Sunday, December 26, 1999
Shareholders' take of profits drained Bengals
Brown family concedes years of conservative spending hurt team
An Enquirer analysis of Tax Court records reveals how Paul Brown negotiated with Bengals shareholders to give his family a chance to own the team he founded. His plan worked. The Brown family now has majority ownership of the team. But in the process, an '80s contender has become the worst team of the '90s.
BY JOHN J. BYCZKOWSKI
The Cincinnati Enquirer
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Paul Brown made it possible for his son Mike to own and control the team he founded.
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During the dance to keep the Cincinnati Bengals from moving to Baltimore, team president Mike Brown was asked in 1995 if he could help fund a new stadium in Cincinnati.
No, he said: “Plain and simple, I don't have it. I'm not a wealthy person. I don't have tens of millions to contribute to it.”
He's right. He didn't. Twelve years earlier, his father, Paul Brown, the legendary NFL coach and founder of the Bengals, signed away the family's profits so that one day 10 years down the road, his son Mike could own and control the team.
From 1984 to 1993, the Bengals paid out every penny of profit — $66 million — to shareholders. Nearly all of that money was paid to John Sawyer and Austin Knowlton, the men whose money brought the new franchise to Cincinnati in 1968.
The Brown family understood the price the deal would extract from the team, already on shaky ground financially. The deal added “another layer of uncertainty regarding whether the Bengals would have sufficient resources to survive in a competitive environment,” the family would later tell a federal judge.
Still, Paul Brown's conservative management, football prowess and eye for talent worked to guide the Bengals to two Super Bowls. But in 1991, the first season after the legend's death and the first with son Mike Brown at the rudder, the Bengals began 0-8 and went on the the worst record of any NFL team in the decade.
The story behind the quest for control — and why the Bengals came to be known as a team that served no free breakfast to players — unfolds in the files of the U.S. Tax Court in Washington, D.C. There, in 1996, the family challenged the IRS over a $37 million estate-tax bill that came after Paul Brown's death in 1991. The family won the case in 1997.
The documents allow a rare look inside the Bengals, which like most NFL teams keeps the details of its finances from the fans. “We're a small, closely held business, and we feel that we have a right to keep that private,” said Bengals president Mike Brown in a recent interview. “I'm just not going to discuss it.”
The Bengals end the 1990s with the decade's worst record: 52 wins and 106 losses. They have won 60 fewer games and spent $90 million less on talent than the decade's top team, the San Francisco 49ers.
Former Bengals see the roots of the team's dismal decade in the team's historic frugality. “Absolutely,” said Reggie Williams, former team captain who played for the Bengals from 1976 to 1989. “To have stewardship of this institution and have run it into the ground, for whatever reason, is unconscionable.”
Former head coach Sam Wyche said the Bengals' tough negotiating stance, Spartan facilities and small organization hardened the image that the team was needlessly frugal — an image that still haunts the team today.
In an age of free agency, when players have more freedom to choose where they play, many of the best are not choosing Cincinnati. “That is a real fact of life,” Mr. Wyche said. “I went through that and I think other (Bengals') coaches went through that.
But Mike Brown, who now controls a majority of the team's stock, said it's “dead-ass wrong” to think the money paid to shareholders would have improved the Bengals' performance had it been invested in the team.
“We spend comparable to what others spend,” he said.
Records obtained by the Enquirer show the Bengals' 1999 payroll is $56 million, $8.2 million below the median NFL team payroll. The Bengals had the second-lowest average payroll in the league during the 1990s.
“Our problem might be that we haven't gotten quite the team together that we need. But that's typical. We've had some things that were pretty tough breaks,” he said.
Mike Brown attributes the team's record to bad luck. The team drafted Dan Wilkinson with the first pick of the NFL draft in 1994, but he never had an impact with the Bengals and was traded to Washington in 1998.
In 1995 the Bengals aggressively traded up to take the first pick in the draft and chose All-American running back Ki-Jana Carter. But his playing time has been limited because of injuries.
“When you draft a guy No. 1, real high, and he gets injured and can't play successfully, that's a tough break,” Mr. Brown said. “Those things are not ordinary in this league, and we've had a rash of that.”
Mr. Sawyer, former majority shareholder and team president 1968-94, agreed the Bengals have had some bad luck with first-round draft choices. He denied, though, that the team suffered because all the profits were paid to him and other shareholders. But he conceded that a lack of investment “might have been a factor” behind the team's 56-106 record in the 1990s.
“Nobody ever feels they have enough money. ... People didn't want to come (to play for the Bengals) because it was perceived that we were a lousy place, poor training facilities and all those things. And by some standards we were behind.
“But we did the best we could.”
Austin Knowlton, of Knowlton Construction in Columbus and the team's other major shareholder, did not respond to requests for an interview. He is today chairman of the Bengals.
There's little doubt spending money and winning football go hand in hand.
“This idea that teams that spend more, win more, it's not an opinion. All you have to do is look at the data. It's a fact,” said Rodney Fort, a sports economist at Washington State University.
But winning has a downside, the Brown family told U.S. Tax Court in 1996:
“Super Bowl teams do not make as much money as the public thinks. Revenues are shared among all 28 teams and expenses are only borne by the teams that play in the Super Bowl. Super Bowl teams lose more money in the following years because they have to pay their players more for their superior performance.”
Fired in Cleveland
Mike Brown labeled as “ancient history” the facts brought out in the U.S. Tax Court case, Estate of Paul Brown vs. Commissioner of Internal Revenue, over a deal Paul Brown and John Sawyer made in 1983.
Regardless, the Brown family went back decades for details to convince the tax court that Paul Brown had not tried to avoid estate taxes.
“Paul Brown was a product of the Great Depression in the 1930s,” the family told tax court. “He thought borrowing money was a sign of weakness.”
The documents detail Paul Brown's founding of the Cleveland Browns in 1946, and his firing in 1963 by new team owner Art Modell, who believed the team could never be his as long as Paul was around. Paul stayed out of football for five years, turning down coaching jobs in Atlanta and Miami, waiting to find a team where he would have total control.
Paul Brown found it in Cincinnati, as chosen leader of a group of investors who were awarded a NFL franchise in 1967. The original investors included Mr. Knowlton, who owned 30 percent; Mr. Sawyer, 20 percent; the Enquirer, 11 percent; and Paul Brown, 10 percent. Seven others owned 29 percent.
Though he owned just 10 percent of the team, Paul Brown, with the approval of the other shareholders, controlled every aspect of the franchise. He retained that authority until his death in 1991.
Paul Brown ran a lean organization, and rather than distribute profits to shareholders during the Bengals early years, he used the money to buy out minority shareholders, court documents show.
From 1968 to 1982, the holding company that owned the team paid less than $1 million in dividends to shareholders. But between 1977 and 1980, the company spent more than $8 million to buy back shares.
The repurchases effectively left Mr. Knowlton, Mr. Sawyer and Paul Brown holding 99 percent of the Bengals' stock. (By 1979 the Enquirer was no longer a shareholder.) The Brown family, in court documents, conceded Paul Brown's conservative spending hurt the team competitively.
“Unlike other NFL teams like the Dallas Cowboys, the Bengals had to run their team within the budget they had,” the Brown family told tax court.
“They could not afford to take an unlimited number of players to training camp like the Cowboys did. The Bengals also had a small administrative staff. The Bengals' frugality,” the family said, “affected the Bengals' ability to attract players to Cincinnati at times when there was another league competing for players” — the United States Football League, in 1983.
Demanding more profits
Coming off the Bengals' first Super Bowl appearance in early 1982, shareholders Mr. Knowlton and Mr. Sawyer wanted to see more of the team's profits coming to them.
“In 1982 and 1983, the Bengals' shareholder with the greatest number of shares, Austin Knowlton, was anxious to see more Bengals revenues distributed to shareholders,” the Brown family said in one tax court document.
Mr. Sawyer, of Indian Hill, a Princeton-educated farmer, had his own problems.
High interest rates, high energy prices and low prices for farmland created financial difficulties for Mr. Sawyer, court documents show.
“Because of his increasing cash flow problems, Mr. Sawyer sought to find a way through his investment in the Bengals to generate cash,” said one court document.
Football had its own troubles, and they worried Paul Brown:
• In 1982 season, players staged a two-month strike that emptied stadiums around the league. Teams lost money from ticket and TV revenues. Paul Brown worried fans wouldn't return in 1983.
• Raiders owner Al Davis and the Los Angeles Coliseum in 1982 won a $60 million judgment against the NFL, and the right to move the Raiders from Oakland to Los Angeles. That cost each NFL team more than $2 million. Paul Brown worried the decision would trigger a wave of team relocations that would hurt small-market teams like the Bengals.
• And in May 1982, plans were announced for a new league, the 12-team USFL. That set off a bidding war that robbed the Bengals of some of their best players, including tight end Dan Ross. Paul Brown feared rising player salaries and a costly antitrust lawsuit against the NFL.
The net effect was devastating for the team. “The Bengals were practically broke as of February 28, 1983,” the Brown family told tax court. “They were in terrible financial condition.”
The loss of revenue during the 1982 strike combined with a bill for $2.5 million in back taxes drove the team toward a $2.2 million deficit.
It was in May 1983 that Paul Brown, then 75, entered into an agreement that would help his partners in the short term and later give his family the opportunity to own the team. Here's what they agreed to:
• The Bengals reorganized as an “S” corporation, meaning the income of the team became the income of the individual shareholders. “As a result of the agreement, the Bengals were required to pay dividends to the extent of the team's income,” the family told tax court.
• Paul Brown sold 117 of his 118 Bengals shares to Mr. Sawyer for $30,000 each, or $3.5 million. Combined with his own shares, this gave Mr. Sawyer 330 of the Bengals' 586 shares, or 56 percent. Though that was a majority, Paul Brown retained control over the team's operations.
• As part of the deal, Mr. Sawyer agreed that Paul Brown's sons, Mike and Pete, could buy 329 of his shares — and controlling interest in the team — for $25,000 per share, during a three-year period beginning March 1, 1993. Mr. Sawyer sold this option to the brothers, Pete and Mike, for $1.
• The agreement limited the salaries of Paul, Mike and Pete Brown to 105 percent of their 1983 compensation, plus bonuses and adjustments for inflation. In 1984, general manager Paul was paid $310,622; assistant GM Mike, $190,733; and player personnel director Pete, $125,339. The three also split a bonus pool that year of $263,757. Each owned a single share of Bengals stock during the period.
Everybody was happy: Paul Brown was protected against a drop in the value of his shares. Mr. Sawyer and Mr. Knowlton were getting millions in cash from their Bengals' shares. And a mechanism was established to pass long-term control of the team to the Brown family.
The documents say that from 1984 to 1993, Mr. Sawyer's 330 shares of Bengals stock paid $37.6 million in dividends. With 586 shares outstanding, that meant dividends paid out over that period totaled $66.7 million, or nearly $114,000 per share.
How that compares to other NFL teams isn't known, because those figures aren't publicly available. Data released in a 1992 court case involving the NFL showed that in 1989, the Bengals were the third-most profitable of the league's 28 franchises.
The agreement to distribute all the profits to the shareholders would have a long-term impact on the team. “The Bengals were not going to have retained earnings when the (stock) option was first exercisable in 1993,” the family told tax court. Retained earnings are a company's piggy bank, a financial cushion to weather unanticipated misfortunes.
It was unfortunate timing: Free agency hit the NFL in 1993, and the effect was immediate and large. The average NFL team salary climbed $11.5 million that year, to $39.3 million.
Without the cushion of retained earnings, the Bengals cut their payroll by $2.1 million to $26.2 million in 1993.
Driving hard bargains
The Bengals worked hard to keep the team's payroll in check, and acquired a reputation as unyielding negotiators. Eight of the 10 first-round draft picks from 1984 to 1993 were not with the team on the first day of training camp. Ricky Hunley, drafted in 1984, never signed with the team. Unable to reach a deal, Mr. Hunley was instead traded to Denver.
“I think that the Bengals always drove such a hard bargain, that when the leverage swung over more toward to the agent and the player (when free agency was introduced in 1993), there may have been some instances where it was more difficult” for the Bengals to obtain players, said Sam Wyche, the team's head coach from 1984-1991.
Although they owned only one share each at the time, Paul and Mike Brown “were making it clear that it was a family-owned business, that they weren't shopping center moguls or car dealers that also owned a football team, that this was their life,” he said. “And they were going to run the business with a profit motive in mind, but they still wanted to do things and win games and do what they could.”
Despite posting tens of millions of dollars in profits, the Brown family continued to run the franchise frugally, but that was by design, Mr. Sawyer said. “The owners didn't complain one bit about (Paul Brown) being frugal,” he said.
That meant the Bengals often went without.
The biggest complaint was about Spinney Field, the Bengals' training complex in Lower Price Hill, just west of downtown. “We needed a better facility,” said Mr. Wyche, now a football analyst for CBS.
Mr. Williams, the former Bengals linebacker, agreed: “Everyone knows we had the worst practice facilities in the NFL for years during that time.”
Another complaint: the team's lean scouting staff, among the smallest in the league. “Other teams' coaches were studying football and doing football things — playbooks and training reels and studying what other teams were doing. We were on the road, as soon as the season ended,” Mr. Wyche said.
Mr. Sawyer insisted the stockholders never put their dividends over the interest of the team.
“The choices were never made, "OK, we can't spend this because we've got to get our money out.' That was never a part of the decision.”
During those 10 years he was majority shareholder, Mr. Sawyer hoped that Mike Brown would not exercise his option to buy the controlling shares, he told tax court. It wasn't until almost 1993 that he finally believed Mike would.
The Brown family exercised the option on the first day it was allowed, March 1, 1993.
Five members of the Brown family bought 329 Bengals shares from Mr. Sawyer for $25,000 per share — a bargain, given that the tax court found they were worth $111,000 each in 1991.
As part of the deal, the Brown family forgave a promissory note Mr. Sawyer had given Paul Brown in 1983. That brought the bottom-line cost of buying the shares to just $1.6 million.
For the first time ever, the family owned controlling ownership of the Bengals, something Paul Brown never saw.
Seven months later, Mike Brown made his first threats to move the franchise out of Cincinnati. To stay, he said he needed a new, publicly financed stadium that would help the team make more money to meet rising salaries.
He said he needed a stadium with luxury boxes, advertising opportunities, better concessions — everything he didn't get in his lease at Riverfront Stadium, later renamed Cinergy Field.
In 1996, Hamilton County voters passed a half-cent sales tax increase to fund construction of new stadiums for the Bengals and the Reds.
Today, the Brown family controls a franchise that next year moves into a new 66,965-seat stadium with all the opportunities for revenue any sports franchise could want — 108 luxury boxes, club seats, advertising, naming rights, beverage pouring rights, parking and concessions.
Forbes magazine estimates the Bengals are worth nearly $394 million.
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