Next week* the Riverhounds, Tuffy, Kutney, representatives of the banks, other creditors, etc. will be in court deciding if the reorganization plan submitted by the team earlier this fall will lead the Riverhounds out of bankruptcy and into a stable future. (*if it wasn’t rescheduled and I missed it, but either way it’s soon). Thanks to court records being public records I’ve read through the plan and did my best to pull out the major points. I’ll say upfront I’m not a lawyer, just a guy with too much free time. Nevertheless there’s been questions surrounding all of this and I think I can help answer some of them. Plus we think you as supporters deserve to know.

Note: This plan I read was filed in late August. There was a revised version filed in September, but as far as I could tell the basics are the same.

Debt

A quick aside- the Riverhounds are actually broken into two separate organizations. The Riverhounds Acquisition Group (RAG) which is the team, and the Riverhounds Event Center (REC), which is the stadium. While own by the same folks they are two separate legal entities with different amounts of debt, but for the purpose of this post, and because it’s easier to talk about, I’m going to lump it all together.

The long and short of it is the Riverhounds are in a lot of debt. Shocking for a company in Chapter 11 I know. Pretty much all of this is because of the construction of Highmark Stadium. At the time the Hounds made a big deal about the stadium being privately funded, and while technically true, it was actually thanks to a couple big loans more than paying out of pocket. The Hounds financed Highmark Stadium to the tune of approx. $8.8 million from First National Bank and the Pittsburgh Urban Initiative (about a 20/80 split between the two), and they still owe pretty much all of it. There’s also a half a million dollar loan filed by the Pittsburgh Urban Redevelopment Authority, though the Riverhounds contest the validity of it. And there’s a couple million dollars of additional debt to various creditors and to Tuffy himself for floating the team over the last year or so. All in all the Riverhounds are about $10-12 million in debt.

Oi that’s a lot for a small team. In the long run I don’t doubt Highmark Stadium was needed to keep the team existing, especially with the way the USL is heading, but boy was it a big risk. Don’t get me wrong we love the stadium and everything it’s done for the club and for us, but at the time either someone was over ambitious, or things just haven’t worked out as well as they hoped.

Bankruptcy

The Riverhounds have been operating at a loss for a few years now, around $180,000 a year by 2012 alone. In general this isn’t uncommon for sports teams (especially minor leagues), and so while not great, it wasn’t necessarily a bad thing. While moving to Highmark Stadium brought more attention and higher attendance numbers to the team, it also brought much higher operating costs. Normally this would be countered by increased revenue, but for whatever reason what the Hounds were pulling in just wasn’t enough.

The operating cost for the Riverhounds increased by approx. $650,000 from 2012 to 2013 due to moving into Highmark, but their revenue only increased by approx. $300k ($1.3m to $1.6m). All in all the Riverhounds yearly loss increased from $180,000 a year to around $400,000 a year with a projected flat line revenue over the next few years. Obviously a dire financial outlook even for a sports team. We like to joke about Tuffy money, but even Tuffy can’t afford to hemorrhage nearly half a million dollars a year. With the team losing so much every year and big loans looming overhead, Chapter 11 was the only choice to make sure the team doesn’t die.

Finances

So what was eating up all the money and what was bringing money in? We’ve known for some time that the Academy was brought in most of the money for the organization, and that still holds true. What was shocking in reading the court documents is the cost to run the academy is almost the same as running the professional team, approx. $1.2 million each. With how much overlap there seems to be between the professional team and the academy I have no idea what they’re spending the money on, but I also can’t deny it works. The Academy is almost a net zero as far as profit/loss goes, and going forward it’s going to be what keeps all this going. We’ve heard rumors in the past that they had plans in the future to split (from an organizational / legal perspective) the Academy from the professional team, but with the way things are now I don’t see that happening any time soon if ever.

Some other numbers. Travel costs for the Riverhounds spiked this year due to the new western teams, which was to be expected. Word on the street is divisions next season which should help bring that back down. Merch sales are way up which is nice to see, especially considering the push they made this year with the team store. Unfortunately ticket sales are down in 2014 as the allure of a new stadium diminished, plus the poor performance on the field. Finally, sponsorship revenue took a nose dive but that’s due to the bankruptcy than anything. That should go back up.

Team Payroll

Probably the biggest increase in cost between 2012, 2013, and 2014 was payroll. As the Academy expanded they’ve hired more administrative people, which is to be expected. The big increase seems to be player salaries. This shouldn’t be too much of a surprise considering some of the signings they made in 2013/2014. It’s tough to tell from the way they organized their numbers but it looked like payroll was approx. $320,000 in 2012, which seems about right for a team in a high school stadium. By 2014 it ballooned to what I estimate as $650,000 – $700,000. From what I gathered this put them in the top bracket of USL teams in 2014, but as we saw throwing cash around didn’t buy success.

Reorganization Plan

The plan in a short and sweet format-

• Take on the secured $1.3 million debt from First National Bank.
• Repay the couple million they owe Tuffy.
• Shed as much of the remaining unsecured debt as possible through the courts.
• Substantially expand the Academy to generate more cash flow.
• Reduce some of the operating costs of the team while aggressively increasing sponsorship deals.

In the revised documents dated late September it indicates the Riverhounds worked out a deal with the Pittsburgh Urban Initiative to pay a (relatively) small lump sum at which point “the CDE shall waive and release any right to distribution on account of the CDE Unsecured Claim, and no recovery shall be paid to the CDE.” That’s a good $7 million they’re able to shed right there which will help a lot.

The BIG, and I mean BIG part of the reorganization plan is when this is all said and done, “Shallenberger and/or Persons or entities owned and controlled by Shallenberger shall receive 100% of the ownership and equity in the Reorganized Debtor.” Bankruptcy as it seems, is a loser goes home match. Tuffy currently owns 51% of both the team and the stadium, with the rest owned by various individuals and groups. The person who stands to lose the most in this plan is David Wilke who currently owns 26% of the stadium and I believe is part of the Greentree Sportsplex group that owns 16% of the team. Not to mention a few loans he gave to the team. Wilke played a big role in keeping this team alive and to get it to where it is today. With the cut throat nature of business, this reorganization plan is probably going to piss a lot of people off it it goes through.

The Hounds submitted financial projections for the next three years. They expect to be in the hole a decent amount in 2015 (about another $700,000), but that is mostly due to expanding the Academy and the costs surrounding it. The Academy is expected to start operating at a profit in 2016, and the entire organization in 2017. Finally, Tuffy has agreed to float the team over the next three years as needed.

Other Stuff

As mentioned above the Hounds payroll in 2014 was somewhere in the range of $650,000 – $700,000. As part of the cost cutting measures we’re going to see a significant decrease over the next few years. Around $520,000 next year which will slightly increase each year after. While by pure numbers this is a big cut, per the documents this will actually bring them down to around league average. As we saw in 2014 having too many cooks in the kitchen throwing around money makes splashes for the papers but not for results. We won’t have to worry about that much next season as “Most players have 1 year contracts, and several higher-priced players have already expressed their intention to leave the team in 2015.” As long as the Hounds spend smart they can still be a competitive team. I doubt Harrisburg is spending any more than that and they made the finals this season.

The team also expects to reduce travel costs by not going to Houston for preseason in 2015. Possibly an indication of future affiliation plans.

There should be a much bigger advertising push next year to help get attendance numbers up. This was an area that was slashed by approx. 60% this season to help reduce costs. Going forward they are planning to bring it back up to 2013 levels.

Most of the sponsorship revenue was axed due to the bankruptcy which hurt quite a bit. The Hounds are planning on aggressively going after more, and more expensive, deals in the coming years to get back on track.

The USL would permit the team to sell its franchise rights if it comes to that point as long as the buyer and location are acceptable to the league. However, the USL indicated that if they attempted to sell its franchise rights to an owner in the same market as an existing franchise or prospective franchise, the league would not approve the transaction.

Conclusion

It’s been fascinating to be able to take a peak behind the curtain of a sports team to see how it’s run. While seeing some of the big numbers in the loss category is scary, looking at the projections they don’t seem too out there. I don’t see the team folding anytime in the near future. I’ve met Tuffy a few times and he’s come across as a straight forward, takes no crap kind of guy who is doing what he thinks is best for the team in the long run. I try to stay out of taking sides in the world of businessmen and focus on the product on the field. That said I have to support Tuffy and his plan, because if it doesn’t work… it’s going to be a rather bleak world for us. Whatever the outcome of all of this, it’s going to be quite a trip.

If you have any questions post in the Facebook comments and I’ll try to answer them. We’ll let you know the outcome of the court hearing as soon as we know.

#UNLEASH