The Hornets' Financial Statements: The Hornets have been unprofitable for a long time

In a Wikileaks-like dump, Deadspin released the Hornets' financial statements from the fiscal year ending 2009. I'll be going through these statements for the next couple of days off and on, but I can share some of my preliminary analysis with you right now. I'm happy to finally be putting my finance major to good use.

The short version of the story is that the Hornets were not profitable from 2008 to 2009, and it doesn't appear that they were particularly profitable before that. The NBA was keeping them on life support, giving them loans, letting them get cheap credit, and deferring payment of the Hornets' liabilities to the NBA. Follow me beneath the jump for some of the details.

A couple of quick notes:

1) The Hornets have their fiscal year end on June 30 of every year (befitting an NBA franchise), so when I say "2008," I mean the financial results of the 2007-2008 season. Deadspin only released a financial statement that has results from 2008 and 2009, so the 2009-2010 season is not included in this analysis (presumably, with the Chris Paul injury, that season went even worse for the Hornets financially).

2) I'm going to be focusing on the Hornets' cash flows, since that's where the money is. As long as the team can generate positive cash flows, they can continue operating. If they have a hard time doing that, then they won't. It's that simple.

So, on to the analysis. If you'll go to page 11 of the Deadspin dump, you'll find the Hornets' statement of operations This tells us what in the Hornets' organization is making how much money, and whether their revenue is able to cover their expenses.

In 2008, just on operations, the Hornets lost money. A lot of it, in fact - $7 Million. That's a -7% operating margin, which is terrible. In the end, they reported a Net Income of -$16 Million, which, again, looks really bad. The next year, 2009, the Hornets were able to significantly boost their Net Income to the point that it was positive - nearly $2 Million. Why is that? Well, there are two big causes for the jump. The first is a nearly $10 Million jump in home ticket revenue, and the second is a strange $4 Million "Gain on modification of relocation obligation." Without that strange $4 Million addition, the Hornets would have lost $2 Million in 2009, even with the huge spike in ticket revenue and a $3 Million cut in expenses.

Now what was the "Gain on modification of relocation obligation?" The bottom of page 25 and all of page 26 gives us the answer. The Hornets owed the NBA a $30 Million for moving from Charlotte to New Orleans. They decided to pay that over a 7-year installment plan. However, the Hornets were having such a hard time paying the fee, the NBA allowed them to push back their payment of the fee until they were more profitable. So in 2009, the Hornets were able to log a "Gain" of $4 Million, since the NBA wasn't making them pay their existing liabilities. Without that charity from the NBA, the Hornets would have lost $2 Million in 2009.

Now let's look at the Hornets' statement of cash flows. That tells us how much cash the company is currently taking in. It's the most important measure of a company's health. We see under the line "Net Cash used in operating activities" that the Hornets bled cash due to their operations in both years, even with the NBA's creative bookkeeping (creative bookkeeping, by the way, doesn't mean anything untoward was being done. It just means the NBA was doing all it could to keep the Hornets afloat).

To make sure that the Hornets could keep doing business, they had to rely on borrowing money from other people. Look at "Proceeds from related-party notes payable" under "Cash flows from financing activities." We can learn on Page 29 of the Deadspin dump under note 15 that Shinn and Chouest gave short-term loans to the Hornets to make sure that they could keep operating. In 2009, we see that those short-term loans had been paid back, and the Hornets had issued $14.5 Million of long-term debt to cover that payment back to the owners, and had drawn $8 Million from their revolvers (a standing line of credit from the NBA). These revolvers are the lines of credit that David Stern said the team had maxed out.

To summarize: The Hornets were losing significant amounts of money as a team. To cover their losses, they were borrowing from anybody they could get money from – their owners, issuing long-term debt, and credit from the NBA. Finally, this year, the Hornets finally ran out of places they could get money from to cover their losses, and the NBA had to take over.

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