C ASE 7-4 LOCKOUT The Celtics Basketball Holdings, L.P. and Subsidiary included
ID: 2699757 • Letter: C
Question
CASE 7-4 LOCKOUT
The Celtics Basketball Holdings, L.P. and Subsidiary included the following note in its 1998
annual report:
Note G%u2014Commitments and Contingencies (in Part)
National Basketball Association (%u201CNBA%u201D) players, including those that play for the Boston
Celtics, are covered by a collective bargaining agreement between the NBA and the NBA Players
Association (the %u201CNBPA%u201D) that was to be in effect through June 30, 2001 (the %u201CCollective
Bargaining Agreement%u201D). Under the terms of the Collective Bargaining Agreement, the NBA
had the right to terminate the Collective Bargaining Agreement after the 1997%u20131998 season if it
was determined that the aggregate salaries and benefits paid by all NBA teams for the 1997%u2013
1998 season exceeded 51.8% of projected Basketball Related Income, as defined in the Collective
Bargaining Agreement (%u201C BRI%u201D ). Effective June 30, 1998, the Board of Governors of the
NBA voted to exercise that right and reopen the Collective Bargaining Agreement, as it had
been determined that the aggregate salaries and benefits paid by the NBA teams for the 1997%u2013
1998 season would exceed 51.8% of projected BRI. Effective July 1, 1998, the NBA commenced
a lockout of NBA players in support of its attempt to reach a new collective bargaining
agreement. The NBA and the NBPA have been engaged in negotiations regarding a new collective
bargaining agreement, but as of September 18, 1998, no agreement has been reached. In
the event that the lockout extends into the 1998%u2013 1999 season, NBA teams, including the Boston
Celtics, will refund amounts paid by season ticket holders (plus interest) for any games that
are canceled as a result of the lockout. In addition, as a result of the lockout, NBA teams have
not made any payments due to players with respect to the 1998%u2013 1999 season. The NBPA has
disputed the NBA%u2019 s position on this matter, and both the NBA and the NBPA have presented
their cases to an independent arbitrator, who will make his ruling no later than the middle of
October 1998. As of September 18, 1998, the arbitrator has not ruled on this matter.
Although the ultimate outcome of this matter cannot be determined at this time, any loss of
games as a result of the absence of a collective bargaining agreement or the continuation of the
lockout will have a material adverse effect on the Partnership%u2019 s financial condition and its results
of operations. Further, if NBA teams, including the Boston Celtics, are required to honor the
player contracts for the 1998%u2013 99 season and beyond without agreeing to a new collective bargaining
agreement or without ending the lockout, which would result in the loss of games, the Partnership%u2019 s
financial condition and results of operations will be materially and adversely affected.
The Partnership has employment agreements with officers, coaches and players of the
basketball team (Celtics Basketball). Certain of the contracts provide for guaranteed payments
which must be paid even if the employee is injured or terminated. Amounts required
to be paid under such contracts in effect as of September 18, 1998, including option years
and $8,100,000 included in accrued expenses at June 30, 1998, but excluding deferred compensation
commitments disclosed in Note E%u2014 Deferred Compensation, are as follows:
Years ending June 30, 1999 $32,715,000
2000 33,828,000
2001 27,284,000
2002 20,860,000
2003 19,585,000
2004 and thereafter 10,800,000
Commitments for the year ended June 30, 1999, include payments due to players under
contracts for the 1998%u2013 1999 season in the amount of $18,801,000, which are currently not
being paid as a result of the lockout described above.
Celtics Basketball maintains disability and life insurance policies on most of its key players.
The level of insurance coverage maintained is based on management%u2019 s determination of
the insurance proceeds which would be required to meet its guaranteed obligations in the
event of permanent or total disability of its key players.
Required Discuss how to incorporate the contingency note into an analysis of Celtics Basketball
Holdings, L.P. and Subsidiary.
Explanation / Answer
The NBA commenced a lockout of NBA players in support of its attempt to reach a new collective bargaining agreement. On January 20, 1999, the NBA and the NBA Players Association (the "NBPA") entered into a new collective bargaining agreement (the "New Collective Bargaining Agreement"), thereby ending the lockout. The New Collective Bargaining Agreement is to be in effect through June 30, 2004, and the NBA has an option to extend it for one year thereafter. As a result of the lockout, the 1998-99 NBA regular season consisted of 50 games per team (25 of which were home games), beginning in early February 1999. The impact of the lockout and the shortened NBA season had a materially adverse effect on BCLP's financial condition and results of operations. See "Collective Bargaining Agreement." Sources of Revenues. The Boston Celtics derive their revenues principally from the sale of tickets to home games, the licensing of television, cable network and radio rights, and promotional and novelty revenues.
Ticket Sales. Ordinarily, the Boston Celtics play an equal number of home games and away games during the 82-game NBA regular season. In addition, the Boston Celtics ordinarily play eight exhibition games prior to the commencement of the regular season. Under the NBA Constitution and By- laws, the Boston Celtics receive all revenues from the sale of tickets to regular season home games (subject to the NBA gate assessment of 6%) and no revenue from the sale of tickets to regular season away games. Generally, the Boston Celtics retain all revenues from the sale of tickets to home exhibition games played in Boston as well as certain ticket revenues from home exhibition games played outside of Boston. Under certain circumstances, the Boston Celtics pay appearance fees to the visiting team for exhibition games, and likewise the team may receive appearance fees for exhibition games played elsewhere. As a result of the lockout, the 1998-99 NBA regular season was shortened to 50 regular season games consisting of an equal number of home games and away games. In addition, upon resolution of the lockout, NBA teams, including the Boston Celtics, played two exhibition games for which tickets were issued at no charge.
Other sources of revenues for the basketball operations include promotional and novelty revenues, including royalties from NBA Properties, Inc. ("NBA Properties"). NBA Properties is a corporation organized in 1967 to which each NBA member has assigned the exclusive rights to the merchandising of its team name, insignia and other similar properties to the extent such rights were not previously assigned to others prior to the formation of NBA Properties. NBA Properties pays royalties to each NBA team in consideration of the receipt of such rights. This assignment is subject to the right of each team, including the Boston Celtics, to use its insignia and symbols in connection with the promotion of the team in its home territory and retail sales in its home arena. NBA Properties licenses other companies to manufacture and sell official NBA items such as sneakers, basketballs, warm-up jackets and sweatshirts, as well as certain non-sports items. Celtics Basketball also leases approximately 16,000 square feet of space at 151 Merrimac Street, Boston, Massachusetts. This facility houses the Boston Celtics administrative offices. The term of this lease extends through December 2005, with an option to extend for one five-year renewal period. Under the provisions of the Lease Agreement with NBGC, Celtics Basketball is reimbursed for the cost of 10,000 square feet of office space during the 10-year term of the Lease Agreement with NBGC.
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