NBA

Ex-NBA Star Kevin Garnett Believes His Former Accountant Helped Wealth Manager Screw Him Out of $77 Million

During his illustrious 21-year NBA career, Kevin Garnett was a 15-time all-star, named the league’s MVP in 2004, and won a championship with the Boston Celtics in 2008. He also is the Minnesota Timberwolves’ all-time leader in steals. But Garnett doesn’t take too kindly to having $77 million stolen from him. That’s what he is […]

(UPDATE) Who Wants to Comb Over the New Jersey Nets’ Financial Statements?

Deadspin has gotten its hands on more sports team financial statements, this time those of the NBA’s New Jersey Nets for fiscal years 2004-2006. The NBA owners are set to officially lock out the players tonight at midnight and the strangest piece of information – and some say the cause of the owner/player beef – is highlighted in Tommy Craggs’ post which is known as “roster depreciation allowance.”

UPDATE: Deadspin has updated their post to state that the initial analysis of the RDA was incorrect. That is, the $25.1 million was not RDA but rather the loss the team took on a player contract in that fiscal year (Craggs speculates that it was Dikembe Mutombo). Craggs then writes:

The example is bad, and I apologize for that. I’m leaving the text here for a couple reasons: 1.) The roster depreciation allowance is real, even if we’ve misidentified it here, and it provides owners with a significant tax shelter based on a baroque logic. 2.) The Nets, like all franchises, do use large paper losses to pad their expenses.

I’ve updated the blockquote after the jump to show Deadspin’s note of the correction. They’ve also included some analysis from ESPN and a statement from the NBA’s CFO.

In 2004, the Nets had a $25 million “Loss on players’ contracts” which you can see here on the team’s income statement:

Craggs explains:

The first thing to do is toss out that $25 million loss, says Rodney Fort, a sports economist at the University of Michigan [See correction above.]. That’s not a real loss. That’s house money. The Nets didn’t have to write any checks for $25 million. What that $25 million represents is the amount by which Nets owners reduced their tax obligation under something called a roster depreciation allowance, or RDA.

Bear with me now. The RDA dates back to 1959, and was maybe [sports franchise owner] Bill Veeck’s biggest hustle in a long lifetime of hustles. Veeck argued to the IRS that professional athletes, once they’ve been paid for, “waste away” like livestock. Therefore a sports team’s roster, like a farmer’s cattle or an office copy machine or a new Volvo, is a depreciable asset.

The underlying logic is specious at best. As Fort points out, a team’s roster at any given moment isn’t actually depreciating. While some players are fading with age, others are developing and improving. But the Nets don’t have to pay more taxes when a player becomes more valuable. And in any case, the cost of depreciation is borne by the athletes themselves, when they pass their primes and lose their personal earning power.

As Craggs notes, if that loss, which also saved the team about $9 million in taxes, doesn’t exist, you’ve got a $7 million profit (see update above). But since we’re talking about rich owners with the hands in honeypots all over the place, a profit really doesn’t do them any good on an investment like a sports franchise. Particularly one in New Jersey that was in the process of being sold back in 2004.

Craggs’ whole post is excellent, so check it out. In the meantime, I’ll note some other interesting things from 2004 (financials, in full on page 2) include:

• An enormous working capital deficit of $124 million. This was mostly due to a $95 million term loan the team was guaranteed by a partnership called “YankeeNets” which was created when the then-owners, Lewis Katz and Ray Chambers, bought 37.5% of the New York Yankees Partnership. YankeeNets was 99% owned by Katz and Chambers. It’s all pretty convoluted but I don’t know of any business that wants a huge working capital deficit like that. Even if the term loan was omitted, the negative working capital would be over $29 million, with accrued salaries being nearly double of current assets.

• The enormous members deficit of $81 million, again exacerbated by the phony loss of $27 million.

• Negative net cash flow from operations of $20 million.

• Under Note 5, “Intangible Assets” you can see that players’ contracts were completely amortized for a net value of $0.

Of course when you look at the 2005 and 2006 financial statements (page 3), things look very different.

• For starters the term loan has jumped into long-term liabilities but the team still has a pathetic working capital of negative $16.8 million in ’06 and negative $25.3 million in ’05.

• Note that depreciation and amortization is now itemized on the income statement for $41 million and $42 million in ’06 and ’05 respectively. These make a huge portion of their losses from operations. D&A did not have its own line item in the ’04 financials.

• In the two years presented there were member distributions of over $15 million and large negative balances for cash flows used in operating activities.

As we’ve seen with the New Orleans Hornets, you can own a NBA franchise but that doesn’t mean you have to run it like anything that closely resembles successful business (at least i the traditional sense). For starters, you don’t have to answer to anyone except your co-owners with whom you worked out this strategy. I guess you could consider loyal fans to be stakeholders in your organization but my guess is most owners don’t.

I gave these a real quick and dirty look, so if you’ve got the time (and need to distract yourself until the holiday weekend starts) pour over these and call anything else weird you see. Enjoy.

Nets 04

Nets 0506

New Orleans Hornets’ Audited Financial Statements Leaked

While the House of Klynveld is enjoying their town hall circa now, we’ll share you the latest scoop from Deadspin, who has published the audited (courtesy of KPMG) financial statements of the NBA’s New Orleans Hornets.

We’ve skimmed the financials, noting some interesting items here:

• In 2009, the franchise paid $115,000 for their audit, an additional $10,000 for “accounting issues” and $35,000 for tax compliance services.

• The team has a partners’ deficit of over $80 million thanks, in part to $111.5 million in long-term debt at June 30, 2009.

• The team did have operating income of over $5.8 million for the fiscal year ended June 30, 2009, however, paying nearly $9 million in interest (among other things) swung them to a much narrower net income of $1.8 million.

• Net cash from operating activities were a negative $7.4 million for the FYE June 30, 2008 but improved to a negative $1.5 million for FYE June 30, 2009. The team’s cash balance at June 30, 2009 was a mere $650k.

• George Shinn, the team’s owner, owes the franchise approximately $5 million from “various advances” but has also loaned the team over $8.3 million.

• The franchise has various investment associated with the NBA that have negative equity including: NBA Joint Venture; WNBA Holdings, LLC; NBDL Holdings, LLC

• The team has principal payments of approximately $115 million coming due through 2014.

• Guaranteed contracts to players through the 2013-2014 season amount to $247.5 million.

• “Revenue assistance” from the NBA (team is eligible if it has both an actual loss and a pro forma loss) for the FYE June 30, 2009 was $3.4 million.

Whew! So as you can see, the franchise isn’t in the best of shape. Our analysis is just a scratch on the surface so if you’ve got some time, crunch some numbers and share your findings with the group below.

Earlier:
Who Leaked the MLB Financial Statements?