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Pirates Financial Information Leaked and Club Responds08/22/2010 3:41 PM ET
Someone with access to the Club's financial statements has breached his/her fiduciary obligation to the Club by providing a copy of the Club's audited financial statements for the 2007 and 2008 seasons to the Associated Press. The Club is a private company that has no obligation to publically report its financial results and, like most private companies, has consistently declined to do so. This is an appropriate approach that we will continue. Given the unfortunate breach of fiduciary duty to the Club, however, it is important to explain exactly what payments the Club has made to Club partners.
While we have not publicly announced financial results, we have said that, after a period in which the Club incurred large losses, the Club has operated on a sound financial basis over the last several years, generating positive net income. This is a very good development for the organization and our fans as this sound financial footing has allowed us to make the type of long-term and short-term investments in the Club necessary to return winning baseball to Pittsburgh. We all remember the very dark days when the Club was forced to trade valuable players like Aramis Ramirez in order to come into compliance with Baseball's Debt Service Rule. Because we have turned around the Club's financial picture, we have been solidly in compliance with the Debt Service Rule and able to make significant investments in players, our scouting and player development resources and in top-of-the-industry baseball facilities in Florida and the Dominican Republic.
We have also said that ownership was not taking money out of the Club but instead that the revenues generated by the Club are being reinvested back into the Club in both long-term and short-term investments needed to completely overhaul and rebuild this baseball team. The Club has paid no dividends to its partners. Moreover, while it is quite common for a Chairman of the Board of Directors of a partnership to draw a salary, Bob Nutting has never received any salary. And, the Club pays no management fee to any entity related to an owner. We have said that the only distributions the Club has made to its owners were to pay a portion of the income tax obligations that the Club's partners incur as a result of their ownership of the Club and to pay interest due on an obligation stemming from a capital infusion made at a time when the Club was in financial distress. Distributions to pay taxes incurred by partners as a result of their ownership and the payment of interest accrued on a note held by a partner and are neither unusual nor in any way inappropriate.
The Pirates, like virtually all sports franchises, are operated through a partnership. The income of the partnership is, for tax purposes, allocated to its partners, even if the Club does not in fact distribute cash to them. The Pirates, however, has never distributed income generated by the partnership to the partners in cash in the form of a dividend. In recognition of the obligation of the partners to pay taxes on money they did not receive, the Club made two separate payments in 2008 totaling $10.8 million to cover a portion of the taxes partners were required to pay for the 2006 and 2007 tax years. The Club has not made any distributions to partners to cover taxes incurred relating to the 2008 or 2009 tax years. The individual partners are responsible for paying the taxes on the income of the partnership based on their ownership share, even if no cash is distributed. Had the Club been a corporation, the Club would be obligated to pay all of the income taxes due on any income before any distribution is made to shareholders. And, it is common practice for a partnership to distribute cash to allow partners to pay the taxes incurred as a result of their interest in the partnership.
The payment of interest on a note held by a partner is equally routine and appropriate. After years of suffering significant losses, the Club in 2003 was unable to meet its operational needs, including making its payroll, without a significant infusion of cash. The Club sought additional equity from its partners in the form of a convertible note. This significant capital contribution in 2003 allowed the Club to meet its obligations and put the Club in a position to move towards compliance with the new Debt Service Rule added to the Players' Collective Bargaining Agreement in 2002. As is standard, the partners who participated in the convertible note were due accrued interest the Club. Two interest payments totaling $9.6M covered interest accrued in 2007 and 2008 and were both paid in the 2008 fiscal year.
The total of $20.4M in distributions made in the 2008 fiscal year looks significant simply because, as a result of the timing of Board votes, two separate interest payments and two separate tax payments associated with three different years were all made in one fiscal year. Had the four distributions been made over the three years to which they related, there likely would have been little interest in these standard and appropriate distributions.
This story was not subject to the approval of Major League Baseball or its clubs.
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