<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
FOR THE TRANSITION PERIOD FROM____________________TO____________________________
COMMISSION FILE NUMBER 0-24377
CLEVELAND INDIANS BASEBALL COMPANY, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
OHIO 34-1861303
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
2401 ONTARIO STREET, CLEVELAND, OHIO 44115
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code 216-420-4200
Former Name, Former Address and Former Fiscal Year, if Changed Since Last
Report.
Indicate by checkmark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
The number of shares outstanding of each of the issuer's classes of
common stock, as of November 12, 1999 was as follows:
CLASS A COMMON SHARES 4,141,976 SHARES
CLASS B COMMON SHARES 2,283,957 SHARES
<PAGE> 2
INDEX*
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PART I. FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS:
a) Unaudited Consolidated Balance Sheets as of September 30, 1999 and
December 31, 1998 3
b) Unaudited Consolidated Statements of Operations of Cleveland
Indians Baseball Company, Inc. for the Three Months Ended
September 30, 1999 and 1998 4
c) Unaudited Consolidated Statements of Operations of Cleveland
Indians Baseball Company, Inc. for the Nine Months Ended September
30, 1999 and for the period from June 9, 1998 to September 30,
1998 and the Combined Statement of Operations of Cleveland Indians
Baseball Company Predecessor Group for the period from January 1,
1998 to June 8, 1998 5
d) Unaudited Condensed Consolidated Statements of Cash Flows of
Cleveland Indians Baseball Company, Inc. for the Nine Months Ended
September 30, 1999 and for the period from June 9, 1998 to
September 30, 1998 and the Condensed Combined Statement of Cash
Flows of Cleveland Indians Baseball Company Predecessor Group for
the period from January 1, 1998 to June 8, 1998 6
e) Notes to Unaudited Condensed Consolidated and Combined Financial
Statements 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION 12
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 22
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 23
SIGNATURES 24
</TABLE>
* Items not listed are inapplicable
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. - CONDENSED CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
CLEVELAND INDIANS BASEBALL COMPANY, INC.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED AND IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1999 1998
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 30,497 $ 39,283
Marketable securities 7,465 13,287
Investments - 3,783
Receivables and accrued income 21,806 9,421
Merchandise inventories 2,357 1,207
Prepaid expenses and other current assets 2,447 2,969
Deferred taxes 817 -
Deposit for grievance settlement 8,743 9,589
---------- ----------
Total current assets 74,132 79,539
---------- ----------
FIXED ASSETS:
Leasehold improvements, furniture and fixtures
and other equipment, at cost 11,506 8,969
Less accumulated depreciation and amortization 4,304 3,387
---------- ----------
Total fixed assets, net 7,202 5,582
PREPAID SIGNING BONUSES AND PLAYER
CONTRACTS (Net of accumulated amortization) 10,805 10,590
INTANGIBLE ASSETS (Net of accumulated amortization) 9,785 10,383
DEFERRED TAXES 1,434 3,960
OTHER ASSETS 18,388 11,969
---------- ----------
TOTAL $ 121,746 $ 122,023
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Accounts payable and accrued liabilities $ 15,454 $ 10,961
Deferred revenue 34,907 48,829
Current portion of long-term debt 449 448
Reserve for players' grievance damages 8,743 9,589
Income taxes payable - 750
---------- ----------
Total current liabilities 59,553 70,577
LONG-TERM LIABILITIES 61,427 57,951
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY (DEFICIT):
Preferred shares, without par value; 1,000,000 shares
authorized; no shares issued and outstanding - -
Class A Common Shares, without par value; 27,000,000 shares
authorized; 4,139,476 shares issued and outstanding 55,802 55,800
Class B Common Shares, without par value; 3,000,000 shares
authorized; 2,283,957 shares issued and outstanding 5,125 5,125
Additional paid in capital 4,700 4,700
Retained earnings (deficit) (64,861) (72,130)
---------- ----------
Total shareholders' equity (deficit) 766 (6,505)
---------- ----------
TOTAL $ 121,746 $ 122,023
========== ==========
</TABLE>
See notes to condensed consolidated and combined financial statements.
-3-
<PAGE> 4
CLEVELAND INDIANS BASEBALL COMPANY, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED AND IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30,
1999 1998
<S> <C> <C>
REVENUES:
Net ticket sales $ 28,588 $ 27,168
Local radio and television 10,992 9,069
Concession and catering 7,508 7,792
Private suite and club seat rentals 5,508 4,524
Advertising and promotion 6,104 4,767
Merchandise 5,040 4,957
Major Leagues Central Fund 5,637 5,438
Other (primarily Major League Baseball Properties) 1,263 1,126
Post-season - 1,792
Provision for revenue sharing (5,360) (4,948)
---------- ----------
Total revenues 65,280 61,685
---------- ----------
OPERATING EXPENSES:
Major league team 38,232 29,049
Player development 3,480 3,326
Ballpark operations 5,073 4,807
Cost of merchandise sold 3,680 3,633
Administrative and general 2,765 2,074
Major Leagues Central Fund 1,921 1,543
Advertising and promotion 1,001 792
Post-season - 1,813
Amortization of signing bonuses and player contracts 2,388 2,102
Depreciation and amortization 524 777
---------- ----------
Total operating expenses 59,064 49,916
---------- ----------
OPERATING INCOME 6,216 11,769
OTHER INCOME (EXPENSE):
Interest income 263 536
Interest expense (603) (783)
Gain on player transactions 20 10
---------- ----------
INCOME BEFORE MINORITY INTEREST AND INCOME
TAX BENEFIT (PROVISION) 5,896 11,532
MINORITY INTEREST (2,889) (5,650)
INCOME TAX BENEFIT (PROVISION) 2,108 (2,700)
---------- ----------
NET INCOME $ 5,115 $ 3,182
========== ==========
NET INCOME PER SHARE:
Basic $ 0.80 $ 0.50
========== ==========
Diluted $ 0.79 $ 0.50
========== ==========
WEIGHTED AVERAGE NUMBER OF COMMON SHARES:
Basic 6,423,421 6,423,333
========= ==========
Diluted 6,459,493 6,423,333
========= ==========
</TABLE>
See notes to condensed consolidated and combined financial statements.
-4-
<PAGE> 5
CLEVELAND INDIANS BASEBALL COMPANY, INC. AND
CLEVELAND INDIANS BASEBALL COMPANY PREDECESSOR GROUP
CONSOLIDATED AND COMBINED STATEMENTS OF OPERATIONS
(UNAUDITED AND IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
THE
PREDECESSOR
THE COMPANY GROUP
----------- -----
NINE MONTHS PERIOD PERIOD
ENDED JUNE 9, TO JANUARY 1,
SEPTEMBER 30, SEPTEMBER 30, TO JUNE 8,
1999 1998 1998
<S> <C> <C> <C>
REVENUES:
Net ticket sales $ 59,617 $ 36,581 $ 19,248
Local radio and television 21,578 10,889 7,317
Concession and catering 15,395 10,513 5,250
Private suite and club seat rentals 11,223 6,162 3,160
Advertising and promotion 13,194 6,470 3,284
Merchandise 12,863 6,848 5,388
Major Leagues Central Fund 10,304 6,140 2,206
Other (primarily Major League Baseball Properties) 2,952 1,191 1,509
Post-season - 1,792 -
Provision for revenue sharing (10,985) (6,409) (3,041)
--------- -------- ---------
Total revenues 136,141 80,177 44,321
--------- -------- ---------
OPERATING EXPENSES:
Major league team 77,826 36,724 28,943
Player development 10,318 4,238 5,422
Ballpark operations 11,469 6,392 5,218
Cost of merchandise sold 9,336 4,683 4,072
Administrative and general 8,185 2,767 4,234
Major Leagues Central Fund 4,564 1,946 1,569
Advertising and promotion 3,474 1,057 1,784
Post-season - 1,813 -
Amortization of signing bonuses and player contracts 5,169 2,597 1,779
Depreciation and amortization 1,494 898 778
--------- -------- ---------
Total operating expenses 131,835 63,115 53,799
--------- -------- ---------
OPERATING INCOME (LOSS) 4,306 17,062 (9,478)
OTHER INCOME (EXPENSE):
Interest income:
Affiliate - - 595
Other 3,376 747 2,020
Interest expense (1,730) (952) (1,191)
Gain (loss) on player transactions 20 10 (1,604)
--------- -------- ----------
INCOME (LOSS) BEFORE MINORITY INTEREST AND
INCOME TAX BENEFIT (PROVISION) 5,972 16,867 (9,658)
MINORITY INTEREST (2,926) (8,265) -
INCOME TAX BENEFIT (PROVISION) 1,297 (3,615) -
--------- -------- ---------
NET INCOME (LOSS) $ 4,343 $ 4,987 $ (9,658)
========= ======== ==========
NET INCOME PER SHARE:
Basic $ 0.68 $ 0.78
========= ========
Diluted $ 0.67 $ 0.78
========= ========
WEIGHTED AVERAGE NUMBER OF COMMON SHARES:
Basic 6,423,362 6,423,333
========= =========
Diluted 6,437,910 6,423,333
========= =========
</TABLE>
See notes to condensed consolidated and combined financial statements.
-5-
<PAGE> 6
CLEVELAND INDIANS BASEBALL COMPANY, INC. AND
CLEVELAND INDIANS BASEBALL COMPANY PREDECESSOR GROUP
CONDENSED CONSOLIDATED AND COMBINED STATEMENTS OF CASH FLOWS
(UNAUDITED AND IN THOUSANDS)
<TABLE>
<CAPTION>
THE
PREDECESSOR
THE COMPANY GROUP
----------- -----
NINE MONTHS PERIOD PERIOD
ENDED JUNE 9, TO JANUARY 1,
SEPTEMBER 30, SEPTEMBER 30, TO JUNE 8,
1999 1998 1998
CASH FLOWS FROM (USED IN) OPERATING ACTIVITIES $ (6,863) $ (1,222) 3,607
---------- --------- ---------
<S> <C> <C> <C>
CASH FLOWS FROM INVESTING ACTIVITIES:
Net change in short-term investments 3,783 5,624 14,300
Purchases of marketable securities (61,092) - -
Maturities of marketable securities 66,914 - -
Purchase of long-term investments (3,783) (847) (1,156)
Proceeds from sale of player contracts 261 332 413
Capital expenditures (2,559) (524) (1,062)
Expenditures for the purchase of
player contracts and signing bonuses (5,449) (3,271) (4,007)
Decrease in loan to general partner - - 35,500
Acquisition of partnership interest - (55,800) -
--------- -------- ---------
Net cash provided by (used in) investing activities (1,925) (54,486) 43,988
--------- -------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payment of debt issuance costs - - (192)
Net proceeds from sale of common stock 2 55,800 -
Distributions to general partner - - (49,200)
--------- -------- ---------
Net cash provided by (used in) financing activities 2 55,800 (49,392)
--------- -------- ---------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS (8,786) 92 (1,797)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 39,283 1,935 3,732
--------- -------- ---------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 30,497 $ 2,027 $ 1,935
========= ======== =========
</TABLE>
See notes to condensed consolidated and combined financial statements.
-6-
<PAGE> 7
CLEVELAND INDIANS BASEBALL COMPANY, INC.
AND CLEVELAND INDIANS BASEBALL COMPANY PREDECESSOR GROUP
NOTES TO CONDENSED CONSOLIDATED AND COMBINED
FINANCIAL STATEMENTS
(UNAUDITED AND IN THOUSANDS, EXCEPT SHARE DATA)
1. ORGANIZATION AND BASIS OF PRESENTATION
Cleveland Indians Baseball Company, Inc., an Ohio corporation (the
"Company"), was formed to acquire the 51% sole general partnership
interest of, and controlling interest in, Cleveland Indians Baseball
Company Limited Partnership, an Ohio limited partnership (the
"Operating Partnership"). The Operating Partnership was formed to
acquire, own, maintain, operate and control the membership of the
Cleveland Indians Baseball Club (the "Indians") in The American League
of Professional Baseball Clubs ("American League") and to operate and
manage a baseball facility ("Jacobs Field") under a long-term
management agreement with Gateway Economic Development Corporation of
Greater Cleveland ("Gateway"). The historical financial information
prior to June 9, 1998 includes the combined operations of Cleveland
Indians Baseball Company Limited Partnership and Ballpark Management
Company (collectively, the "Cleveland Indians Baseball Company
Predecessor Group" or the "Predecessor Group").
On June 9, 1998, the Company commenced operations after completing
an initial public offering of 4,000,000 Class A Common Shares (the
"Offering"). The 4,000,000 common shares were issued at a price per
share of $15.00, generating gross proceeds of $60,000. The aggregate
proceeds to the Company, net of underwriters' discount, were
approximately $55,800. The Company utilized these net proceeds to
purchase its 51% general partnership interest in the Operating
Partnership and to engage in the other transactions described below.
The following transactions occurred simultaneously with the
completion of the Offering (collectively, the "Formation
Transactions"):
- The Company issued and sold 133,233 Class A Common Shares to the
original shareholders and Martin J. Cleary at a purchase price of
$15.00 per share. The proceeds were used to pay the expenses of
the Offering.
- The original shareholders and Martin J. Cleary contributed their
interests in Ballpark Management Company ("Ballpark Management")
and MJC Baseball, Inc. ("MJC") to the Company in exchange for
6,043 Class A Common Shares and 2,283,957 Class B Common Shares
valued at $5,125.
- The Company contributed to the Operating Partnership all of the
assets, business, contract rights and liabilities held by Ballpark
Management immediately prior to the mergers in exchange for
partnership interests in the Operating Partnership.
- Upon completion of the contribution described above, the Company
purchased additional general partnership interests from Cleveland
Baseball Company ("CBC") with the net proceeds of the Offering.
Upon completion of the purchase, the Company became the sole
general partner of the Operating Partnership with a 51% interest
in the Operating Partnership. Upon completion of the sale of
partnership interests, CBC converted its remaining general
partnership interest into a 49% limited partnership interest in
the Operating Partnership.
-7-
<PAGE> 8
The Class A Common Shares are entitled to one vote per share and
the Class B Common Shares are entitled to 10,000 votes per share.
On May 13, 1999, the Company announced that its Board of Directors
had engaged the Goldman Sachs Group, Inc. and McDonald Investments,
Inc. to identify potential buyers for the franchise.
The consolidated financial statements of the Company include all
the accounts of the Company and its majority-owned Operating
Partnership. The financial statements reflect the acquisition of the
partnership interest at its historical basis of accounting as the
acquired interest was from the Predecessor Group's owners who continue
as investors. The accompanying combined financial statements for the
Predecessor Group have been presented on a combined basis due to common
ownership and management; therefore, its combined financial statements
are presented for comparative purposes. All significant intercompany
balances and transactions have been eliminated.
2. INTERIM FINANCIAL STATEMENTS
The accompanying interim financial statements are unaudited;
however, the financial statements have been presented as permitted by
Form 10-Q and do not include all of the disclosures required by
generally accepted accounting principles for complete financial
statements. In the opinion of management, all adjustments (consisting
solely of normal recurring matters) necessary for a fair presentation
of the financial statements for these interim periods have been
included. The results of operations for the interim periods are not
necessarily indicative of the results to be obtained for the full
fiscal year. These financial statements should be read in conjunction
with the Company's annual report on Form 10-K for its fiscal year ended
December 31, 1998 and the consolidated financial statements and notes
of the Company and the combined financial statements and notes of the
Predecessor Group.
The Company's operations are seasonal, commencing with spring
training camp that opens in mid-February and ending with the conclusion
of the Major League Baseball ("MLB") regular season in late September
or early October. If the Indians qualify for post-season playoffs, the
team can play until the end of October. For financial reporting
purposes, the Company generally recognizes revenues and expenses on a
per game basis. Because the regular season begins in late March or
early April, the first fiscal quarter, which ends on March 31,
generally includes limited revenues and reflects a loss attributable to
fixed costs of operations during the quarter. Based on a typical MLB
regular season, approximately one-half of the revenues are recognized
in the second quarter and the remainder in the third quarter, excluding
Major League Central Fund revenues. The number of home events
scheduled, and ultimately played, in a given quarter will significantly
influence quarterly financial results from year to year. Because of the
scheduling of post-season playoffs in any given year, revenues and
expenses associated with the post-season will be generally recognized
in the third and fourth quarters, depending upon when actual games are
played.
-8-
<PAGE> 9
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Revenue and Expense Recognition - Revenue from ticket sales, radio
and television broadcasting and advertising and promotions generally
are recorded at the time the game, to which such proceeds relate, is
played. Major league team expenses, principally player compensation and
game and post-season expenses, are recorded as expense generally on the
same basis. Accordingly, advance ticket sales, payments on private
suite and club seat rentals and payments for team and game expenses not
earned or incurred are recorded as deferred revenues, prepaid signing
bonuses and as a component of prepaid expenses and other. Such amounts
are amortized ratably as regular season games are played.
Administrative and general and advertising and promotional expenses are
charged to operations as incurred.
Marketable Securities - Marketable securities classified as
current assets are comprised of bankers' acceptances and various debt
securities. The Company has classified these marketable securities as
available-for-sale. Available-for-sale securities are carried at fair
value with unrealized gains and losses reported as a separate component
of equity. Realized gains and losses are computed on the basis of
specific identification and are included in interest income. The
estimated fair value of marketable securities approximated cost at
September 30, 1999. Marketable securities classified as other
non-current assets acquired to assist in the funding of certain
deferred compensation liabilities are classified as trading securities
and, accordingly, are carried at fair value with unrealized gains and
losses reported as current period income and expense.
Minority Interest Allocation - Minority interest relates to the
interest in the Operating Partnership that is not owned by the Company,
which, at September 30, 1999, amounted to 49%. The deficit recorded by
the Company as of the date of the Offering and related transactions
include the deficit attributable to the minority interest. Earnings
allocable to the minority interest, net of distributions and losses
allocable to the minority interest, will be credited to retained
earnings until the deficit is restored.
Income Taxes - Income taxes are provided using the liability
method in accordance with Statement of Financial Accounting Standards
No. 109, "Accounting for Income Taxes." Deferred income taxes reflect
the tax consequences in future periods of differences between the tax
bases of assets and liabilities and their financial reporting amounts.
A valuation allowance reduces deferred tax assets when management has
determined it is "more likely than not" that some portion or all of the
deferred tax assets will not be realized. The current deferred tax
asset at September 30, 1999 in the amount of $817 has been recognized
since management believes realization in future interim periods is
"more likely than not."
Earnings Per Share - Earnings per share is calculated based on the
weighted average number of common shares outstanding. The assumed
exercise of outstanding stock options, using the treasury stock method
became dilutive in the third quarter of 1999. The dilutive shares also
include stock grants to directors of the Company who have elected
deferred payment in the form of Class A Common Shares related to the
Directors' Deferred Compensation Plan.
Comprehensive Income - For the three-month period ended September
30, 1999 and nine-month period ended and as of September 30, 1999,
there were no material differences between net income and comprehensive
income.
-9-
<PAGE> 10
Reclassifications - Certain reclassifications have been made to
the 1998 financial statements to conform with classifications used in
1999.
4. MAJOR LEAGUE BASEBALL REVOLVING CREDIT AGREEMENT
In April 1998, the Company entered into a revolving credit
facility ("facility") which replaced the previous agreement arranged by
MLB and funded by a bank group. The terms of the facility require
interest only payments through April 2001. Outstanding balances can be
repaid in whole or in part in accordance with the facility. On April
10, 2001, the facility may convert to a four-year term loan with
principal repayments of 15%, 20%, 25% and 40% of the outstanding
principal amount of all borrowings as of the termination date payable
on January 10 of the first, second, third and fourth calendar years
following the termination date, respectively. Accordingly, the
outstanding balance of $35,500 at September 30, 1999 is reflected in
long-term liabilities. Outstanding borrowings bear interest under the
facility, based upon LIBOR plus .35%, at 5.38% and 5.51% at September
30, 1999 and December 31, 1998, respectively.
5. LONG-TERM INCENTIVE PLAN
The Company has established a long-term incentive plan (stock
option plan) for the purpose of retaining and rewarding key employees
of the Company and its affiliates and members of the Board of Directors
and to strengthen the mutuality of interest between such key employees
and the Company's shareholders. In conjunction with the Offering, the
Company granted options to purchase 294,350 Class A Common Shares to
directors, officers and employees. All options were issued at an
exercise price of $15.00, the initial public offering price per share.
The options vest in three equal annual increments beginning one year
after the date of grant and will expire ten years after the date of
grant. On June 4, 1999, options to purchase 87,083 common shares
vested.
Since the Offering, options to purchase 48,550 common shares were
forfeited. As of September 30, 1999, options to purchase 245,700 common
shares were outstanding. During the third quarter of 1999, stock
options to acquire 100 shares were exercised. An additional 454,200
common shares are reserved for issuance under the Company's long-term
incentive plan.
-10-
<PAGE> 11
6. EARNINGS PER SHARE DATA
The following table sets forth the computation of basic and
diluted earnings per share for the periods indicated:
<TABLE>
<CAPTION>
(In thousands, except share data)
Three Months Ended Nine Months Period
September 30, Ended June 9, to
-------------------------- September 30, September 30,
1999 1998 1999 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Basic:
Net income $ 5,115 $ 3,182 $ 4,343 $ 4,987
Average shares outstanding 6,423,421 6,423,333 6,423,362 6,423,333
----------- ----------- ----------- -----------
Basic EPS $ 0.80 $ 0.50 $ 0.68 $ 0.78
=========== =========== =========== ===========
Diluted:
Net income $ 5,115 $ 3,182 $ 4,343 $ 4,987
----------- ----------- ----------- -----------
Average shares outstanding 6,423,421 6,423,333 6,423,362 6,423,333
Net effect of dilutive stock options -
based on the treasury stock method 31,215 - 10,405 -
Board grants 4,857 - 4,143 -
----------- ----------- ----------- -----------
Totals 6,459,493 6,423,333 6,437,910 6,423,333
----------- ----------- ----------- -----------
Diluted EPS $ 0.79 $ 0.50 $ 0.67 $ 0.78
=========== =========== =========== ===========
</TABLE>
7. SUBSEQUENT EVENT
On November 4, 1999, the Company announced that it has signed a
definitive agreement to sell the franchise to Lawrence J. Dolan and
family trusts.
-11-
<PAGE> 12
ITEM 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
The following discussion should be read in conjunction with the financial
statements and related notes appearing elsewhere in this report.
OVERVIEW
Portions of Management's Discussion and Analysis of Results of Operations
and Financial Condition include "forward-looking statements" within the meaning
of the Private Securities Litigation Reform Act of 1995. The words "believe,"
"expect," "anticipate," "project," and similar expressions, among others,
identify "forward-looking statements," which speak only as of the date the
statement was made. Such forward-looking statements are subject to risks,
uncertainties and other factors which could cause actual results to materially
differ from those made, projected or implied in such statements. The most
significant such risks, uncertainties and other factors are:
- - The control of the Company by Richard E. Jacobs
- - The limited potential for further revenue growth
- - The Company's dependence on the competitive success of the baseball club
- - The uncertainties relating to increases in players' salaries
- - Risks of labor difficulties
- - A decline in the popularity of baseball
- - The concentration of the Company's operations in one business
These and other risks, uncertainties and other factors are more fully
described in the "Risk Factors" section of the final Prospectus dated June 4,
1998 relating to the Company's initial public offering. The Company undertakes
no obligation to publicly update or revise any forward-looking statements
whether as a result of new information, future events or otherwise.
Cleveland Indians Baseball Company, Inc. ("CIBC" or the "Company") was
formed to acquire the sole general partnership interest of, and controlling
interest in, the Partnership. The historical financial information prior to June
9, 1998 includes the combined operations of Cleveland Indians Baseball Company
Limited Partnership (CIBC, LP) and Ballpark Management Company (collectively,
the "Cleveland Indians Baseball Company Predecessor Group" or "Predecessor
Group"). CIBC commenced operations on June 9, 1998 after completing an initial
public offering of 4,000,000 Class A Common Shares.
The Company recognizes a majority of its revenues as home games are played
(i.e., net ticket sales, concessions and catering, private suite and club
rentals and merchandise), and the most significant expense, major league team
salaries, is recognized over the entire regular season.
The Company derives substantially all of its revenues from:
- - Sales of tickets to home games
- - Contracts with local broadcast organizations
- - Food and beverage concession sales
- - Premium seating rents
- - Advertising and promotional sales
- - Merchandise sales and royalties
- - Participation in the Major Leagues Central Fund ("MLCF")
- - Parking and ancillary baseball related revenues
-12-
<PAGE> 13
If the Indians qualify for post-season play, incremental revenues are
earned from similar sources.
The Company's operations are seasonal, commencing with spring training camp
that opens in mid-February and ending with the conclusion of the MLB regular
season in late September or early October. If the Indians qualify for the
post-season playoffs, the team can play until the end of October, the duration
of participation being contingent on continued winning at each level of
post-season play (the Division, League Championship and World Series). For
financial reporting purposes, the Company generally recognizes revenues and
expenses on a per game basis. Because the regular season begins in late March or
early April, the first fiscal quarter, which ends on March 31, generally
includes limited revenues and reflects a loss attributable to fixed costs of
operations during the quarter. Based on a typical MLB regular season schedule,
approximately one-half of the revenues are recognized in the second quarter and
the remainder in the third quarter, excluding MLCF revenues. The number of home
events scheduled, and ultimately played, in a given quarter will significantly
influence quarterly financial results from year to year. Because of scheduling
of post-season playoffs in any given year, revenue and expenses associated with
post-season will generally be recognized in the third and fourth quarters,
depending upon when actual games are played.
The Company currently receives a substantial portion of its receipts from
the advance sale of regular season tickets during the months of November through
January and premium seating rents during the months of September through
December, prior to the commencement of the MLB regular season. Season tickets
and public single-game tickets are sold during this time period. In recent
years, Jacobs Field attendance during the regular season has approximated 3.5
million fans, of which approximately 2.2 million are represented by season
tickets.
The Major League Baseball regular season schedule consists of 162 games, of
which 81 are scheduled to be played at home and 81 are scheduled to be played on
the road. The following table outlines the regular season games played during
1999 and 1998:
<TABLE>
<CAPTION>
1999 1998
-------------------------------------------- --------------------------------------------
Home Away Total Home Away Total
------------ ------------ ------------ ------------ ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
First Quarter - - - - 1 1
Second Quarter 40 36 76 41 38 79
Third Quarter 38 45 83 40 42 82
Fourth Quarter 3 - 3 - - -
============ ============ ============ ============ ============ =============
Total 81 81 162 81 81 162
============ ============ ============ ============ ============ =============
</TABLE>
There were 16 spring training home games and two exhibition games played
during 1999 compared to 13 spring training home games and two exhibition
games played during 1998. During the three-month period ended September 30,
1999, there were 38 regular season home games played versus 40 in the
three-month period ended September 30, 1998. During the nine-month period ended
September 30, 1999, there were 78 regular season home games played versus 81 in
the nine-month period ended September 30, 1998. In addition, there were no
post-season games played in the three-month period ended September 30, 1999
while there were two post-season home games played in the three-month period
ended September 30, 1998.
-13-
<PAGE> 14
RESULTS OF OPERATIONS
The following discussion compares the results from continuing operations of
the Company for the three-month and nine-month periods ended September 30, 1999
with the results of the Company for the three-month period ended September 30,
1998 and from continuing combined operations of the Company and the Predecessor
Group for the nine-month period ended September 30, 1998.
REVENUES
Net ticket sales revenue is comprised of gross ticket revenues from regular
season home games, less City of Cleveland admissions tax and an American League
assessment, plus net revenues derived from spring training and exhibition games.
Net ticket sales revenue increased $1,420,000, or 5%, in the three-month period
ended September 30, 1999 and $3,788,000, or 7%, in the nine-month period ended
September 30, 1999 compared to the same periods in 1998 primarily due to a
10% increase in the average ticket price offset by a 5% and a 4% decrease in
paid attendance in the three-month period and in the nine-month period ended
September 30, 1999, respectively, compared to the same periods in 1998. Paid
attendance decreased as a result of two fewer regular season home events played
in the three-month period and three fewer regular season home events played in
the nine-month period ended September 30, 1999 compared to the same periods in
1998 due to scheduling.
Local radio and television revenue is recognized as the regular season
games are played. Local radio and television revenue increased $1,923,000, or
21%, in the three-month period ended September 30, 1999 and $3,372,000, or 19%,
in the nine-month period ended September 30, 1999 compared to the same
periods in 1998. Local radio revenue increased $713,000 in the three-month
period ended September 30, 1999 as there was one additional game broadcast and
an increase in radio advertising rates and advertising volume compared to the
same periods in 1998. Local radio advertising revenue increased $1,125,000 due
to a 17% increase in radio advertising rates and volume even though there were
three fewer games broadcast in the nine-month period ended September 30, 1999.
Television revenues increased $1,210,000 in the three-month period ended
September 30, 1999 due to a 44% increase in rights fees and one additional
telecast and $2,247,000 in the nine-month period ended September 30, 1999 due to
the rights fees increase offset by three fewer telecasts due to scheduling
compared to the same periods in 1998.
Concession and catering revenue is primarily derived from general food and
beverage concessions throughout Jacobs Field, including private suite and club
seat catering. Concession and catering revenue decreased approximately $284,000,
or 4%, in the three-month period and $368,000, or 2%, in the nine-month period
ended September 30, 1999 compared to the same periods in 1998. The decreases
were primarily attributable to two fewer home events played in the three-month
period 1999 and three fewer home events played in the nine-month period 1999
offset by increased consumer spending in the three-month period and nine-month
period ended September 30, 1999 compared to the same periods in 1998.
-14-
<PAGE> 15
Revenue from private suite and club seat rentals includes lease income from
the suites and club seats that are leased on four-year terms as well as single
game rentals of suites and Terrace Club memberships. Private suite and club seat
rental revenue is recognized as the home games are played and increased
$984,000, or 22%, in the three-month period ended September 30, 1999 and
$1,901,000, or 20%, in the nine-month period ended September 30, 1999
compared to the same periods in 1998. The increases were primarily attributable
to an $842,000 and $1,605,000 increase in rental revenues for the three-month
period and nine-month period ended September 30, 1999, respectively, compared
to the same periods in 1998 associated with the renewal of 62 suites and 461
club seats at higher rental rates. The remaining increase in rental income was
primarily from suites rented on a single game basis.
Advertising and promotion revenue consists primarily of the sale of
advertising space throughout Jacobs Field, marketing and promotional activities
and licensing of the Club's name and logo. Advertising and promotion revenue
increased $1,337,000, or 28%, in the three-month period and $3,440,000 or 35%,
in the nine-month period ended September 30, 1999, compared to the same periods
in 1998. The increases were primarily due to an increase in ballpark advertising
signage primarily related to new signage behind homeplate commencing in 1999.
Merchandise sales include all sales at the Indians team shops and Jacobs
Field. The $83,000, or 2%, increase in merchandise sales in the three-month
period ended September 30, 1999 is primarily attributable to increased game day
sales and the opening of two additional retail stores during the third quarter
offset by two fewer home events played. The $627,000, or 5%, increase for the
nine-month period ended September 30, 1999 compared to the same period in 1998
was primarily due to increased game day sales, the two additional retail stores
opened during the third quarter and to sales at the Winter Haven team shop
during 1999 spring training offset by playing three less regular season home
events. Beginning in 1999, the control of retail operations and, therefore, the
related revenues and expenses at the Winter Haven site was transferred to the
Company from the city of Winter Haven.
Post-season revenue includes incremental revenues earned from net ticket
sales, local radio and television fees, food and beverage concession sales,
private suite rentals, Jacobs Field merchandise sales and League distributions
from post-season games. Prior year post-season revenue of $1,792,000 consisted
of two home post-season games played in September 1998 while the 1999
post-season began in October.
The Major Leagues Central Fund was established by the Commissioner of Major
League Baseball to collect certain revenues and to pay certain expenses that
relate to the operations of Major League Baseball. The 30 major league baseball
teams generally share these revenues and expenses. The principal component of
MLCF revenues is the Cleveland Indians' share of national television and radio
broadcasting fees. Major Leagues Central Fund revenues increased $1,958,000, or
23%, in the nine-month period ended September 30, 1999 compared to the same
period in 1998. The increase is primarily attributable to an increase in Central
Fund revenue associated with contractual broadcasting fees and copyright
arbitration royalties pertaining to 1992 through 1997.
Major League Baseball member clubs participate in a revenue sharing system.
Under the system, each club must contribute a percentage of its net local
revenue to a revenue sharing pool. Once the pool is accumulated, it is
redistributed to the clubs on a basis that disproportionately benefits clubs
with below average revenue. The Cleveland Indians have been a net payor under
the revenue sharing system since inception. Provision for revenue sharing
increased $412,000, or 8%, for the three-month period ended September 30, 1999
and $1,535,000 or 16%, for the nine-month period ended September 30, 1999
compared to the same periods in 1998. These increases were primarily
attributable to the increase in the revenue sharing tax rate from 16% in 1998 to
17% in 1999 and an increase in the Club's net local revenue as defined in the
Collective Bargaining Agreement.
-15-
<PAGE> 16
OPERATING EXPENSES
Major league team costs include salaries of players and coaches, the
payroll luxury tax, travel costs, spring training, equipment and medical costs.
These costs increased $9,183,000, or 32%, in the three-month period ended
September 30, 1999 and $12,159,000, or 19%, in the nine-month period ended
September 30, 1999 compared to the same periods in 1998. The increase for both
periods is primarily attributable to an increase in major league roster
salaries.
Player development costs, which include scouting programs, minor league and
Latin America operations and other specialized development programs, increased
$154,000, or 5%, in the three-month period ended September 30, 1999 and
increased $658,000, or 7%, in the nine-month period ended September 30, 1999
compared to the same periods in 1998. The increase in both periods is primarily
due to increased medical costs, costs for a new development program in
Venezuela, equipment costs and other costs.
The cost of merchandise sold increased $581,000, or 7%, in the nine-month
period ended September 30, 1999 compared to the same period in 1998. The
increase in cost of merchandise sold is consistent with the increase in
merchandise sales.
Administrative and general expenses increased $691,000, or 33%, in the
three-month period ended September 30, 1999 and increased $1,184,000, or 17%, in
the nine-month period ended September 30, 1999 compared to the same periods in
1998. The increases are primarily due to contractual increases in front office
salaries, increased medical costs and franchise sale costs. In addition, the
nine-month period ended September 30, 1999 included an increase attributable to
operating as a public company beginning in the second quarter of 1998 and an
increase in pension expense.
Major Leagues Central Fund expenses allocated to the Cleveland Indians
increased $378,000, or 24%, in the three-month period ended September 30, 1999
and increased $1,049,000, or 30%, in the nine-month period ended September 30,
1999 compared to the same periods in 1998. These increases were due to an
increase in the expenses associated with the administration of the Office of the
Commissioner of Major League Baseball.
Advertising and promotion expenses increased $209,000, or 26%, in the
three-month period ended September 30, 1999 and increased $633,000, or 22%, in
the nine-month period ended September 30, 1999 compared to the same periods in
1998. The increase in both periods was primarily due to costs related to a 1999
advertising campaign.
Post-season expenses include major league team expense, ballpark
operations, cost of merchandise sold at Jacobs Field, advertising and promotion
and general and administrative expenses related to the post-season games. Prior
year post-season expenses of $1,813,000 consisted of two home post-season games
played in September 1998.
The amortization of signing bonuses and player contracts results from the
recognition of these expenses over the lives of the related player contracts and
the write-off of the net book value of the signing bonus and contract value of
player contracts disposed of, in transactions not involving a trade or sale.
These costs increased $286,000, or 14%, in the three-month period ended
September 30, 1999 and increased $793,000, or 18%, in the nine-month period
ended September 30, 1999 compared to the same periods in 1998 primarily due to
the amortization of increased costs associated with the acquisition and signing
of players.
-16-
<PAGE> 17
Depreciation and amortization includes depreciation on fixed assets and
amortization of the Club's membership in the American League and deferred lease
costs. Depreciation and amortization decreased $253,000, or 33%, in the
three-month period ended September 30, 1999 and decreased $182,000, or 11%, in
the nine-month period ended September 30, 1999 compared to the same periods in
1998 due largely to prior year write-offs in the third quarter.
OTHER INCOME AND EXPENSE
Interest income includes earnings on cash equivalents, marketable
securities, securities purchased to assist in the funding of certain deferred
compensation liabilities and the loan to the general partner. Interest income
decreased $273,000, or 51%, for the three-month period ended September 30, 1999
compared to the same period in 1998 due to a $406,000 decline in value for the
three-month period ended September 30, 1999, on securities purchased to assist
in the funding of certain deferred compensation liabilities that were previously
offset against the increase in the deferred compensation liability by an
increase in interest on cash equivalents and marketable securities. For the
nine-month period ended September 30, 1999, interest income increased due to
higher average combined cash equivalents, marketable securities, and securities
purchased to assist in the funding of certain deferred compensation liabilities
balance offset by reduced interest income due to the repayment in March 1998,
of the Predecessor Group's $35,500,000 loan to the Partnership's general
partner.
Interest expense is primarily interest incurred on the Major League
Baseball Revolving Credit Agreement. Interest expense decreased $180,000, or
23%, for the three-month period ended September 30, 1999 and $413,000, or 19%,
for the nine-month period ended September 30, 1999 compared to the same periods
in 1998. These decreases were primarily due to a decrease in the interest rate
related to the revolving credit facility.
A loss on player transactions of $1,604,000 in the first quarter of 1998 is
comprised of approximately a $2,000,000 loss attributable to a February 1998
trade of one player partially offset by the sale of one player's contract to a
Japanese team resulting in a gain of $300,000.
Minority interest represents the interest in the earnings of the
Partnership that was not purchased and is not owned by the Company. The minority
interest of $2,889,000 and $2,926,000 represents a 49% interest in the earnings
of the Company for the three-month period and for the nine-month period ended
September 30, 1999, respectively.
The provision for income taxes was $2,700,000 and $3,615,000 for the
three-month period ended and for the nine-month period ended September 30, 1998,
respectively. For the three-month period ended and for the nine-month period
ended September 30, 1999, there was an income tax benefit of $2,108,000 and
$1,297,000, respectively. The provision for income taxes in 1998 represented the
estimated tax on the Company's earnings at the applicable income tax rates. The
tax benefit recognized in 1999 is due to the anticipated recovery of taxes
remitted in 1998 of approximately $3,200,000 due to the changes in estimates and
the finalization of the tax purchase price allocation in conjunction with the
Company's purchase of the 51% general partnership interest of CIBC, LP in June
of 1998. The changes in the estimates for the purchase price allocation are
primarily due to the lives over which certain assets will be amortized. This
benefit has been partially offset by the current utilization of the Company's
deferred tax assets.
-17-
<PAGE> 18
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal source of cash historically has been cash provided
from operating activities. Operating activities utilized $6,863,000 for the
nine-month period ended September 30, 1999 compared to providing net cash of
$2,385,000 for the nine-month period ended September 30, 1998. The increase of
$9,248,000 in the use of cash by operating activities was primarily due to a
decrease in deferred revenues, taxes payable and accounts payable and accrued
liabilities and an increase in other assets.
The Company's cash management strategy is to achieve favorable returns
commensurate with the short-term nature of the investments while maintaining
sufficient cash flows to meet its short-term and long-term requirements for
capital and acquisition of player contracts. All marketable securities
classified as current assets are available to support current operations or to
take advantage of other investment opportunities.
Under the terms of the Major League Credit Facility, certain MLB clubs,
including the Cleveland Indians have the ability to obtain financing on a
revolving credit basis. The obligations under the Major League Credit Facility
are non-recourse to the Partnership, and the obligations to repay advances for
the benefit of the Partnership are secured by the rights of the Partnership to
receive revenues that are shared by various MLB clubs, including revenues from
the Major Leagues Central Fund and royalties from MLB Properties. In connection
with the Major League Credit Facility, the Indians have assigned their rights to
receive their share of revenues and royalties to the Indians Club Trust, a
bankruptcy remote entity. The terms of the facility require interest only
payments through April 2001. Outstanding balances can be repaid in whole or in
part in accordance with the facility. On April 10, 2001, the facility may
convert to a four-year term loan with principal repayments of 15%, 20%, 25% and
40% of the outstanding principal amount of all borrowings as of the termination
date payable on January 10 of the first, second, third and fourth calendar years
following the termination date, respectively. Accordingly, the outstanding
balance of $35,500,000 at September 30, 1999 is reflected in long-term
liabilities. The interest rate on the amounts borrowed on the facility is based
on LIBOR plus a program fee of 0.35% and is adjusted semiannually in April and
October. As of September 30, 1999, the interest rate was 5.38%. In October 1999,
the interest rate was adjusted and increased to 6.37%. During the term of the
facility, the Company pays interest only on the outstanding borrowings, in
addition to commitment and other fees. The facility also provides that upon the
expiration of the current Collective Bargaining Agreement, and until a new
agreement is entered into, the Indians will be required to maintain an interest
contingency reserve equal to nine months' interest expense at 2% above the
then-applicable borrowing rate.
Until the first quarter of 1998, the Predecessor Group had historically
borrowed the full amount available to it under the Major League Credit Facility
and in-turn loaned the proceeds to CBC, the Partnership's general partner. In
March 1998, the Partnership distributed $49,200,000 to its partners and CBC
repaid its $35,500,000 debt due to the Partnership. These transactions had the
effect of allowing CBC to use cash generated by the Partnership to repay its
debt to the Partnership. The Major League Credit Facility currently provides the
Company with an aggregate availability of $45,000,000 of which $9,500,000 was
available as of September 30, 1999.
-18-
<PAGE> 19
The Company's ability to incur additional indebtedness is limited by
applicable provisions of the agreements that govern all MLB clubs, which limit
the amount of debt that may be secured by the assets of, or ownership interests
in, an MLB club and require that the parties to any secured loan that is
approved execute an agreement limiting the rights of the lenders and the club
under certain circumstances, including upon an event of default or foreclosure.
The consent of the MLB is also required prior to the issuance of any additional
debt or equity securities by the Company. In addition, MLB clubs may not incur
indebtedness in an amount in excess of two-thirds of the value of their assets
calculated in accordance with MLB rules.
The Company has significant commitments under its contracts with players
and other personnel, aggregating approximately $159 million as of September 30,
1999, including approximately $63 million scheduled for payment in the remainder
of 1999 and 2000. The Company's commitments under all multi-year contracts and
some single-year contracts are guaranteed, even if the player's contract is
terminated or if the player is physically unable to perform due to death, injury
or illness. The Company's obligations under non-guaranteed single-year contracts
are payable if the player's contract is terminated for performance reasons or
due to disability resulting directly from injury sustained in the course and
within the scope of his employment, but are otherwise not guaranteed. The
Company carries life insurance to insure its obligations under the contracts for
the 25-man major league roster. As of October 31, 1999, the Company also carried
disability insurance in the aggregate amount of approximately $105 million for
players under multi-year contracts. The disability benefits are generally
payable after 90 days of a player's disability and are subject to specified
pre-existing conditions.
FINANCIAL CONDITION
Cash and cash equivalents, marketable securities and investments at
September 30, 1999 were $37,962,000 compared to $56,353,000 at December 31,
1998. The decrease was primarily attributable to the seasonal operations of the
Company and the substantial cash and investment position at December 31, 1998
related to advance ticket sales in the fourth quarter of 1998 and corresponds
largely to the decrease in the deferred revenue balance. The majority of the
Company's expenditures occur during the regular season. A majority of the cash
and cash equivalents and marketable securities balance at September 30, 1999
consisted of receipts for post-season ticket sales which occurred primarily in
September.
Receivables and accrued income at September 30, 1999 were $21,806,000
compared to $9,421,000 at December 31, 1998. The increase was primarily
attributable to the recording of $3,200,000 of tax refunds, billings for
sponsorship contracts and concessionaire and catering revenue that occur during
the season and are paid throughout the year based upon predetermined payment
schedules and accrued Central Fund proceeds and accrued television revenues
which are paid after the regular season.
Prepaid signing bonuses and player contracts at September 30, 1999 were
$10,805,000 compared to $10,590,000 at December 31, 1998. The increase was
attributable to $5,412,000 of prepaid signing bonuses and acquisition costs
associated with the acquisition and signing of players offset by $5,197,000 of
amortization and write-offs during the nine-month period ended September 30,
1999.
Other assets at September 30, 1999 were $18,388,000 compared to $11,969,000
at December 31, 1998. The increase was primarily attributable to the purchase of
certain investments and appreciation in existing investments held in trust to
assist in the funding of the Company's deferred compensation obligations.
-19-
<PAGE> 20
Accounts payable and accrued liabilities at September 30, 1999 were
$15,454,000 compared to $10,961,000 at December 31, 1998. The increase was
primarily attributable to a $1,453,000 increase in accounts payable and a
$3,174,000 increase in accrued expenses. The increase in payables and accrued
expenses are due to the normal operations during the regular season.
The majority of the Company's current liabilities are deferred revenues
which decreased to $34,907,000 at September 30, 1999 compared to $48,829,000 at
December 31, 1998. Deferred revenues consist primarily of advanced ticket sales
and the Company satisfies this liability by playing its regular season games.
The deferred revenue balance at September 30, 1999 is affected by receipts for
post-season ticket sales which occurred primarily in September.
Long-term liabilities at September 30, 1999 were $61,427,000 compared to
$57,951,000 at December 31, 1998. The increase was primarily attributable to
increases in deferred compensation obligations.
SIGNIFICANT EVENTS
On May 13, 1999, the Company announced that its Board of Directors has
engaged the Goldman Sachs Group, Inc. and McDonald Investments, Inc. to identify
potential buyers for the franchise.
On November 4, 1999, the Company announced that it has signed a definitive
agreement to sell the franchise to Lawrence J. Dolan and family trusts. The copy
of the press release making this announcement is filed as Exhibit 99.1 to this
report.
YEAR 2000 COMPLIANCE
The Year 2000 issue is the result of many computer programs being written
using two digits rather than four digits to define a year. Such programs may
recognize a year containing "00" as the year 1900 rather than the year 2000.
This could result in equipment or system failures or miscalculations causing
disruptions of daily operations for some organizations.
The Company has substantially completed the process of identifying and
modifying all significant hardware and software applications that will require
modification to ensure Year 2000 Compliance. Internal and external resources
have been used to make the required modifications and test Year 2000 Compliance.
In addition, the Company has substantially completed its communications with
external service providers to ensure that the providers are taking the
appropriate action to address Year 2000 issues. To date, the Company is not
aware of any third parties with a Year 2000 issue that would materially impact
the Company's results of operations, liquidity, or capital resources.
Management of the Company believes it has an effective program in place to
resolve internal Year 2000 issues in a timely manner. Management of the Company
further believes that its most likely worst-case Year 2000 scenario would
involve problems with the systems of external parties rather than with the
Company's internal systems. However, there can be no assurance that the failure
of third parties to convert systems on which the Company's systems rely, or that
a conversion that is incompatible with the Company's systems, would not have a
material adverse effect on the Company's systems.
-20-
<PAGE> 21
To date, the Company has incurred approximately $150,000 on efforts
directed solely at Year 2000 Compliance and does not anticipate any further
significant spending on this issue. The total cost of the Year 2000 Compliance
project has been funded through operating cash flows, and in the opinion of
management will not have a material impact on the Company's business, operations
or financial condition.
Based on the Company's assessment of the readiness of its own systems and
those of significant third parties, it has and will continue to develop
contingency plans that address critical functions such as ticketing and
merchandising. In the event additional information comes to the Company's
attention which would change its current assessment, it will consider the need
for additional contingency plans at that time. In addition, as the primary
operations of the Company will not begin until April of 2000, with the
commencement of the MLB regular season, the Company believes adequate time will
be available, if necessary, to ensure alternative plans can be developed,
assessed and implemented prior to the Year 2000 issue having any unforeseen
significant negative impact on most of its principal operations.
-21-
<PAGE> 22
ITEM 3. - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company measures its market risk, related to its holdings of financial
instruments based on changes in interest rates utilizing a sensitivity analysis.
The sensitivity analysis measures the potential loss in fair values, cash flows
and earnings based on a hypothetical 10% change (increase and decrease) in
interest rates. The Company used current market rates on its debt to perform
sensitivity analysis.
The Company's primary interest rate exposures relate to its cash,
marketable securities, and variable rate debt. The potential loss in fair values
is based on an immediate change in the net present values of the Company's
interest rate sensitive exposures resulting from a 10% change in interest rates.
The potential loss in cash flows and earnings is based on the change in the net
interest income/expense over a one-year period due to an immediate 10% change in
rates. A hypothetical 10% change in interest rates does not have a material
impact on the fair values, cash flows or earnings of the Company.
-22-
<PAGE> 23
PART II. OTHER INFORMATION
Except to the extent noted below, the items required in Part II are
inapplicable, or if applicable, would be answered in the negative and have been
omitted.
ITEM 6. - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
EXHIBIT
NO. DESCRIPTION
--- -----------
10.1 Amendment to Employment Agreement between the Company and
John Hart
10.2 Employment Agreement between the Company and Ken Stefanov
27.1 Financial Data Schedule
99.1 Company Press Release Dated November 4, 1999
(b) Reports on Form 8-K
None
-23-
<PAGE> 24
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.
DATE: November 15, 1999 By: /s/ Kenneth E. Stefanov
-----------------------
Kenneth E. Stefanov
Vice President, Finance
(principal financial officer and
principal accounting officer)
-24-
<PAGE> 1
EXHIBIT 10.1
July 14, 1999
Mr. John Hart
Dear John:
The purpose of this letter is to evidence an amendment to your
Employment Agreement with Cleveland Indians Baseball Company Limited Partnership
dated January 30, 1998 (the "Employment Agreement"). Paragraph 5 of the
Employment Agreement concerning a post season bonus shall be deleted in its
entirety and replaced with the following new Paragraph 5:
5. POST SEASON BONUS. In the event that the Club wins
the Central Division Championship, American League Wild Card American
League Championship Pennant or the World Series Championship during any
championship season during the term of this Agreement, including any
option year if the applicable option has been exercised, you shall be
paid a post-season bonus payment equal to the greater of (i) a full
player's share payable to the Club's players as determined pursuant to
Major League Rule 45(b)(2) as the same shall be amended from time to
time or (ii) the Bonus Formula Amount. The Bonus Formula Amount shall
be equal to the sum of the following amounts attributable to the
championships actually won by the Club during the championship season:
(a) American League Central Division
Championship or Wild Card $ 50,000
(b) American League Championship $100,000
(c) World Series Championship $100,000
This amendment shall be effective as of January 30, 1998. All of the
other terms of the contract will remain unchanged and in full force and effect.
<PAGE> 2
Mr. John Hart
July 14, 1999
Page 26
Please indicate your acceptance of these amendments by executing both
copies of this letter and returning one of the executed copies to me. You may
retain the other copy for your records.
Very truly yours,
CLEVELAND INDIANS BASEBALL
COMPANY LIMITED PARTNERSHIP
By: Cleveland Indians Baseball Company,
Its General Partner
By: /s/ Richard E. Jacobs
------------------------------------------
Richard E. Jacobs, Chief Executive Officer
ACCEPTED:
/s/ John H. Hart
- --------------------------------
DATE: July 18, 1999
-----------------------
<PAGE> 1
EXHIBIT 10.2
August 3, 1999
Mr. Kenneth E. Stefanov
Dear Ken:
The following should constitute the employment agreement by and between
Cleveland Indians Baseball Company, Inc., an Ohio Corporation, (The Club) and
you, and shall, upon acceptance by you, serve as an Employment Contract dated
August 3, 1999.
1. TERM
A. Subject to the terms and conditions set forth below, The Club
agrees to employ you as Vice President of Finance, for a
period commencing on the date of your acceptance as set forth
below and ending December 31, 2001, subject to subsection B
below.
B. The Club shall have the unilateral option to extend the term
of this Agreement through December 31, 2002 at a salary of
$204,000.00 for the year 2002. Such option may be exercised by
written notice personally delivered to you at The Club's
offices on or before December 31, 2000.
C. Your salary shall be paid each calendar year in twenty-four
(24) equal semi-monthly installments.
2. SALARY
A Your salary as Vice President of Finance under this Agreement
shall be as follows:
January 1, 1999 through December 31, 1999 at the rate of
$162,000.00 per year.
January 1, 2000 through December 31, 2000 at the rate of
$175,000.00 per year.
January 1, 2001 through December 31, 2001 at the rate of
$189,000.00 per year.
Option Year: January 1, 2002 through December 31, 2002
$204,000.00.
<PAGE> 2
Mr. Ken Stefanov
August 3, 1999
Page 2
B. DEFERRED COMPENSATION PLAN. On or before December 1 of the
year immediately preceding any calendar year, you may elect to
defer the payment of not more than 50% of the salary otherwise
payable under subsection (A) of this Section 2 and 100% of any
bonus payments for such calendar year and on June 15 of such
calendar year (or, if later, the date that any bonus payment
would otherwise have been payable), the Club shall deposit
such deferred compensation in a trust, the earnings of which
are not currently taxable for federal income tax purposes,
which shall be established by the Club to provide deferred
compensation to you in accordance with this subsection (B)
(the "Deferred Compensation Account"); a copy of such trust is
attached hereto as Exhibit I. Notwithstanding the foregoing,
if you terminate employment, die or become "permanently
disabled" (as defined under Section 10) during a calendar
year, the amount to be credited to the Deferred Compensation
Account for that year shall be equal to the portion of the
deferred amount that you actually earned through the date of
your termination of employment, death or permanent disability.
The fair market value of the Deferred Compensation Account, as
determined under clause (i) of this subsection (B), shall be
paid by the Club to you, or in the case of your death, to your
beneficiary, in ten installments, commencing on the first
business day of January of the calendar year following the
earlier of (a) the date of your death or permanent disability
or (b) the later of (i) termination of your employment with
the Club or (ii) your fifty-fifth (55) birthday. The payments
will be computed in accordance with the following schedule.
Percentage of
Fair Market Value
Payment of Deferred
Number Compensation Account
------ --------------------
1 10%
2 11.11%
3 12.5%
4 14.28%
5 16.67%
6 20%
7 25%
8 33.33%
9 50%
10 100%
(i) INVESTMENT POLICY. Any deferred compensation
payments credited to the Deferred Compensation
Account pursuant to this subsection (B) and all
income attributable to such amounts (net of expenses)
shall be invested and reinvested in accordance with
the trust agreement described herein until such time
as the Deferred Compensation Account is paid by the
Club to you, or your beneficiary, as applicable.
<PAGE> 3
Mr. Ken Stefanov
August 3, 1999
Page 3
(ii) DEATH BENEFITS. You shall be entitled to designate a
beneficiary (or beneficiaries) who shall be entitled
to receive that portion of your undistributed
Deferred Compensation Account, as determined under
the first paragraph of this subsection (B) if you
die before receiving the total value of the Deferred
Compensation Account. The designation of a
beneficiary (or beneficiaries) must be made in
writing on a form substantially similar to the form
attached as Exhibit II to this Agreement and
delivered to the Club. You may change or revoke a
beneficiary designation by filing a new designation
or notice of revocation with the Club. If you fail
to designate a beneficiary or if no designated
beneficiary survives you, the Club shall pay any
amounts payable pursuant to this subsection (B) to
your surviving spouse, and to your personal
representative if there is no surviving spouse.
(iii) HARDSHIP. Regardless of the date on which payment of
the deferred compensation under this subsection (B)
otherwise is to be paid, in the event of your
hardship, payment of all or a portion of the fair
market value of the Deferred Compensation Account
can be accelerated by the Club's determination of
hardship. The Club shall have sole discretion as to
whether a hardship has occurred and if so, also
shall have sole discretion to determine the amount
of deferred compensation that may be distributable
to you in order to alleviate that hardship. For this
purpose, hardship shall mean any emergency or
necessity affecting your personal or family affairs
having a significant adverse financial effect.
(iv) NO FORFEITURE OF DEFERRED COMPENSATION. All deferred
compensation credited to the Deferred Compensation
Account shall be nonforfeitable.
(v) DEBITING OF DEFERRED COMPENSATION ACCOUNT. Once an
amount of deferred compensation has been paid, such
amount shall be debited from the Deferred
Compensation Account and shall cease to exist.
(vi) PARTICIPANT'S RIGHTS ARE UNFUNDED AND UNSECURED.
Notwithstanding the creation of the trust described
herein, all deferred compensation benefits under
this subsection (B) are unfunded for purposes of the
Employee Retirement Income Security Act of 1974, as
amended. You (or your beneficiary's) right to
receive a distribution hereunder shall be an
unsecured claim against the general assets of the
Club or the trust referred to herein. Any deferred
compensation benefits payable hereunder to you or
your beneficiary may be payable out of the trust
established by the Club, or may be payable from the
general assets of the Club.
(vii) ANTI-ASSIGNMENT. No right or deferred compensation
payment under this subsection (B) shall be subject
to alienation, sale or assignment.
<PAGE> 4
Mr. Ken Stefanov
August 3, 1999
Page 4
C. Post Season Bonus. In the event that the Club participates in
a division playoff series, league championship series or the
World Series during any championship season during the term of
this Agreement, including either option year if the applicable
option has been exercised, you shall be entitled to receive a
bonus equal to one-quarter (25%) of a player's share payable
to the Club's players as determined pursuant to Major League
Rule 45(b)(2) as the same shall be amended from time to time.
3. GROUP PLAN
In addition to all other rights and benefits under this Agreement, you shall be
eligible to participate in current or future plans which may be provided by The
Club for the benefit of its employees, provided that you qualify, and subject to
such plans terms and conditions. You may participate in, among other things, any
and all group life insurance policies, plans, and medical and health benefits
maintained by or on behalf of The Club to the fullest extent possible in
accordance with the terms and provisions hereof.
4. EXPENSES
You will be entitled to incur on behalf of The Club reasonable and necessary
expenses in connection with your duties, in accordance with The Club's customary
practice including the following:
A. Expenses incurred in connection with your business use of an
automobile which will be provided by the Club for your
exclusive use;
B. Travel Expenses, consistent with The Club's customary
policies, incurred by you on approved Club business trips.
5. JOB DESCRIPTION
During the term of your employment, you shall faithfully perform the duties and
have the responsibilities of Vice President of Finance. You agree to devote your
full time energies, talent and best efforts exclusively to your duties as Vice
President of Finance and to such other duties that may be assigned to you by the
Executive Vice President of Business.
6. PUBLIC CONTACT
You agree to conduct yourself with propriety and due regards to public
convention and morals, and agree not to engage in conduct which is detrimental
to or contrary to the rules of the Cleveland Indians Baseball Company, Inc.,
Major League Baseball and the American League of Professional Baseball Clubs,
and you further agree to abide by and be subject to the discipline of the
Commissioner of Major League Baseball and his decisions rendered in accordance
with the Professional Baseball Agreement.
<PAGE> 5
Mr. Ken Stefanov
August 3, 1999
Page 5
7. DEATH OR DISABILITY
Your death or permanent disability during the term of this agreement shall
immediately terminate this agreement. For the purposes of this Section 7,
permanent disability is defined as any condition caused by an accident, sickness
or otherwise, which, in the reasonable judgment of the President and Chief
Executive Officer of the Club, if any, the Chairman of the Board or the Board of
Directors, disables, or may in the future disable, you from substantially
performing the duties and services required under this agreement for a period of
120 days, whether consecutive or non-consecutive, in any 12-month period. Upon
termination of this Agreement pursuant to this Section 7, you shall be entitled
to no compensation or any of the other rights or benefits provided in this
agreement not already earned as of the date of such termination or otherwise
required by law. Provided, however, that upon your death, your primary
beneficiary shall be entitled to six (6) month's continued compensation and
benefits provided in this Agreement to you as of the date of your death.
8. TERMINATION FOR CAUSE OR VOLUNTARY TERMINATION
In the event that you fail to observe and comply with the provisions of this
Agreement in any material respect, or in the event of your fraud or dishonesty
in the performance of your duties, The Club may discharge you prior to the
expiration of this Agreement by giving you written notice, which notice shall
state the specific facts upon which the discharge is based. In the event of such
discharge, or if you terminate your employment hereunder voluntarily, you shall
be entitled to no compensation or any of the other rights or benefits provided
in this Agreement not already earned as of the date of such discharge or
termination, except as otherwise required by law. Both parties agree, however,
that you shall have no right to terminate this Agreement voluntarily.
9. TERMINATION WITHOUT CAUSE
You agree that should you be discharged from your duties without cause, you are
obligated to seek, and if offered, accept other comparable employment, either
from another Major League Club or from other Baseball or non-baseball employer.
In the event that you are so discharged without cause, you will receive not less
than five (5) days written notice of such discharge. The compensation due by The
Club under this Agreement will be reduced by any compensation which you receive
from such other employment following such termination. The amount to be deducted
includes, but is not limited to, compensation or any free services, including,
salary, bonuses, fees, commissions, payments in kind, and similar items, and the
reasonable value of service rendered by you should you become self-employed
following termination.
10. BINDING EFFECT
This Agreement shall be binding upon, and shall inure to the benefit of, both
you and The Club. This Agreement may not be assigned or transferred without
consent of both parties.
<PAGE> 6
Mr. Ken Stefanov
August 3, 1999
Page 6
11. ENTIRE AGREEMENT
This Agreement constitutes the entire Agreement of the parties and supersedes in
its entirety any prior Agreements, arrangements and understandings between the
parties with respect to the subject matter thereof, and no amendment hereof
shall be deemed valid unless in writing and signed by both parties hereto.
12. GOVERNANCE
This Agreement is subject to and is governed by, all applicable rules of Major
League Baseball and the American League of Professional Baseball Clubs, and any
rules and regulations which The Club may announce from time to time.
Very truly yours,
CLEVELAND INDIANS BASEBALL COMPANY, INC.
By: Richard E. Jacobs
President & CEO Accepted:
/s/ Richard E. Jacobs /s/ Kenneth E. Stefanov
- ---------------------------- ---------------------------
Signature Signature
August 3, 1999 August 3, 1999
- ---------------------------- ---------------------------
Date Date
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<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JUL-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 30,497
<SECURITIES> 7,465
<RECEIVABLES> 21,806
<ALLOWANCES> 0
<INVENTORY> 2,357
<CURRENT-ASSETS> 74,132
<PP&E> 11,506
<DEPRECIATION> 4,304
<TOTAL-ASSETS> 121,746
<CURRENT-LIABILITIES> 59,553
<BONDS> 35,500
0
0
<COMMON> 60,927
<OTHER-SE> (64,861)
<TOTAL-LIABILITY-AND-EQUITY> 121,746
<SALES> 0
<TOTAL-REVENUES> 65,280
<CGS> 0
<TOTAL-COSTS> 59,064
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 603
<INCOME-PRETAX> 5,896
<INCOME-TAX> (2,108)
<INCOME-CONTINUING> 5,115
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,115
<EPS-BASIC> .80
<EPS-DILUTED> .79
</TABLE>
<PAGE> 1
EXHIBIT 99.1
RICHARD JACOBS ANNOUNCES SALE
OF CLEVELAND INDIANS TO LARRY DOLAN
DEAL NEEDS APPROVAL OF SHAREHOLDERS, BASEBALL OWNERS
CLEVELAND, Ohio - November 4, 1999 - Richard E. Jacobs, chairman, president,
chief executive officer and controlling stockholder of Cleveland Indians
Baseball Company, Inc. (Nasdaq: CLEV), announced today that the company has
signed a definitive agreement to sell the franchise to Lawrence J. Dolan and
family trusts. Dolan is an attorney from Chardon, Ohio.
Dolan will acquire all outstanding stock in the company in a cash merger. The
company is the general partner of Cleveland Indians Baseball Company Limited
Partnership, the limited partnership that owns the franchise. Dolan will also
acquire all of the limited partnership interests in the partnership.
The transaction is expected to close by the end of the first quarter of 2000
upon the completion of certain financing arrangements and necessary approvals.
The parties will implement a plan for an orderly transition, and the existing
management team will continue to operate the business, subject to Jacobs'
oversight and control, pending the closing.
The final purchase price is subject to certain adjustments that will not be
finally determined until shortly before closing. However, the estimated purchase
price reflects an approximate enterprise value of $320 million. After deducting
assumed debt and transaction expenses, the company's shareholders are expected
to receive approximately $22.25 to $22.75 per share. All shareholders, including
Jacobs, will receive the same price per share. The company completed its initial
public offering and began trading on the Nasdaq Stock Market on June 4, 1998, at
$15 per share.
"The sale of this franchise to Larry Dolan fulfills my strong desire to turn the
team over to someone who is deeply committed to Cleveland and its tremendous
fans," said Jacobs. "Larry and his family have the enthusiasm and strongest
desire to continue the success of this ballclub well into the new century."
<PAGE> 2
2
Dolan said, "This is a dream come true for me and my family. Not only is
ownership of this team a great honor, but it is also an incredible
responsibility. Dick Jacobs and his organization have developed and operated an
outstanding franchise here for many years, and I am honored to follow in those
footsteps. Cleveland has the best baseball fans in America, and I will not take
them for granted. We will always strive to put a competitive product on the
field."
The Indians, one of the most successful teams in Major League Baseball since
1994, won their fifth straight American League Central Division championship
this season.
Dolan explained, "One of the things that attracted me to this opportunity was my
strong belief that the Indians organization is one of the best in baseball. Dick
and I are committed to working together on a smooth transition over the coming
months. Once the transaction has closed, I look forward to working with John
Hart, Dennis Lehman and their staffs. My approach as an owner will be a
hands-off approach that I think will be similar to Dick's in that I expect to
listen to our baseball staff about what they believe must be done to reach our
goals for success."
The transaction is subject to approval by the company's shareholders and Major
League Baseball owners, as well as necessary regulatory reviews and customary
conditions. Jacobs, who holds shares sufficient to assure shareholder approval,
has agreed to vote those shares in favor of the transaction.
"We have maintained all along that growth in franchise value has been a key
driver of an investment in the Cleveland Indians," said Jacobs. "I am pleased
that the shareholders who invested in this company's stock will be rewarded for
the confidence they have demonstrated in the organization."
The Indians' ballpark will continue to be known as Jacobs Field at least through
the 2006 season, as the Jacobs family will use a portion of their share of the
proceeds to retain the name during that period.
Jacobs announced May 13 that the company's Board of Directors had engaged
Goldman, Sachs & Co. and McDonald Investments Inc. to identify potential buyers
for the franchise. He said he hoped to obtain an appropriate price for the
company's shareholders and "to ensure that the ballclub is in good hands going
forward."
<PAGE> 3
3
Jacobs and his late brother, David, bought the struggling Indians franchise in
December 1986. The team endured five straight losing seasons through 1993 while
the organization placed greater emphasis on player development and scouting and
implemented its long-term "Blueprint for Success."
The "Jacobs Field Era" began in the strike-shortened 1994 season, when the
Indians moved into a new, state-of-the-art ballpark. Since then, the team has
made two World Series appearances by winning the American League pennant.
The team also boasts 373 consecutive sellouts at Jacobs Field, a figure that
leads all of Major League Baseball and extends back to early in the 1995 season.
Statements in this press release that are not historical statements, including
those relating to the completion of the transaction, the expected closing date,
the final purchase price and Major League Baseball approval, are forward-looking
statements within the meaning of the Private Securities Litigation Reform Act of
1995, which are subject to risks and uncertainties. Actual events or results
could differ materially from those stated or implied in the forward-looking
statements, as a result of, among other things, Major League Baseball's review
of the transaction, actual operating results and transaction expenses that could
affect the final purchase price and financial markets which could have an impact
on the financing of the transactions.
FOR CLEVELAND INDIANS BASEBALL COMPANY, INC.
MEDIA CONTACT: Dennis Lehman, (216) 420-4200
INVESTOR RELATIONS CONTACT: Kenneth E. Stefanov, (216) 420-4200
FOR LAWRENCE J. DOLAN
MEDIA CONTACTS: Kathy Obert or Brian Upton
Edward Howard & Co., (216) 781-2400
