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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
(Mark One)
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934.
For the fiscal year ended December 31, 1998
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.
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(Exact name of registrant as specified in its charter)
Ohio 34-1861303
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State or other jurisdiction I.R.S. Employer
of incorporation or organization Identification No.)
2401 Ontario Street, Cleveland, Ohio 44115
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (216) 420-4200
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
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None N/A
Securities registered pursuant to Section 12(g) of the Act:
Class A Common Shares, without par value
(Title of Class)
Indicate by check mark whether the registrant: (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes |X| No |_|
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. |_|
The aggregate market value of the Class A Common Shares held by
non-affiliates of the registrant was approximately $29,048,528 on March 26,
1999, based on the closing price for such shares on that date on the Nasdaq
National Market.
As of March 26, 1999, the number of outstanding shares of each class of
the registrant's common equity was as follows:
Class A Common Shares 4,139,376 shares
Class B Common Shares 2,283,957 shares
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's Proxy Statement for the registrant's
Annual Meeting of Shareholders to be held on June 2, 1999 (the "1999 Annual
Meeting") are incorporated by reference in Part III in this Annual Report on
Form 10-K (this "Annual Report") and are identified under the appropriate items
in this Annual Report.
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TABLE OF CONTENTS
PAGE
----
PART I.........................................................................1
Item 1. Business........................................................1
Item 2. Properties.....................................................11
Item 3. Legal Proceedings..............................................12
Item 4. Submission of Matters to a Vote of Security Holders............12
EXECUTIVE OFFICERS OF THE REGISTRANT....................................12
PART II.......................................................................12
Item 5. Market for Registrant's Common Shares and Related Shareholder
Matters......................................................12
Item 6. Selected Financial Data........................................13
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations....................................13
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.....22
Item 8. Consolidated Financial Statements and Supplementary Data.......22
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.....................................22
PART III......................................................................22
Item 10. Directors and Executive Officers of the Registrant............22
Item 11. Executive Compensation........................................23
Item 12. Security Ownership of Certain Beneficial Owners and
Management..................................................23
Item 13. Certain Relationship and Related Transactions.................23
PART IV.......................................................................23
Item 14. Exhibits, Financial Statement Schedules, and Reports on
Form 8-K....................................................23
SIGNATURES....................................................................26
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PART I
ITEM 1. BUSINESS
COMPANY OVERVIEW
Cleveland Indians Baseball Company, Inc., an Ohio corporation ("CIBC"),
serves as the sole general partner of the Cleveland Indians Baseball Company
Limited Partnership (the "Partnership"), which owns the Cleveland Indians (the
"Indians" or the "Club") and manages Jacobs Field, the Indians' home ballpark.
References to the "Company," including the financial information included or
incorporated by reference in this Annual Report, refer to CIBC and the
Partnership, unless the context requires otherwise.
The Club is a Major League Baseball team that competes in the American
League. The American League, and its member clubs, and the National League, and
its member clubs, are collectively referred to herein as "MLB" or "Major League
Baseball."
The Company owns a 51% general partnership interest in the Partnership,
and Richard E. Jacobs, Chairman of the Board, President and Chief Executive
Officer of the Company, as the sole trustee of two family trusts (the "Jacobs
family trusts"), beneficially owns a 49% limited partnership interest in the
Partnership, through the trusts' ownership of Cleveland Baseball Corporation
("CBC"). In addition, Mr. Jacobs, through the Jacobs family trusts, beneficially
owns 2,281,667 Class B Common Shares and 133,200 Class A Common Shares which
represent 99.88% of the total voting control of the Company. As a result, Mr.
Jacobs is able to control all decisions regarding the Company requiring a
shareholder vote (other than certain charter amendments), including the election
of the entire Board of Directors. Each of the 6,043,334 limited partnership
Units in the Partnership held by CBC is exchangeable for Class A Common Shares
on a one-for-one basis, subject to the right of the Company to pay cash upon
receiving notice of a proposed exchange.
The Company is an Ohio corporation incorporated on March 17, 1998. The
Company's principal executive offices are located at 2401 Ontario Street,
Cleveland, Ohio 44115, and its telephone number is (216) 420-4200.
BUSINESS OPERATIONS
Ticket Sales. Jacobs Field has an annual paid capacity of approximately
3.5 million fans. During each of the past three seasons, season ticket sales
have accounted for approximately 2.2 million of that capacity. All available
tickets for home games for the 1996, 1997 and 1998 regular seasons have been
sold out prior to Opening Day. The Indians anticipate that all available tickets
for the 1999 regular season will be sold prior to Opening Day. The Indians hold
the Major League Baseball record for consecutive regular season sell-outs, which
stands at 292 through the end of the 1998 regular season.
Ticket prices for regular season home games during the 1999 season will
range from $6.00 to $30.00 per game and the average ticket price is $19.37.
Revenue from ticket sales is reduced by an 8% admissions tax imposed by the City
of Cleveland and by the American League assessment. See "-- Major League
Baseball -- American League Assessments." The Company has a contract with
TicketMaster, a national ticket outlet, pursuant to which all single-game
tickets, other than those sold at Jacobs Field and at Indians Team Shops, are
sold.
Concessions, Catering and Merchandise Sales. The Company has the
exclusive right to operate all Jacobs Field concessions, including private suite
and club seat catering, and to receive all concession revenues. The Company has
a license agreement with an affiliate of Sportservice Corporation
("Sportservice"), a national manager of event concessions, to operate the food
and beverage concession stands and roving vendors in the ballpark during games.
Sportservice has the right to make all food and beverage concession sales at
Jacobs Field, excluding catering, club seat and Club Seat Lounge sales, private
suite sales, restaurant sales or merchandise sales. The Company has the
exclusive right to determine pricing, profit margins, brands, portions and
quality of the products sold by Sportservice, as well as the right to prohibit
the sale of any product. The Company has a similar agreement with an affiliate
of Levy Restaurants, a national restaurateur based in
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Chicago, Illinois, to provide catering for private functions and to provide
concession sales for the club seats and Club Seat Lounge, private suites and the
Terrace Club.
The Company offers team oriented clothing items and novelties at Jacobs
Field and Chain of Lakes Park and at six Indians Team Shops located in
Northeastern Ohio shopping malls. At Jacobs Field, the Company operates a
full-service Team Shop that is open during games and also has an outside
entrance which permits it to operate during normal retail hours throughout the
year.
Local Television and Radio. All Cleveland Indians games are broadcast
on local radio and through the Cleveland Indians Radio Network, a network of 37
stations in Ohio, Western New York and Western Pennsylvania that purchase rights
to the games from the Company. In 1999, 145 games are scheduled to be televised
locally or through local cable television stations. All radio broadcast
personalities are chosen by, and enter into contracts with, the Indians. All
television broadcast personalities are employed by the broadcast stations,
subject to approval by the Club.
The Company and WUAB have entered into a contract for the local
television broadcast of 70 of the Indians regular season games and up to six
pre-season games each year. WUAB has the option to broadcast an additional five
games per year and has exercised the option for the 1999 season. The contract
with WUAB expires on October 31, 2001. The Company also has a contract with Fox
Sports Ohio for the local cable television broadcast of up to 70 Indians games
during the 1999 and 2000 regular seasons and 75 games in each of the 2001
through 2004 regular seasons.
The Company has a contract with Jacor Broadcasting Corporation pursuant
to which the Company is given radio air time and sells, on its own behalf,
advertising in connection with the local radio broadcast of all regular and
post-season games. The contract with Jacor expires on December 31, 1999, and the
Company has the option to renew the contract for two additional years.
Advertising and Corporate Sponsorship. The Company typically
coordinates the sale of radio advertising with the sale of advertising at
locations in Jacobs Field, including space on the main scoreboard, ancillary
scoreboards, outfield walls and concourse signage. Advertising is also sold in
game programs and on the Club's internet website. The Company also licenses the
Club's name and logo in connection with corporate sponsorships and promotions
throughout Northeastern Ohio.
The Company offers a number of promotional activities at Jacobs Field
in conjunction with Indians home games. The Club has scheduled 19 promotional
events for the 1999 season. These promotional events typically include the
distribution to fans of premiums, such as calendars, baseball caps, baseball
cards and replica uniform T-shirts, or special events, such as post-game
fireworks.
Player Contracts and Salaries. Player salaries constitute the Club's
single largest item of expense. The Major League Baseball Collective Bargaining
Agreement requires each team to enter into a uniform player contract with each
of its players and also establishes a minimum season salary of $200,000 for
major league service in 1999, generally payable in semi-monthly installments
during the season. Players who sustain injuries or are terminated by the team
during the regular season are entitled to all of their salaries. Player
contracts may be for single-year or multi-year terms. Generally, salaries
payable pursuant to multi-year contracts are guaranteed even if a player's
contract is terminated by the team or if the player is physically unable to
perform due to death, injury or illness. The Company is not obligated to
continue to pay players under single-year or multi-year contracts if the player
resigns or refuses to play.
In addition to the salaries paid to its players, the Company is
obligated to pay salaries to the minor league players who play for the Indians'
minor league affiliates pursuant to the terms of the players' respective
contracts, which are also governed by the Collective Bargaining Agreement. Some
players are signed to option agreements or "split" contracts, giving the Club
the right to move the player from the Indians major league roster to that of a
minor league affiliate team roster and back, the rate of pay being based on the
number of days the player plays in each league.
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TEAM
RECENT PERFORMANCE
The following table shows the regular season performance of the Indians
in each of the last five seasons:
WINNING
WINS LOSSES PERCENTAGE
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1998....................... 89 73 .549
1997(1).................... 86 75 .534
1996(1).................... 99 62 .615
1995(2).................... 100 44 .694
1994(2).................... 66 47 .584
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Total ..................... 440 301 .594
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(1) Total games fewer than 162 because of rain-outs that were not re-scheduled.
(2) Season shortened due to players' strike.
The Indians have competed in post-season play in each of the last four
seasons as American League Central Division champions. In 1996, the Indians lost
to the Baltimore Orioles three games to one in the best-of-five Division Series.
After winning the Division Series in each of 1995 and 1997, the Indians played
in the American League Championship Series and won the best-of-seven series in
six games against the Seattle Mariners in 1995 and in six games against the
Baltimore Orioles in 1997. The Indians lost to the Atlanta Braves in six games
in the 1995 World Series and lost to the Florida Marlins in seven games in the
1997 World Series. In 1998, the Indians defeated the Boston Red Sox in the
Division Series three games to one, and lost to the New York Yankees, the
eventual 1998 World Series Champions, four games to two in the American League
Championship Series.
PLAYER PERSONNEL
The Club's player management strategy is to build and maintain a
competitive team, while managing the player roster to reduce the uncertainties
associated with salary arbitration and free agency. Generally, a MLB player with
more than three years of major league service is eligible for binding salary
arbitration, and a player with more than six years of major league service is
eligible for free agency. The Club has not been to arbitration over a player's
salary since 1991. Prior to eligibility for arbitration, a player's salary may
be established by the club, subject to the MLB minimum. See " -- Major League
Baseball -- Collective Bargaining Agreement -- Salary Arbitration and MLB Free
Agency."
MLB permits each team to have 40 players under contract but limits the
active roster to 25 players from Opening Day through August 31. From September 1
through the end of the season, each team is permitted an active roster of 40
players.
PLAYER DEVELOPMENT
In the past decade, the Company has built a player development and
scouting system based on a program-wide applied approach to player evaluation,
instruction and coaching. In addition to providing a source of talent for the
Indians' major league roster, the Club's player development efforts also enhance
its ability to obtain proven major league players in trades with other teams.
The Indians employ 31 full-time scouts and several part-time scouts in their
player development program. The scouts are evaluated in part by the success of
the prospects they find. The Club also uses independent scouts who are paid a
finders' fee for prospects.
The Club's player development efforts are based on a standardized
approach to the evaluation and development of player talent. The Club's staff of
scouts is trained to assess and evaluate player talent consistently throughout
the organization. In addition, the managerial and coaching staffs at all of the
Club's minor league affiliates use instructional principles that are applied
consistently at all levels of the Club's system. The Club's minor league system
involves the
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establishment of an individual plan for every player in the system. The plan is
intended to cover all aspects of player development, including mental and
physical development and baseball fundamentals. The Company's player development
program also includes the Winter Development Program, which brings minor league
prospects to Cleveland in the off-season to better prepare young players for the
transition to the major league level. Participants in the Winter Development
Program receive intensive instruction in various baseball skills and
conditioning methods. In addition, participants receive instruction in a number
of off-field areas, including media and fan relations and financial planning.
Players from Puerto Rico and Latin American countries are an important
source of talent for the Indians and other MLB clubs. Players from countries
other than the United States and Canada are not part of the MLB Rule 4 draft,
and the Club can enter into contracts with these players subject to MLB rules.
See "Major League Baseball -- Major League Rules -- Signing Players." The
Indians sponsor baseball programs in the Dominican Republic and Venezuela in
which coaches affiliated with the Club work to develop the skills of promising
young players in those countries. The Indians have a full-time member of the
front office who is fluent in Spanish and who works closely with Latin American
prospects, the Club's minor league coaching staffs and other Indians personnel
in order to promote the development of these players. The Club provides these
prospects with instruction in the English language and assistance in adjusting
to cultural differences between the United States and their native countries.
The Indians also work with Club personnel in order to promote an understanding
of cultural differences and to prevent these differences from adversely
affecting player development.
The Indians are affiliated with seven minor league teams of which they
own two (the Burlington Indians and the Dominican Summer League Indians). No
revenues are derived from the club-owned affiliates. A large portion of the
expenses associated with all of the minor league teams, including player
salaries, is paid by the Club.
MAJOR LEAGUE BASEBALL
TEAMS
Major League Baseball is comprised of 30 baseball clubs. MLB clubs
belong to either the American League or the National League. Each league
currently has three divisions: the East, West and Central. The clubs are aligned
as follows:
<TABLE>
<CAPTION>
AMERICAN LEAGUE
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AMERICAN LEAGUE EAST AMERICAN LEAGUE CENTRAL AMERICAN LEAGUE WEST
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<S> <C> <C>
Baltimore Orioles Chicago White Sox Anaheim Angels
Boston Red Sox Cleveland Indians Oakland Athletics
New York Yankees Detroit Tigers Seattle Mariners
Tampa Bay Devil Rays Kansas City Royals Texas Rangers
Toronto Blue Jays Minnesota Twins
<CAPTION>
NATIONAL LEAGUE
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NATIONAL LEAGUE EAST NATIONAL LEAGUE CENTRAL NATIONAL LEAGUE WEST
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<S> <C> <C>
Atlanta Braves Chicago Cubs Arizona Diamondbacks
Florida Marlins Cincinnati Reds Colorado Rockies
Montreal Expos Houston Astros Los Angeles Dodgers
New York Mets Milwaukee Brewers San Diego Padres
Philadelphia Phillies Pittsburgh Pirates San Francisco Giants
St. Louis Cardinals
</TABLE>
REGULAR SEASON AND POST-SEASON PLAY
During the regular season, which typically begins in late March or
early April and extends to late September or early October, each MLB team is
scheduled to play a total of 162 games. Half of the games are scheduled at home
and half are scheduled away. For the most part, a club competes against other
clubs in the same league during the regular season. However, a limited number of
interleague games are scheduled for the 1999 season.
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At the end of the regular season, four clubs from each league compete
in the Division Series. The clubs with the best season record in each division
and the club in each league with the best season record of the remaining clubs
in the respective league play a best-of-five series. The two winners of the
Division Series in each league then compete against each other in the League
Championship Series. Each League Championship Series is a best-of-seven series.
The resulting American League Champion and National League Champion play in the
World Series, which is a best-of-seven series.
MLB GOVERNANCE
The American League and National League are governed by their own
Constitutions. The leagues and their members are parties to a Major League
Agreement, which establishes the Office of the Commissioner (the "Commissioner")
and governs matters concerning MLB clubs (including voting rules, dispute
resolution and administration). The members of each league elect the
Commissioner, whose functions include serving as the chief executive officer of
MLB, investigating complaints regarding MLB and regulating the conduct of teams,
owners, coaches and players. The Commissioner has the power to impose sanctions,
including fines and suspensions, for violations of MLB rules. The Major League
Agreement also establishes an Executive Council, consisting of the Commissioner,
the presidents of each league and four team representatives from each league,
which has jurisdiction over various other matters, including the promotion of
baseball and investigations into possible changes in how the game is played. Mr.
Jacobs currently serves on the Executive Council.
Under the terms of the Major League Agreement, various levels of member
approval are required under certain circumstances, including in connection with
the sale or relocation of a member. The Major League Agreement provides that
members are prohibited from resorting to the courts to enforce or maintain
rights or claims against other members, and all disputes must be submitted to
the Commissioner for his determination, and such determination, when rendered,
is final and binding. However, courts have not always dismissed lawsuits filed
by members naming the leagues or their members as defendants. Accordingly, there
can be no assurance that the Company will not be named as a defendant in
lawsuits involving other MLB teams.
The Indians play in the American League and are subject to its
Constitution. The Constitution establishes a board of directors that generally
supervises and manages the affairs and business of the league. The board
consists of six league members and rotates membership, with two board members
retiring and two board members coming on each year. Each member serves on the
board for a three-year term and is off of the board for a four- or five-year
period before returning. The President of the American League has governance and
executive duties over the American League. The President is sole arbitrator over
disputes among American League members and has final and binding determination
regarding such matters.
RESTRICTIONS ON OPERATIONS
By virtue of the Indians' membership in the American League, the
Company and its personnel are bound by a number of rules, regulations,
guidelines, bulletins, directives, policies and agreements of the Commissioner,
the American League President, the MLB clubs collectively, the American League,
MLB committees, Major League Baseball Enterprises, Inc., Major League Baseball
Properties, Inc., Baseball Television, Inc. and any other entity owned by the
MLB clubs collectively, including, without limitation, the American League
Constitution, the Major League Agreement, the Major League Rules, the Collective
Bargaining Agreement, the Ownership Guidelines and national telecast and radio
broadcast agreements (each, as the same may now exist or be amended or adopted
in the future, a "Governing Document").
MLB requires that the Company submit to the Commissioner for approval,
which may be withheld in the Commissioner's sole discretion, any agreement that
might affect control of the team prior to execution of that agreement. Such
agreements specifically include loan agreements, ballpark leases, television and
radio rights agreements, concession agreements and any other agreement on any
subject with a potential duration of five years or more. These agreements cannot
be signed prior to the Commissioner's approval even if they, by their terms, are
subject to such approval. Furthermore, should the Company decide or be required
to relocate the Indians to another city, at least a 75% vote of the
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American League members, and a majority vote of the members of the National
League, must be obtained. If the relocation is to a city located within the same
geographic area as an existing National League franchise, the minimum requisite
affirmative vote of the National League members increases to 75%. The Governing
Documents require that the Company be a single-purpose entity. Should management
determine that it is beneficial to the Company to expand into other business
areas, the expansion plan must be reviewed and approved by the Commissioner
prior to being put into effect. The Governing Documents 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 (or shareholder) under
certain circumstances, including upon an event of default or foreclosure. MLB or
the American League could in the future adopt different or additional
restrictions which could adversely affect the shareholders.
CONTROL REQUIREMENT AND OWNERSHIP RESTRICTIONS
The Ownership Guidelines require that Mr. Jacobs (or a group of no more
than 20 individuals) maintain at least a 10% economic interest in the Company
and at least 90% voting control of the Company at all times. Mr. Jacobs'
beneficial ownership of Class B Common Shares satisfies both the economic
interest and voting control requirements of the Ownership Guidelines.
Any transfer of a controlling interest in a club must be submitted for
review to an MLB ownership committee and requires approval by 75% of the members
of the American League and a majority of the members of the National League. In
addition, each MLB club must designate an individual who is accountable to the
Office of the Commissioner for the Club's operation and its compliance with MLB
rules and who is responsible for and empowered to make all club decisions. This
requirement must be satisfied regardless of whether a club is owned in corporate
or partnership form, and a change in the designated person constitutes a control
interest transfer under the Governing Documents and, therefore, requires league
approval. Mr. Jacobs serves in this capacity for the Indians.
The Governing Documents contain limitations on the ownership by clubs
and their owners, shareholders, officers, directors and employees of stock and
other financial interests in other MLB clubs. In particular, any person
acquiring more than a 5% interest in a publicly traded entity that owns a club
must obtain approval of the Commissioner before making such acquisition. To
ensure the Club's compliance with the Governing Documents, the Company's Amended
and Restated Articles of Incorporation provide that no person (other than Mr.
Jacobs) may beneficially own 5% or more of the Class A Common Shares without
first receiving written approval from the Office of the Commissioner. The
Amended and Restated Articles of Incorporation also require any person owning 5%
or more of the Class A Common Shares to submit at the Company's request a
statement stating such information as the Company may request in order to ensure
compliance with the Articles of Incorporation and the Governing Documents.
Failure by a holder of Class A Common Shares to comply with these provisions may
result in a forced sale of such holder's interest or the repurchase of such
interest by the Company. The Company's Amended and Restated Articles of
Incorporation provide that the Company may redeem, at the lower of fair market
value or cost, shares held by any person or entity who becomes the owner of 5%
or more of the Company's shares without the approval of MLB.
AMERICAN LEAGUE ASSESSMENTS
Each club in the American League is required to pay an annual
assessment to the American League based on gate receipts net of local ticket
taxes, if any. In recent years, the assessment has ranged from 2.5% to 3.5%. In
1998, the assessment was 3.0%, and the Company paid $1.7 million to the American
League.
POST-SEASON RECEIPTS ALLOCATIONS
The Governing Documents and the Collective Bargaining Agreement govern
the allocation of gate receipts attributable to post-season play. The terms of
the allocation depend on whether the Players Association decides to exercise its
option to extend the Collective Bargaining Agreement for the 2001 season. If the
agreement is extended, 60% of the total gate receipts of the first three games
of the Division Series will be allocated to a players' pool. The remaining
receipts from those games, and 100% of the gate receipts from the fourth and
fifth games, if played, are split between the
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two competing teams net of the applicable league assessment and local taxes.
If the Players Association's option to exercise the Collective Bargaining
Agreement for the 2001 season is not exercised, 80% (instead of 60%) of such
receipts will be allocated to the players' pool for the 1997 through 2000
seasons. Until it is known whether or not the option is exercised, the amount
representing the difference between 60% and 80% of such receipts is distributed
by MLB to each team annually on a pro rata basis. Each team is obligated to
maintain a fictional account for such amount plus interest, and if the option is
not exercised, each team will be required to distribute the amount in that
account to the Players Association following the 2000 season.
In the League Championship Series, 60% of the net gate receipts of the
first four games are allocated to the players' pool and 40% of such receipts are
allocated to the competing teams. The net gate receipts from the remaining
games, if any, are allocated according to each league. The American League
allocates such receipts equally between the competing teams, net of the American
League assessment. For the World Series, 60% of the net gate receipts from the
first four games is paid to the players' pool, 15% is allocated to the Office of
the Commissioner and the remainder is split between the competing teams and
their respective leagues. Fifteen percent of net gate receipts from the
remaining games, if any, are allocated to the Office of the Commissioner and the
remainder is divided in four equal shares among the competing teams and their
respective leagues.
COLLECTIVE BARGAINING AGREEMENT
The Collective Bargaining Agreement became effective on January 1, 1997
and, with respect to certain provisions, was retroactive to the 1996 season. The
Agreement expires on the later of October 31, 2000 or the day following the last
game of the 2000 World Series, except that the Players Association has the
unilateral option to extend the Agreement to October 31, 2001 or the day after
the last game of the 2001 World Series, whichever is later.
Revenue Sharing. The MLB clubs participate in a revenue sharing system,
which is being phased in over a five-year period and will be fully implemented
in the 2000 season. The revenue sharing rate, which applies to a club's net
local revenue, was 12% in 1996 and 1997, was 16% in 1998, and will be 17% in
1999 and 20% in 2000. Net local revenue is defined in the Collective Bargaining
Agreement as all revenue received by a team or a related party excluding any
centrally-generated revenues of the club that are administered by MLB, such as
revenues from the Major Leagues Central Fund and MLB Properties. In determining
net local revenue, a club may deduct any expenses directly attributable to
stadium operations and certain other specified expenses. Each club contributes
the applicable percentage of its net local revenue to a pool. Once the pool is
accumulated, 75% of it is re-distributed to the clubs equally on a pro rata
basis. The remaining 25% is distributed to teams whose total revenue was below
the average revenue for all clubs based on the extent to which that team's
revenue was below the average. The Tampa Bay Devil Rays and the Arizona
Diamondbacks, as expansion teams, are currently exempt from revenue sharing and
will not participate until the 2000 season. The Company was a net payor under
the revenue sharing system for the 1998 season and estimates that its final
contribution will be $10.2 million. The Company contributed $7.2 million and
$5.7 million for the 1997 and 1996 seasons, respectively.
Luxury Tax. Pursuant to the Collective Bargaining Agreement, a club
that has an actual club payroll for a season above a specified threshold minimum
for that season may be subject to the luxury tax, but the threshold minimum is
adjusted so that no more than five teams are required to pay the luxury tax in
any season. The adjusted threshold minimum was $55.6 million for 1997, $70.3
million for 1998 and will be, unless further adjusted, $75.3 million for 1999.
Actual club payroll is determined by adding the total compensation cost
including cost of benefits, signing bonuses, performance bonuses and deferred
compensation for each player the club has under a major league contract.
Compensation amounts guaranteed under multi-year contracts are reported on the
basis of an average annual value. The luxury tax rate for 1997 and 1998 is 35%
and 34% for 1999. There is no luxury tax imposed in the 2000 season. The amount
that is taxed is the difference between a club's total actual payroll and the
threshold minimum. Proceeds collected from the luxury tax are used to fund
revenue sharing or the Industry Growth Fund, which has a stated objective of
promoting the growth of baseball throughout the world by enhancing fan interest
and increasing the sport's popularity. In 1998 and 1997, the Indians paid
$24,000 and $2.1 million, respectively, pursuant to the luxury tax.
Salary Arbitration and MLB Free Agency. Certain player rights provided
in the Collective Bargaining Agreement are determined by credited major league
service. A player is credited for a day of major league service for each day of
the
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<PAGE> 10
baseball season that he is on a club's active roster. A total of 172 days of
major league service constitutes a year. Under the Collective Bargaining
Agreement, any club, or any player with a total of three or more (but less than
six) years of major league service, may submit the issue of that player's salary
to final and binding arbitration without the consent of the other party upon
expiration of his then current contract. Those players with more than two years
but less than three years of major league service are also eligible for
arbitration if they fall within the top 17% of such players based on major
league service. When a player completes six years of major league service and
the term of his then current contract has expired, he becomes eligible for free
agency. An eligible player may elect to become a free agent with respect to the
following season by giving notice to the Players Association within a 15-day
period beginning on the later of October 15 or the day following the last game
of the World Series. Generally, once a player is a free agent, he has the right
to negotiate and contract with any MLB club subject to his former team's right
to offer, prior to December 7, to sign the free agent and arbitrate the contract
salary amount. If the former club does not offer to arbitrate or the free agent
does not accept the offer, the former club loses its rights to negotiate with or
sign the free agent until the succeeding May 1. Clubs are compensated with draft
choices if a ranking free agent signs with another club prior to December 7 or
after his former club's offer to arbitrate. Additionally, a player who has at
least three years of major league service and whose contract is assigned
outright to a minor league team or a player whose contract is being assigned
outright to a minor league team for the second or any subsequent time may reject
the assignment and elect free agency. Prior to eligibility for arbitration, a
player's salary may be established by the club subject to the MLB minimum base
salary and maximum reduction rules.
MAJOR LEAGUE RULES
The MLB clubs operate under the Major League Rules (the "Rules"). The
Rules govern matters including drafting, signing and trading players, the minor
league system and team and player conduct.
MLB Draft System. Professional baseball conducts an annual draft of
first year players referred to as the "Rule 4" draft each June. Eligible players
are limited to those players who reside in the United States, Canada, Puerto
Rico and other United States territories or possessions and who have not
previously contracted with a major league or minor league club. A player
eligible for the draft may be signed only after the selection meeting. The draft
is limited to 50 rounds. The order of selection is based on the prior season
overall win-loss record in the respective league excluding post-season games.
Selections alternate between American League and National League clubs. The
first selection is made by an American League club in odd-numbered years and by
a National League club in even-numbered years.
Signing Players. A club has the exclusive right to contract with the
players it selects in the Rule 4 draft for a period of one year following the
draft, subject to MLB's signing rules. If the drafting club has not signed the
player, he may be eligible for the next Rule 4 draft. Generally, a player who is
a high school student in the United States (including Puerto Rico and other
United States territories and possessions) or Canada is not eligible to enter
into a professional baseball contract during any period he is eligible to
participate in high school athletics. Generally, once a player has attended a
college class he is not eligible for selection in the draft again until he has
completed his junior year or has withdrawn from college and remained out of
college for a period of 120 days. A player who is not eligible for the draft
because he is not a resident of the United States or Canada must be 17 years of
age at the time of signing or will attain 17 years of age prior to the later of
September 1 or the last day of the season for which the player has contracted.
All player contracts for major league and minor league service are
uniform agreements and there is a minimum salary for each level of play. Major
league and minor league contracts can include certain additional provisions that
establish performance incentives and provide benefits to the player. Generally,
players selected by a club initially enter into a contract for minor league
service. After three or four seasons in the minor leagues, depending on the
player's age at the time he is drafted, if a player has not been put on a club's
major league team 40-man roster, he is eligible to be selected by another major
league club for its major league roster pursuant to the "Rule 5" draft. The Rule
5 draft is held each December. If a club selects a player in the Rule 5 draft,
the selecting club must keep the player on its active 25-man roster for the
entire next season. If the player is not kept on the active roster, the
selecting club must obtain waivers from all other MLB clubs and offer the player
back to his original team before the player may be assigned to a minor league
affiliate of the selecting club.
-8-
<PAGE> 11
Reserve System. Each MLB club is required to maintain and file with the
Commissioner a major league reserve list and a minor league reserve list for
each of its minor league affiliates. A player on a club's major league or minor
league reserve list is not eligible to play or negotiate with any other major
league or minor league club unless that player's contract has been terminated or
assigned. A club may reserve, and retain the rights to, a maximum of 40 players
for its major league club, 38 players for a Class AAA club, 37 players for a
Class AA club and 35 players for each Class A club and each Rookie League club.
From Opening Day until August 31 of each season the maximum number of players
allowed on a major league active list is 25, and from September 1 until the end
of the season the maximum number is 40.
Inactive Lists. Upon application to the Commissioner, a club may
request that a player unable to play because of injury or illness be placed on a
disabled list for a minimum period of 15 or 60 days based on the severity of the
ailment. Players on the 15-day list count against the reserve list, but not
against the active list, while players on the 60-day list do not count against
either the reserve or active list. Players may be put on the voluntarily
retired, restricted, disqualified or ineligible list and do not count against
the reserve or active lists. Players put on the suspended list by the
Commissioner count against both the active and reserve lists.
Termination of Player Contracts. A club may unconditionally release a
player from a major league contract at any time, subject to the player's
contractual right to termination pay, if the Club has received waivers of that
player's contract from all the other major league clubs. A waiver is permission
granted for certain assignments or unconditional release of a major league
player. Any other major league team may claim the player's contract for $1 if
unconditional release waivers are requested. Once claimed, a released player has
the option of terminating his contract or accepting the assignment to the major
league team claiming such player. If more than one team in the same league makes
a waiver claim, the contract will go to the club with the lowest standing in the
win-loss records. If claims are made by clubs in different leagues, the contract
will go to a club in the same league as the releasing club.
Assignment of Player Contracts. A team may assign a player's contract
to another major league club (for example, in connection with a trade with that
club) or a minor league club subject to certain rights of the player and other
clubs.
A player with at least five years of major league service may not be
assigned to a minor league club without his written consent. A player with at
least five years of major league service at the time of the assignment of his
contract and whose contract covers the next succeeding season may elect, at the
conclusion of the season following the assignment, that his contract be assigned
to another major league club, and he may specify not more than six clubs that
are unacceptable to him for such assignment. If the club fails to assign the
contract in accordance with the player's request, the player is eligible to
become a free agent. Once a player's contract has been assigned pursuant to that
player's request, he does not have the right to require another assignment or
become a free agent until he has completed another three years of service.
During the period beginning August 1 and ending on the last day of the season,
waivers from other clubs must be obtained prior to any assignment to another
major league club. A player with at least ten years of major league service, the
last five of which have been with one club, may not be assigned to any club
without his written consent.
A major league player's contract may be assigned to a minor league club
with options to recall that player for up to three seasons without obtaining
waivers. Waivers are required for an optional assignment to the minor leagues if
the player has three or more years of major league service. A club may only have
an optional agreement in place for a player for three seasons, and the maximum
number of optional agreements that any club can have in effect at one time is
16.
If a major league club proposes to remove a player from its 40-man
roster by making an outright assignment of that player's contract to a minor
league team or to cancel a right to recall a player under an existing optional
agreement, waivers are required. If a club is awarded the assignment of a
contract pursuant to that club making a waiver claim, the consideration to be
paid to the assignor club is established by agreement between the clubs, but may
not be less than $20,000.
-9-
<PAGE> 12
MLB PROPERTIES
Major League Baseball Properties ("MLB Properties") was established in
1966 and markets and manages the licensing of the names, logos, uniforms,
mascots, stadium names and other trademarks and intellectual property rights
("Marks") of all MLB clubs, the American League, the National League, MLB and
MLB's special events (including All-Star and post-season games). Each club owns
its own Marks and has appointed MLB Properties as its exclusive agent to license
its Marks. Each club has the right to operate club-owned stores within a
200-mile radius of the team's home field. All of the Company's Indians Team
Shops are located within the prescribed area. MLB Properties conducts licensing
activities worldwide and enters into agreements to permit use of the Marks with
corporate sponsors and manufacturers of retail products and media publishers and
producers. MLB Marks are incorporated into advertising campaigns, featured in
clothing and novelties and used in videos, motion pictures and print media. In
addition to promoting MLB and MLB clubs, the activities of MLB Properties
generate a significant amount of revenue. After payment of an agency commission
to MLB Properties, the net revenues are distributed equally among the MLB clubs.
MAJOR LEAGUES CENTRAL FUND
The Major Leagues Central Fund serves as a receipt and disbursement
fund for certain transactions that are shared by the 30 MLB clubs. The Major
Leagues Central Fund's primary sources of funds are national television
(broadcast and cable) and radio broadcasting revenue. The Major Leagues Central
Fund's excess of revenue over expenses is distributed to the clubs or used for
specific purposes, as approved by the clubs.
Currently, the Commissioner, as agent for the MLB clubs, has agreements
with each of Fox Broadcasting Company, Fox Sports Net and The National
Broadcasting Company, Inc. for the telecasting of Major League Baseball games
through the 2000 season and agreements with ESPN, Inc., and Turner Broadcasting
System, Inc. through the 2002 season. The agreements provide for the telecasting
of a specified number of regular season games, the All-Star Game, the Division
Series, the League Championship Series and the World Series.
MLB has an agreement with ESPN Radio for broadcasting Major League
Baseball games through the 2002 season. The agreement provides for the
broadcasting of regular season games, the All-Star Game and post-season games.
In addition, MLB clubs that have broadcast agreements with, or cable
distribution through, cable "superstations" are obligated to contribute a
portion of the revenues derived from those agreements to the Major Leagues
Central Fund.
COMPETITION
The Indians compete with other sports, entertainment and recreational
activities for entertainment and advertising dollars. During portions of its
season, the Indians face competition from professional basketball (the Cavaliers
and the Rockers) and professional minor league hockey (the Cleveland
Lumberjacks). Moreover, the City of Cleveland is currently building a new
football-only stadium, and the Cleveland NFL franchise, the Cleveland Browns, is
scheduled to begin play there in August 1999. The Cleveland Browns have an
established and popular name, have a long-standing heritage in Cleveland and
will have loyal fan support upon the opening of their 1999 season. The Indians
also compete for attendance and advertising revenue with a wide range of other
entertainment and recreational activities available in Northeastern Ohio. The
Indians compete with other MLB teams to obtain the services of available
players.
EMPLOYEES
As of March 26, 1999, the Company employed 324 baseball personnel
(including 223 players) and 114 non-baseball personnel on a full-time basis. The
Company also employs approximately 1,459 part-time personnel, including ushers,
novelty sales people, vendors and statisticians. At March 26, 1999,
approximately 639 of the Company's part-time employees, in addition to players
on the major league roster, were members of labor unions. The Company considers
relations with its employees to be good.
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<PAGE> 13
ITEM 2. PROPERTIES
JACOBS FIELD
The current home of the Indians is Jacobs Field, a baseball-only
ballpark, which is part of the Gateway Sports and Entertainment Complex (the
"Complex") in downtown Cleveland. The Complex contains Jacobs Field, which is
leased to the Company, and Gund Arena, which is home of the Cleveland Cavaliers,
a National Basketball Association franchise, the Cleveland Lumberjacks, a
professional minor league hockey team, and the Cleveland Rockers, a women's
professional basketball team.
Jacobs Field was completed in 1994. Jacobs Field has 132 private suites
which include a living area, wet bar and private bathroom, and covered seating
with a premium view of the game. Of the total suites, 98 are leased by the
Company to guests for four-year terms, 24 are leased on a ten-year, prepaid
basis and ten suites are reserved for Club use. Depending on the size of the
suite, each leaseholder must purchase at least eight to 12 tickets, with the
option to purchase up to four additional tickets for each home game. The lease
entitles suite guests access to the Club Seat Lounge, a full-service bar and
lounge located inside the ballpark directly behind the club seats. Jacobs Field
also contains three party suites, each with a seating capacity of 40, which are
rented for single games. Jacobs Field also contains 2,063 club seats which offer
larger seats, service of an extended menu of concessions and access to the Club
Seat Lounge. Like the private suites, club seats are leased for various terms.
Jacobs Field houses the Terrace Club, a full-service restaurant with a windowed,
terraced view of the playing field. Club members pay an annual membership fee
which entitles them to the right to book reservations for meals before or during
each game. The Terrace Club is open to the public for lunch (except on days when
the Indians have an afternoon home game). The Terrace Club, as well as a
catering service, is available for private parties. Jacobs Field is also the
location of the Company's executive offices.
CHAIN OF LAKES PARK
The Indians' spring training facility is located in Winter Haven,
Florida, and spring training home games are played at Chain of Lakes Park. The
facility is owned by the city of Winter Haven and is available to the Company
through October 31, 2003. The Company has four options to renew the use
agreement for five-year terms. Revenues derived from sources similar to those
derived at Jacobs Field, including ticket sales, concessions, advertising and
media rights, are allocated between the Company and the city of Winter Haven.
OPERATING AGREEMENTS AND LEASES
The Company and Gateway Economic Development Corporation of Greater
Cleveland ("Gateway"), the Ohio non-profit corporation that owns the Complex,
are parties to various agreements relating to Jacobs Field. Gateway leases to
the Company the ballpark land and improvements pursuant to a Lease Agreement
which excludes the baseball playing field and improvements thereon. The playing
field portion of Jacobs Field is leased to the Company pursuant to a Ground
Lease Agreement for which the Company pays nominal rent. Management of the
ballpark facility is governed by a Management Agreement, while the rights and
obligations of the parties regarding the common areas of the Complex are
governed by a Common Area Maintenance Agreement. (The Lease Agreement, Ground
Lease, Management Agreement and Common Area Maintenance Agreement are
collectively referred to as the "Gateway Agreements.")
The Management Agreement grants the Company the exclusive right to
manage and operate Jacobs Field for an annual fee. The fee is equal to the sum
of (i) one-third of any net main scoreboard advertising revenue in excess of
$1,500,000 (adjusted each year for inflation) and (ii) one-quarter of any net
special event revenue. Fees paid to Gateway pursuant to the Management Agreement
were $230,000 in 1998, $193,000 in 1997 and $79,000 in 1996. Under the
Management Agreement, the Company is entitled to the exclusive right to operate
all ballpark concessions, including operation of the Terrace Club and catering
for the private suites and club seats, and is entitled to all revenues
therefrom. The Company also has the exclusive right to sell and lease space for,
and enter into agreements regarding, advertising in and around Jacobs Field.
Gateway has the right to conduct special events at Jacobs Field if certain
conditions are met, including establishing to the satisfaction of the Company
that the event would not render the playing field unsuitable for the playing of
baseball.
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<PAGE> 14
The Gateway Agreements (excluding the Ground Lease) terminate upon the
sooner of (i) the end of the year in which the 20th full season is played or
(ii) the retirement or discharge of all the stadium revenue bonds. The term of
the Ground Lease is for 40 years following the initial season. Following
termination of the Agreements, the Company must surrender the ballpark facility
to Gateway. The Ground Lease and the Lease Agreement do not provide for an
option by the Company to renew the agreement upon their expiration.
Nevertheless, the Company believes it will be able to enter into a new lease
agreement for the facility in 2014 under commercially reasonable and competitive
terms. Pursuant to the Ground Lease, the Company has a leasehold interest in the
playing field and the improvements thereon until the year 2034 and has received
assurances from the City and County that they will commence discussions with the
Company regarding a new lease agreement for Jacobs Field two years before the
current lease has expired.
ITEM 3. LEGAL PROCEEDINGS
The Company and MLB are involved in various lawsuits arising in the
ordinary course of business. Management does not believe that the outcome of
these matters will have a material adverse effect on the Company's financial
condition, results of operations and cash flows
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders during
the fourth quarter of 1998.
EXECUTIVE OFFICERS OF THE REGISTRANT
Certain information relating to the executive officers of the Company
is set forth in Item 10 of this Annual Report, which is hereby incorporated by
reference.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON SHARES AND RELATED SHAREHOLDER MATTERS
(A) MARKET INFORMATION
The Company's Class A Common Shares are traded on the Nasdaq National
Market under the symbol "CLEV." The following table sets forth for the indicated
periods the high and low market prices for the Class A Common Shares:
<TABLE>
<CAPTION>
PRICE RANGE
-----------
Fiscal Year ended December 31, 1998 HIGH LOW
---- ---
<S> <C> <C>
Second Quarter (beginning June 4, 1998) $15.250 $9.875
Third Quarter $10.875 $6.188
Fourth Quarter $8.375 5.375
</TABLE>
(B) SHAREHOLDER INFORMATION
As of March 26, 1999, there were 23,198 record holders of Class A
Common Shares.
(C) DIVIDEND INFORMATION
The Company has never paid, and does not anticipate paying in the
foreseeable future, cash dividends on the Class A Common Shares.
-12-
<PAGE> 15
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth consolidated selected financial data for
the Company and combined historical financial data for the combined operations
of the Partnership and Ballpark Management Company (collectively, "Cleveland
Indians Baseball Company Predecessor Group" or the "Predecessor Group"). The
financial data should be read in conjunction with the Financial Statements and
Notes thereto, included in a separate section at the end of this Annual Report,
and with Management's Discussion and Analysis of Financial Condition and Results
of Operations, included in Item 7 of this Annual Report.
<TABLE>
<CAPTION>
The Company Predecessor Group
-------------------- -----------------------------------------------------------------------
Years ended December 31, Year ended
June 9, 1998 to January 1, 1998 ----------------------------------------- October 31,
December 31, 1998 (a) to June 8, 1998 1997 1996 1995 (c) 1994(b)(c)
-------------------- --------------- ----------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Operating Data:
Total revenues $ 100,043 $44,509 $ 140,030 $ 114,197 $ 97,651 $ 59,281
Operating income (loss) 22,152 (9,436) 8,217 7,733 7,022 (5,036)
Net income (loss) 7,185 (9,658) 22,570 10,159 6,746 (4,886)
Earnings per share $1.12 N/A N/A N/A N/A N/A
<CAPTION>
December 31,
------------------------------------------------------------------------- October 31,
1998 1997 1996 1995 1994
------------ ---------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Total assets $ 122,023 $ 118,152 $ 87,272 $ 79,991 $ 43,032
Long - term liabilities 57,951 47,393 33,458 26,182 25,671
Shareholders'/owners' equity (deficit) (6,505) (2,550) (8,310) (14,537) (18,431)
</TABLE>
(a) Note 1 to the Financial Statements describes the formation of
the Company.
(b) Includes the assets, liabilities and results of operations for
the Predecessor as of October 31, 1994 and for the year then
ended. The results of operations for the Predecessor for the
two-month period ended December 31, 1994, which are not
reflected in the above combined financial data, were as
follows:
<TABLE>
<S> <C>
Revenues $ 578
Operating loss (2,205)
Net loss (2,476)
</TABLE>
(c) A players' strike during 1995 and 1994 resulted in the
cancellation of 18 games of the 1995 season and 45 games of
the regular season and the entire post-season of 1994.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with the
Financial Statements and related Notes included in a separate section at the end
of this Annual Report.
OVERVIEW
Portions of Management's Discussion and Analysis of Financial Condition
and Results of Operations 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 of such risks, uncertainties and other factors are:
o the control by Mr. Richard E. Jacobs of the Company
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<PAGE> 16
o the limited potential for further revenue growth
o the Company's dependence on the competitive success of the
baseball club
o the uncertainties relating to increases in players' salaries
o risks of labor difficulties
o a decline in the popularity of baseball
o 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., 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 the Predecessor Group. CIBC commenced operations on
June 9, 1998 after completing an initial public offering of 4,000,000 Class A
Common Shares. For financial reporting purposes, the operations for the year
ended December 31, 1998 have been segregated between (a) the Predecessor Group
and (b) CIBC and the Partnership on a consolidated basis (collectively, the
"Company"). The Company has recorded operating income of $22.2 million for the
period June 9, 1998 through December 31, 1998 and the Predecessor Group has
recorded an operating loss of $9.4 million for the period January 1, 1998
through June 8, 1998.
The Company recognizes the 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. In order to fairly
evaluate the 1998 operations of the Company, the operations for the Predecessor
Group and the Company should be combined.
The Company derives substantially all of its revenues from:
o Sales of tickets to home games
o Contracts with local broadcast organizations
o Food and beverage concession sales
o Premium seating rents
o Advertising and promotional sales
o Merchandise sales and royalties
o Participation in the Major Leagues Central Fund (MLCF)
o Parking and ancillary baseball related revenues.
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 Major
League Baseball 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, 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 game-by-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 the 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 receives a substantial portion of its receipts from the
advance sale of regular season tickets and premium seating rents during the
months of December and January, prior to the commencement of the MLB regular
season in late March or early April. Season tickets and public single-game
tickets are sold during this time period. Jacobs Field paid attendance during
the regular season approximates 3.5 million fans, of which approximately 2.2
million are represented by season tickets.
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<PAGE> 17
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. During the 1998, 1997 and 1996 baseball seasons, the Indians
participated in post-season play. The Indians played in ten post-season games in
1998, eighteen in 1997 and four in 1996. The Indians derive additional revenues
and incur additional expenses from participation in post-season play. The
results of post-season play, excluding the effect of revenue sharing, have been
presented separately in the financial results.
RESULTS OF OPERATIONS
The following discussion compares results from continuing operations of
the Company and the Partnership on a consolidated basis (including the
operations of the Predecessor Group) for the year ended December 31, 1998 and
the results of operations of the Predecessor Group for the years ended December
31, 1997 and 1996.
Revenues
The following table shows the components of revenues and the percentage
increases and decreases.
<TABLE>
<CAPTION>
(in thousands) % Inc(Dec) % Inc(Dec)
1998(a) 1997 1996 98 vs. 97 97 vs. 96
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Net ticket sales $ 55,830 $ 49,279 $ 45,658 13% 8%
Local radio and television 19,649 17,014 13,631 15 25
Concession and catering 16,208 14,095 14,726 15 (4)
Private suite and club seat rentals 9,358 8,704 7,035 8 24
Advertising and promotion 9,824 8,754 6,891 12 27
Merchandise 15,414 17,449 14,683 (12) 19
Major Leagues Central Fund 16,416 15,505 12,369 6 25
Other 3,352 3,365 3,002 0 12
Post season 8,710 13,051 1,933 (33) 575
Provision for revenue sharing (10,209) (7,186) (5,731) 42 25
----------- ----------- ----------- ----------- -----------
Totals $ 144,552 $ 140,030 $ 114,197 3% 23%
</TABLE>
(a) Includes the combined results of operations for the Company for the
period June 9, 1998 to December 31, 1998 and the Predecessor Group for
the period January 1, 1998 to June 8, 1998.
Net ticket sales revenue is comprised of gross ticket revenues from
regular season games, less City of Cleveland admissions tax and an American
League assessment, plus net revenues derived from spring training and exhibition
games. The 13%, or $6.6 million, increase in net ticket sales in 1998 is
primarily due to a 12% increase in the average ticket price and a 2% increase in
paid attendance. The 8%, or $3.6 million, increase in net ticket sales in 1997
is due to a 7% increase in the average ticket price and a 3% increase in paid
attendance. The attendance is dependent on the number of separate paid events.
There were 81, 80 and 79 paid events in 1998, 1997 and 1996, respectively.
Local radio and television revenue increased 15% in 1998 compared to
25% in 1997. The $2.6 million increase in 1998 was primarily due to additional
television broadcasting rights fees received of $1.5 million as a result of a
contract extension. In addition, radio advertising sales increased $.7 million
and other local television revenue increased $.3 million. In 1997, the increase
of $3.4 million was primarily due to an increase in radio advertising sales of
$1.2 million as the result of increases in advertising rates coupled with a
significant increase in volume and an increase in local broadcast and cable
television of $1.8 million due to higher incentive and advertising revenue from
increased television ratings. In addition, a three-year contract extension with
the flagship radio station entered into in 1997 included an annual base rights
fee of $.8 million that was not included in the prior contract.
Concession and catering income increased 15% in 1998. The $2.1 million
increase was due primarily to increased consumer spending with the general food
and beverage concessionaire influenced by favorable weather
-15-
<PAGE> 18
conditions. The 1997 concession and catering income decreased 4% primarily due
to decreased consumer spending as a result of early season cold weather and
reduced in-park attendance throughout the season.
Revenue from private suite and club seat rentals includes lease income
from the suites and club seats that are leased on three to five year terms as
well as single game rentals of suites and Terrace Club memberships. The first
group of suites and club seats were renewed after the 1996 season. The next
group of suites and club seats come up for renewal for the 1999 season. Revenue
from private suite and club seat rentals increased 8% in 1998 compared to 24% in
1997. The $.7 million increase in 1998 is primarily due to increased rental
income from suites rented on a single game basis and an increase in the annual
membership fees and number of members of the Terrace Club. The $1.7 million
increase in 1997 was due to the increases in rental revenues associated with the
renewal of 37 suites and 1,303 club seats at an average price increase of 24%
and 15%, respectively, and increased rental income from suites rented on a
single game basis.
Advertising and promotions revenue increased 12% in 1998 compared to
27% in 1997. The $1.0 million increase in 1998 was primarily due to a $.9
million increase in ballpark advertising signage of which $.6 million was
attributable to new signage and $.3 million was attributable to increased
advertising rates. The $1.9 million increase in 1997 was primarily due to a $1.2
million increase in print advertising and promotional revenue and a $.6 million
increase in ballpark advertising signage. Approximately $1.0 million was
attributable to advertising rate increases and $.9 million was attributable to
additional advertising volume with new and existing advertisers.
Merchandise sales include all sales of Indians merchandise at the
Indians Team Shops and Jacobs Field except for the Jacobs Field sales of
merchandise at post-season games. Merchandise sales decreased 12% in 1998. This
$2.0 million decrease is primarily attributable to the reduction in sales
associated with not participating in the World Series in 1998. In 1997
merchandise sales increased 19% or $2.8 million due to the Indians participation
in the 1997 World Series.
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. These revenues and
expenses are generally shared by the 30 major league baseball teams. The
principal component of MLCF revenues is the Cleveland Indians share of national
television and radio broadcasting fees. The 6% or $.9 million increase in MLCF
revenues in 1998 is due to a $1.5 million distribution from the MLCF for a
federal arbitration award relative to MLB cable television royalties for the
years 1990 through 1992 offset by a decrease in national broadcasting revenue
due to the addition of two expansion teams in 1998. The 25% or $3.1 million
increase in 1997 is a result of negotiated contractual increases in national
broadcasting rights fees.
Post-season revenues include 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. These revenues are dependent on the number
of post-season games played and the seating capacity and ticket pricing of the
opponents' ballparks. The Cleveland Indians played in ten post-season games in
1998, eighteen in 1997 and four in 1996. The decrease in post-season revenues of
$4.3 million in 1998 was primarily due to not participating in the 1998 World
Series. The decrease in World Series revenues of $4.8 million was offset by a
net increase in revenues from the Division and League Championship series in
1998. The increase of $11.1 million in 1997 is primarily due to the number of
post-season games played.
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. The revenue sharing rate was 16% in
1998 and 12% in 1997 and 1996. Once the pool is accumulated, it is
re-distributed 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. The increase of $3.0 million or 42%
in 1998 is due to an increase in the revenue sharing rate coupled with an
increase in net local revenue. The 25% or $1.5 million increase in 1997 is the
result of significantly higher post-season revenues as well as increases in
other revenue categories.
-16-
<PAGE> 19
OPERATING EXPENSES
The following table shows the components of operating expenses
and the percentage increases and decreases.
<TABLE>
<CAPTION>
% Inc (Dec) % Inc (Dec)
1998(a) 1997 1996 98 vs. 97 97 vs. 96
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Major league team $66,636 $66,085 $53,455 1% 24%
Player development 11,540 10,536 8,889 10 19
Ballpark operations 12,283 11,539 10,834 6 7
Cost of merchandise sold 11,269 12,982 11,692 (13) 11
Administrative and general 12,709 10,499 8,756 21 20
Major Leagues Central Fund 4,168 4,938 4,146 (16) 19
Advertising and promotion 3,653 3,723 2,845 (2) 31
Post season 3,336 6,252 1,309 (47) 378
Amortization of signing bonuses 4,412 3,630 3,212 22 13
and player contracts
Depreciation and amortization 1,830 1,629 1,326 12 23
----------- ----------- ----------- ----------- -----------
Totals $131,836 $131,813 $106,464 0% 24%
</TABLE>
(a) Includes the combined results of operations for the Company for the
period June 9, 1998 to December 31, 1998 and the Predecessor Group for
the period January 1 , 1998 to June 8, 1998.
Major league team operating costs include salaries of players' and
coaches, the payroll luxury tax, travel costs, spring training, equipment and
medical costs. These costs increased 1% in 1998. Included in the $.6 million
increase is an increase in life and disability insurance costs of $1.3 million
due to the signing of several multi-year player contracts, an increase in
coaches salaries of $.3 million, an increase in workers' compensation expense of
$.2 million and an increase in travel and other costs of $.8 million. These
increases were offset by a decrease in the payroll luxury tax of $2.1 million.
The payroll luxury tax was first effective for the 1997 season and is assessed
on the five clubs with the highest actual payroll in accordance with the terms
of the Collective Bargaining Agreement. The reduction in the tax for 1998 was
due to the decline in the Indians ranking in taxable base compared to other
teams. In 1997, the major league team operating expenses increased 24%. The
$12.6 million increase included an increase in player salaries of $9.7 million
primarily due to the signing of one player for $7.0 million as well as existing
player contractual increases and normal player roster changes, a payroll luxury
tax of $2.1 million, and an increase in travel and other costs of $.8 million.
Player development costs include the scouting programs, the minor
league and Latin America operations and other specialized development programs.
These costs increased $1.0 million or 10% in 1998. Included in the increase is
$.4 million of costs due to the addition of two specialty programs in Santo
Domingo, Dominican Republic and San Felipe, Venezuela, $.2 million in increased
scouting expenses due to the addition of two part-time and two full-time scouts,
and $.8 million in minor league players' and coaches' salaries. Offsetting these
increases is a decrease in workers' compensation costs of $.4 million. In 1997,
these costs increased 19% or $1.6 million primarily due to a $.3 million
increase in workers' compensation costs, a $.8 million increase in the costs
associated with various minor league affiliates and specialized development
programs, and a $.5 million increase in scouting costs due to the hiring of
additional scouts.
Ballpark operations include labor and ballpark supply costs, ticket
services, scoreboard operations, broadcasting and ballpark rent. These expenses
increased 6% in 1998. The $.7 million increase is due to a $.3 million increase
in labor costs which is the result of increased staffing levels to improve
customer service, an increase of $.3 million in broadcasting and an increase of
$.1 million in credit card fees on ticket sales. The ballpark operating expenses
for 1997 increased 7%. The $.7 million increase was primarily due to a $.4
million increase in credit card fees on ticket sales and increased ballpark rent
of $.2 million.
The cost of merchandise sold decreased 13% in 1998. This decrease of
$1.7 million includes a $1.2 million decrease in the cost of merchandise due to
reduced sales volume and a $.5 million decrease in operating costs as a result
of closing six shopping center kiosks in June of 1997. The cost of merchandise
sold increased in 1997 by 11%. This $1.3 million increase is due to increased
sales volume and higher fixed expenses.
-17-
<PAGE> 20
Administrative and general expenses increased 21% in 1998 compared to
20% in 1997. The $2.2 million increase in 1998 was primarily due to $1.3 million
of additional expenses attributable to operating as a public company. The
additional costs include legal and accounting fees, quarterly and annual
financial reports, and directors and officers liability insurance. In addition,
front office salaries increased $.7 million and pension expense increased $.5
million. Administrative and general expenses increased $1.7 million in 1997
primarily due to front office salary increases and executive bonuses.
Major Leagues Central Fund expenses allocated to the Cleveland Indians
decreased 16% or $.8 million in 1998 primarily due to a decrease of $.6 million
related to the administration of revenue sharing and the allocation of MLCF
expenses to the two expansion teams that entered the league in 1998. In 1997
these expenses increased 19% or $.8 million due to increased expenses associated
with the administration of the Office of the Commissioner of Major League
Baseball and revenue sharing provided for in the Collective Bargaining
Agreement.
Advertising and promotion expenses decreased 2% in 1998 compared to an
increase of 31% in 1997. The decrease of $.1 million in 1998 is due to the
elimination of advertising expense associated with a 1997 advertising campaign.
In 1997 the increase of $.9 million was due to the costs associated with a
significant advertising campaign focused on increasing merchandise sales.
Post-season expenses include major league team expenses, ballpark
operations, cost of merchandise sold at Jacobs Field, advertising and promotion
and general and administrative expenses related to the post-season games.
Similar to post-season revenues, these expenses are effected by the number of
post-season games. The $2.9 million decrease in post-season expenses in 1998
compared to 1997 is the result of the Indians playing eight fewer post-season
games in 1998 compared to 1997. The increase of $4.9 million in post-season
expenses in 1997 compared to 1996 is due the Indians playing fourteen more
post-season games in 1997 than in 1996.
The amortization of signing bonuses and player contracts results from
the recognition of these expenses over the lives of the related player
contracts. In 1998 amortization increased 22% or $.8 million. This increase was
primarily due to the increased costs associated with extending certain players'
contracts. In 1997 amortization increased 13% or $.4 million primarily due to
the cost associated with the acquisition of one player in December 1996.
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 increased 12% in 1998 and 23% in 1997.
These increases were due to depreciation on additional capital expenditures made
in 1998 and 1997.
OTHER INCOME AND EXPENSE
Interest income includes interest on the loan to the general partner
and earnings on cash equivalents and marketable securities. Interest income
increased 12% or $.6 million in 1998. This increase was due to an increased
return on investments offset by a reduction of interest income of $1.4 million
on the loan to the general partner that was repaid in March 1998. In 1997,
interest income increased 21% or $.8 million as the result of increases in the
balances of the loan to the general partner of $12.2 million and funds from
advance ticket sales and expansion proceeds.
Interest expense is primarily interest incurred on the Major League
Baseball Revolving Credit Agreement. The outstanding balance was increased by
$12.2 million in June 1997. Interest expense increased $.4 million or 17% in
1998 due to the increase in the balance on the credit agreement. This increase
was partially offset by a decrease in the interest rate due to the revised terms
of the credit agreement in April 1998. In 1997, interest expense increased $.3
million or 13% primarily due to the increase in the outstanding balance on the
credit agreement.
In 1998, the Company incurred a net loss of $1.4 million on player
transactions primarily due to a loss of $2.0 million on the trade of one player
which required the Cleveland Indians to pay a portion of the traded player's
1998 salary. In 1997, there was a net gain of $2.7 million on player
transactions which was primarily due to a gain of $3.0 million on the trade of
one player. The gain on player transactions of $.6 million in 1996 is the result
of the sale of one player's contract to a Japanese league.
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<PAGE> 21
League expansion proceeds recognized in 1997 of $9.3 million represent
the Cleveland Indians share of fees paid by two expansion groups to obtain
expansion franchises in Major League Baseball. The two expansion teams began
play in 1998.
Minority interest represents the interest in the earnings of the
Partnership that was not purchased and is not owned by the Company. For 1998,
the minority interest of $11.6 million is 49% of the earnings since June 9,
1998, the date the Company commenced operations.
The provision for income taxes represents the estimated tax on the
Company's earnings at the applicable corporate income tax rates. For 1998, the
provision for income taxes on earnings since June 9, 1998 was $4.8 million.
FOURTH QUARTER RESULTS
Income before minority interest and provision for income taxes was $6.7
million for the fourth quarter of 1998 compared to $18.6 million for 1997. The
decrease of $11.9 million was primarily due to the recognition of $9.3 million
in expansion proceeds in the fourth quarter of 1997. In addition, not
participating in the 1998 World Series resulted in a decrease in income from
post-season of $1.3 million and profits on merchandise sales of $1.5 million.
Other items effecting comparability between the quarters include the recognition
of a gain on a player transaction of $2.6 million in 1997, recognition of
additional television broadcasting rights fees of $1.5 million as a result of a
contract extension in the fourth quarter of 1998, the reversal of the payroll
luxury tax accrual of $2.1 million due to a change in the team's ranking in
taxable base compared to other teams in 1998 and the recognition of a realized
gain of $.6 million in November 1998 upon withdrawal from the pooled investment
account.
LIQUIDITY AND CAPITAL RESOURCES
<TABLE>
<CAPTION>
1998 1997 1996
--------- -------- ---------
<S> <C> <C> <C>
Sources of funds:
Cash provided by operating activities 23,985 31,136 6,852
Net sales of investments 35,703
Proceeds from expansion teams 5,215 1,786
Contributions from general partner 13,900
Net proceeds from financings 12,153 1,647
Decrease in loan to partner 35,500
--------- -------- ---------
95,188 48,504 24,185
--------- -------- ---------
Uses of funds:
Net purchases of investments 21,078 25,248
Net expenditures for player contracts 4,410 4,843 2,535
Capital expenditures 1,800 1,699 2,701
Distributions 53,235 4,657 2,000
Increase in loan to partner 12,153 15,832
Other, net 192 996
--------- -------- ---------
59,637 45,426 48,316
--------- -------- ---------
Net change in cash and cash equivalents 35,551 3,078 (24,131)
</TABLE>
The Company's principal source of cash historically has been cash
provided from operating activities. Operating activities generated $24.0 million
in 1998 compared to $31.1 million in 1997 and $6.9 million in 1996. The decrease
in cash provided by operating activities of $7.2 million in 1998 was primarily
due to a decrease in accounts payable and
-19-
<PAGE> 22
accrued liabilities and an increase in accounts receivable and accrued income.
The increase in cash provided by operating activities of $24.3 million in 1997
was primarily due to an increase in deferred revenue of $18.5 million. The net
increase in cash and cash equivalents of $35.6 million in 1998 was primarily due
to the withdrawal of funds from the pooled investment account and reinvesting
the amount primarily in instruments classified as cash equivalents rather than
investments. In addition, during 1998, the Partnership made distributions to its
Partners of $53.2 million and received repayment of a loan to its general
partner of $35.5 million.
The majority of the Company's current liabilities at December 31, 1998
and 1997 were deferred revenues that consist primarily of advance ticket sales
which the Company satisfies by playing its regular season home games.
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 facility expires on the earlier of April of 2001
or voluntary termination by the MLB Trust. As of December 31, 1998, the interest
rate on the amounts borrowed on the facility, which is based on LIBOR plus a
program fee of .35% was 5.51%. During the term of the facility, the Company pays
interest only on the outstanding borrowings, in addition to commitment and other
fees, which amounted to $.1 million in 1998. Unless the facility is renewed by
the parties, upon expiration, the outstanding borrowings convert into a
four-year term loan with a principal repayment schedule as follows: 15% in the
first year, 20% in the second, 25% in the third and 40% in the fourth and final
year. 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 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 $49.2 million to its partners and CBC repaid its $35.5
million debt 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 Company remains obligated to repay the amounts borrowed under
the credit facility. The Major League Credit Facility currently provides the
Company with an aggregate availability of $45.0 million, of which $9.5 million
was available at December 31, 1998.
The Company maintained a line of credit with Key Bank N.A. which
provided aggregate availability of up to $9.0 million. The line of credit
matured on November 1, 1998 and was extended to February 28, 1999. There were no
borrowings outstanding on the line as of December 31, 1998 and the Company did
not renew the line when it expired in February 1999.
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 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 $190.7 million as of February 25, 1999,
including $121.8 million scheduled for payment in 1999 and 2000. Since February
25, 1999 additional signings increased the total commitments by $33.9 million.
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-
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<PAGE> 23
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 fully insure its
obligations under the contracts for the 25 man major league roster. As of March
26, 1999, the Company also carried disability insurance in the aggregate amount
of $132 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.
The Company's capital expenditure budget for 1999 is approximately $1.3
million. The budget anticipates expenditures for facility and equipment
improvements.
The Company believes that it will generate sufficient cash flows from
operations, in addition to existing working capital and availability on its
credit facility, to meet its short term and long term requirements for capital
and acquisition of player contracts.
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 is in 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 are being used to
make the required modifications and test Year 2000 Compliance. The Company plans
to complete the testing and modification of all significant hardware and
software applications by September 30, 1999. The estimated cost to address Year
2000 issues is .3 million, which is being 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. The cost of the project
and the date on which the Company believes it will substantially complete the
Year 2000 modifications are based on management's best estimates, which were
derived from numerous assumptions of future events, including the continued
availability of computer programming expertise and other factors. Because none
of these estimates can be guaranteed, actual results could differ materially
from those anticipated. Specific factors that might cause material differences
include, but are not limited to, the availability and cost of trained personnel,
the ability to locate and correct all relevant computer codes, and similar
uncertainties.
In addition, the Company is communicating with external service
providers to ensure that the providers are taking the appropriate action to
address Year 2000 issues. However, there can be no assurance that the systems of
third parties on which the Company's systems rely will convert, or that a
conversion that is incompatible with the Company's systems, would not have a
material adverse effect on the Company's systems.
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 late March or early 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.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1998, the FASB issued Statement No. 133, "Accounting for
Derivative Instruments and Hedging Activities," which is required to be adopted
in years beginning after June 15, 1999. The Statement will require the
recognition of all derivatives on the balance sheet at fair value. The Company
is currently evaluating the potential impact of this Statement, but management
does not believe that the adoption of this Statement will have a significant
effect on its results of operations or financial position.
-21-
<PAGE> 24
ITEM 7A. 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 the sensitivity analysis.
The Company's primary interest rate exposures relate to its cash,
marketable securities, short-term investments 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.
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The response to this Item 8 is included in a separate section at the
end of this Annual Report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
In accordance with General Instruction G(3) to Form 10-K, the
information called for in this Item 10 relating to the directors of CIBC is
incorporated herein by reference to the Proxy Statement under the caption
"Election of Directors."
The following sets forth certain information concerning the executive
officers of CIBC. Executive officers serve at the pleasure of the Board of
Directors, subject to the terms of their employment agreements.
<TABLE>
<CAPTION>
NAME AGE POSITION WITH COMPANY
- ---- --- ---------------------
<S> <C> <C>
Richard E. Jacobs.... 73 Chairman of the Board,
President and Chief Executive Officer
John H. Hart......... 50 Executive Vice President and General Manager
Dennis Lehman........ 47 Executive Vice President, Business
Mark A. Shapiro...... 31 Vice President, Baseball Operations and
Assistant General Manager
Jeffry L. Overton.... 42 Vice President, Marketing and Communications
Kenneth E. Stefanov.. 41 Vice President, Finance
David W. Pancoast.... 57 Secretary
Anthony W. Weigand... 61 Treasurer
</TABLE>
Richard E. Jacobs has been Chairman of the Board, President and Chief
Executive Officer of CIBC since it began operations in June 1998. Since 1986,
Mr. Jacobs has been Chairman of the Board, President and Chief Executive Officer
of the Partnership. Mr. Jacobs is also Chairman of the Board, Chief Executive
Officer and President of CBC, the sole limited partner of the Partnership, and
Chairman of the Board and Chief Executive Officer of The Richard E. Jacobs Group
Inc., a real estate management and development company ("The Jacobs Group").
John H. Hart has been Executive Vice President and General Manager of
CIBC since it began operations. Mr. Hart has been Executive Vice President since
1993 and General Manager of the Partnership since 1991.
Mark A. Shapiro has served as Vice President, Baseball Operations and
Assistant General Manager of CIBC and the Partnership since March 10, 1999. From
June 1998 to March 10, 1999, Mr. Shapiro was Director, Minor League Operations
of CIBC. From January 1994 to March 10, 1999, he served as Director, Minor
League Operations of the Partnership.
Dennis Lehman has been Executive Vice President, Business of CIBC since
it began operations. Since 1993, Mr. Lehman has been Executive Vice President,
Business of the Partnership.
-22-
<PAGE> 25
Jeffry L. Overton has been Vice President, Marketing and Communications
of CIBC since it began operations. Since 1989, Mr. Overton has been Vice
President, Marketing and Communications of the Partnership.
Kenneth E. Stefanov has been Vice President, Finance of CIBC since it
began operations. Since 1995, he has served as Vice President, Finance of the
Partnership.
David W. Pancoast has been Secretary of CIBC it began operations. Mr.
Pancoast is also General Counsel and Secretary of The Jacobs Group.
Anthony W. Weigand has been Treasurer of CIBC since it began
operations. Mr. Weigand is also Vice President and Treasurer of The Jacobs
Group. From 1975 to 1997, Mr. Weigand served as Chief Financial Officer of The
Jacobs Group.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item 11 is incorporated by reference
to the section entitled "Executive Compensation" in the Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item 12 is incorporated by reference
to the section entitled "Security Ownership of Certain Beneficial Owners and
Management" in the Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIP AND RELATED TRANSACTIONS
The information required by this Item 13 is incorporated to the section
entitled "Certain Relationships and Related Transactions" in the Proxy
Statement.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(A)(1) FINANCIAL STATEMENTS
The following financial statements of Cleveland Indians Baseball
Company, Inc. and Cleveland Indians Baseball Company Predecessor Group and the
Independent Auditors' Report are included in a separate section at the end of
this Annual Report:
Independent Auditors' Report .....................................F-2
Consolidated Balance Sheet of Cleveland Indians
Baseball Company, Inc. as of December 31, 1998 and
Combined Balance Sheet of Cleveland Indians Baseball
Company Predecessor Group as of December 31, 1997 ................F-3
Consolidated Statement of Operations of Cleveland
Indians Baseball Company, Inc. for the Period June 9,
1998 to December 31, 1998, and the Combined Statements
of Operations of Cleveland Indians Baseball Company
Predecessor Group for the Period January 1, 1998 to
June 8, 1998 and for the Years Ended December 31, 1997
and 1996 .........................................................F-4
Consolidated Statement of Shareholders' Equity
(Deficit) of Cleveland Indians Baseball Company, Inc.
for the Period June 9, 1998 to December 31, 1998, and
the Combined Statements of Owners' Equity (Deficit) of
Cleveland Indians Baseball Company
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<PAGE> 26
Predecessor Group for the Period January 1, 1998 to
June 8, 1998 and for the Years Ended December 31, 1997
and 1996 ......................................................F-5
Consolidated Statement of Cash Flows of Cleveland
Indians Baseball Company, Inc. for the Period June 9,
1998 to December 31, 1998, and the Combined Statements
of Cash Flows of Cleveland Indians Baseball Company
Predecessor Group for the Period January 1, 1998 to
June 8, 1998 and for the Years Ended December 31, 1997
and 1996 ......................................................F-6
Notes to Consolidated and Combined Financial Statements
for the Years Ended December 31, 1998, 1997 and 1996 ..........F-7
(A)(2) FINANCIAL STATEMENT SCHEDULES
All financial statement schedules have been omitted as not applicable
or because the required information is included in the Financial Statements or
the notes thereto.
(A)(3) EXHIBITS
Exhibit No. Description
----------- -----------
3.1 Amended and Restated Articles of Incorporation of the Company.
(1)
3.2 Code of Regulations of the Company. (1)
4.1 Form of Share Certificate for Class A Common Shares. (1)
4.2 Form of Share Certificate for Class B Common Shares. (1)
10.1 Basic Agreement between the American League, the National
League and the Players Association dated December 7, 1996 (the
Collective Bargaining Agreement). (1)
10.2 Lease Agreement between Gateway and the Partnership dated July
3, 1991. (1)
10.3 Ground Lease Agreement between Gateway and the Partnership
dated July 3, 1991. (1)
10.4 Management Agreement between Gateway and Ballpark Management
dated July 3, 1991. (1)
10.5 Common Area Maintenance Agreement between Gateway, the
Partnership and Ballpark Management dated July 31, 1991. (1)
10.6 Amended and Restated Use Agreement by and between the City of
Winterhaven, Florida and the Partnership dated October 15,
1993, as amended. (1)
10.7 Club Trust Revolving Credit Agreement among Major League
Baseball Trust, Fleet Bank and the Club Trusts, dated April
17, 1998. (1)
10.8 Ratification Agreement among Indians Club Trust and Fleet
National Bank, dated April 17, 1998. (1)
10.9 Club Trust Pledge and Security Agreement between Indians Club
Trust and Major League Baseball Trust dated April 17, 1998.
(1)
10.10 Transfer Agreement between the Partnership and Indians Club
Trust, dated May 22, 1992. (1)
10.11 Amendment and Confirmation of Transfer Agreement between the
Partnership and Indians Club Trust dated June 28, 1996. (1)
-24-
<PAGE> 27
10.12 Cleveland Indians Baseball Company, Inc. Long-Term Incentive
Plan. (1)(2)
10.13 Form of Indemnification Agreement between the Company and each
of its Directors. (1)
10.14 Form of Indemnification Agreement between the Company and each
of its executive officers. (1)
10.15 Second Amendment and Confirmation of Transfer Agreement
between the Partnership and Indians Club Trust, dated April
17, 1998. (1)
10.16 First Amended and Restated Agreement of Limited Partnership of
the Partnership. (1)
10.17 Second Amendment to the Club Trust Reducing Revolving Credit
Agreement and the Club Trust Pledge and Security Agreement
dated May 27, 1997. (1)
10.18 Cleveland Indians Baseball Company, Inc. Directors' Deferred
Compensation Plan. (1)
10.19 Employment Agreement between the Company and John Hart. (1)(2)
10.20 Employment Agreement between the Company and Dennis Lehman.
(1)(2)
10.21 Employment Agreement between the Company and Jeff Overton.
(1)(2)
10.22 Employment Agreement between the Company and Ken Stefanov.
(1)(2)
10.23 Employment Agreement between the Company and Dan O'Dowd, as
amended. (2)
27.1 Financial Data Schedule
- ---------------------
(1) Incorporated by reference from the Company's Registration
Statement on Form S-1 (Registration No. 333-49357), as amended.
(2) Management contract or compensation plan or arrangement.
(B) REPORTS ON FORM 8-K
None.
-25-
<PAGE> 28
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: March 30, 1999 CLEVELAND INDIANS BASEBALL COMPANY, INC.
By: /s/ Richard E. Jacobs
-------------------------------------
Richard E. Jacobs
Director, Chairman of the Board of
Directors and Chief Executive Officer
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/ Richard E. Jacobs Chairman of the Board, President, March 30, 1999
- --------------------------- Chief Executive Officer and Director
Richard E. Jacobs (principal executive officer)
/s/ Kenneth E. Stefanov Vice President, Finance March 30, 1999
- --------------------------- (principal financial officer and
Kenneth E. Stefanov principal accounting officer)
/s/ Martin J. Cleary Director March 30, 1999
- ---------------------------
Martin J. Cleary
/s/ Robert W. Brown, M.D Director March 30, 1999
- ---------------------------
Robert W. Brown, M.D
/s/ Raymond P. Park Director March 30, 1999
- ---------------------------
Raymond P. Park
/s/ Edward G. Ptaszek, Jr. Director March 30, 1999
- ---------------------------
Edward G. Ptaszek, Jr.
/s/ William B. Summers, Jr. Director March 30, 1999
- ---------------------------
William B. Summers, Jr.
-26-
<PAGE> 29
INDEX TO FINANCIAL STATEMENTS
Independent Auditors' Report ...............................F-2
Consolidated Balance Sheet of Cleveland Indians
Baseball Company, Inc. as of December 31, 1998 and
Combined Balance Sheet of Cleveland Indians Baseball
Company Predecessor Group as of December 31, 1997 ..........F-3
Consolidated Statement of Operations of Cleveland
Indians Baseball Company, Inc. for the Period June 9,
1998 to December 31, 1998, and the Combined Statements
of Operations of Cleveland Indians Baseball Company
Predecessor Group for the Period January 1, 1998 to
June 8, 1998 and for the Years Ended December 31, 1997
and 1996 ...................................................F-4
Consolidated Statement of Shareholders' Equity
(Deficit) of Cleveland Indians Baseball Company, Inc.
for the Period June 9, 1998 to December 31, 1998, and
the Combined Statements of Owners' Equity (Deficit) of
Cleveland Indians Baseball Company Predecessor Group for
the Period January 1, 1998 to June 8, 1998 and for the
Years Ended December 31, 1997 and 1996 .....................F-5
Consolidated Statement of Cash Flows of Cleveland
Indians Baseball Company, Inc. for the Period June 9,
1998 to December 31, 1998, and the Combined Statements
of Cash Flows of Cleveland Indians Baseball Company
Predecessor Group for the Period January 1, 1998 to
June 8, 1998 and for the Years Ended December 31, 1997
and 1996 ...................................................F-6
Notes to Consolidated and Combined Financial Statements
for the Years Ended December 31, 1998, 1997 and 1996 .......F-7
F-1
<PAGE> 30
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders
of Cleveland Indians Baseball Company, Inc.
Cleveland, Ohio
We have audited the accompanying consolidated balance sheet of Cleveland Indians
Baseball Company, Inc. (the "Company") as of December 31, 1998 and the combined
balance sheet of Cleveland Indians Baseball Company Predecessor Group (the
"Predecessor Group") as of December 31, 1997, and the related consolidated
statements of operations, shareholders' equity (deficit) and cash flows for the
period June 9, 1998 to December 31, 1998 for the Company and the related
combined statements of operations, owners' equity (deficit) and cash flows for
the period January 1, 1998 to June 8, 1998 and for the years ended December 31,
1997 and 1996 for the Predecessor Group. These financial statements are the
responsibility of the management of the Company. 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, such consolidated and combined financial statements present
fairly, in all material respects, the financial position of Cleveland Indians
Baseball Company, Inc. as of December 31, 1998 and Cleveland Indians Baseball
Company Predecessor Group as of December 31, 1997, and the consolidated results
of operations and cash flows of the Company for the period June 9, 1998 to
December 31, 1998 and the combined results of operations and cash flows for the
Predecessor Group from January 1, 1998 to June 8, 1998 and the years ended
December 31, 1997 and 1996 in conformity with generally accepted accounting
principles.
DELOITTE & TOUCHE LLP
Cleveland, Ohio
February 25, 1999
F-2
<PAGE> 31
CLEVELAND INDIANS BASEBALL COMPANY, INC.
AND CLEVELAND INDIANS BASEBALL COMPANY PREDECESSOR GROUP
CONSOLIDATED AND COMBINED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
THE
THE PREDECESSOR
COMPANY GROUP
------- -----
DECEMBER 31,
1998 1997
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 39,283 $ 3,732
Marketable securities 13,287 --
Investments 3,783 57,909
Receivables and accrued income 9,421 7,867
Merchandise inventories 1,207 1,568
Prepaid expenses and other current assets 2,969 5,040
Deposit for grievance settlement (Note 14) 9,589 9,079
--------- ---------
Total current assets 79,539 85,195
FIXED ASSETS:
Leasehold improvements, furniture and fixtures
and other equipment, at cost 8,969 7,685
Less accumulated depreciation and amortization 3,387 2,757
--------- ---------
Total fixed assets, net 5,582 4,928
PREPAID SIGNING BONUSES AND PLAYER
CONTRACTS (Net of accumulated amortization) 10,590 10,743
INTANGIBLE ASSETS (Net of accumulated amortization) (Note 3) 10,383 11,048
DEFERRED TAXES (Note 7) 3,960 --
OTHER ASSETS (Notes 10 and 12) 11,969 6,238
--------- ---------
TOTAL $ 122,023 $ 118,152
========= =========
LIABILITIES AND SHAREHOLDERS' AND OWNERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Accounts payable and accrued liabilities (Note 6) $ 10,961 $ 15,359
Deferred revenue 48,829 41,375
Current portion of long-term debt (Note 8) 448 7,496
Reserve for players' grievance damages (Note 14) 9,589 9,079
Income taxes payable (Note 7) 750 --
--------- ---------
Total current liabilities 70,577 73,309
LONG-TERM LIABILITIES (Note 8) 57,951 47,393
COMMITMENTS AND CONTINGENCIES (Notes 10, 14 and 15)
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; 4,139,376 shares issued and outstanding 55,800 --
Class B common shares, without par value; 3,000,000 shares
authorized; 2,283,957 shares issued and outstanding 5,125 --
Additional paid-in capital 4,700 --
Retained earnings (deficit) (72,130) --
OWNERS' EQUITY (DEFICIT) -- 32,950
Loan to general partner (Note 5) -- (35,500)
--------- ---------
Total shareholders' equity (deficit) (6,505) (2,550)
--------- ---------
TOTAL $ 122,023 $ 118,152
========= =========
</TABLE>
See notes to consolidated and combined financial statements.
F-3
<PAGE> 32
CLEVELAND INDIANS BASEBALL COMPANY, INC.
AND CLEVELAND INDIANS BASEBALL COMPANY PREDECESSOR GROUP
CONSOLIDATED AND COMBINED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
THE COMPANY THE PREDECESSOR GROUP
----------- ---------------------
PERIOD JUNE 9, PERIOD YEARS
1998 TO JANUARY 1, ENDED
DECEMBER 31, 1998 TO DECEMBER 31,
1998 JUNE 8, 1998 1997 1996
<S> <C> <C> <C> <C>
REVENUES:
Net ticket sales $ 36,582 $ 19,248 $ 49,279 $ 45,658
Local radio and television 12,338 7,311 17,014 13,631
Concession and catering (Note 11) 10,916 5,292 14,095 14,726
Private suite and club seat rentals 6,198 3,160 8,704 7,035
Advertising and promotion 6,540 3,284 8,754 6,891
Merchandise 9,874 5,540 17,449 14,683
Major Leagues Central Fund (Note 4) 14,210 2,206 15,505 12,369
Other (primarily Major League Baseball Properties) 1,843 1,509 3,365 3,002
Post-season (Note 18) 8,710 -- 13,051 1,933
Provision for revenue sharing (Note 17) (7,168) (3,041) (7,186) (5,731)
----------- ----------- ----------- -----------
Total revenues 100,043 44,509 140,030 114,197
----------- ----------- ----------- -----------
OPERATING EXPENSES:
Major league team (Note 17) 38,256 28,380 66,085 53,455
Player development 6,299 5,241 10,536 8,889
Ballpark operations (Note 16) 7,084 5,199 11,539 10,834
Cost of merchandise sold 7,125 4,144 12,982 11,692
Administrative and general (Note 16) 7,595 5,114 10,499 8,756
Major Leagues Central Fund (Note 4) 2,599 1,569 4,938 4,146
Advertising and promotion 1,912 1,741 3,723 2,845
Post-season (Note 18) 3,336 -- 6,252 1,309
Amortization of signing bonuses and player contracts 2,633 1,779 3,630 3,212
Depreciation and amortization 1,052 778 1,629 1,326
----------- ----------- ----------- -----------
Total operating expenses 77,891 53,945 131,813 106,464
----------- ----------- ----------- -----------
OPERATING INCOME (LOSS) 22,152 (9,436) 8,217 7,733
OTHER INCOME (EXPENSE):
Interest income:
Affiliate (Note 5) -- 595 2,023 1,733
Other 2,667 1,978 2,649 2,122
Interest expense (1,490) (1,191) (2,301) (2,045)
Gain (loss) on player transactions 249 (1,604) 2,696 616
League expansion proceeds (Note 9) -- -- 9,286 --
----------- ----------- ----------- -----------
INCOME (LOSS) BEFORE MINORITY INTEREST AND
PROVISION FOR INCOME TAXES 23,578 (9,658) 22,570 10,159
MINORITY INTEREST (11,553) -- -- --
PROVISION FOR INCOME TAXES (4,840) -- -- --
----------- ----------- ----------- -----------
NET INCOME (LOSS) $ 7,185 $ (9,658) $ 22,570 $ 10,159
=========== =========== =========== ===========
BASIC AND DILUTED EARNINGS PER SHARE $ 1.12
===========
WEIGHTED AVERAGE NUMBER OF COMMON SHARES 6,423,333
===========
</TABLE>
See notes to consolidated and combined financial statements.
F-4
<PAGE> 33
CLEVELAND INDIANS BASEBALL COMPANY, INC.
AND CLEVELAND INDIANS BASEBALL COMPANY PREDECESSOR GROUP
CONSOLIDATED AND COMBINED STATEMENTS OF SHAREHOLDERS'
AND OWNERS' EQUITY (DEFICIT)
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
THE COMPANY
---------------------------------------------------------------------------------
NUMBER OF
COMMON COMMON ADDITIONAL RETAINED
SHARES SHARES PAID-IN EARNINGS
------------------------ --------------------- CAPITAL (DEFICIT)
CLASS A CLASS B CLASS A CLASS B
<S> <C> <C> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1996
Contributions
Distributions
Loan to general partner
Net income
BALANCE, DECEMBER 31, 1996
Distributions
Loan to general partner
Net income
BALANCE, DECEMBER 31, 1997
Distributions to partners
Repayment of loan to general partner
Net loss for period January 1, 1998
through June 8, 1998
Sale of common shares net of
offering costs 4,133,333 $ 55,800
Issuance of common shares in
exchange for contribution of
interests 6,043 2,283,957 -- $ 5,125
Acquisition of interest in
Operating Partnership -- -- -- -- $ 4,700 $ (55,800)
Reclassification adjustment -- -- -- -- -- (31,033)
Restoration of minority
deficit (Note 2) -- -- -- -- -- 7,518
Net income for period June 9, 1998
to December 31, 1998 -- -- -- -- -- 7,185
---------- ---------- -------- -------- --------- ----------
BALANCE, DECEMBER 31, 1998 4,139,376 2,283,957 $ 55,800 $ 5,125 $ 4,700 $ (72,130)
========== ========== ======== ======== ========= ==========
<CAPTION>
THE PREDECESSOR
GROUP
----------------------------
TOTAL
OWNERS' LOAN TO SHAREHOLDERS'
EQUITY GENERAL EQUITY
(DEFICIT) PARTNER (DEFICIT)
<S> <C> <C> <C>
BALANCE, JANUARY 1, 1996 $ (7,022) $ (7,515) $ (14,537)
Contributions 13,900 -- 13,900
Distributions (2,000) -- (2,000)
Loan to general partner -- (15,832) (15,832)
Net income 10,159 -- 10,159
--------- --------- ----------
BALANCE, DECEMBER 31, 1996 15,037 (23,347) (8,310)
Distributions (4,657) -- (4,657)
Loan to general partner -- (12,153) (12,153)
Net income 22,570 -- 22,570
--------- --------- ----------
BALANCE, DECEMBER 31, 1997 32,950 (35,500) (2,550)
Distributions to partners (49,200) -- (49,200)
Repayment of loan to general partner -- 35,500 35,500
Net loss for period January 1, 1998
through June 8, 1998 (9,658) -- (9,658)
Sale of common shares net of
offering costs -- -- 55,800
Issuance of common shares in
exchange for contribution of
interests (5,125) -- --
Acquisition of interest in
Operating Partnership -- -- (51,100)
Reclassification adjustment 31,033 -- --
Restoration of minority
deficit (Note 2) -- -- 7,518
Net income for period June 9, 1998
to December 31, 1998 -- -- 7,185
--------- --------- ----------
BALANCE, DECEMBER 31, 1998 $ -- $ -- $ (6,505)
========= ========= ==========
</TABLE>
See notes to consolidated and combined financial statements.
F-5
<PAGE> 34
CLEVELAND INDIANS BASEBALL COMPANY, INC.
AND CLEVELAND INDIANS BASEBALL COMPANY PREDECESSOR GROUP
CONSOLIDATED AND COMBINED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
THE COMPANY THE PREDECESSOR GROUP
----------- ---------------------
PERIOD JUNE 9, PERIOD YEARS
1998 TO JANUARY 1, ENDED
DECEMBER 31, 1998 TO DECEMBER 31,
1998 JUNE 8, 1998 1997 1996
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 7,185 $ (9,658) $ 22,570 $ 10,159
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Minority interest 11,553 -- -- --
Depreciation and amortization 3,772 2,557 5,259 4,538
(Gain) loss on player transactions (249) 1,604 (2,696) (616)
League expansion proceeds -- -- (9,286) --
(Increase) decrease in receivables and accrued income (1,205) (2,933) (1,205) 868
(Increase) decrease in merchandise inventories 699 (338) (319) (363)
(Increase) decrease in prepaid expenses and other current assets 2,265 (194) (781) (2,292)
Decrease in deferred taxes 740 -- -- --
(Increase) decrease in other assets (98) (497) 1,643 (999)
Increase (decrease) in accounts payable and accrued liabilities (8,024) 4,592 2,710 2,959
Increase (decrease) in deferred revenue 22 7,432 7,960 (10,556)
Increase in income taxes payable 750 -- -- --
Increase in deferred compensation 2,169 635 4,981 2,854
Increase in long-term liabilities 799 407 300 300
---------- ---------- ---------- ---------
Net cash provided by operating activities 20,378 3,607 31,136 6,852
---------- ---------- ---------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net change in short-term investments 39,826 14,300 (16,924) (23,021)
Purchases of marketable securities (13,287) -- -- --
Purchase of long-term investments (3,980) (1,156) (4,154) (2,227)
Expenditures for cash surrender value of life insurance -- -- (900) --
Proceeds from sale of player contracts 3,000 413 185 510
Proceeds from expansion teams -- -- 5,215 1,786
Capital expenditures (738) (1,062) (1,699) (2,701)
Expenditures for the purchase of player contracts and signing bonuses (3,816) (4,007) (5,028) (3,045)
(Increase) decrease in loan to general partner -- 35,500 (12,153) (15,832)
Acquisition of partnership interest (55,800) -- -- --
---------- ---------- ---------- --------
Net cash provided by (used in) investing activities (34,795) 43,988 (35,458) (44,530)
---------- ---------- ---------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from Major League Baseball Revolving Credit Agreement -- -- 12,153 2,847
Principal payment on Major League Baseball Revolving Credit Agreement -- -- -- (1,200)
Payment of debt issuance costs -- (192) (96) --
Net proceeds from sale of common stock 55,800 -- -- --
Proceeds from note payable borrowings -- -- -- 360
Repayment of notes payable -- -- -- (360)
Contributions from general partner -- -- -- 13,900
Distributions to general partner -- (49,200) (4,657) (2,000)
Distribution to minority interest (4,035) -- -- --
---------- ---------- ---------- --------
Net cash provided by (used in) financing activities 51,765 (49,392) 7,400 13,547
---------- ---------- ---------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 37,348 (1,797) 3,078 (24,131)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 1,935 3,732 654 24,785
---------- ---------- ---------- ---------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 39,283 $ 1,935 $ 3,732 $ 654
========== ========== ========== =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION -
Cash paid during the period for interest $ 1,531 $ 1,326 $ 2,399 $ 2,026
========== ========== ========== =========
Cash paid during the period for income taxes $ 3,350 $ -- $ -- $ --
========== ========== ========== ========
</TABLE>
See notes to consolidated and combined financial statements.
F-6
<PAGE> 35
CLEVELAND INDIANS BASEBALL COMPANY, INC.
AND CLEVELAND INDIANS BASEBALL COMPANY PREDECESSOR GROUP
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(DOLLARS IN THOUSANDS)
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, "Cleveland
Indians Baseball Company Predecessor Group" or "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"):
o 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.
o 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
shares of Class A Common Shares and 2,283,957 shares of Class B
Common Shares valued at $5,125.
o 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.
o 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.
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.
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.
F-7
<PAGE> 36
2. 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 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.
Ticket sales are presented net of local admission taxes of $4,514, $3,968
and $3,009 for the years ended December 31, 1998, 1997 and 1996,
respectively, and net of the American League's assessment of $1,693,
$1,612 and $1,598 for the years ended December 31, 1998, 1997 and 1996,
respectively.
CASH EQUIVALENTS - Cash equivalents consist primarily of highly liquid
investments with initial maturities of three months or less at date of
purchase.
MARKETABLE SECURITIES - Marketable securities are comprised of bankers'
acceptances and various debt securities. The Company has classified all
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
December 31, 1998.
At December 31, 1998, all marketable securities have a maturity of less
than one year and consist of:
<TABLE>
<S> <C>
Bankers' acceptances $ 4,429
U.S. government securities 4,943
U.S. agency securities 3,915
--------
Total $ 13,287
========
</TABLE>
INVESTMENTS - The Company participates in a cash management arrangement,
along with other entities affiliated through common ownership. Through an
affiliate, cash is accumulated in a pooled account and invested in
certificates of deposit, bankers' acceptances, deposit notes and various
debt securities. Included in the consolidated and combined balance sheets
is the Company's proportionate share of investments. All marketable
securities held in the pooled account are classified as available-for-sale
and are available to support current operations or to take advantage of
other investment opportunities. These securities are stated at estimated
fair value based upon market quotes. Unrealized gains and losses are
computed on the basis of specific identification and are included in
equity. There were no significant differences between amortized cost and
estimated fair value at December 31, 1998 or 1997.
The following table presents the relative composition of investments by
category at December 31, 1998 and 1997:
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Certificates of deposit, bankers' acceptances and deposit notes 14% 22%
U.S. government securities 60 58
U.S. agency securities 20 12
Commercial paper 6 8
---- ----
Total 100% 100%
==== ====
<CAPTION>
The relative contractual maturities at December 31, 1998 are as follows:
<S> <C>
Due in one year or less 39%
Due after one year through five years 47
Due after five years 14
----
Total 100%
====
</TABLE>
F-8
<PAGE> 37
On November 2, 1998, the Company withdrew substantially all of its
proportionate share of investments from the pooled account and reinvested
the funds in cash equivalents and marketable securities. A realized gain
of $614 was recognized and is included in interest income.
MERCHANDISE INVENTORIES - Inventories consist primarily of apparel and
novelty merchandise and are stated at the lower of cost or market.
Effective May 13, 1998, the method of determining cost was changed from
the first-in, first-out (FIFO) method to the weighted average method.
There was no material effect on the interim or year end results of
operations as a result of this change.
FIXED ASSETS - Leasehold improvements, furniture and fixtures and other
equipment are stated at cost. Depreciation and amortization are provided
by using accelerated methods over the estimated useful lives of the assets
which range from 5 to 20 years. Leasehold improvements are being
depreciated over the original terms of the respective leases.
PREPAID SIGNING BONUSES AND PLAYER CONTRACTS - The basis of all major
league player contracts acquired and signing bonuses paid are amortized on
a straight-line basis over the term of the respective player's contract.
Minor league player contracts acquired and signing bonuses paid are
amortized on a straight-line basis over the estimated useful lives of the
players, currently estimated to be 4 to 5 years. For dispositions of
players not involving a trade or sale, whether by outright release, or
expiration of all ownership rights, the Company's policy is to write-off
the net book value of the signing bonus and any contract cost in the year
of disposition. The Company accounts for trades of players as like-kind
exchanges, whereby the recorded basis of the acquired player(s) is equal
to the net book value of the traded player(s) (including signing bonuses
and any contract cost) plus or minus any cash consideration. Gains or
losses resulting from sales are recognized in the current period. Prepaid
signing bonuses and player contract costs consisted of the following at
December 31, 1998 and 1997:
<TABLE>
<CAPTION>
DECEMBER 31
1998 1997
<S> <C> <C>
Prepaid signing bonuses $ 17,472 $ 14,928
Player contract costs 1,295 1,038
--------- ---------
18,767 15,966
Less accumulated amortization 8,177 5,223
--------- ---------
Total $ 10,590 $ 10,743
========= =========
</TABLE>
Included in accounts receivable at December 31, 1998 and 1997 are $416 and
$3,000, respectively, of receivables relating to player transactions.
MEMBERSHIP IN AMERICAN LEAGUE - The membership in the American League
represents an allocation of the original purchase price of the franchise
based on an independent appraisal and is amortized using the straight-line
method over a 25-year period. Accumulated amortization of the membership
was $7,366 and $6,752 at December 31, 1998 and 1997, respectively.
DEFERRED LEASE AND OTHER COSTS - Certain initial direct lease costs
associated with the leases of baseball facilities discussed in Note 10,
primarily legal and consulting services rendered to the Company during
lease negotiations, have been capitalized in the accompanying consolidated
and combined balance sheets. The costs are being amortized on a
straight-line basis over the original terms of the respective leases.
Accumulated amortization of the deferred lease costs was $757 and $601 at
December 31, 1998 and 1997, respectively.
LEAGUE EXPANSION PROCEEDS - Proceeds received from expansion franchises
were deferred from recognition as revenue until substantial completion of
obligations under the expansion agreement.
DEFERRED COMPENSATION - Provisions of employment contracts of specific
players and front office personnel provide for the deferral of a portion
of their total compensation. The contracts generally provide that payments
will begin upon retirement from baseball. Compensation expense is accrued
as earned.
F-9
<PAGE> 38
MINORITY INTEREST ALLOCATION - Minority interest relates to the interest
in the Operating Partnership that is not owned by the Company, which, at
December 31, 1998, amounted to 49%. The deficit recorded by the Company as
of the date of the Offering and related transactions includes the deficit
attributable to the minority interest. Earnings allocable to the minority
interest, net of distributions, will be credited to retained earnings
until the deficit is restored.
SELF INSURANCE - The Company is substantially self-insured for losses
related to workers' compensation and medical and dental claims. Losses are
accrued based upon the Company's estimates of aggregate liability for
claims incurred based on Company experience and certain actuarial
assumptions followed in the insurance industry.
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 years 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.
STOCK OPTIONS - The Company has granted stock options for a fixed number
of shares to employees with an exercise price equal to the fair value of
the shares at the date of grant. The Company accounts for stock option
grants in accordance with APB Opinion No. 25, "Accounting for Stock Issued
to Employees," and, accordingly, recognizes no compensation expense for
the stock option grants.
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, is not
dilutive.
FAIR VALUE OF FINANCIAL INSTRUMENTS - The carrying values of cash and cash
equivalents, marketable securities, investments, accounts receivable,
mutual fund shares included in other assets, accounts payable, accrued
expenses and long-term liabilities are equal to, or approximate, their
fair values.
COMPREHENSIVE INCOME - The Company has adopted Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income." This
statement requires presentation of the components of comprehensive income
such as unrealized gains on marketable securities. For the period June 9,
1998 to December 31, 1998, there were no material differences between net
income and comprehensive income.
DERIVATIVE INSTRUMENTS - In June 1998, the Financial Accounting Standards
Board issued Statement No. 133, "Accounting for Derivative Instruments and
Hedging Activities," which is to be adopted in years beginning after June
15, 1999. The statement will require the recognition of all derivatives on
the balance sheet at fair value. The Company is currently evaluating the
impact of this statement, but management does not believe that the
adoption of this statement will have a significant effect on its results
of operations or financial position.
USE OF ESTIMATES - 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 reporting period. Actual results could differ from
those estimates.
RECLASSIFICATIONS - Certain reclassifications have been made to the 1997
and 1996 financial statements to conform with the classifications used in
1998.
3. INTANGIBLE ASSETS
Intangible assets consisted of the following at December 31, 1998 and
1997:
<TABLE>
<CAPTION>
DECEMBER 31
1998 1997
<S> <C> <C>
Membership in American League $ 15,345 $ 15,345
Deferred lease and debt issuance costs 3,177 3,081
--------- ---------
18,522 18,426
Less accumulated amortization 8,139 7,378
--------- ---------
Total $ 10,383 $ 11,048
========= =========
</TABLE>
F-10
<PAGE> 39
4. MAJOR LEAGUES CENTRAL FUND
The Major Leagues Central Fund ("MLCF") was established by the
Commissioner of Baseball to collect certain revenues and pay certain
expenses that relate to the operation of Major League Baseball ("MLB").
Substantially all of the net revenues of the MLCF are distributed to the
30 major league baseball teams. The principal component of MLCF revenue is
national television and radio revenue. The principal component of the MLCF
expenses is the contribution to the Major League Baseball Players' Benefit
Plan (see Note 12). The remaining expenses are for the Office of the
Commissioner, the Major League Baseball Player Relations Committee, Inc.
and the MLCF operating and administrative costs. In 1998, the Company
received a distribution of $1,538 from the MLCF, which represented its
share of a federal arbitration award relative to MLB cable television
royalties for the years 1990 through 1992.
5. LOAN TO GENERAL PARTNER
A loan to the general partner of $35,500 was outstanding at December 31,
1997. The loan which was payable upon demand and accrued interest at rates
consistent with the Company's borrowings under the Major League Baseball
Revolving Credit Agreement (see Note 8) was repaid during March of 1998.
6. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
Accounts payable and accrued liabilities consisted of the following at
December 31, 1998 and 1997:
<TABLE>
<CAPTION>
DECEMBER 31
1998 1997
<S> <C> <C>
Accrued player signing bonuses $ 1,895 $ 2,775
Accounts payable 746 3,001
Accrued payroll and related benefits 3,875 3,839
Other accrued liabilities 4,445 5,744
--------- ---------
Total $ 10,961 $ 15,359
========= =========
</TABLE>
Other accrued liabilities include liabilities for revenue sharing, luxury
tax payments and other obligations.
7. INCOME TAXES
The provision for income taxes is based upon income before tax for
financial reporting purposes. Deferred tax assets and liabilities are
recognized for the expected future tax consequences of temporary
differences between the tax bases of assets and liabilities and their
carrying values for financial reporting purposes. Components of the
provision for income taxes for the period June 9, 1998 to December 31,
1998 are as follows:
<TABLE>
<S> <C>
Federal - current $ 3,300
Federal - deferred 540
State and local - current 800
State and local - deferred 200
---------
Total $ 4,840
=========
</TABLE>
A reconciliation of tax at the statutory federal rate to the tax provision
for the period June 9, 1998 to December 31, 1998 is shown below:
<TABLE>
<S> <C>
U.S. federal income tax at 34% $ 4,089
State and local taxes, net of federal benefit 660
Other - net 91
---------
Total $ 4,840
=========
</TABLE>
F-11
<PAGE> 40
The approximate tax effect of each type of temporary difference that gave
rise to significant portions of the Company's deferred tax assets at
December 31, 1998 was as follows:
<TABLE>
<S> <C>
Book and tax difference in fixed asset basis $ 21,996
Accrued compensation and benefits 1,444
Other 1,758
---------
Total gross deferred tax asset 25,198
Less valuation allowance (21,238)
---------
Total net deferred tax asset $ 3,960
=========
</TABLE>
As a result of the Offering, the Company has recorded deferred tax assets
of $25,938, net of valuation allowances of $21,238, as of the date of the
Offering. These net deferred tax assets were credited to additional
paid-in capital.
The Company has recorded a valuation allowance as of December 31, 1998
(and also as of June 9, 1998) relating to the deferred tax assets that
were primarily generated as a result of the Offering. The Company has
assessed its past earnings history and trends and anticipated taxable
earnings and has determined that a valuation allowance is required to
reduce the deferred tax assets to an amount that management believes is
"more likely than not" to be realized at this time.
8. LONG-TERM LIABILITIES
Long-term liabilities consisted of the following at December 31, 1998 and
1997:
<TABLE>
<CAPTION>
DECEMBER 31
-----------
1998 1997
<S> <C> <C>
Major League Baseball Revolving Credit Agreement $ 35,500 $ 35,500
Deferred compensation (Note 12) 15,001 12,197
Deferred revenue 1,947 1,524
Accrued pension benefit cost (Note 12) 2,066 1,582
Accrued player signing bonuses 1,500 2,000
Other 2,385 2,086
--------- ---------
58,399 54,889
Less current portion 448 7,496
--------- ---------
Total $ 57,951 $ 47,393
========= =========
</TABLE>
MAJOR LEAGUE BASEBALL REVOLVING CREDIT AGREEMENT - In June of 1996, the
Company entered into a revolving credit facility ("facility") which
replaced the previous agreement arranged by MLB and funded by a bank
group. The facility is administered by a trust established by MLB. The
trust has borrowings from the syndicated lenders, the funds of which have
been loaned to the participating clubs. In April 1998, the terms of the
Company's revolving credit facility were renegotiated. The new terms of
the facility require interest only payments through April 2001, at which
time the facility may convert to a four year term loan with principal
repayments on the outstanding balance as follows: 15% in the first year,
20% in the second year, 25% in the third year and 40% in the fourth year.
Accordingly, the outstanding balance of $35,500 at December 31, 1998 is
reflected in long-term liabilities. The interest rate on the facility,
based upon LIBOR plus .35%, was 5.51% at December 31, 1998.
Total credit available of $45,000 and $35,500 at December 31, 1998 and
1997, respectively, is reduced by a labor contingency reserve sufficient
to service nine months' interest expense as mandated by the agreement. The
facility contains various covenants of which the Company was in compliance
at December 31, 1998 and 1997. Additionally, MLB has represented to the
Company that the trust is in compliance with various covenants at December
31, 1998 and 1997. The Company's borrowings against the facility are
secured by its interest in, rights under, and funds from existing and
future national broadcasting contracts, rights under certain licensing
contracts, and rights under the Major League Agreements.
DEFERRED REVENUE - Deferred revenue includes club seat deposits which will
be applied against the final year payment or refunded in the final year of
the related club seat license agreements.
F-12
<PAGE> 41
LINE OF CREDIT - The Company has a line of credit agreement with a bank
that provides for borrowings up to $9,000 at either the bank's base
lending rate or LIBOR plus 1.75%. Availability is reduced to $2,000 during
the period from December 1 to February 28, and the line must be repaid in
full for a period of 30 consecutive days throughout the term of the note.
In December 1998, this agreement was amended to provide for an extension
of the maturity date to February 28, 1999, at which time the outstanding
loan balance may be converted to a four-year term note, subject to certain
terms and conditions. No borrowings on this line were outstanding at
December 31, 1998 and 1997. The original shareholders of the Company are
guarantors on the note. The Company does not intend to renew the line of
credit when it expires on February 28, 1999.
9. LEAGUE EXPANSION PROCEEDS
In March 1995, the American and National Leagues and the 28 existing
member clubs signed an agreement to award expansion franchises to two
expansion groups. The expansion groups each paid a fee of $130,000 in
installments from July of 1995 through November of 1997. In 1997 and 1996,
the Company received $5,215 and $1,786, respectively, representing its
share of the final installment payments. The Company recognized these fees
as income upon completion of the expansion draft in November of 1997.
10. LEASE, MANAGEMENT AND NAMING RIGHTS AGREEMENTS
JACOBS FIELD - The Company is a party to a lease agreement (the
"Agreement") with Gateway for the construction and use of Jacobs Field.
Jacobs Field is owned by Gateway and leased to and operated by the
Company.
The term of the Agreement is 20 years and commenced in April 1994, the
date the Company occupied Jacobs Field. There is no minimum annual lease
payment required, although the Company is liable for rental payments if
certain paid attendance levels are achieved, as defined in the Agreement.
If paid attendance is less than 1.85 million, then no rent is due. The
Company incurred $1,916, $2,144 and $1,634 in rent for 1998, 1997 and
1996, respectively. Additionally, the Company has the ability under the
Agreement to offset certain expenditures incurred against rental payments
due to Gateway.
Under the terms of a related common area management agreement, the Company
receives one-third of all net revenues, as defined, generated from the
common areas. No revenues were received from common areas for the years
ended December 31, 1998, 1997 and 1996.
MANAGEMENT AGREEMENT - Concurrent with entering into the Agreement, the
Company entered into a management agreement with Gateway to manage and
operate Jacobs Field and to market and license all premium seating, as
defined. The term of the management agreement coincides with that of the
Agreement. Under the terms of the management agreement, the Company has
the exclusive right to receive all ballpark related revenues, as defined.
The annual management rights fee payable to Gateway is based upon a share
of net main scoreboard advertising revenue in excess of a base amount as
adjusted annually for increases in the Consumer Price Index plus a share
of net special event revenue, as defined in the management agreement. The
Company's management rights fee expense was $230, $193 and $79 for the
years ended December 31, 1998, 1997 and 1996, respectively.
Pursuant to the management agreement, the Company is required to market
and license all premium seating, as defined. Funds collected from premium
seating are remitted to a trustee to the extent of certain portions of
Gateway's debt service obligations. The Company is entitled to revenues in
excess of the debt service obligations, which cannot exceed $2,950 in a
term year, as defined in the management agreement. The Company acts in the
capacity of an agent in regards to the collection of these funds and,
accordingly, has reflected only that amount in excess of Gateway's debt
service obligations as revenue in the accompanying consolidated and
combined statements of operations. The total funds collected and remitted
to the trustee in 1998, 1997 and 1996 in connection with the 1998, 1997
and 1996 baseball seasons were $2,505, $2,505 and $2,507, respectively.
Included in other assets at December 31, 1998 and 1997 are deposits for
long-term club seat rentals totaling $1,753 and $1,298, respectively,
representing restricted funds that will be applied against the final year
payment under the related club seat license agreement.
F-13
<PAGE> 42
NAMING RIGHTS AGREEMENT - The Company and Richard E. Jacobs are parties to
an agreement with Gateway for the naming rights to the baseball facility.
The term of the naming rights agreement coincides with that of the
Agreement. Under the terms of the naming rights agreement, the parties are
able to change the name of the facility throughout the term of the
agreement and have the exclusive merchandising and use rights for the
commercial exploitation of the baseball facility name. Richard E. Jacobs
has assigned to the Company all of his rights under the naming rights
agreement and any future revenue generated from the sale or marketing of
the baseball facility name. The Company is required to make annual
payments to Gateway of $400 through 2003 and $989 thereafter through 2013.
The payments are to be made from premium seating revenue proceeds. The
Company has recognized expense on a straight-line basis over the term of
the agreement.
RETAIL, WAREHOUSE SPACE AND SPRING TRAINING FACILITIES - The Company has
entered into various agreements to lease retail, warehouse space and
spring training facilities. Rental expense under the provisions of these
agreements was $794, $970 and $403 inclusive of rental expense to related
parties of $506, $554 and $213, for the years ended December 31, 1998,
1997 and 1996, respectively. Additionally, the Company shares advertising,
ticket, concession and parking revenues with the City of Winter Haven,
Florida, for the use of its spring training facilities.
Future minimum annual commitments under the retail and warehouse space
leases, the spring training facilities lease and miscellaneous other
leases are as follows:
<TABLE>
<CAPTION>
RELATED
THIRD-PARTY PARTY
LEASES LEASES TOTAL
<S> <C> <C> <C>
1999 $ 848 $ 326 $ 1,174
2000 613 326 939
2001 415 326 741
2002 186 267 453
2003 157 262 419
Thereafter 311 655 966
--------- --------- ---------
Total $ 2,530 $ 2,162 $ 4,692
========= ========= =========
</TABLE>
11. CONCESSION AND CATERING AGREEMENTS
The Company and Cleveland Sportservice, Inc. ("Sportservice") have a
concession agreement granting Sportservice the exclusive rights to manage
and operate certain Jacobs Field food and beverage concession facilities.
The Company and D.B. Kaplan's Delicatessen Limited Partnership II ("Levy")
have an agreement, whereby Levy provides certain other food, beverage and
catering services at Jacobs Field. Pursuant to the terms of the concession
and catering agreements, the Company receives as a commission certain
percentages of food and beverage concession and catering sales at Jacobs
Field. In addition, the Company receives a percentage of the Sportservice
and Levy fiscal year net profits earned at Jacobs Field, as defined.
12. BENEFIT PLANS
MAJOR LEAGUE BASEBALL PLAYERS' BENEFIT PLAN - The Company's major league
baseball players and coaches are covered under the Major League Baseball
Players' Benefit Plan which is administered by the MLCF and represents a
multiemployer defined benefit plan. Payments to the Players' Benefit Plan
are made out of proceeds received by the MLCF (see Note 4). The Company's
share of the contribution to the plan was $2,452, $2,429 and $2,429 in
1998, 1997 and 1996, respectively.
MAJOR LEAGUE BASEBALL PENSION PLAN FOR NON-UNIFORMED PERSONNEL - The
Company also participates in the Major League Baseball Pension Plan for
Non-Uniformed Personnel, which is administered by the Office of the
Commissioner of Baseball. The benefits are based on years of service and
the employee's compensation during the last five years of employment. The
plan is a single-employer defined benefit plan which covers substantially
all employees of the Company exclusive of major league players and
coaches.
At December 31, 1998, the Company adopted Statement of Financial
Accounting Standards No. 132, "Employers' Disclosure About Pensions and
Other Postretirement Benefits." This statement revises the disclosures
about pension and other postretirement benefit plans but does not change
the way obligations or expense are measured or recognized in the financial
statements. Disclosures for prior periods have been restated to conform to
the requirements of this statement.
F-14
<PAGE> 43
Significant assumptions used in the non-uniformed plan actuarial valuation
were as follows:
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Discount rate 6.75% 7.00% 7.50%
Expected rate of increase in compensation 5.50% 5.50% 5.50%
Expected long-term rate of return on assets 9.00% 9.00% 9.00%
</TABLE>
Net periodic pension costs for the non-uniformed plan include the
following:
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Service cost-benefits earned during the period $ 711 $ 570 $ 469
Interest cost on projected benefit obligation 354 283 265
Return on assets 203 (529) (257)
Amortization and deferral of gains and losses (425) 325 67
--------- --------- ---------
Net periodic pension cost $ 843 $ 649 $ 544
========= ========= =========
</TABLE>
The following table sets forth the changes in the benefit obligation and
the fair value of plan assets for 1998 and 1997:
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Change in benefit obligation:
Benefit obligation at beginning of year $ 5,039 $ 3,751
Service cost 711 570
Interest cost 354 283
Actuarial losses (gains) 381 546
Benefits paid (107) (111)
--------- ---------
Benefit obligation at end of year $ 6,378 $ 5,039
========= =========
Change in plan assets:
Fair value of plan assets at beginning of year $ 3,043 $ 2,431
Actual return on plan assets (203) 529
Company contributions 359 194
Benefits paid (107) (111)
--------- ---------
Fair value of plan assets at end of year $ 3,092 $ 3,043
========= =========
Funded status of the plan (underfunded) $ (3,286) $ (1,996)
Unrecognized net actuarial losses (gains) 1,156 343
Unrecognized transition obligation 6 7
Unrecognized prior service cost 58 64
--------- ---------
Accrued benefit cost $ (2,066) $ (1,582)
========= =========
</TABLE>
DEFERRED COMPENSATION PLANS - The Company has nonqualified deferred
compensation programs which permit certain current and former players and
employees to annually elect (via individual contracts) to defer a portion
of their compensation, on a pre-tax basis. Certain amounts under deferred
compensation contracts earn a guaranteed rate of return while other
amounts deferred earn variable rates of return consistent with certain
mutual fund indices (see Note 2).
To assist in the funding of these plans, commencing in 1996, the Company
purchased partnership-owned annuity contracts and shares of mutual funds
which are consistent with the indices that certain of the contracts
specify. The cash surrender value of these policies and the market value
of the mutual fund shares included in non-current "other assets" totaled
$11,725 and $5,966 at December 31, 1998 and 1997, respectively, and $2,100
in prepaid expenses and other current assets at December 31, 1997. During
1997 and 1996, gains and losses on investments directly offset the
deferred compensation liability. In accordance with EITF 97-14,
"Accounting for Deferred Compensation Arrangements Where Amounts Earned
are Held in a Rabbi Trust and Invested," in 1998, the increases in the
value of the mutual funds held in rabbi trusts have been included in
interest income and the corresponding increase to the liability has been
recognized as compensation expense.
F-15
<PAGE> 44
13. STOCK OPTION PLAN
The Company has established a long-term incentive plan (stock option plan)
for the purpose of attracting, 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 of such options were issued at an exercise
price of $15.00, the initial public offering price per share. The options
will vest in three equal annual increments beginning one year after the
date of grant and will expire ten years after the date of grant.
Since the Offering, options to purchase 29,150 common shares were
forfeited. As of December 31, 1998, options to purchase 265,200 common
shares were outstanding. An additional 434,800 common shares were reserved
for issuance under the Company's long-term incentive plan.
Pro forma information relating to net income and earnings per share is
required by Statement of Financial Accounting Standards No. 123,
"Accounting for Stock Based Compensation," and has been determined as if
the Company had accounted for its employee stock options under the fair
value method of that statement. The fair value of these options was
estimated at the date of grant using a Black-Scholes option pricing model
with the following assumptions:
<TABLE>
<S> <C>
Risk free interest rate 6.0%
Expected lives 5 years
Expected volatility 10%
Pro forma net income $6,863
Pro forma net income per share $ 1.07
</TABLE>
14. LEGAL MATTERS
During 1987 and 1988, two Arbitrators (Roberts and Nicolau) ruled that the
26 Major League Clubs (the "Clubs"), including the Company, violated
Article XVIII(H) of the Basic Agreement with the Major League Baseball
Players Association (the "Basic Agreement") by acting in concert with
respect to those players who became free agents following the 1985 and
1986 seasons. A similar grievance alleging violation of Article XVIII(H)
and certain other provisions of the Basic Agreement was filed by the Major
League Baseball Players Association ("MLBPA") with respect to players who
became free agents following the 1987 season. No further grievances were
filed by the MLBPA.
In August 1989, Arbitrator Roberts issued an interim award of $10,528,
representing his judgment of the aggregate amount by which salaries of
approximately 140 players were reduced in 1986 by reason of the contract
violation following the 1985 season. On October 31, 1989, the MLCF, on
behalf of the Clubs, deposited $10,528 in an interest-bearing escrow
account, to be distributed in accordance with Arbitrator Roberts'
instructions in a subsequent phase of the remedial proceedings. The
Company's portion of the deposit was $408.
In December 1990, the owners of the Clubs voted in favor of settling all
collusion claims for the sum of $280 million, plus the grant of "second
look" free agency rights to a group of 16 players, none of whom were
employed by the Company. For the years ended December 31, 1998, 1997 and
1996, the escrow deposit earned interest of $13,656, $15,847 and $17,284,
respectively. During the years ended December 31, 1998 and 1996, there
were no distributions to the players. For the year ended December 31,
1997, $81,230 was distributed to the players. The remaining balance will
be distributed in subsequent years.
The Company funded its remaining liability under the settlement of $10,361
in 1991 through reductions in the distributions from the MLCF and prior
year charges against operations. The funds withheld by the MLCF have been
classified as "deposit for grievance settlement" in the accompanying
consolidated and combined balance sheets. The balance at December 31, 1998
and 1997 represents the net effect of the Company's share of interest
earned on the deposit and distributions made to players since 1991. The
interest and distributions made have been treated as non-cash activities
and have not been reflected in the consolidated and combined statements of
operations.
F-16
<PAGE> 45
The Company is involved in various other legal proceedings and claims
which are incidental to its business. Management believes that they have
meritorious defenses and will vigorously defend themselves in these
actions. Although the ultimate disposition of these proceedings is not
presently determinable, management does not believe that such proceedings
would have a material adverse effect upon the financial condition, results
of operations or cash flows of the Company.
15. CONTINGENT LIABILITIES, COMMITMENTS AND OTHER CONTRACTS
Because the American League and MLB are non-profit associations, the
Indians and other members of MLB are generally jointly and severally
liable for the debts and obligations of the associations. Any failure of
other members of MLB to pay their pro rata share of any such debt or
obligation could adversely affect the Company.
Under the terms of working agreements, the Company is required to
reimburse various minor league clubs for certain expenses. Payments under
these agreements amounted to $1,130, $1,227 and $1,071, for the years
ended December 31, 1998, 1997 and 1996, respectively.
Employment contracts provide for, among other things, aggregate
compensation in future years as follows:
<TABLE>
<S> <C>
1999 $ 70,780
2000 51,036
2001 39,599
2002 28,527
2003 750
----------
Total $ 190,692
==========
</TABLE>
Certain player contracts require payments that are contingent upon playing
performance, length of employment with the Indians or attendance at a
college prescribed by the College Scholarship Plan. Payments under these
contracts amounted to $847, $1,664 and $1,467 for the years ended December
31, 1998, 1997 and 1996, respectively. The Company is contingently liable
for payments under these plans aggregating $19,952 at December 31, 1998
and $21,872 at December 31, 1997. These amounts, which are not included in
the accompanying consolidated and combined financial statements, relate to
contracts in effect at December 31, 1998, or entered into thereafter
through February 25, 1999, the date of the auditors' report. The contracts
are contingent upon continued employment with the Company, but do
guarantee payment in the event a player is unable to play due to injury or
death.
The Company has obtained disability insurance policies for substantially
all of its players under multi-year contracts. In the event of injuries
sustained resulting in lost services as defined in the policies, the
policies provide for payment to the Company of a portion of the player's
salary for the remaining term of the contract or until the player can
resume playing.
The Company is substantially self-insured with respect to workers'
compensation in the State of Ohio and, in connection therewith, maintains
a $375 standby letter of credit with a bank in order to satisfy state
deposit requirements. The current letter of credit expires May 1, 1999.
16. RELATED PARTY TRANSACTIONS
Included in administrative and general expense for the years ended
December 31, 1998, 1997 and 1996 are allocations of legal and accounting
expenses from an affiliate of $267, $267 and $335, respectively. Included
in ballpark operations expense during 1996 are $523 of payroll and related
taxes for game day labor services from an affiliate. Included in deferred
lease costs at December 31, 1998 and 1997 are $1,423 of legal and
consulting charges from an affiliate for costs incurred in connection with
the development of Jacobs Field.
F-17
<PAGE> 46
17. COLLECTIVE BARGAINING AGREEMENT
In the Fall of 1996, MLB Owners and the MLBPA reached an agreement with
respect to a five-year Collective Bargaining Agreement. The agreement
became effective on January 1, 1997 and, with respect to certain
provisions, was retroactive to the 1996 season. The agreement expires on
the later of October 31, 2000 or the day following the last game of the
2000 World Series; except that, the MLBPA has the unilateral option to
extend the agreement to October 31, 2001 or the day after the last game of
the 2001 World Series, whichever is later. The Collective Bargaining
Agreement introduced a new revenue sharing system and implemented for the
first time a luxury tax on payrolls.
REVENUE SHARING - Member clubs of MLB participate in a revenue sharing
system. The new revenue sharing system is being phased in over a five-year
period and will be fully implemented in the 2000 season. Under the system,
each club must contribute a portion, 16% in 1998 and 12% in 1997 and 1996,
of its net local revenue to a revenue sharing pool. The revenue sharing
rate will be 17% in 1999 and 20% in 2000 and thereafter. Net local revenue
is defined in the Collective Bargaining Agreement. Once the pool is
accumulated, it is re-distributed to the clubs on a basis defined in the
Collective Bargaining Agreement that disproportionately benefits clubs
with below average revenue.
LUXURY TAX - The luxury tax became effective at the beginning of the 1997
season and is only assessed on the five clubs with the highest actual
payroll, as defined, above a specified threshold minimum for that season.
The threshold minimum was $70,277 for 1998, $55,607 for 1997 and will be
$75,266 for 1999. If more than five teams have payrolls that exceed the
threshold, the threshold is increased so that only five teams are subject
to the tax. The luxury tax rate for 1998 and 1997 was 35% and for 1999
will be 34%. There is no luxury tax imposed in the 2000 season. The amount
that is taxed is the difference between a club's total actual payroll and
the threshold minimum, as adjusted if necessary. In 1998 and 1997, the
Indians were assessed $24 and $2,065, respectively, pursuant to the luxury
tax and have included this amount in major league team expenses in the
accompanying consolidated and combined statements of operations.
18. POST-SEASON
During 1998, 1997 and 1996, the Indians advanced to post-season play and
participated in ten, eighteen and four post-season games, respectively.
The following table sets forth the revenues and expenses relating to the
post-season activity. These amounts do not include a provision for revenue
sharing related to post-season games.
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
REVENUES:
Net ticket sales $ 5,305 $ 6,847 $ 695
Local radio and television 403 515 108
Concession and catering 1,113 2,114 446
Private suite rentals 164 198 17
Merchandise 792 2,507 282
League Championship Series distribution 300 300 --
Other 633 570 385
--------- --------- ---------
Total revenues 8,710 13,051 1,933
--------- --------- ---------
OPERATING EXPENSES:
Major league team 582 1,054 190
Ballpark operations 1,346 1,901 518
Cost of merchandise sold 551 1,421 224
Administrative and general 516 1,417 106
Advertising and promotion 341 459 271
--------- --------- ---------
Total operating expenses 3,336 6,252 1,309
--------- --------- ---------
$ 5,374 $ 6,799 $ 624
========= ========= =========
</TABLE>
F-18
<PAGE> 47
19. QUARTERLY RESULTS OF OPERATIONS (unaudited)
The following is a summary of the quarterly results of operations for the
years ended December 31, 1998 and 1997:
<TABLE>
<CAPTION>
THE PREDECESSOR GROUP THE COMPANY
----------------------- -----------------------------------------
JANUARY 1 APRIL 1 JUNE 9 JULY 1 OCTOBER 1
TO TO TO TO TO
MARCH 31, JUNE 8, JUNE 30, SEPTEMBER 30, DECEMBER 31,
1998 1998 1998 1998 1998
<S> <C> <C> <C> <C> <C>
Revenues $ 3,035 $ 41,474 $ 18,553 $ 61,681 $ 19,809
Operating expenses 12,794 41,151 13,247 49,912 14,732
--------- -------- --------- --------- ---------
Operating income (loss) (9,759) 323 5,306 11,769 5,077
Other income (expense) (317) 95 30 (237) 1,633
--------- -------- --------- --------- ---------
Income (loss) before minority
interest and provision for
income taxes (10,076) 418 5,336 11,532 6,710
Minority interest -- -- 2,615 5,650 3,288
Provision for income taxes -- -- 915 2,700 1,225
--------- -------- --------- --------- ---------
Net income (loss) $ (10,076) $ 418 $ 1,806 $ 3,182 $ 2,197
========= ======== ========= ========= =========
Net income per share n/a n/a $ .28 $ .50 $ .34
========= ========= =========
<CAPTION>
THE PREDECESSOR GROUP - THREE MONTHS ENDED
--------------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
1997 1997 1997 1997
<S> <C> <C> <C> <C>
Revenues $ 2,999 $ 52,700 $ 57,559 $ 26,772
Operating expenses 11,531 50,854 48,968 20,460
-------- --------- --------- ---------
Operating income (loss) (8,532) 1,846 8,591 6,312
Other income 802 676 583 12,292
-------- --------- --------- ---------
Net income (loss) $ (7,730) $ 2,522 $ 9,174 $ 18,604
======== ========= ========= =========
</TABLE>
The Company's operations are seasonal, with the MLB regular season
beginning in late March or early April. Accordingly, 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 the scheduling of post-season playoffs in
any given year, revenues and expenses associated with post-season will generally
be recognized in the third and fourth quarters depending upon when actual games
are played.
Revenues and operating expenses declined from the fourth quarter of 1997 to
the fourth quarter of 1998 due primarily to the team's participation in 17
fourth quarter post-season games in 1997 as compared to eight fourth quarter
post-season games in 1998. The decrease in other income from the fourth quarter
of 1997 to the fourth quarter of 1998 was primarily due to the recognition of
$9,286 in expansion proceeds and the recognition of a gain on a player
transaction of $2,572 in 1997.
F-19
<PAGE> 1
Exhibit 10.23
September 25, 1998
Mr. Daniel J. O'Dowd
425 Britannia Parkway
Avon Lake, Ohio 44012
Dear Dan:
The purpose of this letter is to set forth our mutual understanding and
agreement concerning the amendment of your Employment Agreement with the
Cleveland Indians Baseball Company Limited Partnership (the "Club") dated as of
February 5, 1998 (the "Employment Agreement"). Pursuant to Paragraph 7 of the
Employment Agreement you have agreed that the Club would not grant permission to
any other Major League Club to discuss with you employment opportunities with
such other Major League Club. However, the Baltimore Orioles have requested
permission to interview you as a candidate for the position of general manager
and we understand that you would like to pursue this opportunity.
The Club is willing to grant permission to the Baltimore Orioles only if
you are willing to agree to amend your contract with the Club to provide the
Club with the flexibility that it needs to maintain continuity and stability in
the Baseball Operations Department. Therefore, the Club will grant permission to
the Baltimore Orioles in consideration for your agreement to amend your
Employment Agreement with the Club as follows:
Paragraph 1 of the Employment Agreement shall be deleted and replaced with
the following new Paragraph 1:
(a) Subject to the terms and conditions set forth below, the Club
agrees to employ you as Vice President of the Club, for the
period commencing on January 1, 1998 and ending December 31,
1999, subject to subsections (b), (c) and (d) below.
(b) The Club shall have the unilateral option to extend the term
of this Agreement through December 31, 2000 at a salary of
$350,000.00 for 2000. Such option may be exercised by written
notice personally delivered or mailed to the Club's offices on
or before November 15, 1999.
<PAGE> 2
Mr. Daniel J. O'Dowd
September 25, 1998
Page 2
(c) The Club shall have the unilateral option to extend the term
of this Agreement through December 31, 2001 at a salary of
$375,000.00 for 2001. Such option may be exercised by written
notice personally delivered or mailed to the Club's offices on
or before November 15, 2000.
(d) The Club shall have the unilateral option to extend the term
of this Agreement through December 31, 2002 at a salary of
$400,000.00 for 2002. Such option may be exercised by written
notice personally delivered or mailed to the Club's offices on
or before November 15, 2001.
(e) Your salary shall be payable each calendar year in twenty-four
equal semi-monthly installments.
Paragraph 2(a) shall be deleted and replaced with the following new Paragraph
2(a)"
(a) Salary. Your salary as Vice President during the period of your
employment under this Agreement shall be as follows, less the
amounts deferred pursuant to paragraph (b) of this Section 2:
January 1, 1998 to December 31, 1998 at the rate of $300,000.00 per
year.
January 1, 1999 to December 31, 1999 - $240,000
Option Years
January 1, 2000 to December 31, 2000 - $350,000
January 1, 2001 to December 31, 2001 - $375,000
January 1, 2002 to December 31, 2002 - $400,000
Paragraph 3, relating to Life Insurance, shall be deleted and replaced
with the following new Paragraph 3:
3. JOB TITLE. The Club retains the right to amend your job
description and title at any time; provided that during the term of this
Agreement that you shall retain the title of Vice-President.
Paragraph 7 shall be deleted and replaced with the following new Paragraph
7:
<PAGE> 3
Mr. Daniel J. O'Dowd
September 25, 1998
Page 3
7. JOB DESCRIPTION. During the term of your employment, you shall
faithfully perform the duties and have the responsibilities of
Vice-President of the Club, subject to the control and direction of
the President and Chief Executive Officer, if any, the Chairman of
the Board, the Board of Directors, the Executive Vice President and
General Manager of the Club and its General Partner. You agree to
devote your full time, energies, talent, and best efforts
exclusively to your duties as Vice-President and to such other
duties as may be assigned to you as provided above. The Club agrees
that it will grant permission to another Major League Club to
discuss other employment opportunities with you during the term of
this Agreement and in the event that you elect to accept another
employment opportunity any additional options to extend this
Agreement shall terminate and the all of the Club's obligations,
including the obligation to pay the salary and other benefits
described herein, shall terminate as of the date your employment
with the Club terminates.
All other terms and conditions of your Employment Agreement, including but
not limited to, your obligation to maintain the confidentiality of all business
information of the Club which you acquire during your employment, will remain in
full force and effect.
Please indicate your acceptance 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: Its General Partner,
Cleveland Indians Baseball
Company, Inc.
By: /s/ Richard E. Jacobs
-----------------------
Richard E. Jacobs
ACCEPTED:
/s/ Daniel O'Dowd
- -----------------
Date: 9-25-98
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY INFORMATION EXTRACTED FROM THE CONSOLIDATED
FINANCIAL STATEMENTS OF CLEVELAND INDIANS BASEBALL COMPANY, INC. FOR THE PERIOD
JUNE 9, 1998 TO DECEMBER 31, 1998 AND THE COMBINED FINANCIAL STATEMENTS OF
CLEVELAND INDIANS BASEBALL COMPANY PREDECESSOR GROUP FOR THE PERIOD JANUARY 1,
1998 TO JUNE 8, 1998 AND FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JUN-09-1998
<PERIOD-END> DEC-31-1998
<CASH> 39,283
<SECURITIES> 17,070
<RECEIVABLES> 9,421
<ALLOWANCES> 0
<INVENTORY> 1,207
<CURRENT-ASSETS> 79,539
<PP&E> 8,969
<DEPRECIATION> 3,387
<TOTAL-ASSETS> 122,023
<CURRENT-LIABILITIES> 70,577
<BONDS> 35,500
0
0
<COMMON> 60,925
<OTHER-SE> (67,430)
<TOTAL-LIABILITY-AND-EQUITY> 122,023
<SALES> 0
<TOTAL-REVENUES> 100,043
<CGS> 0
<TOTAL-COSTS> 77,891
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,490
<INCOME-PRETAX> 12,025
<INCOME-TAX> 4,840
<INCOME-CONTINUING> 7,185
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7,185
<EPS-PRIMARY> 1.12
<EPS-DILUTED> 0
</TABLE>
