Longform

If You Spend It, Will They Come?

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Colangelo says he considers the 12 percent increase to be "modest," noting it was smaller than some teams are imposing.

"I came to find out that many of the price increases with many of the teams this year were in the 20 to 25 percent range," he says. "We are now anticipating that we will be probably closer to 20th in the league (in average ticket prices, down from 17th in 1998)."

While the ticket price boost seemed "modest" to Colangelo, consumers thought otherwise. Season-ticket renewals plunged for a number of reasons. The biggest factor appeared to be that many season-ticket holders realized they couldn't attend so many games, and chose to consolidate their seats with friends.

It was clear to Colangelo that the Diamondbacks would have to take dramatic action.

"If we were to proceed on our [present] course, we were looking at losses this year," Colangelo says.

Losses?
Nowhere had the Diamondbacks ever projected losses. Not in the March 1995 "Confidential Private Offering Memorandum" that sought investors for the team, or last summer when the club submitted projected financial statements as part of a Phoenix Industrial Development Authority (IDA) bonding issue.

Losses on the field are painful. Losses at the bank, verboten. It was time to set a new course.

A mere seven months ago, the Diamondbacks appeared to be raking in cash. They projected an $18.5 million profit for 1998, according to Phoenix IDA bond-disclosure documents.

As late as last July 1, the Diamondbacks were telling potential bond buyers that the team "feels it can establish positive financial results in each year of operation."

The team made the assertion in a disclosure statement associated with the Phoenix IDA's issuance of $126.9 million in bonds on behalf of the Diamondbacks. The team is using the money to pay off bank loans and cover some construction costs.

It doesn't appear the Diamondbacks were anywhere close to the $18.5 million profit projected in the bond disclosure for the Diamondback's inaugural season.

When it was wooing bond buyers with its disclosure statement, the team said it expected to generate $113.5 million in revenue during the 1999 season, and $20.1 million in profits.

The bond-disclosure documents--which include a six-year revenue, expense and profit projections for the team--state that profits were expected to continue apace: $16.7 million in 2000, $17.5 million in 2001, $17.2 million in 2002 and $22.2 million in 2003.

But those projections were made before season-tickets sales plunged, and Colangelo acknowledged the Diamondbacks faced the prospect of losing money in 1999. Instead of cutting costs, Colangelo elected to sharply increase spending and defer paying bills well into the future.

"The only choice was to protect that investment by moving forward as we did," Colangelo says. "There's really no choice. Either you compete, or you are down at the bottom, and that would never fly."

It remains to be seen how decisions made since the IDA documents were filed will impact the financial projections. What is known is that the Diamondbacks will have to vastly boost revenue at some point to cover significantly higher payroll.

The team projected in the bond documents that payroll for 1999 would total $35 million. The signing of five free agents increased payroll to $42 million, with another $20 million of 1999 payroll (plus interest) deferred.

The bond filing also provided details on how much money the Diamondbacks expected to generate from sources other than ticket sales. The team has secured sponsorship agreements worth $350 million from 50 sponsors, most of whom have signed deals of 10 years or longer. The largest sponsorship agreement is with Bank One for the stadium's naming rights--the team will get $66 million over 30 years.

The Diamondbacks also have a 10-year television contract with Fox Sports Arizona worth $59 million. Combined local television and radio contracts were projected to earn the team $17.7 million in 1999.

The signs that blanket the stadium would generate $7.875 million this year. Luxury suites were to kick in another $6 million, while concessions were projected to generate $7.4 million.

The IDA bonds helped the Diamondbacks reduce interest expense and loan payments. While the bonds are officially issued by the Phoenix Industrial Development Authority, the city has no obligation to repay them if the team should default, says IDA attorney Bryant Barber. A bond insurance company--AMBAC Assurance Co.--stands ready to pay bondholders in the unlikely event the Diamondbacks default on the $10 million-a-year payment.

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John Dougherty
Contact: John Dougherty