. Dawn Darino-Gorski
Page 5
This Agreement will automatically terminate, and be of no further force or effect, on the Expiration Date (other than with respect to any rights which, by the terms of this Agreement, arose before such date); provided, however that the last eight paragraphs hereof, and Annex I and Annex II, shall remain in effect during the Term and thereafter indefinitely (unless otherwise expressly provided) and shall survive any termination or expiration of the Agreement or any termination of your employment with the Company.
Very truly yours,
/s/ Andrea Greenberg
Andrea Greenberg
President & Chief Executive Officer
Accepted and Agreed:
/s/ Dawn Darino-Gorski
Dawn Darino-Gorski
Date: September 11, 2015
THE MADISON SQUARE GARDEN COMPANY
TWO PENNSYLVANIA PLAZA, NEW YORK, NY 10121-0091
TEL 212-465-6000
Ms. Dawn Darino-Gorski
Page 6
ANNEX I
This Annex I constitutes part of the Agreement dated September 11, 2015 (the “Agreement”) by and between Dawn Darino-Gorski (“You”) and The Madison Square Garden Company (to be renamed MSG Networks Inc., the “Company”).
You agree to comply with the following covenants in addition to those set forth in the Agreement.
1. | Confidentiality |
(a)Confidential and Proprietary Information. You agree to retain in strict confidence and not use for any purpose whatsoever or divulge, disseminate, copy, disclose to any third party, or otherwise use any Confidential Information, other than for legitimate business purposes of the Company and its affiliates. As used herein, “Confidential Information” means any non-public information of a confidential, proprietary, commercially sensitive or personal nature of, or regarding, the Company or any of its affiliates or any director, officer or member of senior management of any of the foregoing (collectively “Covered Parties”). The term Confidential Information includes such information in written, digital, oral or any other format and includes, but is not limited to (i) information designated or treated as confidential; (ii) budgets, plans, forecasts or other financial or accounting data; (iii) customer, broadcast affiliate, fan, vendor, sponsor, marketing affiliate or shareholder lists or data; (iv) technical or strategic information regarding the Covered Parties’ television, programming, advertising, or other businesses; (v) advertising, sponsorship, business, sales or marketing tactics, strategies or information; (vi) policies, practices, procedures or techniques; (vii) trade secrets or other intellectual property; (viii) information, theories or strategies relating to litigation, arbitration, mediation, investigations or matters relating to governmental authorities; (ix) terms of agreements with third parties and third party trade secrets; (x) information regarding employees, talent, agents, consultants, advisors or representatives, including their compensation or other human resources policies and procedures; (xi) information or strategies relating to any potential or actual business development transactions and/or any potential or actual business acquisition, divestiture or joint venture, and (xii) any other information the disclosure of which may have an adverse effect on the Covered Parties’ business reputation, operations or competitive position, reputation or standing in the community.
(b)Notwithstanding the foregoing, the obligations of this section, other than with respect to employee or customer information, shall not apply to Confidential Information that is in the public domain (through no breach by you) or specifically exempted in writing by the applicable Covered Party from the applicability of this Agreement.
(c)Notwithstanding anything contained elsewhere in this Agreement, (i) you are authorized to make any disclosure which, in the written advice of outside counsel, is required of you by any federal, state or local laws or judicial, arbitral or governmental agency proceedings, after providing the Company with prior written notice (to the extent legally permissible) and an opportunity to respond prior to such disclosure (to extent reasonably practicable), and (ii) you are authorized to disclose Confidential Information to your personal attorney, solely for the purpose of, and to the extent necessary to, obtain personal legal advice.
THE MADISON SQUARE GARDEN COMPANY
TWO PENNSYLVANIA PLAZA, NEW YORK, NY 10121-0091
TEL 212-465-6000
Ms. Dawn Darino-Gorski
Page 7
(d)You agree not to issue any press release or public statement regarding your employment by the Company and/ or the commencement thereof unless (i) so disclosed with the prior written consent of the Company, or (ii) it is, in the written opinion of outside counsel, required and then only to the extent so required, by applicable law.
2.Additional Understandings
You agree for yourself and others acting on your behalf, that you (and they) will not disparage, make negative statements about (either “on the record” or “off the record”) or act in any manner which is intended to or does damage to the good will of, or the business or personal reputations of the Company, any of its affiliates or any of their respective officers, directors, employees, successors and assigns (including, without limitation, any former officers, directors or employees of the Company and/ or its affiliates, to the extent such individuals served in any such capacity at any point during the Term).
This Agreement in no way restricts or prevents you from providing truthful testimony as is required by court order or other legal process; provided that you afford the Company written notice and an opportunity to respond prior to such disclosure.
If requested by the Company, you agree to deliver to the Company upon the termination of your employment, or at any earlier time the Company may request, all memoranda, notes, plans, files, records, reports, and software and other documents and data (and copies thereof regardless of the form thereof (including electronic copies)) containing, reflecting or derived from Confidential Information or the Materials (as defined below) of the Company or any of its affiliates which you may then possess or have under your control. If so requested, you shall provide to the Company a signed statement confirming that you have fully complied with this paragraph.
In addition, you agree that the Company is the owner of all rights, title and interest in and to all documents, tapes, videos, designs, plans, formulas, models, processes, computer programs, inventions (whether patentable or not), schematics, music, lyrics and other technical, business, financial, advertising, sponsorship, sales, marketing, customer or product development plans, forecasts, strategies, information and materials (in any medium whatsoever) developed or prepared by you or with your cooperation in any way in connection with your employment by the Company (the “Materials”). The Company will have the sole and exclusive authority to use the Materials in any manner that it deems appropriate, in perpetuity, without additional payment to you. You agree to perform all actions reasonably requested by the Company (whether during or after the Term) to establish and confirm the Company’s ownership of such Materials (including, without limitation, the execution and delivery of assignments, consents, powers of attorney and other instruments) and to provide reasonable assistance to the Company or any of its affiliates in connection with the prosecution of any applications for patents, trademarks, trade names, service marks or reissues thereof or in the prosecution or defense of interferences relating to any Materials. If the Company is unable, after reasonable effort, to secure your signature on any such papers, any executive officer of the Company shall be entitled to execute any such papers as your agent and attorney-in-fact, and you hereby irrevocably designate and appoint each executive officer of the Company as your agent and attorney-in-fact to execute any such papers on your behalf, and to take any and all actions as the Company may deem necessary or desirable in order to protect its rights and interests in any Materials, under the conditions described in this sentence.
THE MADISON SQUARE GARDEN COMPANY
TWO PENNSYLVANIA PLAZA, NEW YORK, NY 10121-0091
TEL 212-465-6000
Ms. Dawn Darino-Gorski
Page 8
In addition, you agree for yourself and others acting on your behalf, that you (and they) shall not, at any time, participate in any way in the writing or scripting (including, without limitation, any “as told to” publications) of any book, article, periodical, periodical story, movie, play, other written or theatrical work, or video that (i) relates to your services to the Company or any of its affiliates or (ii) otherwise refers to the Company or its respective businesses, activities, directors, officers, employees or representatives, without the prior written consent of the Company.
3. | Further Cooperation |
Following the date of termination of your employment with the Company, you will no longer provide any regular services to the Company or represent yourself as a Company agent. If, however, the Company so requests, you agree to use commercially reasonable good faith efforts to cooperate fully with the Company in connection with any matter with which you were involved prior to such employment termination, or in any litigation or administrative proceedings or appeals (including any preparation therefore) where the Company believes that your personal knowledge, attendance or participation could be beneficial to the Company or its affiliates. This cooperation includes, without limitation, participation on behalf of the Company and/ or its affiliates in any litigation, administrative or similar proceeding, including providing truthful testimony.
The Company will provide you with reasonable notice in connection with any cooperation it requires in accordance with this section and will take reasonable steps to schedule your cooperation in any such matters so as not to materially interfere with your other professional and personal commitments. The Company will reimburse you for any reasonable out-of-pocket expenses you reasonably incur in connection with the cooperation you provide hereunder as soon as practicable after you present appropriate documentation evidencing such expenses. You agree to provide the Company with an estimate of any such individual expense of more than $1,000 before it is incurred.
4. | No-Hire or Solicit |
During the Term and thereafter through the first anniversary of the date on which your employment with the Company has terminated for any reason, you agree not to hire, seek to hire, or cause any person or entity to hire or seek to hire (without the prior written consent of the Company), directly or indirectly (whether for your own interest or any other person or entity’s interest) any employee of the Company or any of its affiliates. This restriction does not apply to any employee who was not an employee of the Company or any of its affiliates at any time during the six-month period immediately preceding your solicitation. This restriction does not apply to any former employee who was discharged by the Company or any of its affiliates. In addition, this restriction will not prevent you from providing references. For the avoidance of doubt, a general (non-targeted), publicly-accessible advertisement (or web posting) of an open employment position will not in and of itself be deemed to be a breach of the solicitation restrictions set forth in this paragraph.
5. | Specific Performance; Injunctive Relief |
You understand and agree that (i) the provisions of this Annex I are reasonable and appropriate for the Company’s protection of its legitimate business interests, (ii) the consideration provided under the
THE MADISON SQUARE GARDEN COMPANY
TWO PENNSYLVANIA PLAZA, NEW YORK, NY 10121-0091
TEL 212-465-6000
Ms. Dawn Darino-Gorski
Page 9
Agreement is sufficient to justify the restrictions and limitations contained in this Annex I, and (iii) the Company will suffer immediate, irreparable harm in the event you breach any of your obligations under the covenants and agreements set forth in this Annex I, that monetary damages will be inadequate to compensate the Company for such breach and that the Company shall be entitled to injunctive relief as a remedy for any such breach (or threatened breach). Such remedy shall not be deemed to be the exclusive remedy in the event of breach by you of any of the covenants or agreements set forth in this Annex I, but shall be in addition to all other remedies available to the Company at law or in equity. You hereby waive, to the extent you may legally do so, any requirement for security or the posting of any bond or other surety in connection with any temporary or permanent award of injunctive or other equitable relief, and further waive, to the extent you may legally do so, the defense in any action for specific performance or other equitable remedy that a remedy at law would be adequate. Notwithstanding anything to the contrary contained in this Agreement, in the event you violate the covenants and agreements set forth in this Annex I in any material respect, then, in addition to all other rights and remedies available to the Company, the Company shall have no further obligation to pay you any severance benefits or to provide you with any other rights or benefits to which you would have been entitled pursuant to this Agreement had you not breached the covenants and agreements set forth in this Annex I.
THE MADISON SQUARE GARDEN COMPANY
TWO PENNSYLVANIA PLAZA, NEW YORK, NY 10121-0091
TEL 212-465-6000
Ms. Dawn Darino-Gorski
Page 10
ANNEX II
This Annex II constitutes part of the Agreement dated September 11, 2015 (the “Agreement”) by and between Dawn Darino-Gorski (“You”) and The Madison Square Garden Company (to be renamed MSG Networks Inc., the “Company”).
The provisions of this Annex II shall remain in effect during your employment by the Company and for one year following the termination of your employment for any reason; provided, however, that if your employment is terminated by the Company for any reason other than Cause, then the provisions of this Annex II shall automatically expire on such Termination Date (but will be included in the Company’s proposed severance agreement which, for the avoidance of doubt, you will not be required to sign if you wish to waive your rights to the severance benefits described in the Agreement).
Capitalized terms contained herein, and not otherwise defined herein, shall have the meanings ascribed to them in the Agreement (or in the Annex I attached thereto).
Non-Compete
You acknowledge that due to your executive position in the Company and the knowledge of the Company’s and its affiliates’ confidential and proprietary information which you will obtain during the term of your employment hereunder, your employment by certain businesses would be irreparably harmful to the Company and/or its affiliates. During your employment with the Company and thereafter through the first anniversary of the date on which your employment with the Company has terminated for any reason, you agree not to (other than with the prior written consent of the Company), become employed by, consult, have any material interest in or otherwise perform services for any Competitive Entity (as defined below). A “Competitive Entity” shall mean any (A) (i) regional sports network that operates primarily in New York, New Jersey or Connecticut, or (ii) national sports television (e.g., ESPN) or national “over-the-top” sports network in the United States, or (B) affiliate of any person or entity that operates any of the types of businesses described in clause (A) above, provided that you may become employed or otherwise provide services to such an affiliate of a Competitive Entity, so long as (x) your services are neither provided to, nor for the primary benefit of, such Competitive Entity described in clause (A) and (y) the affiliate is not a direct or indirect parent company of the Competitive Entity described in clause (A) if the Competitive Entity subsidiary constitutes more than 30% of the total revenue of the parent company consolidated family of companies. Additionally, the ownership by you of not more than 1% of the outstanding equity of any publicly traded company shall not, by itself, be a violation of this Paragraph.
By accepting the provisions set forth in this Annex II, you understand that the terms and conditions of this Annex II may limit your ability to earn a livelihood in a business similar to the business of the Company and its affiliates, but nevertheless hereby agree that the restrictions and limitations hereof are reasonable in scope, area and duration, and that the consideration provided under the Agreement and the severance agreement is sufficient to justify the restrictions and limitations contained herein which, in any event (given your education, skills and ability), you do not believe would prevent you from otherwise earning a living. You further agree that the restrictions are reasonable and necessary, are valid and enforceable under New York law, and do not impose a greater restraint than necessary to protect the Company’s legitimate business interests.
THE MADISON SQUARE GARDEN COMPANY
TWO PENNSYLVANIA PLAZA, NEW YORK, NY 10121-0091
TEL 212-465-6000
Ms. Dawn Darino-Gorski
Page 11
You understand and agree that the Company will suffer immediate, irreparable harm in the event you breach any of your obligations under the covenants and agreements set forth in this Annex II, that monetary damages will be inadequate to compensate the Company for such breach and that the Company shall be entitled to injunctive relief as a remedy for any such breach (or threatened breach). Such remedy shall not be deemed to be the exclusive remedy in the event of breach (or threatened breach) by you of any of the covenants or agreements set forth in this Annex II, but shall be in addition to all other remedies available to the Company at law or in equity. You hereby waive, to the extent you may legally do so, (i) any requirement for security or the posting of any bond or other surety in connection with any temporary or permanent award of injunctive or other equitable relief, and (ii) the defense in any action for specific performance or other equitable remedy that a remedy at law would be adequate. Notwithstanding anything to the contrary contained in the Agreement, in the event you violate the covenants and agreements set forth in this Annex II, in addition to all other rights and remedies available to the Company, the Company shall have no further obligation to pay you any severance benefits or to provide you with any other rights or benefits to which you would have been entitled pursuant to the Agreement or the severance agreement had you not breached the covenants and agreements set forth in this Annex II.
The restrictions contained in this Annex II shall be extended on a day-for-day basis for each day during which you violate the provisions of this Annex II in any respect.
THE MADISON SQUARE GARDEN COMPANY
TWO PENNSYLVANIA PLAZA, NEW YORK, NY 10121-0091
TEL 212-465-6000
Exhibit 31.1
Certification
I, Andrea Greenberg, certify that:
1. | I have reviewed this Quarterly Report on Form 10-Q of MSG Networks Inc.; |
2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
4. | The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
a. | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
b. | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
c. | Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
d. | Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and |
5. | The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): |
a. | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and |
b. | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. |
Date: November 5, 2015
/s/ Andrea Greenberg |
Andrea Greenberg |
President and Chief Executive Officer |
Exhibit 31.2
Certification
I, Bret Richter, certify that:
1. | I have reviewed this Quarterly Report on Form 10-Q of MSG Networks Inc.; |
2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
4. | The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
a. | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
b. | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
c. | Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
d. | Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and |
5. | The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): |
a. | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and |
b. | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. |
Date: November 5, 2015
/s/ Bret Richter |
Bret Richter |
Executive Vice President and Chief Financial Officer |
Exhibit 32.1
Certification
Pursuant to 18 U.S.C. §1350, the undersigned officer of MSG Networks Inc. (the “Company”), hereby certifies, to such officer's knowledge, that the Company's Quarterly Report on Form 10-Q for the Quarter ended September 30, 2015 (the “Report”) fully complies with the requirements of §13(a) or §15(d), as applicable, of the Securities Exchange Act of 1934 and that the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
Date: November 5, 2015
/s/ Andrea Greenberg |
Andrea Greenberg |
President and Chief Executive Officer |
The foregoing certification is being furnished solely pursuant to 18 U.S.C. §1350 and is not being filed as part of the Report or as a separate disclosure document.
Exhibit 32.2
Certification
Pursuant to 18 U.S.C. §1350, the undersigned officer of MSG Networks Inc. (the “Company”), hereby certifies, to such officer's knowledge, that the Company's Quarterly Report on Form 10-Q for the Quarter ended September 30, 2015 (the “Report”) fully complies with the requirements of §13(a) or §15(d), as applicable, of the Securities Exchange Act of 1934 and that the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
Date: November 5, 2015
/s/ Bret Richter |
Bret Richter |
Executive Vice President and Chief Financial Officer |
The foregoing certification is being furnished solely pursuant to 18 U.S.C. §1350 and is not being filed as part of the Report or as a separate disclosure document.
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