In the Matter of the Class Action Proceedings Involving: CANADIAN HOCKEY LEAGUE WESTERN HOCKEY LEAGUE ONTARIO HOCKEY LEAGUE EXPERT REPORT OF NORM O’REILLY Prepared January 17, 2017 for Torys LLP 1 Background This report provides my view on the financial health of the member clubs of two of the three leagues which make up the Canadian Hockey League (CHL). The two leagues examined are the Western Hockey League (WHL) and the Ontario Hockey League (OHL), who are the current focus of the class action. The WHL is comprised of 22 member clubs and the OHL has 20 clubs, for a total of 42 clubs. This report is an empirical assessment of the financial health of these clubs. It is based on an analysis of actual data in a manner that is consistent with accepted concepts and understandings of the sport business, many of which I have previously written about in published editorial and peer-reviewed outlets. The report involves the following: 1. A profitability analysis of the member teams of the WHL and the OHL. 2. An assessment of the impact of a minimum wage policy. 3. An additional commentary on the report of Dr. Kevin P. Mongeon. Each of these responses is based on empirical data and secondary research. Qualifications 1. I am the Richard P. and Joan S. Fox Professor of Business at the College of Business at Ohio University, where I am a Full Professor and Department Chair in the Department of Sports Administration, one of six (6) Departments within the College of Business, ranked in 2016 by Bloomberg Business week as the 15th best public business school in the United States. Ohio University is the oldest sports administration program in the world and is home to the #1 ranked postgraduate sport business program four (4) of the past five (5) years (2012, 2013, 2015, 2016) in the world and the #1 online postgraduate sport business program the past four (4) years (2013 to 2016), as ranked by Sport Business International (UK-based). 2 2. I joined the faculty at Ohio University following previous tenured or tenure-line appointments at the University of Ottawa, Syracuse University, Laurentian University and Ryerson University. I have also held visiting professorships at Stanford University (two occasions), the University of New South Wales (Australia), and AUT University (New Zealand). 3. I have taught courses in sport business, sport finance, marketing, event management, ice hockey marketing, and sport marketing at both the graduate and undergraduate levels. Currently, at Ohio University, I teach the capstone course (sport business) in both our graduate Masters of Sports Administration (MSA) and undergraduate Bachelor of Sport Management (BSM) programs. Included in these courses are topics related to the management and financial realities facing leagues, clubs, and players at the professional, Olympic, amateur and grassroots levels. Content specific to the stakeholders in the sport of ice hockey (case studies, industry projects, etc.) are common in these classes, as are assignments and exercises on valuation, strategy and club management at various levels. Often, my classes involve guests who are industry leaders and applied student projects with industry partners. 4. I hold four (4) post-secondary degrees and the Chartered Professional Accountant/ Chartered General Accountant (CPA/CGA) designation. I am in good standing with the Ontario Chapter of the CPA. My PhD is in Management, MBA in Marketing, MA in Sport Management and B.Sc. is in Kinesiology with additional coursework in mathematics. 5. Since 2015, I am a member of the Board of Directors of the Business of Hockey Institute (BHI), a not-for-profit group of hockey industry leaders that partners with Athabasca University on the “Hockey MBA” program offered online in an executive format targeting future leaders in the industry. As part of my duties, I designed the course “Marketing Hockey 3 Strategically” which is currently being offered for the first time. I am the “Course Coach” for the inaugural version of the class. 6. Since 2013, I have sat on the Research Advisory Group of ParticipACTION, the leading not-for-profit advocate for sport participation in Canada. Previously, I have held Board positions with a number of amateur sport organizations, including Triathlon Canada, the Canadian Olympic Committee, and Diving Canada. 7. I have taught in executive education programs at both Stanford University (National Football League) and Ohio University (National Association of Sport Commissioners), which are designed for executives in these industries. The topics of my teaching in these programs have been sponsorship and strategy, and have included case studies (which I co-wrote) on hockey club management. 8. I am the author or co-author of seven books, over 90 peer-reviewed management articles, and over 20 published case studies. I have presented at more than 150 conferences. My published work can be classified within four main areas—sport management, sponsorship, marketing and sport finance. My CV provides further details about these writings and is attached as Exhibit A. 9. I am co-author of Sports Business Management: Decision-Making Around the Globe (2016) with George Foster and Tony Davila, published by Routledge (New York). The book is widely used and takes a stakeholder approach to the many business decisions a sport manager faces. A number of sections, exercises, examples and case studies in the book relate to multiple areas of importance to this report, including “Leagues” (Chapter 3), “Clubs, Owners and Management” (Chapter 4), “Professional Athletes and Players’ Associations/Unions” (Chapter 5), “Club Player-Side Decision Making” (Chapter 6), “Athlete Sponsorship, Endorsement, and 4 Branding” (Chapter 12), “Ticket Pricing and Venue-Related Revenue Streams” (Chapter 13), “Building Sports Engagement: Live Sport Event Time and Beyond Live Sport Event Time” (Chapter 14), and “Valuation of Clubs, Companies, and Other Sporting-Related Assets” (Chapter 18). 10. I have written, researched and taught for more than a decade in the valuation area. This includes my PhD thesis and subsequent work in sponsorship evaluation. My work in the measurement of asset value and the valuation of sport properties includes assessments in both the private (for-profit) and public (not-for-profit) sectors in both academic and professional settings. Specific to the sport industry, these valuations include national not-for-profit charities, events, facilities/venues, national sport organizations, provincial sport organizations, and sporting clubs from many leagues, including the CHL and Canadian Interuniversity Sport (CIS). 11. I co-write with Rick Burton, who holds the David Falk Distinguished Professorship at Syracuse University, a monthly column for Sport Business Journal, the leading trade journal in our industry in North America. We are one of a select few academics who are able to publish our work in this publication. To date, we have more than 60 published articles (50 of which were also published as a book this past fall), of which more than 10 are related to the business of ice hockey. 12. I have written, researched and taught for more than a decade on the topic of the profitability of sport clubs and leagues. This work includes a number of published articles and case studies, notably two 2006 articles with Professor John Nadeau titled “Developing a Profitability Model for Professional Sport Leagues: The Case of the National Hockey League” published in the International Journal of Sport Finance, and “Revenue Generation in Professional Sport: A Diagnostic Analysis” which can be found in the International Journal of 5 Sport Management and Marketing. These two articles are often cited and have led to additional research work on the topic by ourselves (see Exhibit A) and others. 13. I have been a co-author on nine (9) cases published in the Harvard/Stanford case study series, widely regarded as the leading source of business cases globally. These cases cover a wide range of contexts in the sport business, including national sport organizations (e.g., Hockey Canada), professional sporting clubs (e.g., Anaheim Ducks, Oakland A’s), sport networks (e.g., YES Network), venues (e.g., Infineon Raceway), and not-for-profit sport organizations (e.g., ParticipACTION). Assignment 14. I have been retained by Torys LLP to provide sport finance and valuation related advice and to provide an opinion on the profitability and the impact of a minimum wage policy on OHL and WHL clubs. I was also asked to respond to the report filed by Dr. Kevin Mongeon. Documents and Materials Relied Upon 15. In preparing this report, I have based the work upon my knowledge of valuation and profitability, as well as my knowledge of sport finance, accounting and the management of sporting clubs and similar organizations. I have further drawn on my professional experiences. 16. I was provided with financial statements and/or tax returns for each WHL and OHL club, as well as copies of the Affidavits (and Exhibits) of the WHL and OHL Commissioners and the Mongeon Report. The level of detail and format of the provided financial statements varied club by club and year over year, but typically included a pro-forma balance sheet, a pro-forma income statement, and a summary copy of the club’s tax return for each year. There was no consistency and it is important to emphasize that a common financial reporting format does not exist across WHL and OHL clubs. 6 17. I personally collected additional data to inform the analysis, all from reliable sources. Reference information for each of these data sources is provided as footnotes in the body of this report. 18. The financial statements and tax returns provided were accepted and analyzed in the form they were presented. Financial statements that were not audited were taken as provided and I assumed them to be accurate.