1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 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.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
OHIO 34-1861303
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
2401 ONTARIO STREET, CLEVELAND, OHIO 44115
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code 216-420-4200
Former Name, Former Address and Former Fiscal Year, if Changed Since Last
Report.
Indicate by checkmark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
----- -----
The number of shares outstanding of each of the issuer's classes of
common stock, as of November 5, 1998 was as follows:
CLASS A COMMON SHARES 4,139,376 SHARES
CLASS B COMMON SHARES 2,283,957 SHARES
2
INDEX*
PART I. FINANCIAL INFORMATION
PAGE
----
ITEM 1. CONDENSED CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS:
a) Condensed Consolidated and Combined Balance Sheets as
of September 30, 1998 (unaudited) and December 31, 1997 3
b) Unaudited Condensed Consolidated and Combined
Statements of Income for the Company for the three
months ended September 30, 1998 and for the
Predecessor Group for the three months ended September
30, 1997 4
c) Unaudited Condensed Consolidated and Combined
Statements of Income for the Company for the period
from June 9, 1998 to September 30, 1998 and for the
Predecessor Group for the period from January 1, 1998
to June 8, 1998 and for the nine months ended September
30, 1997 5
d) Unaudited Condensed Consolidated and Combined
Statements of Cash Flows for the Company for the
period from June 9, 1998 to September 30, 1998 and
for the Predecessor Group for the period from January
1, 1998 to June 8, 1998 and for the nine months ended
September 30, 1997 6
e) Notes to Unaudited Condensed Consolidated and Combined
Financial Statements 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION 9
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 16
Signatures 17
* Items not listed are inapplicable
3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CLEVELAND INDIANS BASEBALL COMPANY, INC. AND
CLEVELAND INDIANS PREDECESSOR GROUP
CONDENSED CONSOLIDATED AND COMBINED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
THE
THE PREDECESSOR
COMPANY GROUP
------- -----
SEPTEMBER 30, DECEMBER 31,
1998 1997
(UNAUDITED)
CURRENT ASSETS:
Cash and cash equivalents $ 2,027 $ 3,732
Investments 37,547 57,909
Receivables and accrued income 22,701 7,867
Merchandise inventories 1,625 1,568
Prepaid expenses and other current assets 3,126 5,040
Deposit for grievance settlement 9,480 9,079
-------- --------
Total current assets 76,506 85,195
FIXED ASSETS:
Leasehold improvements, furniture and fixtures
and other equipment, at cost 9,071 7,685
Less accumulated depreciation and amortization 3,585 2,757
-------- --------
Total fixed assets, net 5,486 4,928
PREPAID SIGNING BONUSES AND PLAYER
CONTRACTS (Net of accumulated amortization) 10,428 10,743
INTANGIBLE ASSETS (Net of accumulated amortization) 10,582 11,048
OTHER ASSETS 11,611 6,238
-------- --------
TOTAL $114,613 $118,152
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Accounts payable and accrued liabilities $ 19,577 $ 16,941
Deferred revenue 34,068 41,375
Current portion of long-term debt 412 7,496
Reserve for players' grievance damages 9,480 9,079
Income taxes payable 2,700 --
-------- --------
Total current liabilities 66,237 74,891
LONG-TERM LIABILITIES 56,331 45,811
COMMITMENTS AND CONTINGENCIES
MINORITY INTEREST 8,265 --
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) (81,845) --
Owners' equity (deficit) -- (2,550)
-------- --------
Total shareholders' equity (deficit) (16,220) (2,550)
-------- --------
TOTAL $114,613 $118,152
======== ========
See notes to condensed consolidated and combined financial statements.
-3-
4
CLEVELAND INDIANS BASEBALL COMPANY, INC. AND
CLEVELAND INDIANS PREDECESSOR GROUP
CONDENSED CONSOLIDATED AND COMBINED STATEMENTS OF INCOME
(UNAUDITED AND IN THOUSANDS, EXCEPT SHARE DATA)
THE
PREDECESSOR
THE COMPANY GROUP
----------- -----------
THREE MONTHS ENDED
SEPTEMBER 30,
1998 1997
REVENUES:
Net ticket sales $ 27,168 $25,863
Local radio and television 9,051 8,237
Concession and catering 7,792 7,655
Private suite and club seat rentals 4,524 4,319
Advertising and promotion 4,767 4,588
Merchandise 5,172 4,727
Major Leagues Central Fund 5,438 3,810
Other (primarily Major League Baseball Properties) 925 1,218
Post-season 1,792 164
Provision for revenue sharing (4,948) (3,022)
---------- -------
Total revenues 61,681 57,559
---------- -------
OPERATING EXPENSES:
Major league team 28,570 31,118
Player development 3,208 3,012
Ballpark operations 4,760 3,916
Cost of merchandise sold 3,591 3,500
Administrative and general 2,783 2,594
Major Leagues Central Fund 1,543 1,841
Advertising and promotion 765 826
Post-season 1,813 73
Amortization of signing bonuses and player contracts 2,102 1,659
Depreciation and amortization 777 429
---------- -------
Total operating expenses 49,912 48,968
---------- -------
OPERATING INCOME 11,769 8,591
OTHER INCOME (EXPENSE):
Interest income:
Affiliate -- 623
Other 536 652
Interest expense (783) (712)
Gain on player transactions 10 20
---------- -------
INCOME BEFORE MINORITY INTEREST AND
PROVISION FOR INCOME TAXES 11,532 9,174
MINORITY INTEREST (5,650) --
PROVISION FOR INCOME TAXES (2,700) --
---------- -------
NET INCOME $ 3,182 $ 9,174
========== =======
BASIC AND DILUTED EARNINGS PER SHARE $ .50
==========
WEIGHTED AVERAGE NUMBER OF COMMON SHARES 6,423,333
==========
See notes to condensed consolidated and combined financial statements.
-4-
5
CLEVELAND INDIANS BASEBALL COMPANY, INC. AND
CLEVELAND INDIANS PREDECESSOR GROUP
CONDENSED CONSOLIDATED AND COMBINED STATEMENTS OF INCOME
(UNAUDITED AND IN THOUSANDS, EXCEPT SHARE DATA)
THE COMPANY THE PREDECESSOR GROUP
----------- ---------------------
PERIOD JUNE 9, PERIOD NINE MONTHS
1998 TO JANUARY 1, ENDED
SEPTEMBER 30, 1998 TO SEPTEMBER 30,
1998 JUNE 8, 1998 1997
REVENUES:
Net ticket sales $ 36,581 $ 19,248 $ 49,279
Local radio and television 10,869 7,311 17,014
Concession and catering 10,525 5,292 14,138
Private suite and club seat rentals 6,162 3,160 8,668
Advertising and promotion 6,470 3,284 8,754
Merchandise 6,911 5,540 11,178
Major Leagues Central Fund 6,140 2,206 7,119
Other (primarily Major League Baseball Properties) 1,191 1,509 2,987
Post-season 1,792 -- 164
Provision for revenue sharing (6,409) (3,041) (6,043)
---------- -------- ---------
Total revenues 80,232 44,509 113,258
---------- -------- ---------
OPERATING EXPENSES:
Major league team 36,104 28,380 63,842
Player development 4,088 5,241 8,477
Ballpark operations 6,314 4,969 10,142
Cost of merchandise sold 4,675 4,144 8,741
Administrative and general 3,699 5,344 7,982
Major Leagues Central Fund 1,946 1,569 4,312
Advertising and promotion 1,024 1,741 3,221
Post-season 1,813 -- 73
Amortization of signing bonuses and player contracts 2,597 1,779 3,364
Depreciation and amortization 898 778 1,199
---------- -------- ---------
Total operating expenses 63,158 53,945 111,353
---------- -------- ---------
OPERATING INCOME (LOSS) 17,074 (9,436) 1,905
OTHER INCOME (EXPENSE):
Interest income:
Affiliate -- 595 1,400
Other 735 1,978 2,123
Interest expense (952) (1,191) (1,596)
Gain (loss) on player transactions 10 (1,604) 134
---------- -------- ---------
INCOME (LOSS) BEFORE MINORITY INTEREST AND
PROVISION FOR INCOME TAXES 16,867 (9,658) 3,966
MINORITY INTEREST (8,265) -- --
PROVISION FOR INCOME TAXES (3,615) -- --
---------- -------- ---------
NET INCOME (LOSS) $ 4,987 $ (9,658) $ 3,966
========== ======== =========
BASIC AND DILUTED EARNINGS PER SHARE $ .78
==========
WEIGHTED AVERAGE NUMBER OF COMMON SHARES 6,423,333
==========
See notes to condensed consolidated and combined financial statements.
-5-
6
CLEVELAND INDIANS BASEBALL COMPANY, INC. AND
CLEVELAND INDIANS PREDECESSOR GROUP
CONDENSED CONSOLIDATED AND COMBINED STATEMENTS OF CASH FLOWS
(UNAUDITED AND IN THOUSANDS)
THE COMPANY THE PREDECESSOR GROUP
----------- ---------------------
PERIOD JUNE 9, PERIOD NINE MONTHS
1998 TO, JANUARY 1, ENDED
SEPTEMBER 30, 1998 TO SEPTEMBER 30,
1998 JUNE 8, 1998 1997
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 4,987 $ (9,658) $ 3,966
Adjustments to reconcile net
income (loss) to net cash provided
by (used in) operating activities:
Minority interest 8,265 -- --
Depreciation and amortization 3,495 2,557 4,563
(Gain) loss on player transactions (10) 1,604 (134)
Increase in receivables and
accrued income (11,899) (2,933) (14,177)
(Increase) decrease in merchandise
inventories 281 (338) (569)
(Increase) decrease in prepaid
expenses and other current assets 8 (194) (194)
(Increase) decrease in other assets 1,827 (497) 1,207
Increase in accounts payable and
accrued liabilities 2,450 4,592 6,178
Increase (decrease) in deferred revenue (14,965) 7,432 (11,978)
Increase in income taxes payable 2,700 -- --
Increase in deferred compensation 1,791 635 4,285
Increase (decrease)in long-term
liabilities (152) 407 225
-------- -------- --------
Net cash provided by (used in)
operating activities (1,222) 3,607 (6,628)
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Maturities of short-term investments, net 5,624 14,300 20,022
Purchase of long-term investments (847) (1,156) (3,500)
Expenditures for cash surrender
value of life insurance -- -- (394)
Proceeds from sale of player contracts 332 413 146
Proceeds from expansion teams -- -- 2,858
Capital expenditures (524) (1,062) (1,440)
Expenditures for the purchase of
player contracts and signing bonuses (3,271) (4,007) (4,177)
(Increase) decrease in loan
to general partner -- 35,500 (12,153)
Acquisition of partnership interest (55,800) -- --
-------- -------- --------
Net cash provided by (used in)
investing activities (54,486) 43,988 1,362
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from Major League Baseball
Revolving Credit Agreement -- -- 12,153
Payment of debt issuance costs -- (192) (96)
Net proceeds from sale of common stock 55,800 -- --
Distributions to general partner -- (49,200) (4,657)
-------- -------- --------
Net cash provided by (used in)
financing activities 55,800 (49,392) 7,400
-------- -------- --------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 92 (1,797) 2,134
CASH AND CASH EQUIVALENTS, BEGINNING
OF PERIOD 1,935 3,732 654
-------- -------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 2,027 $ 1,935 $ 2,788
======== ======== ========
See notes to condensed consolidated and combined financial statements.
-6-
7
CLEVELAND INDIANS BASEBALL COMPANY, INC.
AND CLEVELAND INDIANS PREDECESSOR GROUP
NOTES TO CONDENSED CONSOLIDATED AND COMBINED
FINANCIAL STATEMENTS
(UNAUDITED AND IN THOUSANDS, EXCEPT SHARE DATA)
1. ORGANIZATION AND BASIS OF PRESENTATION
Cleveland Indians Baseball Company, Inc., an Ohio corporation (the
"Company"), was formed to acquire the 51% sole general partnership
interest of, and controlling interest in, Cleveland Indians Baseball
Company Limited Partnership, an Ohio limited partnership (the
"Operating Partnership"). The historical financial information prior to
June 9, 1998 includes the combined operations of Cleveland Indians
Baseball Company Limited Partnership and Ballpark Management Company
(collectively, the "Predecessor Group" or the "Predecessor").
On June 9, 1998, the Company commenced operations after completing an
initial public offering (the "Offering") of 4,000,000 Class A Common
Shares "common shares". The 4,000,000 common shares were issued at a
price per share of $15.00, generating gross proceeds of $60,000. The
aggregate proceeds to the Company, net of underwriters' discount were
approximately $55,800. The Company utilized these net proceeds to
purchase its 51% general partnership interest in the Operating
Partnership and to engage in the other transactions described below.
The following transactions occurred simultaneously with the completion
of the Offering (collectively, the "Formation Transactions"):
* The Company issued and sold 133,233 common shares to the
original shareholders and Martin J. Cleary at a purchase price
of $15.00 per share.
* Ballpark Management Company ("Ballpark Management") and MJC
Baseball, Inc. ("MJC") were merged with and into the Company.
* The Company contributed to the Operating Partnership all of
the assets, business, contract rights and liabilities held by
Ballpark Management immediately prior to the mergers in
exchange for partnership interests in the Operating
Partnership.
* Upon completion of the contribution described above, the
Company purchased additional general partnership interests
from Cleveland Baseball Company ("CBC") with the net proceeds
of the Offering. Upon completion of the purchase, the Company
became the sole general partner of the Operating Partnership
with a 51% interest in the Operating Partnership. Upon
completion of the sale of partnership interests, CBC converted
its remaining general partnership interest into a 49% limited
partnership interest in the Operating Partnership.
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's owners who continue as investors. The
accompanying combined financial statements for the Predecessor Group
have been presented on a combined basis due to common ownership and
management; therefore, its combined financial statements are presented
for comparative purposes. All significant intercompany balances and
transactions have been eliminated.
2. INTERIM FINANCIAL STATEMENTS
The accompanying interim financial statements are unaudited; however,
the financial statements have been presented as permitted by Form 10-Q
and do not include all of the disclosures required by generally
accepted accounting principles for complete financial statements. In
the opinion of management,
-7-
8
all adjustments (consisting solely of normal recurring matters)
necessary for a fair presentation of the financial statements for these
interim periods have been included. The results of operations for the
interim periods are not necessarily indicative of the results to be
obtained for the full fiscal year. These financial statements should be
read in conjunction with the Company's prospectus dated June 4, 1998,
and the combined financial statements and notes thereto of Cleveland
Indians Baseball Company Limited Partnership and Ballpark Management
Company included therein.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Revenue and Expense Recognition - Revenue from ticket sales is
recognized at the time the home game, to which such proceeds relate, is
played. Major league team expenses, principally player compensation,
are recorded as expense over the entire Major League Baseball regular
season.
Minority Interest - Minority interest relates to the interest in the
Operating Partnership that is not owned by the Company, which, at
September 30, 1998, amounted to 49%.
Income Taxes - The Company will be taxed on its taxable income at
applicable corporate rates commencing with the period ending December
31, 1998. As a result of the Offering, the Company has recorded
deferred tax assets of $3,800, net of valuation allowances, as of
September 30, 1998. These deferred tax assets have been credited to
additional paid-in capital.
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.
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, including the changes in equity from non-owner sources such as
unrealized gains on marketable securities. For the three months ended
September 30, 1998 and for the period June 9, 1998 through September
30, 1998, there were no material differences between net income and
comprehensive income.
4. MAJOR LEAGUE BASEBALL REVOLVING CREDIT AGREEMENT
In April 1998, the terms of the Company's revolving credit facility
were renegotiated. The new terms of the facility require interest only
payments, in addition to other fixed fees of $123 annually, through
April 17, 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 September 30, 1998 is reflected in long-term
liabilities. The interest rate on the facility based upon LIBOR plus
.35%, was 6.07% at September 30, 1998.
5. LONG-TERM INCENTIVE PLAN
The Company has established a long-term incentive 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 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.
As of September 30, 1998, the Company had granted options with respect
to 273,250 common shares and an additional 426,750 common shares were
reserved for issuance under the Company's long-term incentive plan.
-8-
9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
The following discussion should be read in conjunction with the financial
statements and notes thereto appearing elsewhere in this report.
OVERVIEW
Management's Discussion and Analysis of Results of Operations and
Financial Condition include certain forward-looking statements about the
Company's business, revenues, expenditures and capital requirements. In
addition, forward-looking statements may be included in various other Company
documents to be issued in the future and in various oral statements by Company
representatives to security analysts and investors from time to time. Any such
statements are subject to risks that could cause the actual results or needs to
vary materially. The risks and uncertainties associated with the forward-looking
information are discussed in detail in the Company's prospectus dated June 4,
1998.
Cleveland Indians Baseball Company, Inc., an Ohio corporation (the
"Company"), was formed to acquire the sole general partnership interest of, and
controlling interest in, Cleveland Indians Baseball Company Limited Partnership,
an Ohio limited partnership (the "Partnership"). The historical financial
information prior to June 9, 1998 includes the combined operations of Cleveland
Indians Baseball Company Limited Partnership and Ballpark Management Company
(collectively, the "Predecessor Group" or the "Predecessor"). The Company
commenced operations on June 9, 1998 after completing an initial public offering
of 4,000,000 common shares. For financial reporting purposes, the operations for
the nine-month period ended September 30, 1998 have been segregated between the
Predecessor Group and the Company. The Company has recorded operating income of
$17.1 million for the period June 9, 1998 through September 30, 1998 and the
Predecessor Group has recorded an operating loss of $9.4 million for the period
January 1 through June 8, 1998. For the period July 1, 1998 through September
30, 1998, the Company has recorded operating income of $11.8 million. The
Company recognizes the majority of its revenue as home games are played (i.e.
net ticket sales, concessions and catering, private suite and club seat 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
operations of the Company, the operations for the Predecessor Group and the
Company should be combined for the nine-month period ended September 30, 1998.
The Company derives substantially all of its revenue from (i) the sale
of tickets to home games, (ii) contracts with local broadcast organizations,
(iii) food and beverage concession sales, (iv) premium seating rents, (v)
advertising and promotional sales, (vi) merchandise sales and royalties, (vii)
its interest in the Major Leagues Central Fund, and (viii) parking and ancillary
baseball related revenues. If the Indians qualify for post-season playoffs,
incremental revenues will be earned from similar sources.
The Company's operations are seasonal, commencing with spring training
camp that opens in mid-February and ending the Major League Baseball ("MLB")
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 MLB season begins in late March or
early April, the Company's 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 the 1998 MLB regular season
schedule, the Company will recognize approximately one-half of its revenues in
the second quarter and the remainder in the third quarter. 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.
-9-
10
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 three-month and nine-month periods
ended September 30, 1998 with the three-month and nine-month periods ended
September 30, 1997.
REVENUES
Revenue from net ticket sales increased 5%, or $1.3 million, in the
three-month period ended September 30, 1998 and 13%, or $6.6 million, in the
nine-month period ended September 30, 1998 compared to the same periods in 1997.
The increase for the three-month period was primarily attributable to a 12%
increase in the average ticket price offset by a 6% decrease in paid attendance.
Paid attendance decreased as a result of three fewer regular season home events
played in the three-month period ended September 30, 1998 compared to the same
period in 1997, due to unfavorable weather conditions experienced in the second
quarter of 1997, which were rescheduled in the third quarter of 1997. The
increase for the nine-month period was primarily attributable to a 12% increase
in the average ticket price coupled with a 2% increase in paid attendance. Paid
attendance increased as a result of one more regular season home event played in
the nine-month period ended September 30, 1998 compared to the same period in
1997, which was due to one rain-out in 1997 that was not rescheduled. Exhibition
receipts decreased approximately $0.3 million for the nine-month period ended
September 30, 1998 due to one less exhibition event played in 1998 compared to
1997.
Local radio and television revenue increased 10% or $0.8 million in the
three-month period ended September 30, 1998 and 7%, or $1.2 million, in the
nine-month period ended September 30, 1998 compared to the same periods in 1997.
The increases in radio advertising revenue were attributable to increased rates
and expanded radio advertising inventory. For the three-month period ended
September 30, 1998, these increases were partially offset because of three
fewergames played in third quarter of 1998 compared to the third quarter of
1997. Local television revenues increased due to one more telecast, at the same
rate, in the three-month period ended September 30, 1998 compared to the same
period in 1997. For the nine-month period ended September 30, 1998, there were
four more telecasts compared to the same period in 1997. In addition, local
television incentive fees in 1998 increased over 1997 by approximately $0.4
million.
Concession and catering revenue increased 2%, or $0.1 million, in the
three-month period ended September 30, 1998 and 12%, or $1.7 million, in the
nine-month period ended September 30, 1998 compared to the same periods in 1997.
The increases were primarily attributable to increased consumer spending with
the general food and beverage concessionaire influenced by favorable weather
conditions in 1998. For the three-month period ended September 30, 1998, despite
playing three fewer home events compared to the same period in 1997, concession
and catering revenue still increased 1%, evidencing higher consumer spending
trends in 1998.
Private suite and club seat rentals increased 5%, or $0.2 million, in
the three-month period ended September 30, 1998 and 8%, or $0.7 million, in the
nine-month period ended September 30, 1998 compared to the same periods in 1997.
The increases were primarily attributable to contractual increases in rental
revenues for certain suites and club seats that averaged 4%, and rental income
attributable to additional suite rentals leased on a per-game basis.
Advertising and promotional revenue increased 4%, or $0.2 million, in
the three-month period ended September 30, 1998 and 11%, or $1.0 million, in the
nine-month period ended September 30, 1998 compared to the same periods in 1997.
For the three-month period ended September 30, 1998, volume increases and
ballpark advertising rate increases on existing contracts were offset by three
fewer games played in the third quarter of 1998 compared to the third quarter of
1997. The increase for the nine-month period was primarily due to rate increases
totaling $0.5 million and new inventory sales of $0.4 million.
Merchandise sales increased 9%, or $0.4 million, in the three-month
period ended September 30, 1998 and 11%, or $1.3 million, in the nine-month
period ended September 30, 1998 compared to the same periods in 1997. The
increases in both
-10-
11
periods were primarily attributable to the team's success during 1998 and recent
seasons as well as a quality assortment of team affinity merchandise.
Major Leagues Central Fund revenues increased 43%, or $1.6 million, in
the three-month period ended September 30, 1998 and 17% or $1.2 million, in the
nine-month period ended September 30, 1998 compared to the same periods in 1997.
The increase for both periods is primarily attributable to a $1.5 million
distribution from the Central Fund for a federal arbitration award relative to
MLB cable television royalties for the years 1990 through 1992. This
distribution was received in September 1998.
Post-season revenue increased $1.6 million for the three-month and
nine-month periods ended September 30, 1998 primarily due to two home
post-season games played in September 1998 compared to one road post-season game
played in September 1997. The majority of the home revenue is comprised of the
team's share of net ticket receipts (as dictated by MLB post-season sharing
rules) as well as food and beverage concessions, merchandise sales and
advertising and promotion revenues. The revenue from one road post-season game
in 1997 represents the team's share of net ticket receipts plus miscellaneous
radio advertising revenue.
Provision for revenue sharing increased 64%, or $1.9 million, for the
three-month period ended September 30, 1998 and 56%, or $3.4 million, for the
nine-month period ended September 30, 1998 compared to the same periods in 1997.
These increases were primarily attributable to the increase in the revenue
sharing tax rate from 12% in 1997 to 16% in 1998 and an increase in the
Company's net local revenue as defined in the Collective Bargaining Agreement.
EXPENSES
Major League team expenses decreased 8%, or $2.5 million, in the
three-month period ended September 30, 1998 and increased 1%, or $0.6 million,
in the nine-month period ended September 30, 1998 compared to the same periods
in 1997. The decrease for the three-month period is primarily attributable to
the luxury tax assessment which was reduced by $2.0 million as a result of a 23%
increase in the player salary threshold from 1998 to 1997 over which the luxury
tax is assessed. The increase for the nine-month period was primarily due to
major league roster salaries.
Player development costs increased 7%, or $0.2 million, for the
three-month period ended September 30, 1998 and 10%, or $0.8 million, for the
nine-month period ended September 30, 1998 compared to the same periods in 1997.
The increases were primarily due to the addition of two specialty programs in
Santo Domingo, Dominican Republic and San Felipe, Venezuela of $0.2 million,
increased player and coaches salaries of $0.5 million and rate increases for
spring training housing of $0.1 million.
Ballpark operations expense increased 22%, or $0.8 million, in the
three-month period ended September 30, 1998 and 11%, or $1.1 million, in the
nine-month period ended September 30, 1998 compared to the same periods in 1997.
The increase for the three-month period was primarily attributable to
day-of-game expenses (ushers, security, in-game events, etc.) which increased
$0.5 million. In addition, salary expense increased $0.2 million and custodial
and maintenance costs increased $0.1 million for the three-month period. For the
nine-month period, the increase was also primarily attributable to day-of-game
expenses as discussed above, which increased $0.6 million, while salary expense
increased $0.3 million and custodial and maintenance cost increased $0.2
million.
Cost of merchandise sold increased for both the three-month and
nine-month periods ended September 30, 1998 compared to the same periods in
1997. This was primarily due to increased sales of 9% and 11%, respectively, and
the closing of six shopping center kiosk locations in 1997.
Administrative and general expenses increased 7%, or $0.2 million, in
the three-month period ended September 30, 1998 and 13%, or $1.0 million, in the
nine-month period ended September 30, 1998 compared to the same periods in 1997.
The increases were primarily attributable to contractual increases in executive
salaries, increased legal and consulting fees, and increased insurance related
to Directors and Officers liability as well as rainout coverage.
-11-
12
Major Leagues Central Fund expense decreased 16%, or $0.3 million, in
the three-month period ended September 30, 1998 and 18%, or $0.8 million, in the
nine-month period ended September 30, 1998 compared to the same periods in 1997.
The decreases were primarily the result of the allocation of expenses to the two
expansion teams that entered the league in 1998.
Advertising and promotion expense decreased by 7%, or $0.1 million, in
the three-month period ended September 30, 1998 and 14%, or $0.5 million, in the
nine-month period ended September 30, 1998 compared to the same periods in 1997.
The decrease is primarily due to a $0.2 million reduction in promotional expense
due to a sponsor's payment of an event in 1998 that was paid for by the Company
in 1997, as well as the elimination of $0.2 million in advertising expense
associated with a 1997 retail campaign.
Post-season expenses increased $1.7 million, primarily due to two home
post-season games played in September 1998 compared to one road post-season game
in 1997. This increase was comprised of $0.6 million in ticket related expenses,
$0.4 million in administrative and general costs, $0.3 million in ballpark
operating costs, $0.2 million in merchandising costs and $0.2 million in
advertising and promotion costs.
Amortization of signing bonuses and player contracts increased 27%, or
$0.4 million, for the three-month period ended September 30, 1998 and 30%, or
$1.0 million, for the nine-month period ended September 30, 1998 compared to the
same periods in 1997. The increase is primarily due to the amortization of
increased costs associated with extending certain players' contracts.
Depreciation and amortization expense increased 81%, or $0.3 million,
for the three-month period ended September 30, 1998 and 40%, or $0.5 million,
for the nine-month period ended September 30, 1998 compared to the same periods
in 1997. The increases are primarily due to the depreciation incurred on capital
expenditures associated with hardware and software acquisitions placed in
service during 1998.
Interest income decreased 58%, or $0.7 million, for the three-month
period ended September 30, 1998 and 6%, or $0.2 million, for the nine-month
period ended September 30, 1998 compared to the same periods in 1997. The
decrease is due to the repayment of a $35.5 million loan to the General Partner
of the predecessor group in March 1998 and lower returns on cash and short-term
investments during 1998 partially offset by increased funds from advanced ticket
sales.
Interest expense increased 10%, or $0.1 million, in the three-month
period ended September 30, 1998 and 34%, or $0.5 million, in the nine-month
period ended September 30, 1998 compared to the same periods in 1997. The
increases are primarily due to an increase of $12.2 million in the outstanding
balance of the Major League Baseball Credit Facility partially offset by a
decrease in the interest rate effective as of April 1998.
Loss on player transactions of $1.6 million for the nine-month period
ended September 30, 1998 is primarily due to the February 1998 trade of one
player, which included a provision requiring the Company to pay a portion of the
traded player's salary during the 1998 season.
Minority interest for the three-month period ended September 30, 1998
and for the period June 9, 1998 through September 30, 1998 represents the 49%
interest in the earnings of the Partnership that was not purchased and is not
owned by the Company.
Provision for income taxes represents the estimated tax on the
Company's earnings for the three-month period ended September 30, 1998 and from
June 9, 1998 through September 30, 1998 at the applicable corporate income tax
rates.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities during the nine-months ended
September 30, 1998 was approximately $2.4 million, while net cash used in
operating activities during the nine-months ended September 30, 1997 was
approximately $6.6
-12-
13
million, despite a net loss and net income for the periods, respectively. In
both periods, increases in receivables contributed to operating uses of cash.
Minority interest, depreciation and amortization, losses on player transactions
(1998 only), decreases in other assets, increases in accounts payable and
accrued liabilities, and increased deferred compensation and long-term
liabilities resulted in sources of operating cash. Net cash provided by
operating activities in 1998 occurred primarily due to increased net income
before minority interest, higher depreciation and amortization, and increased
accounts payable and accrued liabilities.
Financing activities financed net cash of $6.4 million during the
nine-months ended September 30, 1998. Net proceeds from the 1998 offering
totaled approximately $55.8 million. All net proceeds of the offering were paid
to Cleveland Baseball Corporation ("CBC") to purchase its general partnership
interest in the Partnership. Distributions during 1998 totaled $49.2 million.
For the nine-months ended September 30, 1997, financing activities generated net
cash of $7.4 million, as increases in the proceeds from the Major League Credit
Facility were offset in part by increased distributions to CBC.
Principal investment sources and uses of funds include the acquisition
of the 51% general partnership interest in the Partnership, purchases of
long-term investments, loans to CBC and related repayments, expenditures for the
purchase of player contracts and signing bonuses, proceeds from the sale of
player contracts and expenditures for capital fixed assets. Notably, the
proceeds of the offering, in the amount of $55.8 million, were used in 1998 to
acquire the general partner interest in the Partnership. The Company's
short-term investment maturities (net) increased over the nine-months ended
September 30, 1998 and 1997 by $20 million. Loans to CBC increased by $12.2
million during 1997. In 1998, the entire loan balance of $35.5 million to CBC
was repaid.
In April of 1998, the terms of the Major League Credit Facility were
renegotiated. The obligations under the Major League Credit Facility are
non-recourse to the Company, and the obligation to repay advances for the
benefit of the Company are secured by the rights of the Company 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 Partnership has assigned its rights to receive
its share of revenues and royalties to the Indians Club Trust, a bankruptcy
remote entity. The facility expires on the earlier of April 17, 2001 or
voluntary termination by the MLB trust. As of September 30, 1998, the interest
rate on the amounts borrowed under the facility, which is based upon LIBOR plus
a program fee established by the loan agreements, was 6.07%. During the term of
the facility, the Company pays interest only on the outstanding borrowings, in
addition to various other fixed fees of $123,000 annually. 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
Club will be required to maintain an interest contingency reserve equal to nine
months' interest expense at 2% above the then-applicable borrowing rate.
Until recently, the Company has historically borrowed the full amount
available to it under the Major League Credit Facility and in turn loaned the
proceeds of such borrowings to CBC. At December 31, 1997, the outstanding
principal amount of CBC's indebtedness to the Company was $35.5 million. 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 for borrowing at September 30, 1998.
The Company also maintains a bank line of credit providing aggregate
availability of up to $9.0 million. Availability under the line of credit is
reduced to $2.0 million during the period from December 1 to February 28 of each
year, and the line must be repaid in full for a period of 30 consecutive days
during the term of the arrangement. Availability under this line of credit is
reduced by an
-13-
14
outstanding $0.4 million standing letter of credit associated with the Company's
workers' compensation self-insurance arrangement. Amounts outstanding under the
line of credit bear interest at either the bank's base rate or LIBOR plus 1.75%,
and are guaranteed by Richard E. Jacobs, individually and as trustee of the
David H. Jacobs Marital Trust. The line of credit matured on November 1, 1998,
and the Company has received a two month extension while it renegotiates the
terms of this facility. At September 30, 1998, the Company had no borrowings
under the line of credit.
The Company's ability to incur additional indebtedness is limited by
applicable provisions of the agreements that govern the 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 believes that it will generate sufficient cash flows from
operations, as supplemented by available borrowings, to meet debt service
requirements and to meet its short-term and long-term requirements for capital
and acquisition of player contracts, although no assurance can be given that it
will be able to do so or that it will be able to refinance the Major League
Credit Facility at maturity.
FINANCIAL CONDITION
The Company's operating characteristics are similar to those of many
service industries. The Company generally does not have significant receivables
or inventories but generally has high levels of accounts payable and accrued
liabilities. The majority of the Company's current liabilities are deferred
revenues. Deferred revenues consist primarily of advanced ticket sales, and the
Company satisfies this liability by playing its regular season and post-season
games.
Cash and cash equivalents and investments at September 30, 1998 were
approximately $39.5 million compared to approximately $61.6 million at December
31, 1997. The decrease was primarily attributable to the seasonal operations of
the Company and the substantial cash and investment position at December 31,
1997 related to advance ticket sales in the fourth quarter. The majority of the
Company's expenditures occur during the regular season. The cash and cash
equivalents and investment balance and, correspondingly, the deferred revenue
balance at September 30, 1998 are affected by receipts for post-season ticket
sales which occurred primarily in September.
Receivables and accrued income at September 30, 1998 were approximately
$22.7 million compared to approximately $7.9 million at December 31, 1997. The
increase was primarily attributable to billings for sponsorship contracts and
concessionaire revenue that occur during the season and are paid throughout the
year based upon predetermined payment schedules.
Prepaid expenses and other current assets at September 30, 1998 were
approximately $3.1 million compared to $5.0 million at December 31, 1997. The
decrease was primarily attributable to the assignment of a life insurance policy
and the related cash surrender value of a traded player during 1998.
Other assets at September 30, 1998 were approximately $11.6 million
compared to $6.2 million at December 31, 1997. The increase was primarily
attributable to the recording of deferred income taxes of $3.8 million and the
purchase of certain investments and appreciation in existing investments held in
trust to assist in the funding of the Company's deferred compensation
obligations.
Income taxes payable at September 30, 1998 of approximately $2.7
million represents the Company's estimate of current tax liabilities based upon
applicable corporate income tax rates.
-14-
15
Long-term liabilities at September 30, 1998 were approximately $56.3
million compared to $45.8 million at December 31, 1997. The increase was
primarily attributable to increases in existing and additional deferred
compensation obligations and the renegotiation of the repayment terms under the
Major League Credit Facility which resulted in a reclassification of the current
portion of $4.8 million to long-term.
YEAR 2000 COMPLIANCE
The inability of computers, software and other equipment utilizing
microprocessors to recognize and properly process data fields containing a
two-digit year is commonly referred to as the Year 2000 Compliance issue. As the
year 2000 approaches, such systems may be unable to accurately process certain
date-based information.
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 June 30, 1999. The estimated cost to address Year 2000
issues is not expected to have a material impact on the Company's business,
operations or financial condition.
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 not deemed it necessary to
develop a formal contingency plan. In the event additional information comes to
the Company's attention which would change its current assessment, it will
consider the need for a contingency plan at that time.
-15-
16
PART II. OTHER INFORMATION
Except to the extent noted below, the items required in Part II are
inapplicable, or if applicable, would be answered in the negative and have been
omitted.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
EXHIBIT
NO. DESCRIPTION
--- -----------
3.1 Amended and Restated Articles of Incorporation of the
Company.
3.2 Code of Regulations of the Company.
4.1 Form of Share Certificate for Class A Common Shares.
4.2 Form of Share Certificate for Class B Common Shares.
27.1 Financial Data Schedule (filed herewith)
Unless otherwise indicated, the exhibits listed above are incorporated by
reference to the Company's Registration Statement on Form S-1 (Registration No.
333-49357) and are identified therein by the same exhibit number.
(b) Reports of Form 8-K.
None.
-16-
17
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: November 10, 1998 Cleveland Indians Baseball Company, Inc.
(Registrant)
/s/ KENNETH E. STEFANOV
--------------------------------
Kenneth E. Stefanov
Vice President, Finance
(principal financial officer and
principal accounting officer)
-17-