The Celtics Basketball Holdings, L.P. and Subsidiary included the following note in its 1998 annual report:
Note G%u2014Commitments and Contingencies (in Part)
National Basketball Association (%u201CNBA%u201D) players, including those that play for the Boston Celtics, are covered by a collective bargaining agreement between the NBA and the NBA Players Association (the %u201CNBPA%u201D) that was to be in effect through June 30, 2001 (the %u201CCollective Bargaining Agreement%u201D). Under the terms of the Collective Bargaining Agreement, the NBA had the right to terminate the Collective Bargaining Agreement after the 1997%u20131998 season if it was determined that the aggregate salaries and benefits paid by all NBA teams for the 1997%u2013 1998 season exceeded 51.8% of projected Basketball Related Income, as defined in the Collective Bargaining Agreement (%u201CBRI%u201D). 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%u2013 1998 season would exceed 51.8% of projected BRI. Effective July 1, 1998, the NBA commenced a lockout of NBA players in support of its attempt to reach a new collective bargaining agreement. The NBA and the NBPA have been engaged in negotiations regarding a new collective bargaining agreement, but as of September 18, 1998, no agreement has been reached. In the event that 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%u20131999 season. The NBPA has disputed the NBA%u2019s 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%u2019s 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%u201399 season and beyond without agreeing to a new collective bargaining agreement or without ending the lockout, which would result in the loss of games, the Partnership%u2019s 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 payments which must be paid even if the employee is injured or terminated. Amounts required to be paid under such contracts in effect as of September 18, 1998, including option years and $8,100,000 included in accrued expenses at June 30, 1998, but excluding deferred compensation commitments disclosed in Note E%u2014Deferred Compensation, are as follows:
Years ending June 30, 1999 $32,715,000
2000 33,828,000
2001 27,284,000
2002 20,860,000
2003 19,585,000
2004 and thereafter 10,800,000
Commitments for the year ended June 30, 1999, include payments due to players under contracts for the 1998%u20131999 season in the amount of $18,801,000, 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 players. The level of insurance coverage maintained is based on management%u2019s 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.
Discuss how to incorporate the contingency note into an analysis of Celtics Basketball Holdings, L.P. and Subsidiary.