Financial Reporting and Analysis

Refer to the Kansas City Zephyrs PDF file that has been attached. For each of the 5 areas in dispute, answer the following:?

Professors Kenneth A. Merchant and Krishna Palepu and Research As
sociate Joseph P. Mulloy prepared the original version of this
case, “Kansas
City Zephyrs Baseball Club, Inc.,” HBS No. 187-088. This version
was prepared by Professor Krishn
a Palepu with the assistance o
f Senior
Researcher James Weber. This case and the
company and characters depicted are fictit
ious. HBS cases are developed solely as the
basis for class
discussion. Cases are not intended to serv
e as endorsements, sources of primary data
, or illustrations of effective or ineffect
ive management.
Copyright © 2009, 2
011 President and Fellows of Harvard College. To order
copies or request permission to reproduce materials,
call 1-800-545-
7685, write Harvard Business School Publishing, Boston, MA 02163,
or go to
ucators. This publication may
not be
digitized, photocopied, or otherwise reproduced, posted, or tr
ansmitted, without the permission of Harvard Business School.
Kansas City Zephyrs Baseball Club, Inc. 2006
On April 17, 2006, Bill Ahern sat in his office
and contemplated a difficult judgment he had to
make in the next two days. Two weeks before, Bill had
been asked to be an arbitrator in a dispute that
had surfaced in collective bargaining negotiat
ions between the Owner-Player Committee (OPC, the
representatives of the owners of the 30 major league baseball teams) and the Professional Baseball
Players Association (PBPA, the players’ union).
A Baseball Accounting Dispute
The issue Ahern had to resolve was the profitability of the major league baseball teams. The
players felt they should share in the teams’ profits; the owners maintained, however, that most of the
teams were actually losing money each year, and th
ey produced financial statements to support that
position. The players, who had examined the owne
rs’ statements, countered that the owners were
hiding profits through a number of accounting tr
icks and that the statements did not accurately
reflect the economic reality. Ahern’s decision on
the profitability issue was important because it
would affect the ongoing contract negotiations, pa
rticularly in the areas
of minimum salaries and
team contributions to the players’ pension fund.
On April 9, Ahern met with the OPC and the representatives of the PBPA. The two sides
explained they wanted him to focus
on the finances of the Kansas City
Zephyrs Baseball Club, Inc. (a
disguised name). This club had been selected for
review because both sides agreed its operations
were representative, yet it was a relatively clean and simple example to study: the baseball club entity
was not owned by another corporation, and it
did not own the stadium the team played in.
Furthermore, no private financial data would ha
ve to be revealed because the corporation was
publicly owned. Ahern’s task was to review the Ze
phyrs’ financial statements, hear the owners’ and
players’ arguments, and then reach a decision as to the profitability of the team by Friday, April 19.
Major League
Major league baseball in the United States compri
sed a number of components bound together by
sets of agreements and contractual relationships.
At the heart of major league baseball were the 30
Kansas City Zephyrs Baseball Club, Inc. 2006
major league teams. Each team operated as an
independent economic unit in such matters as
contracting for players, promoting games and sellin
g tickets, arranging for the use of a stadium and
other needed facilities and services
, and negotiating local broadcasting of games. The teams joined
together to establish common rules and playing
schedules, and to stage championship games.
The business of most teams was limited exclusivel
y to their major league activities. Very few
integrated vertically by owning their own stadium or minor league teams. Most teams were
organized as partnerships or privately held corporations, although a few were subunits of larger
corporations. While baseball was often thought of
as a big business, the individual teams were
relatively small. For most of them, annual revenues were between $200 million and $300 million.
Each team maintained an active roster of 25 players during the playing season, plus another 15
players who were either minor league players “on option” who might see major league action during
the season, or players on the disabled list. This ma
de a total of up to 40 players on major league
contracts for each team at any one time. Each team
played a schedule of 162 games during the season,
81 at home and 81 away.
Collectively, the team owners established most of
the regulations that governed the industry. The
covenant that bound them was the Major League
Agreement (MLA), which included the Major
League Rules. The rules detailed all the procedures the clubs agreed on, including the rules for
signing, trading, and dealing with players.
Under the MLA, the owners elected a commissioner of baseball who acted as a spokesperson for
the industry, resolved disputes am
ong the clubs and the other baseball
entities, policed the industry,
and enforced the rules. The commissioner had broad powers to protect the best interests of the game.
The commissioner also administered the Major Le
agues Central Fund, under which he negotiated
and received the revenues from national broadcast
contracts for major league games. About one-half
of the fund’s revenues were passed on direct
ly to the teams in approximately equal shares.
Within the overall structure of major league baseball, the 30 teams were organized into two
leagues, each with its own president and administration. The American League had 14 teams and the
National League had 16 teams, one of which was the Kansas City Zephyrs. Each league controlled the
allocation and movement of its respective franchises. In addition to authorizing franchises, the
leagues developed the schedule of games, co
ntracted for umpires, and performed other
administrative tasks. The leagues were financed
through a small percentage share of club ticket
revenues and receipts from the World Se
ries and pennant championship games.
In addition to the major league teams, U.S. baseball included about 250 minor league teams
located throughout the United States, Canada, and Mexico. Minor league teams served a dual
function: they were entertainment entities in thei
r own right, and they were training grounds for
major league players. Through Player Development
Contracts, the major league teams agreed to pay
a certain portion of their affiliated minor league teams’ operating expenses and player salaries.
Meeting with the Zephyrs’ Owners
Bill Ahern spent Tuesday reviewing the history
of major league baseball and the relationships
among the various entities that make up the majo
r leagues. Then he met with the Zephyrs owners’
representatives on Wednesday.
The owners’ representatives gave Ahern a short hi
story of the team and presented him with the
team’s financial statements for the years 2004 and 2005. (See
Exhibits 1
for financial data from

Who is right?? and Why?

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