Item 3. Legal Proceedings
As a member of the NBA, Celtics Basketball is a defendant along with the other NBA members in various lawsuits incidental to the NBA's basketball operations. Celtics Basketball will generally be liable, jointly and severally, with all other members of the NBA for the costs of defending such lawsuits and any liabilities of the NBA which might result from such lawsuits. From time to time, the Partnership may become a party to legal proceedings arising in the ordinary course of business.
In July and August 1998, four separate class action complaints (the "Complaints") were filed by Unitholders in the Court of Chancery of the State of Delaware in and for New Castle County against BCLP II, Celtics, Inc., Paul E. Gaston, Don F. Gaston, Paula B. Gaston, John H.M. Leithead and John B. Marsh III, each a director or former director of Celtics, Inc. BCLP II GP, Inc. is a wholly owned subsidiary of Celtics, Inc. The named plaintiffs, who each purported to bring their individual actions on behalf of themselves and others similarly situated, are Kenneth L. Rilander, Harbor Finance Partners, Maryann Kelly and Kathleen Kruse Perry. Each of the Complaints alleges, among other things, that the Reorganization was unfair to former BCLP II Unitholders, and seeks to recover an unspecified amount of damages, including attorneys' and experts' fees and expenses. The Partnership filed a Motion to Dismiss the Complaint filed by Mr. Rilander on July 29, 1998, and discovery in that case has been stayed by agreement of the parties. The Complaints have been consolidated. On August 6, 1999, the Court of Chancery issued an opinion granting in part, and denying in part, the Partnership's Motion to Dismiss, and on September 3, 1999, the plaintiffs filed an amended consolidated Complaint.
Although the ultimate outcome of these Complaints cannot be determined at this time, management of the Partnership does not believe that the outcome of these proceedings will have a material adverse effect on the Partnership's financial position or results of operations.
Item 4.
Item 4. Submission of Matters to a Vote of Security Holders
None.
PART II -------
Item 5.
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
BCLP's Units are listed on the New York Stock Exchange and the Boston Stock Exchange and are traded under the symbol "BOS". Prior to the Reorganization, BCLP II's Units were listed on the New York Stock Exchange and the Boston Stock Exchange and were traded under the symbol "BOS". Holders of BCLP II Units at the time of the Reorganization who elected to continue their interest in BCLP received, for each BCLP II Unit held, one BCLP Unit, $20 principal amount of Subordinated Debentures and $1.00 in cash. The Subordinated Debentures trade on the New York Stock Exchange and provide for annual interest payments. (See Item 1 for more information regarding the Reorganization.)
The following table sets forth, for the periods indicated, the high and low sales prices per BCLP Unit on the New York Stock Exchange and cash distributions per BCLP Unit to Unitholders for the year ended June 30, 1999 and the high and low sales prices per BCLP II Unit on the New York Stock Exchange and cash distributions per BCLP II Unit to Unitholders for the year ended June 30, 1998. Following the Reorganization, there is no established public trading market for BCLP II Units.
Distributions may be declared from time to time in the sole discretion of BCLP GP as General Partner of the Partnership. See "Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources."
Item 6.
Item 6. Selected Consolidated Financial Data
The selected consolidated financial information set forth below represents the consolidated operating results and balance sheet data of BCLP and BCLP II as described in "Item 7
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Forward Looking Statements
Certain statements and information included herein are "forward- looking statements" within the meaning of the federal Private Securities Litigation Reform Act of 1995, including statements relating to prospective game, broadcast and other revenues, expenses (including player and other team costs), estimates of future impacts of the player lockout, capital expenditures, tax burdens, earnings and distributions, and expectations, intentions and strategies regarding the future. Such forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of the Partnership to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Factors that could cause the Partnership's financial condition, results of operation, liquidity and capital resources to differ materially include the continuing effects of the player lockout and cancellation of 32 regular season games in the 1998-99 season as a result of the lockout, the impact of the lockout on television and other revenues, the competitive success of the Boston Celtics, uncertainties as to increases in players' salaries, the Boston Celtics' ability to attract and retain talented players, the risk of injuries to key players, uncertainties regarding media contracts, uncertainties regarding labor relations and the performance of certain investments by subsidiaries of the Partnership.
Basis of Presentation
As more fully described in "Item 1 - Business and Properties - Overview of the Reorganization," BCLP II completed a Reorganization on June 30, 1998 pursuant to which BCLP was formed as a holding entity for BCLP II. From its date of formation until the completion of the Reorganization, BCLP had no material assets and was not engaged in any business operations. Prior to the Reorganization, BCLP II, through its subsidiaries, owned and operated the Boston Celtics. Accordingly, the operating results of the Boston Celtics are consolidated in BCLP II's financial statements for periods prior to the Reorganization. Upon completion of the Reorganization, effective June 30, 1998, BCLP's and BCLP II's interest in the accounts and operations of the Boston Celtics is reflected in their indirect 48.3% investment in Celtics Basketball Holdings, which is accounted for on the equity method. Celtics Basketball Holdings has a 99.999% limited partnership interest in Celtics Basketball, which owns and operates the Boston Celtics effective July 1, 1998.
Because BCLP had not engaged in any business operations prior to June 30, 1998, the Selected Consolidated Statement of Operations Data presented in "Item 6" above and the following discussion compare the operating results of BCLP and its subsidiaries for the year ended June 30, 1999 with those of BCLP II and its subsidiaries for the year ended June 30, 1998, and compare the operating results of BCLP II and its subsidiaries for the year ended June 30, 1998 with the year ended June 30, 1997. Due to the July 1, 1998 change in BCLP's and BCLP II's method of accounting for their investment in the accounts and operations of the Boston Celtics from consolidation to the equity method, BCLP's and BCLP II's results of operations in the fiscal year ended June 30, 1999 are materially different than those in the fiscal year ended June 30, 1998.
Reorganization costs amounted to approximately $2,350,000, which consisted primarily of legal and professional expenses, costs of printing and distribution and filing fees. These costs were charged to operations by BCLP II prior to June 30, 1998.
Collective Bargaining Agreement
NBA players, including those that play for the Boston Celtics, were previously covered by a collective bargaining agreement between the NBA and the NBPA that was to be in effect through June 30, 2001. Under the terms of the Collective Bargaining Agreement, the NBA had the right to terminate the Collective Bargaining Agreement after the 1997-98 season if it was determined that the aggregate salaries and benefits paid by all NBA teams for the 1997-98 season exceeded 51.8% of projected Basketball Related Income, as defined in the Collective Bargaining Agreement ("BRI"). In March 1998 the Board of Governors of the NBA voted to reopen the Collective Bargaining Agreement, as it had been determined that the aggregate salaries and benefits paid by the NBA teams for the 1997-98 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.
On January 20, 1999, the NBA and the NBPA entered into a 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. Ordinarily, the NBA regular season consists of 82 games per team (41 of which are home games), and generally begins in late October or early November. Further, as provided under the terms of the New Collective Bargaining Agreement, NBA teams were only required to pay 50/82 of each player's salary with respect to the 1998-99 regular season. Previously, an independent arbitrator ruled that NBA teams, including the Boston Celtics, were not required to pay player salaries during the lockout.
NBA teams, including the Boston Celtics, refunded amounts paid by season ticket holders (plus interest at 6%) for a total of 18 home games (including two exhibition games) that were canceled as a result of the lockout. Refunds of approximately $11,632,000 (including interest of $185,000) were paid by Celtics Basketball on a monthly basis for games canceled in the preceding month. In addition, certain season ticket holders elected to leave their refunds and interest on deposit for future games. Such refunds and interest amounted to approximately $571,000 at June 30, 1999 (including interest of approximately $12,000). No interest has accrued on such amounts since January 31, 1999.
General
The Boston Celtics derive revenues principally from the sale of tickets to home games and the licensing of television, cable network and radio rights. The most significant expenses of the Boston Celtics are player and coaching salaries. A large portion of the Boston Celtics' annual revenues and operating expense is determinable at the commencement of each basketball season based on season ticket sales and the Boston Celtics' multi-year contracts with its players, coaches and broadcast organizations.
The operations and financial results of the Boston Celtics are seasonal. On a cash flow basis, the Boston Celtics receive a substantial portion of their receipts from the advance sale of season tickets during the months of June through October, prior to the commencement of the NBA regular season. Cash receipts from playoff ticket sales are received in March of any year for which the team qualifies for league playoffs. Most of the Boston Celtics' operating expenses are incurred and paid during the regular season, which extends from late October or early November through late April.
For financial reporting purposes the Boston Celtics recognize revenues and expenses on a game-by-game basis. Because the NBA regular season begins in late October or early November, the first fiscal quarter, which ends on September 30, will generally include limited or no revenue and will reflect a net loss attributable to general and administrative expenses incurred in the quarter. Based on the present NBA game schedule, the Boston Celtics generally recognizes approximately one-third of its annual regular season revenue in the second fiscal quarter, approximately one-half of such revenue in the third fiscal quarter and the remainder in the fourth fiscal quarter, and it recognizes its playoff revenue, if any, in the fourth fiscal quarter. Due to the lockout in the 1998-99 season, however, the operating results of the Boston Celtics for the year ended June 30, 1999 did not reflect historical seasonal trends.
The consolidated statements of operations data include the results of operations of television station WFXT prior to its sale on July 7, 1995, as well as the gain on its disposal, as discontinued operations.
Results of Operations
Consolidated loss before extraordinary charge for the year ended June 30, 1999 was $7,843,000 or $2.85 per unit and consolidated net loss for the year ended June 30, 1999 was $10,099,000 or $3.67 per unit compared with BCLP II's consolidated net income for the year ended June 30, 1998 of $12,267,000 or $2.45 per unit. The significant loss before extraordinary charge in fiscal 1999 is primarily a result of the lockout, the cancellation of 32 regular season games and the reduced number of games in the revised 1998-99 NBA schedule. In addition, interest expense on the Subordinated Debentures issued on June 30, 1998 in connection with the Reorganization, including amortization of the original issue discount, amounted to $3,644,000 in fiscal 1999.
BCLP II recorded an extraordinary charge in the three months ended September 30, 1998 related to the early retirement of notes payable to a former principal unitholder relating to redeemed BCLP II units. The notes payable to the former principal unitholder had an aggregate initial face amount of $14,365,096. The notes, which were due and payable on July 1, 2000, also provided that the amounts to be paid to such unitholder were to be increased by specified amounts on each July 1 during their term. If the principal unitholder held the notes until July 1, 2000, he would have been entitled to receive aggregate payments (excluding interest) in the amount of $20,044,320. Each of the notes bore interest payable quarterly at the rate of 7.76% per annum. At September 30, 1998, BCLP II repaid the notes payable, which had an aggregate balance, including scheduled increases in the note balances, of $17,538,780. The notes payable were repaid in the amount of $19,794,320, resulting in an extraordinary charge of $2,255,540 related to early retirement of notes payable.
Income from continuing operations for the year ended June 30, 1997 included charges totaling $8,583,000 in the three months ended June 30, 1997 related to significant personnel changes, primarily in basketball operations. These non-recurring charges consisted primarily of player contract termination costs ($4,580,000), bonuses and relocation costs ($2,215,000), severance costs ($909,000) and salaries for the new coaching staff ($879,000). No such non-recurring charges were recorded in the year ended June 30, 1998, which, among other things, contributed to an increase in net income for the year ended June 30, 1998.
Equity in loss of Celtics Basketball Holdings, L.P. of $205,000 for the year ended June 30, 1999 represents BCLP's 48.3% interest in the income (loss) of the entity that indirectly owns and operates the Boston Celtics basketball team subsequent to the Reorganization. Prior to the Reorganization, the operating results of the Boston Celtics basketball team were consolidated with BCLP II's operating results. Celtics Basketball recognizes Boston Celtics team and game revenues and expenses on a game-by- game basis, and the NBA regular season ordinarily begins in late October or early November. As a result, BCLP II's operating results for the year ended June 30, 1998 included revenues from ticket sales, television and radio broadcast rights fees and promotional advertising, and included team and game expenses. Had BCLP II accounted for a 48.3% interest of the Boston Celtics basketball team for the year ended June 30, 1998 using the equity method, BCLP II's pro forma equity in income of the Boston Celtics would have amounted to $8,940,000, reflecting, among other things, team and game revenues and expenses related to the 82 regular season games played by the Boston Celtics in the year ended June 30, 1998. Due to the cancellation of 32 regular season games in the 1998-99 season, the Boston Celtics did not commence their 1998-99 season until early February 1999, and the Boston Celtics played 50 regular season games in the year ended June 30, 1999. As a result, the results of operations of Celtics Basketball for the year ended June 30, 1999 reflected a net loss, as net team and game income related to the 50 regular season games played were more than offset by general and administrative expenses, selling and promotional expenses, certain team expenses contractually related to the 32 canceled games and interest expense, net of interest income.
Revenues from regular season ticket sales of $39,108,000 in fiscal 1998, which related entirely to the Boston Celtics basketball team, increased by $7,295,000 compared to $31,813,000 in fiscal 1997. The increase was a result of increased ticket sales, believed to be primarily caused by improved performance of the basketball team as well as an increase in ticket prices.
Regular season television and radio rights fees revenues of $28,002,000 in fiscal 1998, which related entirely to the Boston Celtics basketball team, increased by $4,733,000 compared to $23,269,000 in fiscal 1997. The increase was primarily the result of increases in the NBA's national broadcasting contracts.
Other revenues, principally promotional advertising revenues of $8,570,000 in fiscal 1998, which related entirely to the Boston Celtics basketball team, increased $654,000 as compared to $7,916,000 in fiscal 1997. The increase in fiscal 1998 was due to increases in revenues from promotional activities ($579,000) as well as proceeds received from NBA Properties from the licensing of novelty type products ($75,000).
Team expenses of $40,402,000 in fiscal 1998, which related entirely to the Boston Celtics basketball team, decreased by $539,000 compared to $40,941,000 in fiscal 1997. Player and coaching salaries increased approximately $7,368,000 in fiscal 1998 as compared to fiscal 1997 due to changes in team player and coaching personnel, but this increase was offset by the effect of certain charges of approximately $8,052,000 recorded in the three months ended June 30, 1997 that did not recur in fiscal 1998. These non-recurring charges recorded in the three months ended June 30, 1997 related to personnel changes in basketball operations, including player contract termination costs ($4,580,000), bonuses and relocation costs ($1,715,000), severance costs ($878,000) and salaries for the new coaching staff ($879,000).
Game expenses of $2,820,000 in fiscal 1998, which related entirely to the Boston Celtics basketball team, consist primarily of the NBA's 6% assessment on gate receipts. Game expenses in fiscal 1998 increased by $434,000 as compared to $2,386,000 in fiscal 1997. The increase in fiscal 1998 was primarily a result of the corresponding change in revenue from ticket sales.
BCLP's general and administrative expenses of $3,837,000 in fiscal 1999 decreased by $9,628,000 compared to BCLP II's general and administrative expenses of $13,465,000 in fiscal 1998. General and administrative expenses in fiscal 1998 included general and administrative expenses related to the Boston Celtics basketball team of $5,709,000. Effective July 1, 1998, BCLP accounts for its 48.3% indirect interest in the Boston Celtics basketball team using the equity method, and, accordingly, general and administrative expenses related to the Boston Celtics basketball team in fiscal 1999 are included in equity in loss of Celtics Basketball Holdings. The balance of the decreases in general and administrative expenses in fiscal 1999 is a result of decreased personnel and other general and administrative expenses as a result of the Reorganization. General and administrative expenses of $13,465,000 in fiscal 1998 decreased $449,000 compared to $13,914,000 in fiscal 1997, primarily as a result of reduced expense related to options to acquire units of partnership interest ($3,531,000), partially offset by increased professional, consulting and legal expenses primarily related to the Reorganization ($2,350,000) and increased management fees ($757,000).
Selling and promotional expenses of $4,819,000 in fiscal 1998, which related entirely to the Boston Celtics basketball team, increased $139,000 compared to $4,680,000 in fiscal 1997. The increase in fiscal 1998 is a result of increased personnel costs.
Depreciation expense of $9,000 in fiscal 1999 decreased by $199,000 compared to BCLP II's depreciation expense of $208,000 in fiscal 1998. Depreciation expense in fiscal 1998 included $199,000 of depreciation expense related to the Boston Celtics basketball team. Depreciation expense of $208,000 in fiscal 1998 increased $19,000 compared to $189,000 in fiscal 1997. The increase in 1998 is primarily attributable to additional depreciation related to additions to property and equipment and leasehold improvements in leased office space.
Amortization expense of $47,000 in fiscal 1999 decreased by $118,000 compared to BCLP II's amortization expense of $165,000 in fiscal 1998. BCLP's amortization expense increased $43,000 in fiscal 1999 due to an increase in deferred financing costs, but this increase was offset by the fact that amortization expense in fiscal 1998 included $161,000 of amortization related to the Boston Celtics basketball team. Amortization expense of $165,000 in fiscal 1998 was consistent with amortization expense in fiscal 1997.
Interest expense of $6,649,000 in fiscal 1999 increased $631,000 compared to $6,018,000 in fiscal 1998. The increase in fiscal 1999 is primarily attributable to interest of $3,644,000 related to the Subordinated Debentures issued by BCLP II in connection with the Reorganization (including amortization of the original issue discount on the Subordinated Debentures) and interest of $419,000 related to new borrowings under BCLP II's revolving credit agreement with its commercial bank. These increases were partially offset by the fact that interest expense in fiscal 1998 included interest expense related to the Boston Celtics basketball team of $3,431,000. Effective July 1, 1998, BCLP accounts for its 48.3% indirect interest in the Boston Celtics basketball team using the equity method, and, accordingly, interest expense related to the Boston Celtics basketball team for the year ended June 30, 1999 is included in equity in loss of Celtics Basketball Holdings. Interest expense of $6,018,000 in fiscal 1998 increased $145,000 compared to $5,873,000 in fiscal 1997. The increase in fiscal 1998 is primarily a result of the new $30,000,000 borrowing by BCLP II in May 1998.
Interest income from marketable securities and other short-term investments of $4,498,000 in fiscal 1999 decreased $1,904,000 compared to $6,402,000 in fiscal 1998, and interest income in fiscal 1998 decreased $208,000 compared to $6,610,000 in fiscal 1997. The decreases are attributable to a reduced amount of available funds for short-term investment as well as the effect of a decrease in interest rates on those invested balances in 1999.
BCLP's provision for income taxes of $1,600,000 in fiscal 1999, which relates to BCLP's subsidiary corporations, decreased $300,000 compared to $1,900,000 in fiscal 1998.
Liquidity and Capital Resources
BCLP used approximately $7,700,000 in cash flows from operating activities in fiscal 1999. BCLP II generated approximately $16,301,000 and $2,462,000 in cash from operating activities in 1998 and 1997, respectively. The decrease in cash flows from operating activities in fiscal 1999 is directly attributable to BCLP's accounting for its interest in the Boston Celtics on the equity method effective July 1, 1998. In addition, cash used in operating activities in fiscal 1999 included the first annual interest payment due on the Subordinated Debentures in the amount of $3,244,000. Capital expenditures amounted to approximately $385,000 and $136,000 in 1998 and 1997, respectively. At June 30, 1999 the Partnership had approximately $2,608,000 of cash and cash equivalents and $83,200,000 of other short-term investments. In addition to these amounts, sources of funds available to the Partnership include funds generated by operations, unused portions of credit facilities with its commercial bank, and distributions from Celtics Basketball Holdings, which through a subsidiary owns and operates the Boston Celtics. These resources will be used to repay commercial bank borrowings and for general partnership purposes, working capital needs or possible investments and/or acquisitions.
On May 20, 1998, BCLP II entered into a $60,000,000 revolving credit agreement with its commercial bank, $20,000,000 of which was reserved for the repayment of notes payable related to redeemed BCLP II Units. Interest on advances under the revolving credit agreement accrues at BCLP II's option of either LIBOR plus 0.70% or the greater of the bank's Base Rate or the Federal Funds Effective Rate plus 0.50%. The revolving credit agreement expires on June 30, 2003 and is secured by a pledge of certain short-term investments of CCC, an indirect subsidiary of BCLP and BCLP II. On May 26, 1998, $30,000,000 was advanced under the revolving credit agreement in connection with the Reorganization, and on September 30, 1998, BCLP II borrowed the $20,000,000 reserved for the repayment of notes payable related to redeemed BCLP II Units and repaid the notes with the proceeds. On June 30, 1999, BCLP II borrowed $2,500,000 against the revolving credit agreement for general working capital purposes. Management anticipates that amounts advanced under the revolving credit agreement will be repaid by BCLP II out of cash flows, principally distributions from Celtics Basketball Holdings.
In connection with the Reorganization, BCLP II distributed 6% Subordinated Debentures to certain former holders of BCLP II units. One $20 face value Subordinated Debenture was distributed for each of the 2,703,664 BCLP II units with respect to which a BCLP II Unitholder elected to receive Subordinated Debentures, cash and BCLP units. The Subordinated Debentures were recorded at $12.20 per debenture, the fair market value at date of issue, or $32,984,700. The original issue discount of $21,088,580 is being amortized over the 40-year life of the debentures using the interest method and accordingly, the Subordinated Debentures are carried on the balance sheet at $33,384,771 at June 30, 1999. The Subordinated Debentures bear interest at the rate of 6% per annum, payable annually commencing June 30, 1999, and mature on June 30, 2038. There is no mandatory redemption of the Subordinated Debentures, and they are not entitled to any sinking fund.
No cash distributions to unitholders of BCLP were declared or paid during the year ended June 30, 1999. During the year ended June 30, 1998, a cash distribution of $1.00 per BCLP II unit was paid to BCLP II unitholders on January 14, 1998 (declared December 11, 1997 to unitholders of record on December 26, 1997). In addition, a cash distribution of $1.00 per unit was paid to BCLP II unitholders electing to receive subordinated debentures and BCLP units in connection with the Reorganization. Future distributions will be determined by BCLP GP in its sole discretion based, among other things, on available resources and the needs of the Partnership, the ability of BCLP's subsidiaries to generate sufficient operating cash flow, and the funds available after debt service payments related to the notes payable to commercial bank, notes payable relating to redeemed Partnership units and the subordinated debentures.
Management believes that BCLP's cash, cash equivalents and other short-term investments together with cash from operating activities will provide adequate cash for the Partnership and its subsidiaries to meet their cash requirements through June 30, 2000.
Market Risk
At June 30, 1999, BCLP had invested approximately $83,200,000 in loan participations issued by a commercial bank with maturities of less than ninety days. Due to their short maturities and applicable transfer restrictions, management believes that the loan participations are not exposed to market risk. Management further believes that the partnership has no other assets that are subject to market risk.
Year 2000
The inability of computers, software and other equipment utilizing microprocessors to recognize and properly process data fields containing a two-digit year is commonly referred to as the Year 2000 compliance issue. As the Year 2000 approaches, such systems may be unable to accurately process certain date-based information. As used by the Partnership, "Year 2000 ready" means that a system will function in the year 2000 without modification or adjustment, or with a one-time manual adjustment.
State of Readiness
The Partnership has established a Year 2000 Committee and an action plan for addressing Year 2000 issues. The Partnership's action plan for addressing Year 2000 issues in its information technology ("IT") and non-IT systems covers four phases: (i) identification of all IT and non-IT systems; (ii) assessment of Year 2000 issues; (iii) repair of IT and non-IT systems, if necessary, and testing and integration of repaired systems; and (iv) creation of a contingency plan to address any potential Year 2000 failures. The Partnership is also contacting third parties with which it deals (such as customers and suppliers) to evaluate their Year 2000 readiness and determine whether any Year 2000 failure will affect their ability to perform as the Year 2000 approaches and arrives.
As of June 30, 1999, the Partnership has completed the first three phases of its Year 2000 action plan with respect to its IT systems. The Partnership has identified all of its IT systems (which are comprised solely of an internal personal computer network and commercially available software products), assessed the Year 2000 readiness of these systems (which involved review and testing by the Partnership's internal information technology specialists) and made necessary repairs. As of June 30, 1999, the Partnership has completed the first phase of its Year 2000 action plan, and has begun the second phase, with respect to its non-IT systems. The Partnership has identified all of its non-IT systems (which are comprised of embedded systems contained in its leased properties) and has assessed the Year 2000 readiness of approximately 50% of these systems through review and testing. The Partnership is scheduled to complete all four phases of its Year 2000 initiative with respect to both IT and non-IT systems no later than September 30, 1999.
The Partnership has received assurances from a majority of its suppliers and third parties with which it interacts that they have addressed their Year 2000 issues. The Partnership is evaluating these assurances for their adequacy and accuracy and, in cases where the Partnership has not received assurances from third parties, is initiating further mail or phone correspondence. As a general matter, the Partnership is vulnerable to failures by third parties to address their own Year 2000 issues. The Partnership relies heavily upon third parties for ticketing, producing and broadcasting basketball games and for transporting the Boston Celtics' players, coaches and equipment to and from basketball games. There can be no assurance that the Partnership's suppliers and third parties will adequately address their Year 2000 issues, and any such issues could have a material adverse effect upon the Partnership's financial condition and results of operations.
Costs to Address the Year 2000 Issue
The Partnership has not spent a material amount to remediate Year 2000 problems and does not anticipate that it will spend a material amount to remediate Year 2000 problems in the future.
Risks Presented by the Year 2000 Issue
Until it has fully completed the first two phases of its Year 2000 action plan with respect to both IT and non-IT systems, the Partnership cannot accurately estimate the risks of its Year 2000 issue. To date, the Partnership has not identified any IT system or non-IT system that presents a material risk of not being ready for the Year 2000. The Partnership's Year 2000 action plan may, however, identify systems that present a risk of Year 2000 related disruption. Any such disruption could have a material adverse effect upon the Partnership's financial condition and results of operations. In addition, the failure to address Year 2000 issues by the Partnership's suppliers and other third parties with which it interacts could have a material adverse effect upon the Partnership's financial condition and results of operations.
Contingency Plans
The Partnership's Year 2000 action plan calls for the Partnership to develop a Year 2000 contingency plan. Because the Partnership has not fully assessed its possible risks from Year 2000 failures, it has not yet developed a Year 2000 contingency plan. The Partnership will develop such a plan if the results of its Year 2000 action plan identify risks of a Year 2000 failure.
Item 8.
Item 8. Financial Statements and Supplementary Data
See Item 14.
PART III
Item 10.
Item 10. Directors and Executive Officers of the Registrant
General Partner
The General Partner of BCLP is BCLP GP, Inc., a Delaware corporation organized in 1998 ("BCLP GP"), and the General Partner of BCLP II is BCLP II GP, Inc., a Delaware corporation organized in 1998 ("BCLP II GP"). BCLP GP is wholly owned by Paul Gaston, and BCLP II GP is wholly owned by Celtics, Inc., which is wholly owned by Walcott Partners, L.P., a Gaston family partnership. BCLP's activities are managed and controlled by BCLP GP.
The General Partner of each of CLP, Celtics Basketball Holdings and Celtics Basketball is Boston Celtics Corporation ("BCC"). Paul E. Gaston and Don F. Gaston (Paul Gaston's father) are the sole stockholders of BCC. The activities of CLP, Celtics Basketball Holdings and Celtics Basketball are managed and controlled by BCC.
The General Partners of Celtics Pride GP are CLP and CCC, which is wholly owned by BCCLP Holdings, which in turn is wholly owned by BCLP II.
The General Partner of BCCLP is Celtics Communications, Inc. ("CCI"). Paul E. Gaston and Don F. Gaston are the sole stockholders of CCI. Prior to their sale, the broadcast operations' activities were managed and controlled by CCI.
BCC receives a management fee of $750,000 per annum, subject to annual increases based on annual cash flows from basketball operations. Management fees of $750,000 were charged to Celtics Basketball's operations in the year ended June 30, 1999 and management fees of $1,577,000 and $820,000 were charged to BCLP II's operations during the years ended June 30, 1998 and 1997, respectively.
In accordance with the partnerships' respective partnership agreements, each item of income, gain, loss and deduction is allocated and distributions are made to the partners and Unitholders in accordance with their respective percentage interests (excluding earnings of subsidiary corporate entities which are taxed directly).
Directors and Executive Officers
The following table sets forth, for each of the directors and executive officers of BCLP GP, his or her principal occupation, age and business experience during the past five years. All of the directors and officers are U.S. citizens and the business address of each is c/o Boston Celtics Limited Partnership, 151 Merrimac Street, Boston, Massachusetts 02114.
Paul E. Gaston became Chairman of the Board of BCLP GP in April 1998 and has been Chairman of the Board of Celtics, Inc. since December 1992 and Director since September 1992. Mr. Gaston has been Chairman of the Board of BCC since September 1993. Upon its formation in November 1992, he became Managing Director of Walcott Partners, L.P., a Gaston family partnership whose investments include limited partnership interests in the Partnership and ownership of Celtics, Inc. From inception in 1990 to June 1992 he was Co-chairman and since June 1992 has been Chairman of the Board of Directors of Celtics Communications, Inc., the general partner of Boston Celtics Communications Limited Partnership. Mr. Paul E. Gaston is the son of Don F. and Paula B. Gaston.
Richard G. Pond was named Vice President, Controller and Secretary of Celtics, Inc. in December 1992. He has been employed by BCLP II since July 1992. From July 1981 to June 1992, he was with the international accounting firm of Ernst & Young LLP, most recently as a senior audit manager. Effective July 1, 1996, Mr. Pond assumed his responsibilities as Executive Vice President, Chief Financial Officer and Treasurer, and effective July 1, 1997, Mr. Pond assumed his responsibilities as Chief Operating Officer. Upon consummation of the Reorganization, Mr. Pond assumed similar responsibilities with BCLP GP.
Don F. Gaston has served as a Director of the General Partners of BCLP II and CLP since his resignation as Chairman of the Board of BCLP II in December 1992 and CLP in September 1993. He was succeeded in each of these positions by his son, Paul E. Gaston. He became Chairman of the Board of Directors of Boston Celtics Incorporated in September 1983 when he, together with Alan C. Cohen and Paul R. Dupee, Jr., acquired the Boston Celtics franchise. He has served as a Director of the BCCLP General Partner since its inception in 1990. Mr. Gaston was Chairman of the Board of Providence Capitol, Ltd. from July 1982 until its liquidation in December 1986. From 1962 to June 1982, he was associated with Gulf & Western Industries, Inc. in various capacities, including Executive Vice President, director and member of the Executive Committee. Mr. Gaston is the husband and father respectively, of Paula B. Gaston and Paul E. Gaston.
Paula B. Gaston became a Director of Celtics, Inc. in September 1992 and a Director of the General Partner of CLP in October 1992. She is a private investor and is the wife of Mr. Don F. Gaston and the mother of Paul E. Gaston.
John B. Marsh became a director of Celtics, Inc. in September 1992. Mr. Marsh is currently managing partner of Corvus Capital, LLC, a strategic investment partnership where he is an investment banker. From 1995 to 1998, he was Director of Trading and Sales with ABSA Securities, Inc., an investment banking firm. From 1991 to 1995, he was Chief Executive Officer and President of Saicor Ltd., an investment banking firm specializing in emerging markets. From 1988 to 1991 he was a Vice President at Deutsche Bank Capital Corporation where he headed an international arbitrage securities trading group. From 1985 to 1988 Mr. Marsh was a Vice President in the international arbitrage department of Merrill Lynch Pierce Fenner and Smith.
BCLP GP has an Audit Committee composed of Mr. Marsh, a non-management director, and Mr. Paul Gaston. Non-management directors will be reimbursed for their expenses, and will receive directors' fees equal to $1,000 per month and $2,500 per meeting attended with respect to their services as directors of BCLP GP. Mr. Marsh received $12,000 in such directors' fees in fiscal 1999. Directors are named by the stockholders of BCLP GP and serve until their successors are named. Thus, holders of limited partnership units have no vote in the selection of directors of BCLP GP. BCLP GP's officers are appointed by, and serve at the discretion of, the Board of Directors.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and the rules and regulations promulgated thereunder, require executive officers and directors of BCLP GP, the general partner of BCLP, to file reports pertaining to their beneficial ownership of the Units of BCLP with the Securities and Exchange Commission and the New York Stock Exchange when they are first elected, and to report (with certain exceptions) subsequent changes in their beneficial ownership of Units. Executive officers, directors and 10% beneficial owners are required to furnish the Partnership with copies of all forms they file pursuant to Section 16(a). The Partnership believes that all filing requirements were complied with in a timely fashion during the year ended June 30, 1999.
Item 11.
Item 11. Executive Compensation
The following Summary Compensation Table sets forth the compensation of each of the Chief Executive Officer and the most highly compensated executive officers of BCLP GP whose annual salary and bonus, if any, exceeded $100,000 for services in all capacities to BCLP (including predecessor entities) and its subsidiaries during the last three fiscal years. Only one of the Partnership's executive officers had an annual salary and bonus exceeding $100,000 for services to BCLP and its subsidiaries during the year ended June 30, 1999.
Neither BCLP nor BCLP II granted any options or appreciation rights during the year ended June 30, 1999. No options were exercised during the year ended June 30, 1999, and there are no options outstanding at June 30, 1999.
Employment and Consulting Agreements
The Partnership
In August 1993, the Board of Directors of Celtics, Inc. approved compensation arrangements and an incentive plan for Paul E. Gaston, Chairman of the Board of Celtics, Inc., under which Mr. Gaston was to be employed on an at will basis, with compensation at the rate of $400,000 per annum. In June 1997, the Board of Directors of the General Partner of BCLP II approved an increase in Mr. Gaston's compensation to $1,000,000 per annum. The incentive plan, which is subject to annual review, provides that Mr. Gaston shall receive annual incentive payments, commencing with the fiscal year ending June 30, 1994, of 5% of the amount by which Consolidated Net Income before taxes on income of BCLP II for the related fiscal year exceeds $8,000,000, payable not later than 10 days after the issuance of audited financial statements of BCLP. Because of the lockout, Mr. Gaston voluntarily received no compensation from BCLP during the year ended June 30, 1999. During the years ended June 30, 1999 and 1997, no annual incentive compensation payments were made to Mr. Gaston, and during the year ended June 30, 1998, Mr. Gaston was paid an annual incentive compensation payment of $324,596.
The Basketball Operations
Under an agreement dated May 6, 1997, Rick Pitino agreed to serve as President and Director of Basketball Operations of CLP through May 6, 2007, and as Head Coach of the team for the first six full NBA seasons of the agreement (through the 2002-03 season). In connection with the Reorganization, this contract was assigned to Celtics Basketball. Under the agreement, Mr. Pitino will receive annual salaries of $6,750,000 through May 6, 2003 and $2,000,000 through May 6, 2007. Mr. Pitino was also granted a bonus in the amount of $600,000, payable on the earlier of May 6, 2003 or upon a change in control of CLP. In addition, in the event of a Change in Control as defined in the agreement, Mr. Pitino will receive the lesser of $22,000,000 or any unpaid amounts for the remainder of the term of the agreement. The Reorganization was not a Change in Control as defined in Mr. Pitino's employment agreement.
Compensation Committee Interlocks and Insider Participation
Mr. Marsh, the non-management director of the Audit Committee of the Board, performed the functions of a compensation committee during the year ended June 30, 1999. Mr. Marsh was not, during the year ended June 30, 1999 or previously, an officer or employee of the Partnership or any of its subsidiaries, and he did not have any affiliated relationship requiring disclosure.
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth certain information regarding the Partnership's Units beneficially owned on September 10, 1999 by (i) each person who is known by the Partnership to beneficially own more than five percent (5%) of the outstanding Units, (ii) each director of BCLP GP, (iii) each executive named in the Summary Compensation Table and (iv) all directors and executive officers of BCLP GP as a group. All information with respect to beneficial ownership is based solely on information furnished by the respective Unitholders to the Partnership.
Unless otherwise indicated, all parties have both exclusive voting and investing power.
Item 13.
Item 13. Certain Relationships and Related Transactions
In 1999, BCLP II reimbursed Conanicut Aircraft, Inc. ("Conanicut") approximately $20,000 for the business use in the fiscal year ended June 30, 1999 of an aircraft based on standard charter rates for comparable aircraft. Conanicut is wholly owned by Walcott Partners, L.P. The General Partners of Walcott Partners, L.P. are Paul E. Gaston and Draycott, Inc., of which Paul E. Gaston is the only stockholder, officer and director. The reimbursement was reviewed and approved by the Audit Committee of the Board of Directors of BCLP GP. Paul E. Gaston, who is a member of the Audit Committee, was recused from and did not participate in any of the Audit Committee's deliberations pertaining to this matter.
BCC receives a management fee of $750,000 per annum, subject to annual increases based on annual cash flows from basketball operations. Management fees of $750,000 were charged to Celtics Basketball's operations in the year ended June 30, 1999 and management fees of $1,577,000 and $820,000 were charged to BCLP II's operations during the years ended June 30, 1998 and 1997, respectively.
On June 30, 1998, BCLP entered into a management services agreement by and between BCLP II, CLP, Celtics Pride G.P., Celtics Capital Corporation, BCCLP Holding Corporation, Castle Creek, Celtics Basketball Holdings and Celtics Basketball. The agreement provides that these entities will provide certain management and corporate services on behalf of the other entities, and will charge a fee for these services based on the cost of the actual services. BCLP II received reimbursements from Celtics Basketball and Castle Creek in the amounts of $702,000 and $1,259,000, respectively, in the fiscal year ended June 30, 1999 for services provided under this agreement. See "Item 12 - Security Ownership of Certain Beneficial Owners and Management" regarding ownership and control of Castle Creek.
PART IV
Item 14.
Item 14. Exhibits, and Reports on Form 8-K
(a) The following documents are filed as part of this report:
1. Financial Statements:
The financial statements listed in the accompanying List of Financial Statements and Financial Statement Schedules are filed as part of this report.
2. Exhibits:
The Exhibits listed below are filed as part of this report.
(3) (a) -- Certificate of Limited Partnership of Boston Celtics Limited Partnership II, as amended.1
(b) -- Agreement of Limited Partnership of Boston Celtics Limited Partnership II.1
(c) -- Certificate of Limited Partnership of Boston Celtics Limited Partnership.10
(d) -- Agreement of Limited Partnership of Boston Celtics Limited Partnership.9
(e) -- First Amendment to Amended and Restated Agreement of Limited Partnership of Boston Celtics Limited Partnership II.2
(f) -- Certificate of Amendment of Certificate of Limited Partnership of Boston Celtics Limited Partnership, changing the name of Boston Celtics Limited Partnership II from its former name of "Boston Celtics Limited Partnership." 10
(g) -- Certificate of Amendment of Certificate of Limited Partnership of Boston Celtics Limited Partnership II, changing the name of Boston Celtics Limited Partnership from its former name of "Boston Celtics Limited Partnership II." 10
(h) -- Certificate of Incorporation of BCLP GP, Inc., dated April 13, 1998.8
(i) -- By-Laws of BCLP GP, Inc.8
(j) -- Certificate of Amendment, dated June 29, 1998, changing the name of BCLP GP, Inc. from its former name of "BCLP II GP, Inc." 10
(k) -- Certificate of Incorporation of BCLP II GP, Inc., dated April 13, 1998.8
(l) -- By-Laws of BCLP II GP, Inc.8
(m) -- Certificate of Amendment, dated June 29, 1998, changing the name of BCLP II GP, Inc. from its former name of "BCLP GP, Inc." 10
(4) (a) -- Form of Unit Certificate Representing Limited Partnership Interest of BCLP.1
(b) -- Form of Indenture between Boston Celtics Limited Partnership and Chase Manhattan Bank, as Trustee, dated as of June 30, 1998.8
(10) (a) -- Joint Venture Agreement by and among NBA member organizations.1
(b) -- Constitution and By-laws of the National Basketball Association.1
(c) -- License/Lease Agreement dated April 4, 1990 between Boston Celtics Limited Partnership and New Boston Garden Corporation (confidential treatment previously granted).2
(d) -- Office Lease Agreement dated April 4, 1990 between Boston Celtics Limited Partnership and New Boston Garden Corporation (confidential treatment previously granted).2
(e) -- Letter Agreement dated April 4, 1990 between the Boston Celtics Limited Partnership and New Boston Garden Corporation (confidential treatment granted).2
(f) -- Unit Option Agreement dated December 31, 1993 by and between Boston Celtics Limited Partnership and Paul E. Gaston.3
(g) -- Restricted Unit Agreement dated June 28, 1996 between Boston Celtics Limited Partnership and Paul E. Gaston.4
(h) -- Letter from Paul Gaston electing to accept all incentive compensation for 1996 in restricted units.4
(i) -- Letter Agreement dated June 30, 1997 between Boston Celtics Limited Partnership and Paul E. Gaston pertaining to the election to exchange options to purchase Limited Partnership Units for Restricted Units. 5
(j) -- Credit Agreement dated as of December 15, 1997 by and between Celtics Limited Partnership as the Borrower, Boston Celtics Limited Partnership and Citizens Bank of Massachusetts as the Lender.6
(k) -- Amended and Restated Agreement and Plan of Reorganization, dated as of June 5, 1998, among Boston Celtics Limited Partnership, Boston Celtics Limited Partnership II, Castle Creek Partners, L.P., Celtics Limited Partnership, Celtics, Inc., BCLP II GP, Inc., Castle Creek Partners GP, Inc., Boston Celtics Corporation, and Celtics Capital Corporation.8
(l) -- Agreement and Plan of Merger of BCLP Merger, Inc., Boston Celtics Limited Partnership and Boston Celtics Limited Partnership II, dated as of June 29, 1998.8
(m) -- Credit Agreement between Boston Celtics Limited Partnership and Citizens Bank of Massachusetts, dated as of May 20, 1998.7
(n) -- Second Amendment to Credit Agreement dated as of July 30, 1999 among Celtics Limited Partnership, Boston Celtics Limited Partnership II, Boston Celtics Limited Partnership, Celtics Basketball, L.P., Celtics Basketball Holdings, L.P., Celtics Pride, G.P. and Citizens Bank of Massachusetts.
(o) -- Second Amendment to Credit Agreement dated as of July 30, 1999 among Boston Celtics Limited Partnership II, the Borrower, and The Royal Bank of Scotland plc, the Lender, and Citizens Bank of Massachusetts, the Agent.
(27) Financial Data Schedule
- -------------------- [FN] Incorporated by reference from the exhibits filed with the Partnership's registration statement on Form S-1 filed under the Securities Act of 1933 (File No. 33-9796). Incorporated by reference from the exhibits filed with the Report on Form 10-K of the Registrant filed with the Securities and Exchange Commission for the year ended June 30, 1990. Incorporated by reference to the exhibits filed with the report on Form 10-Q filed with the Securities and Exchange Commission on February 14, 1994 (File No. 0-19324). Incorporated by reference to the exhibits filed with the report on Form 10-K filed with the Securities and Exchange Commission on September 27, 1996 (File No. 0-19324). Incorporated by reference to the exhibits filed with the report on Form 10-K filed with the Securities and Exchange Commission on September 26, 1997 (File No. 0-19324). Incorporated by reference to the exhibits filed with the report on Form 10-Q filed with the Securities and Exchange Commission on February 6, 1998 (File No. 0-19324).
Incorporated by reference from the exhibits filed with the Schedule 13E-3 filed by Boston Celtics Limited Partnership (File No. 5-37799). Incorporated by reference from the exhibits filed with the report on Form S-4 filed with the Securities and Exchange Commission on April 17, 1998, as amended (File No. 333-50367). Incorporated by reference to the exhibits filed with the report on Form 8-K filed with the Securities and Exchange Commission on June 30, 1998 (File No. 0-19324). Incorporated by reference to the exhibits filed with the report on Form 10-K filed with the Securities and Exchange Commission on September 25, 1998 (File No. 0-19324).
(b) Reports on Form 8-K filed in the fourth quarter of 1999 - None.
(c) Exhibits - The response to this portion of Item 14 is filed as a part of this report.
(d) Financial Statement Schedules - The response to this portion of Item 14 is filed as part of this report.
ANNUAL REPORT ON FORM 10-K
ITEM 8, ITEM 14(a)(1) and (2)(c) and (d)
LIST OF FINANCIAL STATEMENTS
FINANCIAL STATEMENTS CERTAIN EXHIBITS YEAR ENDED JUNE 30, 1999
BOSTON CELTICS LIMITED PARTNERSHIP
BOSTON, MASSACHUSETTS
FORM 10-K -- ITEM 14(a)(1) and (2)
BOSTON CELTICS LIMITED PARTNERSHIP
LIST OF CONSOLIDATED FINANCIAL STATEMENTS
The following consolidated financial statements are included in Item 8:
Boston Celtics Limited Partnership and Subsidiaries
Consolidated Balance Sheets at June 30, 1999 and 1998.
Consolidated Statement of Operations for the year ended June 30, 1999.
Consolidated Statement of Partners' Capital (Deficit) for the year ended June 30, 1999.
Consolidated Statement of Cash Flows for the year ended June 30, 1999.
Notes to Consolidated Financial Statements.
Boston Celtics Limited Partnership II and Subsidiaries
Consolidated Balance Sheets at June 30, 1999 and 1998.
Consolidated Statements of Operations for each of the three years in the period ended June 30, 1999.
Consolidated Statements of Partners' Capital (Deficit) for each of the three years in the period ended June 30, 1999.
Consolidated Statements of Cash Flows for each of the three years in the period ended June 30, 1999.
Notes to Consolidated Financial Statements.
Celtics Basketball Holdings, L.P. and Subsidiary
Consolidated Balance Sheets at June 30, 1999 and 1998.
Consolidated Statement of Operations for the year ended June 30, 1999.
Consolidated Statement of Partners' Capital (Deficit) for the year ended June 30, 1999.
Consolidated Statement of Cash Flows for the year ended June 30, 1999.
Notes to Consolidated Financial Statements.
All schedules for which provision is made in the applicable accounting regulation of the Securities and Exchange Commission are not required under the related instructions or are inapplicable and therefore have been omitted.
Report of Independent Auditors
To the General Partner Boston Celtics Limited Partnership
We have audited the accompanying consolidated balance sheets of Boston Celtics Limited Partnership and Subsidiaries as of June 30, 1999 and 1998, and the related consolidated statements of operations, partners' capital (deficit) and cash flows for the year ended June 30, 1999. These financial statements are the responsibility of the Partnership's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Boston Celtics Limited Partnership and Subsidiaries at June 30, 1999 and 1998, and the consolidated results of their operations and their cash flows for the year ended June 30, 1999, in conformity with generally accepted accounting principles.
/s/ Ernst & Young LLP
Boston, Massachusetts September 10, 1999
BOSTON CELTICS LIMITED PARTNERSHIP and Subsidiaries Consolidated Balance Sheets
See notes to consolidated financial statements.
BOSTON CELTICS LIMITED PARTNERSHIP and Subsidiaries Consolidated Statement of Operations For the Year Ended June 30, 1999
See notes to consolidated financial statements.
BOSTON CELTICS LIMITED PARTNERSHIP and Subsidiaries Consolidated Statement of Partners' Capital (Deficit)
See notes to consolidated financial statements.
BOSTON CELTICS LIMITED PARTNERSHIP and Subsidiaries Consolidated Statement of Partners' Capital (Deficit) (continued)
BOSTON CELTICS LIMITED PARTNERSHIP and Subsidiaries Consolidated Statement of Cash Flows For the Year Ended June 30, 1999
See notes to consolidated financial statements.
BOSTON CELTICS LIMITED PARTNERSHIP and Subsidiaries Notes to Consolidated Financial Statements
Note A - Basis of Presentation
Principles of Consolidation: The consolidated financial statements include the accounts of Boston Celtics Limited Partnership ("BCLP," the "Partnership") and its majority-owned and controlled subsidiaries and partnerships. All intercompany transactions are eliminated in consolidation.
BCLP (formerly "Boston Celtics Limited Partnership II") is a Delaware limited partnership that was formed on April 13, 1998 in connection with a reorganization of Boston Celtics Limited Partnership II (formerly "Boston Celtics Limited Partnership") ("BCLP II"). Pursuant to the reorganization of BCLP II (the "Reorganization"), which was completed on June 30, 1998, BCLP owns a 99% limited partnership interest in BCLP II. The 1% general partner of BCLP is BCLP GP, Inc., and its 99% limited partnership interest is comprised of 2,703,664 publicly held units.
BCLP held no material assets and was not engaged in operations from its date of formation until the completion of the Reorganization on June 30, 1998. Upon completion of the Reorganization, BCLP, through its subsidiaries, holds certain investments, including a 48.3123% limited partnership investment in Celtics Basketball Holdings, L.P., ("Celtics Basketball Holdings") which, through a 99.999% subsidiary partnership, owns and operates the Boston Celtics professional basketball team of the National Basketball Association ("NBA"). BCLP's investment in Celtics Basketball Holdings is accounted for on the equity method, and accordingly, the investment is carried at cost, increased by equity in earnings of Celtics Basketball Holdings and reduced by distributions received.
Note B - Significant Accounting Policies
Cash Equivalents: Cash equivalents represent short-term investments with maturities at the date of purchase of three months or less. Marketable securities represent investments with maturities greater than three months.
Estimates and Assumptions: The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reported period. Actual results could differ from those estimates.
Concentration of Credit Risk: Financial instruments which potentially subject the Partnership to credit risk consist principally of cash equivalents, short-term investments and marketable securities. The Partnership's cash equivalents, short-term investments and marketable securities represent investments with relatively short maturities in the securities of highly rated financial institutions and United States government entities.
Marketable Securities and Other Short-Term Investments: The Partnership accounts for marketable securities and other short-term investments in accordance with Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities" which established the accounting and reporting requirements for investments in equity securities that have readily determinable fair values and for all investments in debt securities. All affected investment securities are classified as securities to be held to maturity, for trading, or available- for-sale.
Financial Instruments: In June 1998, the Financial Accounting Standards Board issued Statement No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("Statement 133"), which is required to be adopted in years beginning after June 15, 1999. The Statement will require that all derivatives be recognized on the balance sheet at fair value. Derivatives that are not hedges must be adjusted to fair value through income. If the derivative is a hedge, depending on the nature of the hedge, changes in fair value of the hedged assets, liabilities or firm commitments will either be immediately recognized in earnings or recognized in other comprehensive income until the hedged item is recognized in earnings. The ineffective portion of a derivatives change in fair value will be immediately recognized in earnings. The Partnership has not yet determined what the effect of Statement 133 will be on the earnings and financial position of the Partnership.
BOSTON CELTICS LIMITED PARTNERSHIP and Subsidiaries Notes to Consolidated Financial Statements
Note B - Significant Accounting Policies (continued)
In September 1998, in order to fix the interest rate on the debt described in Note F, BCLP entered into two interest rate cap agreements with an aggregate notional amount of $50,000,0000, expiring in September 1999 and March 2000. The fixed interest rate on these contracts is 4.99%. The interest rate differential is recognized as an adjustment to interest expense.
The carrying value of financial instruments such as cash equivalents and accounts payable approximate their fair values based on the short-term maturities of these instruments. The carrying value of long-term debt approximates its fair value based on references to similar instruments and the variable interest rate.
The Partnership estimates that the interest rate swap agreements have a fair value of approximately $40,000 at June 30, 1999, based upon interest rates at that date.
Property and Equipment: Property and equipment is stated at cost and is being depreciated over estimated useful lives of five years using the straight-line method of depreciation.
Income Taxes: BCLP is a partnership that is taxed as a corporation. BCLP and its subsidiary corporations report their income tax provision, including the income (losses) of subsidiary partnerships, using the liability method in accordance with Financial Accounting Standards Board Statement 109, "Accounting for Income Taxes." Under this method, deferred tax assets and liabilities are determined based on differences between financial reporting and tax bases of assets and liabilities and are measured using tax rates and laws that will be in effect when the differences are expected to reverse.
Comprehensive Income: The Partnership adopted Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive Income" ("Statement 130") in the fiscal year ended June 30, 1999. The Partnership's comprehensive income is comprised of net income (loss) and unrealized gains and losses on marketable securities held as available-for-sale investments. Comprehensive loss of approximately $10,104,000 for the fiscal year ended June 30, 1999 was not materially different from reported net loss.
Note C - Reorganization of Boston Celtics Limited Partnership II
In connection with the Reorganization, BCLP II unitholders were given an option of exchanging their units of interest in BCLP II for units of limited partnership interest in Castle Creek Partners, L.P. ("Castle Creek"), a privately held partnership formed in connection with the Reorganization, on a 100-for-one basis. BCLP II then contributed to Castle Creek the percentage of its net assets, subject to certain adjustments, corresponding to the percentage of BCLP II unitholders that elected to receive Castle Creek interests (the "Proportionate Election"). BCLP II's net assets consisted primarily of investment assets and, through a subsidiary, the assets of the Boston Celtics. In exchange for the contribution of assets to Castle Creek, BCLP II received limited partnership interests in Castle Creek, which were subsequently distributed to BCLP II unitholders electing to receive Castle Creek interests in the Reorganization.
In anticipation of the contribution of assets to Castle Creek, BCLP II contributed $41,022,067 of investment assets to Castle Creek in May 1998 based on an estimate of the Proportionate Election. When the Reorganization election was complete on June 30, 1998 and the Proportionate Election was finalized at 51.68719%, it was determined that BCLP II needed to contribute an additional $3,036,184 of assets to Castle Creek to reflect the Proportionate Election. This amount was classified as due to related parties on the consolidated balance sheet at June 30, 1998 and was paid to Castle Creek in July 1998.
Note D - Investment in Capital Deficiency of Celtics Basketball Holdings, L.P.
BCLP, through its subsidiary partnerships and corporations, owns a 48.3123% limited partnership interest in Celtics Basketball Holdings. Prior to the completion of the Reorganization on June 30, 1998, Celtics Basketball Holdings held no material assets and was not engaged in operations. Upon completion of the Reorganization, Celtics Basketball Holdings, through Celtics Basketball, L.P. ("Celtics Basketball"), its 99.999% subsidiary partnership, owns and operates the Boston Celtics professional basketball team of the National Basketball Association. BCLP's investment in Celtics Basketball Holdings is accounted for on the equity method.
BOSTON CELTICS LIMITED PARTNERSHIP and Subsidiaries Notes to Consolidated Financial Statements
Note D - Investment in Capital Deficiency of Celtics Basketball Holdings, L.P. (continued)
Summary balance sheet and statement of operations data for Celtics Basketball Holdings is as follows (amounts in thousands):
Note E - Marketable Securities and Other Short-Term Investments
The Partnership held no marketable securities at June 30, 1999. Gross realized gains from available-for-sale U.S. government securities amounted to $6,020 in the fiscal year ended June 30, 1999. The net adjustment to unrealized holding gains and losses on available-for-sale securities included as a separate component of Partners' Capital (Deficit) resulted in a loss of $5,360 in 1999.
Other short-term investments, which consist primarily of private placement notes with a commercial bank with a maturity of under one year, are classified as held-to-maturity and are carried at amortized cost, which approximates market value. There were no unrealized gains or losses in any of these investments at June 30, 1999 and 1998.
Note F - Notes Payable
On August 30, 1995, BCLP II redeemed an aggregate of 758,444 units representing assignments of beneficial ownership of limited partnership interest in BCLP II. The redeemed units were beneficially owned by a principal unitholder and his family. The principal unitholder received two notes from BCLP II in exchange for 668,144 units acquired by BCLP II from him and his family members were paid $1,941,450, equal to $21.50 in cash for each of the 90,300 units acquired from them. The two notes payable to the principal unitholder had an aggregate initial face amount of $14,365,096 equal to $21.50 per unit for each unit acquired from him. The two notes, which were due and payable on July 1, 2000, also provided that the amounts to be paid to such unitholder pursuant to the terms of the notes were to be increased by specified amounts on each July 1 during their term. If the principal unitholder held the two notes until July 1, 2000, he would have been entitled to receive aggregate payments (excluding interest) in the amount of $20,044,320 equal to $30.00 per unit for each unit acquired from him. Each of the notes accrued interest payable quarterly at the rate of 7.76% per annum.
On September 30, 1998, BCLP II borrowed $20,000,000 reserved under its revolving credit agreement (described below) and used the proceeds to repay the notes payable related to the redeemed BCLP II units. At September 30, 1998, the notes payable had an aggregate balance, including scheduled increases, of $17,538,780. The notes payable were repaid in the amount of $19,794,320, resulting in an extraordinary charge of $2,255,540 ($0.82 per unit) related to early retirement of notes payable. Interest expense of $343,000 related to these notes was charged to operations in 1999.
BOSTON CELTICS LIMITED PARTNERSHIP and Subsidiaries Notes to Consolidated Financial Statements
Note F - Notes Payable (continued)
On May 20, 1998, BCLP II entered into a $60,000,000 revolving credit agreement with its commercial bank, $20,000,000 of which was reserved for the repayment of notes payable related to the redeemed BCLP II Units described in the preceding paragraph. Interest on advances under the revolving credit agreement accrues at BCLP II's option of either LIBOR plus 0.70% or the greater of the bank's Base Rate or the Federal Funds Effective Rate plus 0.50% (6.03% at June 30, 1999). On May 26, 1998, $30,000,000 was advanced under the revolving credit agreement in connection with the Reorganization, and on September 30, 1998, BCLP II borrowed the $20,000,000 reserved for the repayment of notes payable related to redeemed BCLP II Units and repaid the notes with the proceeds. As of June 30, 1999, $52,500,000 was outstanding under the revolving credit agreement, $2,500,000 of which is payable on September 30, 1999 and $50,000,000 of which is payable upon maturity of the agreement.
The revolving credit agreement expires on June 30, 2003 and is secured by a pledge of certain short-term investments of Celtics Capital Corporation, an indirect subsidiary of BCLP and BCLP II. The revolving credit agreement contains certain restrictions and various provisions and covenants customary in lending arrangements of this type.
Interest charged to operations in connection with borrowings amounted to $2,662,000 in the fiscal year ended June 30, 1999.
Note G - Subordinated Debentures
In connection with the Reorganization, BCLP II distributed 6% Subordinated Debentures to certain former holders of BCLP II units. One $20 face value Subordinated Debenture was distributed for each BCLP II unit with respect to which a BCLP II Unitholder elected to receive Subordinated Debentures. In the Reorganization, BCLP II Unitholders elected to receive Subordinated Debentures with respect to 2,703,664 former BCLP II units.
The Subordinated Debentures were recorded at $12.20 per debenture, the fair market value at date of issue, or $32,984,700. The original issue discount of $21,088,580 is being amortized over the 40-year life of the Subordinated Debentures using the interest method and, accordingly, the Subordinated Debentures are valued at $33,384,771 at June 30, 1999.
The Subordinated Debentures bear interest at the rate of 6% per annum, payable annually commencing June 30, 1999 and mature on June 30, 2038. There is no mandatory redemption of the Subordinated Debentures, and they are not entitled to any sinking fund.
Note H - Commitments and Contingencies
In July and August 1998, four separate class action complaints (the "Complaints") were filed by Unitholders in the Court of Chancery of the State of Delaware in and for New Castle County against BCLP II, its former general partner (Celtics, Inc.), and the directors of Celtics, Inc. Each of the Complaints alleges, among other things, that the Reorganization was unfair to former BCLP II Unitholders, and seeks to recover an unspecified amount of damages, including attorneys' and experts' fees and expenses. The Partnership filed a Motion to Dismiss one of the complaints on July 29, 1998, and discovery in that case has been stayed by agreement of the parties. The Complaints have been consolidated. On August 6, 1999, the Court of Chancery issued an opinion granting in part, and denying in part, the Partnership's Motion to Dismiss, and on September 3, 1999, the plaintiffs filed an amended consolidated complaint.
Although the ultimate outcome of these Complaints cannot be determined at this time, management of the Partnership does not believe that the outcome of these proceedings will have a material adverse effect on the Partnership's financial position or results of operations.
BOSTON CELTICS LIMITED PARTNERSHIP and Subsidiaries Notes to Consolidated Financial Statements
Note H - Commitments and Contingencies (continued)
Effective June 30, 1998, the Board of Governors of the NBA voted to reopen the collective bargaining agreement ("Collective Bargaining Agreement") between the NBA and the NBA Players Association (the "NBPA"). Effective July 1, 1998, 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 NBPA entered into a new collective bargaining agreement (the "New Collective Bargaining Agreement"), thereby ending the lockout. As a result of the lockout, the 1998-99 NBA regular season consisted of 50 games per team, beginning in early February 1999. Ordinarily, the NBA regular season consists of 82 games per team and generally begins in late October or early November.
NBA teams, including the Boston Celtics, refunded amounts paid by season ticket holders (plus interest at 6%) for a total of 18 home games (including two exhibition games) that were canceled as a result of the lockout. Refunds of approximately $11,632,000 (including interest of $185,000) were paid by Celtics Basketball on a monthly basis for games canceled in the preceding month. In addition, certain season ticket holders elected to leave their refunds and interest on deposit for future games. Such refunds amounted to approximately $571,000 at June 30, 1999 (including interest of approximately $12,000). No interest has accrued on such amounts since January 31, 1999.
All amounts paid by season ticket holders are recorded by Celtics Basketball as deferred revenue and are subsequently recognized as revenue on a game-by- game basis as regular season games are played. No revenues were recognized with respect to amounts paid by season ticket holders for canceled games or for refunds left on deposit for future games. Amounts refunded are recorded by Celtics Basketball as reductions in the deferred revenue liability when paid.
Note I - Benefit Plans
Certain of the Partnership's subsidiaries have defined contribution plans covering substantially all employees who meet certain eligibility requirements. Participants may make contributions to the plans up to 15% of their compensation (as defined). Contributions to these plans are matched by the Partnership and its subsidiaries 100% on the first 7% of compensation contributed by each participant. Contributions are fully vested after three years of service. Costs of the plans charged to operations amounted to $41,000 in the fiscal year ended June 30, 1999.
Note J - Cash Flows
A reconciliation of net loss to net cash flows used in operating activities is as follows:
BOSTON CELTICS LIMITED PARTNERSHIP and Subsidiaries Notes to Consolidated Financial Statements
Note K - Quarterly Results (Unaudited)
A summary of operating results, net income (loss) per unit based on the average units outstanding throughout each year calculated for financial statement purposes only, and cash distributions for the quarterly periods in the fiscal year ended June 30, 1999 is set forth below (000's omitted, except for per unit amounts):
Note L - Income Taxes
BCLP is a partnership that is taxed as a corporation. The consolidated financial statements include the accounts and operating results of wholly owned subsidiary corporations that file tax returns separate from those of BCLP. As a result, income of those subsidiary corporations can not be offset by losses of BCLP. Aggregate pre-tax income of BCLP's wholly owned taxable subsidiary corporations amounted to $3,553,000 in the year ended June 30, 1999.
Components of deferred tax liabilities and assets at June 30, 1999 and 1998 are as follows (000's omitted):
At June 30, 1999, the Partnership has net operating loss carryforwards of $14,946,000 for income tax purposes that expire in fiscal 2014. The net deferred tax liabilities represent the tax-effected difference between the tax and financial statement bases of the net assets of BCCLP Holding Corporation ("Holdings") and Celtics Investments, Inc. ("CII"), and
BOSTON CELTICS LIMITED PARTNERSHIP and Subsidiaries Notes to Consolidated Financial Statements
Note L - Income Taxes (continued)
relate to Holdings or subsidiary partnerships Boston Celtics Communications Limited Partnership ("BCCLP") and Boston Celtics Broadcasting Limited Partnership ("BCBLP"). The net deferred tax assets are derived from different entities in the consolidated group. As a result, the deferred tax assets and liabilities do not necessarily offset and are evaluated separately. Because of the uncertainty of realization, a valuation allowance has been established for the deferred tax assets.
The provision for income taxes included in the consolidated statement of operations consists of the following (000's omitted):
A reconciliation of the statutory federal income tax rate to the effective tax rate of the provision is:
Note M - Net Income Per Unit
In February 1997, the Financial Accounting Standards Board issued Statement No. 128, "Earnings per Share" ("Statement 128"). Statement 128 replaced the calculation of primary and fully-diluted earnings per unit with basic and diluted earnings per unit. Unlike primary earnings per unit, basic earnings per unit excludes any dilutive effects of options, warrants and convertible securities. Diluted earnings per unit is similar to the Partnership's previously reported primary earnings per unit. All earnings per unit amounts for all periods presented have been restated to conform to the Statement 128 requirements.
The following table sets forth the computation of basic and diluted earnings per unit for the fiscal year ended June 30, 1999:
Report of Independent Auditors
To the General Partner Boston Celtics Limited Partnership II
We have audited the accompanying consolidated balance sheets of Boston Celtics Limited Partnership II (formerly Boston Celtics Limited Partnership) and Subsidiaries as of June 30, 1999 and 1998, and the related consolidated statements of operations, partners' capital (deficit) and cash flows for each of the three years in the period ended June 30, 1999. These financial statements are the responsibility of the Partnership's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Boston Celtics Limited Partnership II and Subsidiaries at June 30, 1999 and 1998, and the consolidated results of their operations and their cash flows for each of the three years in the period ended June 30, 1999, in conformity with generally accepted accounting principles.
/s/ Ernst & Young LLP
Boston, Massachusetts September 10, 1999
BOSTON CELTICS LIMITED PARTNERSHIP II and Subsidiaries Consolidated Balance Sheets
See notes to consolidated financial statements.
BOSTON CELTICS LIMITED PARTNERSHIP II and Subsidiaries Consolidated Statements of Operations
See notes to consolidated financial statements.
BOSTON CELTICS LIMITED PARTNERSHIP II and Subsidiaries Consolidated Statements of Partners' Capital (Deficit)
See notes to consolidated financial statements.
BOSTON CELTICS LIMITED PARTNERSHIP II and Subsidiaries Consolidated Statements of Partners' Capital (Deficit) (continued)
BOSTON CELTICS LIMITED PARTNERSHIP II and Subsidiaries Consolidated Statements of Cash Flows
BOSTON CELTICS LIMITED PARTNERSHIP II and Subsidiaries Consolidated Statements of Cash Flows (continued)
See notes to consolidated financial statements.
BOSTON CELTICS LIMITED PARTNERSHIP II and Subsidiaries Consolidated Statements of Cash Flows (continued)
See notes to consolidated financial statements.
BOSTON CELTICS LIMITED PARTNERSHIP II and Subsidiaries Notes to Consolidated Financial Statements
Note A - Basis of Presentation
Principles of Consolidation: The consolidated financial statements include the accounts of Boston Celtics Limited Partnership II ("BCLP II," the "Partnership") and its majority-owned and controlled subsidiaries and partnerships. All intercompany transactions are eliminated in consolidation.
BCLP II is a Delaware limited partnership formed in 1986 as Boston Celtics Limited Partnership. Its general partner was Celtics, Inc. Pursuant to a reorganization of its partnership structure that was completed on June 30, 1998 (the "Reorganization"), the Partnership's name was changed to Boston Celtics Limited Partnership II, and its general partner became BCLP II GP, Inc. ("BCLP II GP"), a wholly owned subsidiary of Celtics, Inc. As a result of the Reorganization, the Partnership's 99% limited partnership interest is owned by Boston Celtics Limited Partnership (a Delaware limited partnership formed in April 1998).
Prior to the Reorganization, BCLP II, through its subsidiaries, owned and operated the Boston Celtics professional basketball team of the National Basketball Association (the "Boston Celtics") and held investments. The Boston Celtics were owned by Celtics Limited Partnership ("CLP"), in which BCLP II has a 99% limited partnership interest.
Upon completion of the Reorganization, the Boston Celtics are owned and operated by Celtics Basketball, L.P. ("Celtics Basketball"), a subsidiary of Celtics Basketball Holdings, L.P. ("Celtics Basketball Holdings"). BCLP II, through its subsidiaries, holds certain investments, including a 48.3123% limited partnership investment in Celtics Basketball Holdings.
Accordingly, the operating results of the Boston Celtics are consolidated in the accompanying financial statements for periods prior to the Reorganization. Effective June 30, 1998, BCLP II's interest in the accounts and operations of the Boston Celtics is reflected in its investment in Celtics Basketball Holdings, which is accounted for on the equity method, and accordingly, the investment is carried at cost, increased by equity in the earnings of Celtics Basketball Holdings and reduced by distributions received.
Note B - Significant Accounting Policies
Cash Equivalents: Cash equivalents represent short-term investments with maturities at date of purchase of three months or less. Marketable securities represent investments with maturities greater than three months.
Estimates and Assumptions: The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reported period. Actual results could differ from those estimates.
Concentration of Credit Risk: Financial instruments which potentially subject the Partnership to credit risk consist principally of cash equivalents, short-term investments, marketable securities and accounts receivable. The Partnership's cash equivalents, short-term investments and marketable securities represent investments with relatively short maturities in the securities of highly rated financial institutions and United States government entities. The Partnership performs periodic credit evaluations of its customers' financial condition and generally does not require collateral. Credit losses have been consistently within management's expectations.
Marketable Securities and Other Short Term Investments: The Partnership accounts for marketable securities and other short-term investments in accordance with Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities" which established the accounting and reporting requirements for investments in equity securities that have readily determinable fair values and for all investments in debt securities. All affected investment securities are classified as securities to be held to maturity, for trading, or available- for-sale.
Property and Equipment: Property and equipment is stated at cost and is being depreciated over estimated useful lives from three to ten years using straight line or accelerated methods of depreciation as appropriate.
BOSTON CELTICS LIMITED PARTNERSHIP II and Subsidiaries Notes to Consolidated Financial Statements
Note B - Significant Accounting Policies (continued)
Financial Instruments: In June 1998, the Financial Accounting Standards Board issued Statement No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("Statement 133"), which is required to be adopted in years beginning after June 15, 1999. The Statement will require that all derivatives be recognized on the balance sheet at fair value. Derivatives that are not hedges must be adjusted to fair value through income. If the derivative is a hedge, depending on the nature of the hedge, changes in fair value of the hedged assets, liabilities or firm commitments will either be immediately recognized in earnings or recognized in other comprehensive income until the hedged item is recognized in earnings. The ineffective portion of a derivatives change in fair value will be immediately recognized in earnings. The Partnership has not yet determined what the effect of Statement 133 will be on the earnings and financial position of the Partnership.
In September 1998, in order to fix the interest rate on the debt described in Note F, BCLP entered into two interest rate cap agreements with an aggregate notional amount of $50,000,0000, expiring in September 1999 and March 2000. The fixed interest rate on these contracts is 4.99%. The interest rate differential is recognized as an adjustment to interest expense.
The carrying value of financial instruments such as cash equivalents, accounts receivable and accounts payable approximate their fair values based on the short-term maturities of these instruments. The carrying value of long-term debt approximates its fair value based on references to similar instruments and the variable interest rate.
The Partnership estimates that the interest rate swap agreements have a fair value of approximately $40,000 at June 30, 1999, based upon interest rates at that date.
Basketball Operations: Revenues, principally ticket sales and television and radio broadcasting fees, generally are recorded as revenues at the time the game to which such proceeds relate is played. Team expenses, principally player and coaches salaries, related fringe benefits and insurance, and game and playoff expenses, principally National Basketball Association attendance assessments and travel, are recorded as expense on the same basis. Accordingly, advance ticket sales and payments on television and radio broadcasting contracts and payments for team and game expenses not earned or incurred are recorded as deferred revenues and deferred expenses, respectively, and amortized ratably as regular season games are played. General and administrative and selling and promotional expenses are charged to operations as incurred.
Stock Options: The Partnership accounts for stock options in accordance with Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees." The Partnership has adopted the disclosure provisions only of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" (SFAS 123). Adoption of SFAS 123 did not have a material impact on the Partnership's financial statements.
Income Taxes: No provision for income taxes is required by the Partnership as its income and expenses are taxable to or deductible by its partners. Celtics Capital Corporation ("CCC"), BCCLP Holding Corporation ("Holdings") and Celtics Investments, Inc. ("CII"), wholly-owned subsidiary corporations of the Partnership, are subject to income taxes and report their income tax provision, including the income (losses) of Boston Celtics Communications Limited Partnership ("BCCLP"), a subsidiary partnership, using the liability method in accordance with Financial Accounting Standards Board Statement 109, "Accounting for Income Taxes." Under this method, deferred tax assets and liabilities are determined based on differences between financial reporting and tax bases of assets and liabilities and are measured using tax rates and laws that will be in effect when the differences are expected to reverse.
Comprehensive Income: The Partnership adopted Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive Income" ("Statement 130") in the fiscal year ended June 30, 1999. The Partnership's comprehensive income is comprised of net income (loss) and unrealized gains and losses on marketable securities held as available-for-sale investments. Comprehensive income (loss) of approximately ($7,794,000), $12,337,000 and $269,000 for the fiscal years ended June 30, 1999, 1998 and 1997, respectively, was not materially different from reported net income (loss).
BOSTON CELTICS LIMITED PARTNERSHIP II and Subsidiaries Notes to Consolidated Financial Statements
Note C - Reorganization
In connection with the Reorganization, unitholders were given an option of exchanging their units of interest in BCLP II for units of limited partnership interest in Castle Creek Partners, L.P. ("Castle Creek"), a privately held partnership formed in connection with the Reorganization, on a 100-for-one basis. The Partnership then contributed to Castle Creek the percentage of its net assets, subject to certain adjustments, corresponding to the percentage of unitholders that elected to receive Castle Creek interests (the "Proportionate Election"). The Partnership's net assets consisted primarily of investment assets and, through a subsidiary, the assets of the Boston Celtics. In exchange for the contribution of assets to Castle Creek, the Partnership received limited partnership interests in Castle Creek, which were subsequently distributed to BCLP II unitholders electing to receive Castle Creek interests in the Reorganization.
In anticipation of the contribution of assets to Castle Creek, the Partnership contributed $41,022,067 of investment assets to Castle Creek in May 1998 based on an estimate of the Proportionate Election. When the Reorganization election was complete on June 30, 1998 and the Proportionate Election was finalized at 51.68719%, it was determined that the Partnership needed to contribute an additional $3,036,184 of assets to Castle Creek to reflect the Proportionate Election. This amount was classified as due to related parties on the consolidated balance sheet at June 30, 1998 and was paid to Castle Creek in July 1998.
Note D - Investment in Capital Deficiency of Celtics Basketball Holdings, L.P.
BCLP II, through its subsidiary partnerships and corporations, owns a 48.3% limited partnership interest in Celtics Basketball Holdings. Prior to the completion of the Reorganization on June 30, 1998, Celtics Basketball Holdings held no material assets and was not engaged in operations. Upon completion of the Reorganization, Celtics Basketball Holdings, through Celtics Basketball, its 99.999% subsidiary partnership, owns and operates the Boston Celtics professional basketball team of the National Basketball Association. BCLP II's investment in Celtics Basketball Holdings is accounted for on the equity method.
Summary balance sheet and statement of operations data for Celtics Basketball Holdings is as follows (amounts in thousands):
BOSTON CELTICS LIMITED PARTNERSHIP II and Subsidiaries Notes to Consolidated Financial Statements
Note E - Marketable Securities and Other Short-Term Investments
The Partnership held no marketable securities at June 30, 1999. Gross realized gains and losses on available-for-sale securities during the fiscal years ended June 30, 1999 and 1998 are as follows:
The net adjustment to unrealized holding gains and losses on available-for- sale securities included as a separate component of Partners' Capital (Deficit) resulted in a loss of $5,360 in 1999 and a gain of $69,569 in 1998.
Other short-term investments, which consist primarily of private placement notes with a commercial bank with a maturity of under one year, are classified as held-to-maturity and are carried at amortized cost, which approximates market value. There were no unrealized gains or losses in any of these investments at June 30, 1999.
Note F - Notes Payable
On August 30, 1995, the Partnership redeemed an aggregate of 758,444 units representing assignments of beneficial ownership of limited partnership interest in the Partnership. The redeemed units were beneficially owned by a principal unitholder and his family. The principal unitholder received two notes from the Partnership in exchange for 668,144 units acquired by the Partnership from him and his family members were paid $1,941,450, equal to $21.50 in cash for each of the 90,300 units acquired from them. The two notes payable to the principal unitholder had an aggregate initial face amount of $14,365,096, equal to $21.50 per unit for each unit acquired from him. The two notes, which were due and payable on July 1, 2000, also provided that the amounts to be paid to such unitholder pursuant to the terms of the notes were to be increased by specified amounts on each July 1 during their term. If the principal unitholder held the two notes until July 1, 2000, he would have been entitled to receive aggregate payments (excluding interest) in the amount of $20,044,320 equal to $30.00 per unit for each unit acquired from him. Each of the notes accrued interest payable quarterly at the rate of 7.76% per annum.
On September 30, 1998, the Partnership borrowed $20,000,000 reserved under its revolving credit agreement (described below) and used the proceeds to repay the notes payable related to the redeemed units. At September 30, 1998, the notes payable had an aggregate balance, including scheduled increases, of $17,538,780. The notes payable were repaid in the amount of $19,794,320, resulting in an extraordinary charge of $2,255,540 ($0.82 per unit) related to early retirement of notes payable. Interest of $343,000, $2,403,000 and $2,247,000 related to these notes was charged to operations in 1999, 1998 and 1997, respectively.
On May 20, 1998, the Partnership entered into a $60,000,000 revolving credit agreement with its commercial bank, $20,000,000 of which was reserved for the repayment of notes payable related to the redeemed BCLP II Units described in the preceding paragraph. Interest on advances under the revolving credit agreement accrues at the Partnership's option of either LIBOR plus 0.70% or the greater of the bank's Base Rate or the Federal Funds Effective Rate plus 0.50% (6.03% at June 30, 1999). On May 26, 1998, $30,000,000 was advanced under the revolving credit agreement in connection with the Reorganization, and on September 30, 1998, the Partnership borrowed the $20,000,000 reserved for the repayment of notes payable related to redeemed BCLP II Units and repaid the notes with the proceeds. As of June 30, 1999, $52,500,000 was outstanding under the revolving credit agreement, $2,500,000 of which is payable on September 30, 1999 and $50,000,000 of which is payable upon maturity of the agreement.
BOSTON CELTICS LIMITED PARTNERSHIP II and Subsidiaries Notes to Consolidated Financial Statements
Note F - Notes Payable (continued)
The revolving credit agreement expires on June 30, 2003 and is secured by a pledge of certain short-term investments of Celtics Capital Corporation ("CCC"), an indirect subsidiary of BCLP II. The revolving credit agreement contains certain restrictions and various provisions and covenants customary in lending arrangements of this type.
On December 15, 1997, Celtics Limited Partnership ("CLP"), the Partnership's 99%-owned limited partnership which owned and operated the Boston Celtics basketball team prior to the June 30, 1998 Reorganization, entered into a $60,000,000 credit facility with its commercial bank, consisting of a $50,000,000 term loan bearing interest at 6.29% and a $10,000,000 revolving line of credit. The proceeds from the $50,000,000 term loan were used to repay a separate $50,000,000 loan from a commercial bank that bore interest at 6.35%. Pursuant to the Reorganization, the $60,000,000 credit facility was assigned to Celtics Basketball on June 30, 1998.
Interest charged to operations in connection with borrowings amounted to $2,662,000, $3,212,000, and $3,219,000 in the years ended June 30, 1999, 1998 and 1997, respectively.
Note G - Subordinated Debentures
In connection with the Reorganization, BCLP II distributed 6% Subordinated Debentures to certain former holders of BCLP II units. One $20 face value Subordinated Debenture was distributed for each BCLP II unit with respect to which a BCLP II Unitholder elected to receive Subordinated Debentures. In the Reorganization, BCLP II Unitholders elected to receive Subordinated Debentures with respect to 2,703,664 former BCLP II units.
The Subordinated Debentures were recorded at $12.20 per debenture, the fair market value at date of issue, or $32,984,700. The original issue discount of $21,088,580 is being amortized over the 40-year life of the Subordinated Debentures using the interest method and, accordingly, the Subordinated Debentures are valued at $33,384,771 at June 30, 1999.
The Subordinated Debentures bear interest at the rate of 6% per annum, payable annually commencing June 30, 1999 and mature on June 30, 2038. There is no mandatory redemption of the Subordinated Debentures, and they are not entitled to any sinking fund.
Note H - Related Party Transactions
Boston Celtics Corporation, the general partner of CLP and Celtics Basketball, receives a management fee of $750,000 per annum, subject to annual increases based on annual cash flows from basketball operations. Management fees of $750,000 were charged to Celtics Basketball's operations in the year ended June 30, 1999 and management fees of $1,577,000 and $820,000 were charged to BCLP II's operations during the years ended June 30, 1998 and 1997, respectively.
Note I - Commitments and Contingencies
In July and August 1998, four separate class action complaints (the "Complaints") were filed by Unitholders in the Court of Chancery of the State of Delaware in and for New Castle County against BCLP II, its former general partner (Celtics, Inc.), and the directors of Celtics, Inc. Each of the Complaints alleges, among other things, that the Reorganization was unfair to former BCLP II Unitholders, and seeks to recover an unspecified amount of damages, including attorneys' and experts' fees and expenses. The Partnership filed a Motion to Dismiss one of the complaints on July 29, 1998, and discovery in that case has been stayed by agreement of the parties. The Complaints have been consolidated. On August 6, 1999, the Court of Chancery issued an opinion granting in part, and denying in part, the Partnership's Motion to Dismiss, and on September 3, 1999, the plaintiffs filed an amended consolidated complaint.
Although the ultimate outcome of these Complaints cannot be determined at this time, management of the Partnership does not believe that the outcome of these proceedings will have a material adverse effect on the Partnership's financial position or results of operations.
BOSTON CELTICS LIMITED PARTNERSHIP II and Subsidiaries Notes to Consolidated Financial Statements
Note I - Commitments and Contingencies (continued)
Effective June 30, 1998, the Board of Governors of the NBA voted to reopen the collective bargaining agreement ("Collective Bargaining Agreement") between the NBA and the NBA Players Association (the "NBPA"). Effective July 1, 1998, 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 NBPA entered into a new collective bargaining agreement (the "New Collective Bargaining Agreement"), thereby ending the lockout. As a result of the lockout, the 1998-99 NBA regular season consisted of 50 games per team, beginning in early February 1999. Ordinarily, the NBA regular season consists of 82 games per team and generally begins in late October or early November.
NBA teams, including the Boston Celtics, refunded amounts paid by season ticket holders (plus interest at 6%) for a total of 18 home games (including two exhibition games) that were canceled as a result of the lockout. Refunds of approximately $11,632,000 (including interest of $185,000) were paid by Celtics Basketball on a monthly basis for games canceled in the preceding month. In addition, certain season ticket holders elected to leave their refunds and interest on deposit for future games. Such refunds amounted to approximately $571,000 at June 30, 1999 (including interest of approximately $12,000). No interest has accrued on such amounts since January 31, 1999.
All amounts paid by season ticket holders are recorded by Celtics Basketball as deferred revenue and are subsequently recognized as revenue on a game-by- game basis as regular season games are played. No revenues were recognized with respect to amounts paid by season ticket holders for canceled games or for refunds left on deposit for future games. Amounts refunded are recorded by Celtics Basketball as reductions in the deferred revenue liability when paid.
Celtics Basketball is committed under noncancelable, long-term operating leases for certain of its facilities and equipment. These leases were assigned to Celtics Basketball by CLP effective June 30, 1998 pursuant to the Reorganization. Rent expense charged to operations during the years ended 1998 and 1997 amounted to $410,000 and $292,000, respectively.
Note J - Options to Acquire Units of Partnership Interest
On December 31, 1993, the Partnership granted options to three employees to acquire 530,000 Limited Partnership Units of BCLP at the price of $16.25 per Unit, less all cash distributions per Unit made by the Partnership from July 31, 1993 to the date of exercise. All of the options expired ten years from the date of grant, and at June 30, 1997, all of the options were fully vested. The options also contained Unit Appreciation Rights, entitling the holder to receive an amount equal to the excess of the fair market value of a Unit, determined on the date of exercise over the exercise price of the related option on the date the Unit Appreciation Right was granted, in which event options for an equivalent number of units will be canceled.
On June 27, 1997, the Audit Committee of the Board of Directors of CI (the general partner of BCLP) voted to offer the three option holders the right to exchange their options to purchase BCLP Units for an equal number of restricted Units of Partnership interest. The exchange ratio was determined based on a written report received from an independent employee benefits consultant regarding the respective values of the restricted Units and the options to purchase BCLP Units, and the option holders were required to make this election on or prior to July 7, 1997. On June 30, 1997, Paul E. Gaston elected to exchange his options to purchase 250,000 BCLP Units for 250,000 restricted Units of Partnership interest. Mr. Gaston, who is a member of the Audit Committee, was recused from and did not participate in any of the Audit Committee's deliberations pertaining to this matter. As a result of this exchange, $519,000 was charged to compensation expense in 1997, representing the difference between the fair market value of the restricted Units and the in-the-money value of the optioned Units.
In November 1997, one of the option holders exercised his Unit Appreciation Rights with respect to his 30,000 options, and in June 1998, the remaining option holder exercised his 250,000 options, resulting in proceeds to the Partnership of $2,125,000. As a result, there are no outstanding options to purchase units of partnership interest. The compensation element of the options, comprised of income of $805,000 in the year ended June 30, 1998 and expense of $2,208,000 in the year ended June 30, 1997, was charged to earnings during the period from the date of grant until the date of exercise based on the difference between the exercise and market price of the optioned Units at the end of each quarter.
BOSTON CELTICS LIMITED PARTNERSHIP II and Subsidiaries Notes to Consolidated Financial Statements
Note K - Benefit Plans
Certain of the Partnership's subsidiaries have defined contribution plans covering substantially all employees who meet certain eligibility requirements. Participants may make contributions to the plans up to 15% of their compensation (as defined). Contributions to these plans are matched by the Partnership and its subsidiaries 100% on the first 7% of compensation contributed by each participant. Contributions are fully vested after three years of service. Costs of the plans charged to operations amounted to $41,000, $232,000 and $300,000 during the years ended June 30, 1999, 1998 and 1997, respectively. In addition, costs of these plans charged to Celtics Basketball amounted to $159,000 in the year ended June 30, 1999.
Players, coaches, trainers and the general manager of the basketball operation are covered by multiemployer defined benefit pension plans administered by the National Basketball Association. Costs of these plans charged to Celtics Basketball's operations amounted to $689,000 in the year ended June 30, 1999, and costs of these plans charged to BCLP II's operations amounted to $631,000 and $368,000 during the years ended June 30, 1998 and 1997, respectively.
Note L - Cash Flows
Reconciliations of net income (loss) to net cash flows from (used in) operating activities are as follows:
BOSTON CELTICS LIMITED PARTNERSHIP II and Subsidiaries Notes to Consolidated Financial Statements
Note M - Quarterly Results (Unaudited)
A summary of operating results, net income (loss) per unit based on the average units outstanding throughout each year calculated for financial statement purposes only, and cash distributions for the quarterly periods in the two years ended June 30, 1999 is set forth below (000's omitted, except for per unit amounts):
Note N - Income Taxes
Components of deferred tax liabilities and assets at June 30 are as follows (000's omitted):
The deferred tax liabilities at June 30, 1999 and 1998 represent the tax- effected difference between the tax and financial statement bases of the net assets of BCCLP Holding Corporation ("Holdings") and Celtics Investments, Inc. ("CII"), and relate to Holdings or subsidiary partnerships Boston Celtics Communications Limited Partnership ("BCCLP") and Boston Celtics Broadcasting Limited Partnership ("BCBLP"). At June 30, 1997, the deferred tax liability of $20,100,000 consisted of the full amount of the tax- effected difference between the financial statement bases and the tax bases of the net assets of Holdings and CII.
BOSTON CELTICS LIMITED PARTNERSHIP II and Subsidiaries Notes to Consolidated Financial Statements
Note N - Income Taxes (continued)
At June 30, 1999, the tax bases of the assets and liabilities of BCLP II and its subsidiaries exceeded their financial statement bases by approximately $101,701,000, consisting primarily of a step-up in basis in connection with Unit redemptions ($75,822,000), differences between tax and financial statement basis of the investment in Celtics Basketball Holdings ($24,914,000), and intangible assets ($965,000). No deferred tax asset has been provided for these differences because BCLP II and its subsidiary partnerships are not subject to income taxes.
The provision for income taxes included in the consolidated statements of operations consists of the following (000's omitted):
A reconciliation of the statutory federal income tax rate applied to reported pre-tax earnings of CII, CCC, Holdings and BCCLP ($3,553,000 in 1999, $4,240,000 in 1998 and $3,270,000 in 1997) to the effective tax rate of the provision is:
Note O - Net Income Per Unit
In February 1997, the Financial Accounting Standards Board issued Statement No. 128, "Earnings per Share" ("Statement 128"). Statement 128 replaced the calculation of primary and fully-diluted earnings per unit with basic and diluted earnings per unit. Unlike primary earnings per unit, basic earnings per unit excludes any dilutive effects of options, warrants and convertible securities. Diluted earnings per unit is similar to the Partnership's previously reported primary earnings per unit. All earnings per unit amounts for all periods presented have been restated to conform to the Statement 128 requirements.
BOSTON CELTICS LIMITED PARTNERSHIP II and Subsidiaries Notes to Consolidated Financial Statements
Note O - Net Income Per Unit (continued)
The following table sets forth the computation of basic and diluted earnings per unit for each of the periods indicated:
Report of Independent Auditors
To the General Partner Celtics Basketball Holdings, L.P.
We have audited the accompanying consolidated balance sheets of Celtics Basketball Holdings, L.P. and Subsidiary as of June 30, 1999 and 1998, and the related consolidated statements of operations, partners' capital (deficit) and cash flows for the year ended June 30, 1999. These financial statements are the responsibility of the Partnership's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Celtics Basketball Holdings, L.P. and Subsidiary at June 30, 1999 and 1998, and the consolidated results of their operations and their cash flows for the year ended June 30, 1999, in conformity with generally accepted accounting principles.
/s/ Ernst & Young LLP
Boston, Massachusetts September 10, 1999
CELTICS BASKETBALL HOLDINGS, L.P. and Subsidiary Consolidated Balance Sheets
See notes to consolidated financial statements.
CELTICS BASKETBALL HOLDINGS, L.P. and Subsidiary Consolidated Statement of Operations For the Year Ended June 30, 1999
See notes to consolidated financial statements.
CELTICS BASKETBALL HOLDINGS, L.P. and Subsidiary Consolidated Statement of Partners' Capital (Deficit)
See notes to consolidated financial statements.
CELTICS BASKETBALL HOLDINGS, L.P. and Subsidiary Consolidated Statement of Partners' Capital (Deficit) (continued)
CELTICS BASKETBALL HOLDINGS, L.P. and Subsidiary Consolidated Statement of Cash Flows For the Year Ended June 30, 1999
See notes to consolidated financial statements.
CELTICS BASKETBALL HOLDINGS, L.P. and Subsidiary Notes to Consolidated Financial Statements
Note A - Basis of Presentation
Principles of Consolidation: Celtics Basketball Holdings, L.P. ("Celtics Basketball Holdings," the "Partnership"), a Delaware limited partnership, through Celtics Basketball, L.P. ("Celtics Basketball"), its 99.999% owned subsidiary, owns and operates the Boston Celtics professional basketball team of the National Basketball Association (the "Boston Celtics"). The consolidated financial statements include the accounts of Celtics Basketball Holdings and Celtics Basketball. All intercompany transactions are eliminated in consolidation.
Celtics Basketball Holdings and Celtics Basketball held no material assets and were not engaged in operations from April 13, 1998, their date of formation, until June 30, 1998. On June 30, 1998, Celtics Limited Partnership ("CLP"), which formerly owned and operated the Boston Celtics, contributed the assets and liabilities of the Boston Celtics to Celtics Basketball in exchange for a 99.999% limited partnership interest in Celtics Basketball. Subsequently on June 30, 1998, CLP contributed its 99.999% limited partnership interest in Celtics Basketball to Celtics Basketball Holdings in exchange for a 99.999% limited partnership interest in Celtics Basketball Holdings.
The general partner of both Celtics Basketball Holdings and Celtics Basketball is Boston Celtics Corporation.
Note B - Significant Accounting Policies
Cash Equivalents: Cash equivalents represent short-term investments with maturities at the date of purchase of three months or less.
Estimates and Assumptions: The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reported period. Actual results could differ from those estimates.
Concentration of Credit Risk: Financial instruments which potentially subject the Partnership to credit risk consist principally of cash equivalents and accounts receivable. The Partnership's cash equivalents represent investments with relatively short maturities in the securities of highly rated financial institutions and United States government entities. The Partnership performs periodic credit evaluations of its customers' financial condition and generally does not require collateral. Credit losses have been consistently within management's expectations.
Financial Instruments: The carrying value of financial instruments such as cash equivalents, accounts receivable and accounts payable approximate their fair values based on the short-term maturities of these instruments. The carrying value of long-term debt approximates its fair value based on references to similar instruments and the variable interest rate.
Franchise and Other Intangible Assets: These assets, consisting principally of the National Basketball Association franchise and other intangible assets are being amortized primarily on a straight-line basis over 40 years.
Property and Equipment: Property and equipment is stated at cost and is being depreciated over estimated useful lives of from five to ten years using straight line or accelerated methods of depreciation as appropriate. Leasehold improvements are depreciated over the lesser of the remaining lives of the leases or the assets.
Basketball Operations: Revenues, principally ticket sales and television and radio broadcasting fees, generally are recorded as revenues at the time the game to which such proceeds relate is played. Team expenses, principally player and coaches salaries, related fringe benefits and insurance, and game and playoff expenses, principally National Basketball Association attendance assessments and travel, are recorded as expense on the same basis. Accordingly, advance ticket sales and payments on television and radio broadcasting contracts and payments for team and game expenses not earned or incurred are recorded as deferred revenues and deferred expenses, respectively, and amortized ratably as regular season games are played. General and administrative and selling and promotional expenses are charged to operations as incurred.
CELTICS BASKETBALL HOLDINGS, L.P. and Subsidiary Notes to Consolidated Financial Statements
Note B - Significant Accounting Policies (continued)
Income Taxes: No provision for income taxes is required by Celtics Basketball Holdings as its income and expenses are taxable to or deductible by its partners.
Comprehensive Income: The Partnership adopted Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive Income" ("Statement 130") in the fiscal year ended June 30, 1999. The adoption of Statement 130 did not have a material impact on the Partnership's consolidated financial statements.
Note C - Notes Receivable
Notes receivable represented a convertible note due from an unrelated company which was classified as held-to-maturity and carried at amortized cost, which approximated market value. This note accrued interest at LIBOR plus 1%, with quarterly interest payments beginning in May 1999 and quarterly payments of principal plus interest beginning February 2002 through the maturity of the note in January 2007. On March 18, 1999, the company redeemed the note for cash in the amount of $7,850,000. The balance of the note on that date, including accrued interest, was $6,912,983. The $937,017 gain on the note, consisting of a prepayment penalty of $553,039 pursuant to the terms of the note agreement and a premium paid by the company of $383,978, has been classified as other income in the consolidated statement of operations.
Note D - Property and Equipment
Property and equipment are summarized as follows:
Note E - Deferred Compensation
Certain player contracts provide for guaranteed compensation payments which are deferred until a future date. Operations are charged amounts equal to the present value of future guaranteed payments in the period in which the compensation is earned. The present value of payments due under these agreements is as follows:
CELTICS BASKETBALL HOLDINGS, L.P. and Subsidiary Notes to Consolidated Financial Statements
Note F - Notes Payable
Notes payable to bank represents outstanding borrowings under a $60,000,000 credit facility dated December 15, 1997 between Celtics Basketball and its commercial bank. The credit agreement, which was originally entered into by CLP and contributed to Celtics Basketball on June 30, 1998, consists of a $50,000,000 term loan bearing interest at 6.29% and a $10,000,000 revolving line of credit. On January 29, 1999, Celtics Basketball borrowed $3,000,000 against the revolving line of credit for general working capital purposes. This amount was repaid on June 1, 1999. As of June 30, 1999, no borrowings were outstanding against the $10,000,000 revolving line of credit.
Under the terms of the $50,000,000 term loan agreement, interest is payable quarterly in arrears at a fixed annual rate of 6.29% from December 15, 1997 through December 15, 2007. Principal payments are due in equal quarterly installments of $2,500,000 commencing on January 1, 2003, with the final payment due on December 15, 2007, the maturity date of the loan.
The $10,000,000 revolving line of credit agreement expires on December 15, 2000, with two automatic one-year extensions cancelable at the option of the commercial bank. Interest on any borrowings under the revolving line of credit accrues at the Partnership's option of either LIBOR plus 0.70% or the greater of the bank's Base Rate or the Federal Funds Effective Rate plus 0.50%.
Interest charged to operations in connection with the term loan and revolving line of credit amounted to $3,247,000 in the year ended June 30, 1999.
Borrowings under the term loan and revolving line of credit are secured by all of the assets of and are the liability of Celtics Basketball. The loan agreement contains certain restrictions and various provisions and covenants customary in lending arrangements of this type.
Note G - Related Party Transactions
Boston Celtics Corporation, the general partner of CLP, Celtics Basketball Holdings and Celtics Basketball, receives a management fee of $750,000 per annum, subject to annual increases based on annual cash flows from basketball operations. Management fees of $750,000 were charged to Celtics Basketball's operations in the year ended June 30, 1999.
Note H - Commitments and Contingencies
Effective June 30, 1998, the Board of Governors of the NBA voted to reopen the collective bargaining agreement ("Collective Bargaining Agreement") between the NBA and the NBA Players Association (the "NBPA"). Effective July 1, 1998, 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 NBPA entered into a new collective bargaining agreement (the "New Collective Bargaining Agreement"), thereby ending the lockout. As a result of the lockout, the 1998-99 NBA regular season consisted of 50 games per team, beginning in early February 1999. Ordinarily, the NBA regular season consists of 82 games per team and generally begins in late October or early November.
NBA teams, including the Boston Celtics, refunded amounts paid by season ticket holders (plus interest at 6%) for a total of 18 home games (including two exhibition games) that were canceled as a result of the lockout. Refunds of approximately $11,632,000 (including interest of $185,000) were paid by Celtics Basketball on a monthly basis for games canceled in the preceding month. In addition, certain season ticket holders elected to leave their refunds and interest on deposit for future games. Such refunds amounted to approximately $571,000 at June 30, 1999 (including interest of approximately $12,000). No interest has accrued on such amounts since January 31, 1999.
All amounts paid by season ticket holders are recorded by Celtics Basketball as deferred revenue and are subsequently recognized as revenue on a game-by- game basis as regular season games are played. No revenues were recognized with respect to amounts paid by season ticket holders for canceled games or for refunds left on deposit for future games. Amounts refunded are recorded by Celtics Basketball as reductions in the deferred revenue liability when paid.
CELTICS BASKETBALL HOLDINGS, L.P. and Subsidiary Notes to Consolidated Financial Statements
Note H - Commitments and Contingencies (continued)
Celtics Basketball is committed under noncancelable, long-term operating leases for certain of its facilities and equipment. These leases were assigned to Celtics Basketball by CLP effective June 30, 1998 pursuant to the Reorganization. Rent expense charged to operations during the year ended June 30, 1999 amounted to $299,000.
Celtics Basketball has employment agreements with officers, coaches and players of the Boston Celtics basketball team. 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 10, 1999, including option years but excluding deferred compensation commitments disclosed in Note E - Deferred Compensation, are as follows:
Commitments for the year ended June 30, 2000 include payments due to players under contracts for the 1999-2000 season in the amount of $41,126,000.
Celtics Basketball maintains disability and life insurance policies on most of its key players. The level of insurance coverage maintained is based on management'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.
The Partnership and its subsidiary are also committed under noncancelable, long-term operating leases, substantially all of which are related to Celtics Basketball, for certain of its facilities and equipment. Rent expense charged to operations during the years ended June 30, 1999, 1998 and 1997 was $299,000, $410,000 and $292,000 respectively. Minimum annual payments, including renewable option periods, required by these operating leases are as follows:
Note I - Benefit Plans
Celtics Basketball has a defined contribution plan covering substantially all employees who meet certain eligibility requirements. Participants may make contributions to the plans up to 15% of their compensation (as defined). Contributions to these plans are matched by the Partnership and its subsidiaries 100% on the first 7% of compensation contributed by each participant. Contributions are fully vested after three years of service. Costs of these plans charged to operations amounted to $159,000 in the year ended June 30, 1999.
Players, coaches, trainers and the general manager of the basketball operation are covered by multiemployer defined benefit pension plans administered by the National Basketball Association. Costs of these plans charged to operations amounted to $689,000 in the year ended June 30, 1999.
Note J - Accounts Payable and Accrued Expenses
Accounts payable and accrued expenses include accrued compensation to players and coaches of $12,473,000 and $17,397,000 at June 30, 1999 and 1998, respectively.
CELTICS BASKETBALL HOLDINGS, L.P. and Subsidiary Notes to Consolidated Financial Statements
Note K - Cash Flows
A reconciliation of net loss to net cash flows used in operating activities for the year ended June 30, 1999 is as follows:
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
BOSTON CELTICS LIMITED PARTNERSHIP
By: BCLP GP, Inc., General Partner -----------------------------------
Date: September 17, 1999 By: /s/ Paul E. Gaston ----------------------------------- Paul E. Gaston Chairman of the Board and Director
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature Title* Date - --------------------------------------------------------------------------
/s/ Don F. Gaston Director September 17, 1999 - ------------------------- Don F. Gaston
/s/ Paula B. Gaston Director September 17, 1999 - ------------------------- Paula B. Gaston
/s/ John B. Marsh, III Director September 17, 1999 - ------------------------- John B. Marsh, III
/s/ Richard G. Pond Executive Vice President, September 17, 1999 - ------------------------- Chief Financial Officer Richard G. Pond and Chief Accounting Officer
- ------------------- [FN] Title indicates position with General Partner.