Question

The Celtics Basketball Holdings, L.P. and Subsidiary included the following note in its 1998 annual report: Note G-Commitments and Contingencies (in Part) 1 Baskethall Association CNBA") players, including those that play for the Boston the NBA and the NBA Play- Celtics, are covered by a collective bargaining agreement between ers Association (the "NBPA") that was to be i Bargaining Agreement"). Under the terms of the Collective in effect through June 30, 2001 (the Collective Bargaining Agreement, the NBA had the right to terminate the Collective Bargaining was determined that the 1998 season exceeded 51.8% of projected Basketball Related Income, as defined in the Collec tive Bargaining Agreement "BRI"). Effective June 30, 1998, the Board of Governors of the NBA voted to exercise that right and reopen the Collective Bargaining Agreement, as it had been determined that the aggregate salaries and benefits paid by the NBA teams for the 1997- 1998 season would exceed 51.8% of projected BRI. Effective July 1, 1998, the NBA menced a lockout of NBA players in support of its attempt to reach a new collective bargaining The NBA and the NBPA have been engaged in negotiations regarding a new collec rive bargaining agreement, but as of September 18, 1998, no agreement has been reached. In the event that the lockout extends into the 1998-1999 season, NBA teams, including the Bos- ton Celtics, will refund amounts paid by season ticket holders (plus interest) for any games that are canceled as a result of the lockout. In addition, as a result of the lockout, NBA teams have not made any payments due to players with respect to the 1998-1999 season. The NBPA has disputed the NBA's position on this matter, and both the NBA and the NBPA have presented their cases to an independent arbitrator, who will make his ruling no later than the middle of October 1998. As of September 18, 1998, the arbitrator has not ruled on this matter. Although the ultimate outcome of this matter cannot be determined at this time, any loss of games as a result of the absence of a collective bargaining agreement or the continuation of the lockout will have a material adverse effect on the Partnership's financial condition and its results of operations. Further, if NBA teams, including the Boston Celtics, are required to honor the player contracts for the 1998-99 season and beyond without agreeing to a new collective bargain- ing agreement or without ending the lockout, which would result in the loss of games, the Partner- ship's financial condition and results of operations will be materially and adversely affected. The Partnership has employment agreements with officers, coaches and players of the basketball team (Celtics Basketball). Certain of the contracts provide for guaranteed pay ments which must be paid even if the employee is injured or terminated. Amounts required to be paid under such contracts in effect as of September 18, 1998, including option years and $8,100,000 included in accrued expenses at June 30, 1998, but excluding deferred com- pensation commitments disclosed in Note E-Deferred Compensation, are as follows: Years ending June 30, 1999 2000 2001 2002 2003 2004 and thereafter $32,715,000 33,828,000 27,284.000 20,860,000 19.585,000 10,800,000 Commitments for the year ended June 30, 1999, include payments due to players under contracts for the 1998-1999 season in the amount of S18,801,000, which are currently not being paid as a result of the lockout described above. Celtics Basketball maintains disability and life insurance policies on most of its key play ers. The level of insurance coverage maintained is based on management's determination of the insurance proceeds which would be required to meet its guaranteed obligations in the event of permanent or total disability of its key players. Required Discuss how to incorporate the contingency note into an analysis of Celtics Basket-

Answer 1