barclays center financials june 2015

8/20/2019 Barclays Center Financials June 2015

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Brooklyn Arena, LLC and Subsidiaries

Consolidated Financial Statements

June 30, 2015


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Table of Contents

Page(s)

Independent Auditor’s Report .......................................................................................................................................1

Consolidated Balance Sheet ..........................................................................................................................................2

Consolidated Statement of Operations ..........................................................................................................................3

Consolidated Statement of Members’ Equity ...............................................................................................................4

Consolidated Statement of Cash Flows .........................................................................................................................5

Notes to Consolidated Financial Statements ..... ........... ............ ........... ........... .......... ........... ........... ........... ........... ...6–12


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PricewaterhouseCoopers LLP, 200 Public Square, 18th Floor, Cleveland, OH 44114T: (216) 875 3000, F: (216) 566 7846, www.pwc.com/us

Independent Auditor's Report

To the Members ofBrooklyn Arena, LLC:

We have audited the accompanying consolidated financial statements of Brooklyn Arena, LLC and itssubsidiaries, which comprise the consolidated balance sheet as of June 30, 2015, and the relatedconsolidated statements of operations, members’ equity and cash flows for the year then ended.

Management's Responsibility for the Consolidated Financial Statements

Management is responsible for the preparation and fair presentation of the consolidated financialstatements in accordance with accounting principles generally accepted in the United States of America;this includes the design, implementation, and maintenance of internal control relevant to the preparationand fair presentation of consolidated financial statements that are free from material misstatement,

whether due to fraud or error.

Auditor's Responsibility

Our responsibility is to express an opinion on the consolidated financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assuranceabout whether the consolidated financial statements are free from material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures inthe consolidated financial statements. The procedures selected depend on our judgment, including theassessment of the risks of material misstatement of the consolidated financial statements, whether due to

fraud or error. In making those risk assessments, we consider internal control relevant to the Company'spreparation and fair presentation of the consolidated financial statements in order to design auditprocedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion onthe effectiveness of the Company's internal control. Accordingly, we express no such opinion. An auditalso includes evaluating the appropriateness of accounting policies used and the reasonableness ofsignificant accounting estimates made by management, as well as evaluating the overall presentation ofthe consolidated financial statements. We believe that the audit evidence we have obtained is sufficientand appropriate to provide a basis for our audit opinion.

Opinion

In our opinion, the consolidated financial statements referred to above present fairly, in all materialrespects, the financial position of Brooklyn Arena, LLC and its subsidiaries at June 30, 2015, and theresults of its operations and its cash flows for the year then ended in accordance with accounting

principles generally accepted in the United States of America.

September 25, 2015


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Consolidated Balance Sheet

June, 30 2015

The accompanying notes are an integral part of these consolidated financial statements.

2


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Consolidated Statement of Operations

For the Year Ended June 30, 2015


3

Revenues

Sponsorship and suites 56,709,343$

Events and other income 39,902,207

Ticketing, facility and related fees 7,059,357

Concession revenue 9,244,606

Total revenues 112,915,513

Operating expenses

Operating and maintenance 35,887,716

Events 32,779,325

Selling, general and administrative 6,208,993

Total operating expenses 74,876,034

Interest expense - financing lease o bligation and other 33,264,215

Interest expense - related party 13,808,468

Depreciation and amortization expense 33,034,842

Net loss (42,068,046)$


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Consolidated Statement of Members’ Equity



4

Onexim Sports and Nets Sports and

Entertainment, LLC Entertainment, LLC Total

Balance at June 30, 2014 192,190,481 97,544,964 289,735,445

Capital Contributions - - -

Distributions - - -

Net Loss (18,930,621) (23,137,425) (42,068,046)

Balance at June 30, 201 5 173,259,860$ 74,407,539$ 247,667,399$


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Consolidated Statement of Cash Flows



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Cash flows from operating activities

Net loss (42,068,046)$

Adjustments to reconcile net loss to net cash

flows provided by operating activities

Depreciation and amortization 33,034,842

Changes in operating assets and liabilities

Accounts receivable 807,981

Prepaid expenses and other assets (368,225)

Deferred costs 157,038

Accounts payable and accrued expenses 4,300,410

Accounts payable - affiliates (5,687,275)

Loan from affiliates - accrued interest expense 13,808,468

Deferred revenue 15,912,061

Financing lea se obliga tion - accrued interest expe nse 3,975,182

Net cash flows provided by operating activities 23,872,436

Cash flows from investing activities

Investment in the Arena (10,975,588)

Deposits into restricted cash and escrowed funds (2,927,109)

Payments from restricted cash and escrowed funds 7,822,354

Net cash flows used by investing activities (6,080,343)

Cash flows from financing activities

Proceeds from financing lease obligation 1,615,226

Net cash flows provided by financing activities 1,615,226

Net increase in cash and cash equivalents 19,407,319

Cash and cash equivalents

Cash and cash equivalents, beginning of the period 32,743,171

Cash and cash equivalents, end of the period 52,150,490$

Supplemental cash transactionsInterest paid 29,289,033$

Supplemental non-cash transactions

Change in capital expenditures included in construction payable 3,849,303$

Change in capital expenditures included in accounts payable -affiliates 760,870$


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Notes to Consolidated Financial Statements

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1. Organization

Brooklyn Arena, LLC (“Brooklyn Arena”), a Delaware limited liability company, owns 100% membership interestsin Brooklyn Arena Holding Company, LLC (“ArenaHoldCo”), a Delaware limited liability company, which owns100% of the membership interest of Brooklyn Events Center, LLC (“Brooklyn Events”), a Delaware limited liabilitycompany. The members of Brooklyn Arena are Nets Sports and Entertainment, LLC (“NS&E”) and Onexim Sportsand Entertainment, LLC (“OS&E”) with a 55% and 45% ownership interest, respectively. Through its subsidiaries,Brooklyn Arena operates the Barclays Center (the “Arena”), a state-of-the-art sports and entertainment arena locatedin Brooklyn, New York.

Nature of BusinessThe Arena is the home of a professional basketball team, the Brooklyn Nets, and expected future home of the NewYork Islanders (“Islanders”), a professional hockey team. The Arena also hosts live entertainment events, such asconcerts, family shows, and other entertainment events.

2. Summary of Significant Accounting Policies

Basis of Presentation

The accompanying consolidated financial statements include Brooklyn Arena and its wholly-owned subsidiaries,ArenaHoldCo and Brooklyn Events (collectively, the “Company”). All significant intercompany transactions and

balances have been eliminated in consolidation.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the UnitedStates of America requires management to make estimates and assumptions about future events. These estimatesand underlying assumptions affect reported amounts of assets and liabilities at the date of the financial statementsand reported amounts of revenues and expenses during the reporting period. Such estimates included valuation of accounts receivable, long-lived assets and other liabilities. In addition, estimates are used in revenue recognition,

expense recognition, prepaid expenses, accrued expenses, and depreciation and amortization of assets. Theseestimates are based on management’s best judgment at a point in time and actual results could differ from thoseestimates.

Cash and Cash Equivalents

The Company considers all cash balances on deposit with financial institutions and highly liquid instruments purchased with an original maturity of three months or less to be cash equivalents.

Restricted Cash and Escrowed Funds

Restricted cash primarily consists of cash held in escrow to comply with insurance requirements as part of theconstruction of the Arena. Escrowed funds represent the balance of amounts funded in accordance with the ArenaLease. As of June 30, 2015, restricted cash and escrowed funds consist of the following:

Restricted Cash $ 3,185,346Escrowed Funds 12,363,440

Total $ 15,548,786

Accounts Receivable

Accounts receivable are recorded at net realizable value. The Company maintains an allowance for doubtfulaccounts to reserve for potentially uncollectible receivables. The allowance for doubtful accounts is estimated basedon the Company's analysis of receivables aging, specific identification of receivables that are at risk of not being

paid and other factors.


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Concentration of Credit Risk Financial instruments that may potentially subject the Company to a concentration of credit risk consist primarily of cash and cash equivalents and accounts receivable. The Company maintains cash deposits with major financialinstitutions which from time to time may exceed federally insured limits. The Company periodically assesses thefinancial condition of the institutions and believes that the risk of any loss is minimal.

There are no customers that represented 10% or more of accounts receivable as June 30, 2015 or revenues for year ended June 30, 2015.

Prepaid Expenses and Other AssetsPrepaid expenses represents costs incurred for insurance which are amortized on a straight-line basis over the related

period of insurance coverage, and costs incurred for various future events which are paid in advance and expensedwhen the events occur.

ArenaThe Arena is recorded at cost. Cost and related accumulated depreciation applicable to assets retired or disposed areeliminated from the accounts, and any gains or losses are included in earnings. Maintenance and repairs areexpensed as incurred. Assets are depreciated on a straight-line basis over the following estimated useful lives not toexceed the remaining life of the ground lease as follows:

Arena 34.5 yearsFurniture and equipment 3 to 34.5 years

As of June 30, 2015, Arena consists of the following:

Building and land $ 922,420,497Furniture and equipment 73,530,046

Less: Accumulated depreciation (87,724,401)Arena, net $ 908,226,142

The Company reviews its long-lived assets to determine if its carrying costs will be recovered from futureundiscounted cash flows whenever events or changes in circumstances indicate that recoverability of long-livedassets may not be supported. Significant estimates are made in the determination of future undiscounted cash flows.When the Company does not expect to recover its carrying costs, an impairment loss is recorded to the extent thecarrying value exceeds fair value. No impairment was recorded during the period presented.

Deferred Costs

Deferred costs represent costs incurred in connection with obtaining the PILOT Bonds. These costs are amortized

over the term of the financing lease obligation using the effective interest rate method. For the year ended June 30,2015, $749,981 has been expensed.

Deferred Revenue

Deferred revenue represents cash received from sponsorship, suite license and future events which will berecognized as revenue when earned. Deferred revenue is presented net of approximately $6,676,000 of advancesponsorship and suite license billings that are outstanding at June 30, 2015, but pertain to the next fiscal year.

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Construction Payable

Construction payable consists of amounts owed to contractors related to the construction of the Arena and to aninsurance company related to Owner Controlled Insurance Program (“OCIP”) for premiums and claims. OCIP is aninsurance policy which covers general liability, umbrella liability, and workers compensation liability for claims thatoccurred during the construction period. The long term component of OCIP represents estimated potential liabilitieswhich are expected to be settled subsequent to June 30, 2016. As of June 30, 2015 Construction payable consists of amounts owed for:

Fair Value of Financial Instruments

The Company estimates the fair value of its debt instruments by discounting future cash payments at interest ratesthat the Company believes approximate current market rates. The estimated fair value is based upon market prices of

public debt, available industry financing data, current treasury rates, recent financing transactions and other factors.The carrying value of the Company’s cash and cash equivalents, restricted cash and escrowed funds, accountsreceivable, prepaid expenses and other assets, accounts payable, construction payables, accrued expenses, deferredrevenue and payable to affiliates approximate their fair value due to the short-term nature maturities of these assetsand liabilities.

Commitment and Contingencies

Liabilities for loss contingencies arising from claims, assessments, litigation, fines and penalties and other sourcesare recorded when it is probable that a liability has been incurred and the amount of the assessment can bereasonably estimated. As of June 30, 2015 there is no loss contingencies accrued.

Revenues

Sponsorships and Suites

Sponsorships and suite revenue are recognized on a straight-line basis over the term of the respective contracts.

Events and other income

Event and other income results from the sale of tickets, and venue license fees earned in connection with events thatthe company does not produce or promote. Event and other income are recognized when the events occur.

Concession

Concessions revenue is based on the Arena's share of gross receipts in accordance with the agreement with theArena concession operator. Concession revenue is recorded at the time the concession is provided. In addition, tothe extent the concession operator generates a profit at the end of the fiscal year; the Company records its share as

provided for in the agreement.

Ticketing, facility, and related fees

Ticketing fee revenue is based on the Arena's share of ticket sale fees in accordance with the agreement withTicketmaster. In addition, the Company also earns a facility fee for events. Fees are recognized when the eventoccurs.

Gross versus Net E vent Revenue Recogniti on

The Company reports revenue on a gross or net basis based on management's assessment of whether the Company

acts as a principal or agent in the transaction. To the extent the Company acts as the principal, revenue is reported on

Arena Construction 6,957,070$

OCIP 3,500,000$

Construction Payable current 10,457,070$

OCIP - Construction payable long term 4,500,000$


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a gross basis. The determination of whether the Company acts as a principal or an agent in a transaction is based on

an evaluation of whether the Company has the substantial risks and rewards of ownership under the terms of anarrangement. Generally, when the Company is the promoter or co-promoter of an event the Company reportsrevenue on a gross basis. When the Company acts as an agent, revenue is reported on a net basis.

Operating and maintenance

Operating and maintenance expense primarily consists of salaries and benefits, property and general insurance,utilities and maintenance costs. These costs are expensed as incurred.

Selling, general and administrative

Selling, general and administrative expense primarily consists of non-event related marketing, and office overheadexpense such as printing, supplies, phone service, etc.

Income Taxes

The Company is a limited liability company. No provision or benefit for federal, state and local income taxes has

been reflected in the financial statements since such income taxes, if any, are the responsibility of the individualmembers.

Subsequent Events Review

The Company has evaluated and disclosed events and transactions that occurred between June 30, 2015 andSeptember 25, 2015, which is the date the financial statements were available to be issued.

3. Financing Lease Obligation

Due to Brooklyn Event’s option to purchase the Arena at the end of the lease term, the Company’s obligation under the Arena Lease is recorded as a financing lease obligation.

On September 12, 2007, and as subsequently amended, Brooklyn Arena entered into a Funding Agreement withEmpire State Development Corp (“ESDC”), an agency of New York State, pursuant to which the New York CityEconomic Development Corporation contributed, through ESDC, $131,000,000 (“Acquisition Price”), whichapproximates the value of the land, to acquire the land from the Company. In March 2010, the title to the Arenaland vested with ESDC.

A ground lease agreement was entered into between ESDC and Brooklyn Arena Local Development Corp (“LDC”).Effective on March 12, 2010, LDC sublet the land (“Arena Lease”) to Brooklyn Events. Since Brooklyn Events hascontinuing involvement in the form of an option to purchase the Arena at the end of the initial lease term for fair market value, the receipt of the $131,000,000 is recorded as a financing lease obligation.

In December 2009, LDC issued $511,000,000 in PILOT Revenue Bonds, Series 2009 (“PILOT Bonds”) for the purpose of paying the costs of construction of the Arena, servicing interest during the construction period and

establishing the required collateral reserves.

In accordance with the Arena Lease, on May 12, 2010 and various dates thereafter, Brooklyn Events deposited cashinto escrow accounts (“Escrowed Funds”) held by the PILOT Trustee. Escrowed Funds are used to fundconstruction costs, interest payments during the construction period and certain collateral reserve accounts. If theEscrowed Funds are insufficient, Brooklyn Events was required to fund the amounts required to complete the Arena.

No additional funding was required in the current year.

The Arena Lease has an initial term of thirty-seven years with seven consecutive renewal options: extensions onethrough six are ten years each and the seventh extension is for a two-year period, for a total number of yearsavailable under the Arena Lease not to exceed ninety-nine years. The following are the components of rental

payments:

Base Rent - Initial term at an annual amount of $10.00; renewal terms at fair market rental value.


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Additional Rent - Equivalent to the members’ funding in the Company that is ultimately used to pay for theconstruction of the Arena and fund the Escrowed Funds, plus any additional contributions required due tocost over-runs.

Pilot Payments - The estimated PILOT Payments provide 110% coverage over the estimated net debt servicerequirements of the PILOT Bonds. The PILOT Payments in excess of the net debt service requirements aredeposited into the Escrowed Funds and will be made available to Brooklyn Events for certain operating andmaintenance expenses (“O&M Funds”) of the Arena provided that the amount on-hand with the PILOTTrustee is not less than 10% of the remaining current year’s PILOT payment.

The PILOT Payments may not exceed actual taxes, as defined in the Arena Lease, and each PILOT Payment issecured by a mortgage agreement which encumbers the Arena. For the year ended June 30, 2015, the total PILOTPayments made by Brooklyn Events were $32,198,200 of which $29,271,091 was used to service the PILOTRevenue Bonds and the difference is deposited to the Escrowed Funds. The following table presents scheduledPILOT payments due under the Arena Lease:

The PILOT Payments are allocated between principal and interest to amortize construction funds and accruedinterest in a manner which produces a constant interest rate of 8% over the term of the Arena Lease. The PILOTPayments, presented above, through June 30, 2019 will be applied between interest expense and O&M Fund. In theyears subsequent to 2019, principal payments toward the financing lease obligation will commence and be fully paidoff by the end of the lease term. Total interest for the year included in Interest expense is $33,246,273.

4. Related Party Transactions

Loan from AffiliateOn May 12, 2010, ArenaHoldCo entered into a $75,842,086 loan agreement with an affiliate of OS&E (the “Loan”).On September 7, 2012 NS&E purchased a 55% interest in the Loan plus accrued interest and fee to date. The Loan

bears interest at 11% per annum, compounded monthly. There is also a loan fee (the “Fee”) of $1,000,000 payable atmaturity. During the Arena’s construction no interest was payable, and became part of the Loan principal. Whenthe Arena opened on September 28, 2012 the Loan, together with interest accrued, totaled $98,428,908. Interest is

payable monthly, provided the Company meets certain distribution requirements in accordance with the Company’soperating agreement. The Loan matures annually on June 12 th and automatically extends for one year until the Loanis refinanced with a third party. As of June 30, 2015, accrued interest is $34,707,303. Total interest for the year included in Interest expense for the Loan is $13,808,468.

Based on the borrowing rates on loans with similar terms and maturities, the estimated fair value of the Loan from

affiliate at June 30, 2015 is approximately $136,000,000.


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Agreement with the Nets and Affiliates of both NS&E and OS&EThe Company has an agreement to reimburse the Nets for the costs of various employees and other Arena relatedexpenses which are shared between the two companies. Total amount paid under this agreement for the year endedJune 30, 2015 is approximately $17,400,000.

Also, the Company has suite license agreements with NS&E, an Affiliate of NS&E, and OS&E. NS&E purchasedone license with an annual license fee of $290,000, the affiliate of NS&E purchased two suite licenses with acombined annual fee of $675,000, and OS&E purchased two suite licenses with a combined annual fee of $920,000.

On May 12, 2012, the Company entered into a 37 year licensing agreement with the Nets whereby the Nets havecertain and exclusive rights regarding the use of the Arena. The licensing agreement requires the Nets to pay thegreater of an annual base licensing fee of $6,500,000 or 10% of Net Ticket Revenue, as defined, and an ancillarylicensing fee of $626,000, and other reimbursable expenses to Brooklyn Events beginning November 1, 2012 whichare subject to annual increases equal to the lesser of 3% or the Consumer Price Index.

Agreement with Affiliates of NS&E

In March of 2015, the Company entered into a retail lease agreement with an affiliate of NS&E for a term of 5 years.The base rent for the first year is $435,000 and escalates each year by 3% throughout the term of the lease.

Accounts Payable to Affiliates

As of June 30, 2015, accounts payable to affiliates consists of the following:

Green Roof

On June 30, 2014, the Company entered into an agreement with an affiliate of NSE to construct a green roof, whichis composed of small plants and soil like cover, over the existing roof. The green roof is intended to enhance thequality of life for the residents living in the vicinity of the Arena. All cost associated with the construction of thegreen roof will be paid by the affiliate of NSE. As of June 30, 2015, there are no costs related to the green roof onthe Company’s Consolidated Balance Sheet or Consolidated Statement of Operations.

5. Arena Revenue Agreements

Naming Rights Agreement

Brooklyn Events and an affiliated entity related through common ownership entered into a Naming RightsAgreement (the “NR Agreement”) with Barclays Services Corporation (“Barclays”), where, in exchange for certainfees and other considerations, the Arena is named Barclays Center and Barclays is entitled to certain additionalsponsorship, branding, promotional, media, hospitality, and other rights and entitlements. This Agreement expireson June 30 following the twentieth anniversary of the opening date of the Arena, subject to certain extension rights.


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Agreement with the Islanders

On October 24, 2012, the Company entered into a licensing agreement with the Islanders whereby the Islanders havecertain and exclusive rights regarding the use of the Arena and the Arena is entitled to certain revenues. The term of the agreement is for 25 NHL seasons commencing on the first home date during the initial season, which is expectedto be the 2015/2016 season. The licensing agreement requires the Islanders to pay an annual license fee of and

provide for an operating expense reimbursement to the Arena subject to a per game cap. The Arena is required to pay Islanders an annual guaranteed season payment net of direct sales and management costs, which is subject tocertain adjustments as defined in the agreement. The annual season payment is subject to annual increases of 1.5%each season over the term.

No amounts have been paid under this agreement for the year ended June 30, 2015.

Sponsorship and Product Availability Agreements

Sponsorship agreements have been entered into with various entities, which entitle the sponsor to certain marketing,advertising, promotional, media, hospitality and/or other rights and entitlements in association with the Arena andthe Nets. In addition, certain of such agreements require Brooklyn Events to purchase designated goods andservices from the sponsor at rates that are no less competitive than the prevailing market rates. Terms of theagreements range from one to seven years from the opening date of the Arena, as defined in each underlyingagreement.

Suite License Agreements

Brooklyn Events has entered into suite license agreements with various entities and, in addition, granted suitelicenses as an entitlement to certain Arena sponsors. Each suite license entitles the licensee the use of a luxury suitein the Arena, with most luxury suites containing seats for viewing most events at the Arena. The suite licenseagreements are for various terms ranging from one to seven years.

Concessions Agreement

Brooklyn Events has entered into a three year agreement commencing at the opening of the Arena with a food

service company. Under this agreement, Brooklyn Events receives revenues based on a specified percentage of allconcession revenue or a guaranteed minimum based on attendance. In addition, to the extent the concessionoperator generates a profit at the end of the fiscal year; the Company receives its share as provided for in theagreement.

Aggregate Contractual Revenues

The aggregate contractually obligated annual fees, gross of activation costs, from the naming rights, licensingagreements; sponsorships, suite licenses, and concessions agreements for the next five years are approximately asfollows:

barclays center financials june 2015

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