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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2002.
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _________________ TO ________________.
COMMISSION FILE NUMBER 1-13925
CHAMPIONSHIP AUTO RACING TEAMS, INC.
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(Exact name of registrant as specified in its charter)
Delaware 38-3389456
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(State or other jurisdiction of (IRS Employer Identification No.)
Incorporation or organization)
5350 Lakeview Parkway Drive South, Indianapolis, IN 46268
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(Address of principal executive offices) (Zip Code)
(317) 715-4100
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(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
Common Stock, $.01 par value New York Stock Exchange
Securities registered pursuant to section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [ X ] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
Form 10-K [ ].
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes [ ] No [ X ]
On March 24, 2003 the aggregate market value of the shares of voting stock of
Registrant held by non-affiliates was approximately $48,128,298 based on a
closing sales price on the NYSE of $3.27 per share.
At March 24, 2003, the Registrant had 14,718,134 shares of common stock
outstanding.
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DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement for the 2003 Annual Meeting of
Stockholders, to be filed with the Securities and Exchange Commission not later
than 120 days after the close of the Registrant's fiscal year, pursuant to
Regulation 14A, are incorporated by reference into Items 10, 11, 12 and 13 of
Part III of this annual report.
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FORM 10-K TABLE OF CONTENTS
PAGE
PART I
Item 1. Business...........................................................................4
Item 2. Properties........................................................................13
Item 3. Legal Proceedings.................................................................13
Item 4. Submission of Matters to a Vote of Security Holders...............................14
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters...... 15
Item 6. Selected Consolidated Financial Data..............................................16
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operation........................................................18
Item 7A. Quantitative and Qualitative Disclosures About Market Risk........................40
Item 8. Financial Statements and Supplementary Data.......................................40
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure........................................................40
PART III
Item 10. Directors and Executive Officers of the Registrant................................41
Item 11. Executive Compensation............................................................41
Item 12. Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters.................................................41
Item 13. Certain Relationships and Related Transactions....................................41
Item 14. Controls and Procedures...........................................................41
PART IV
Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K...................42
SIGNATURES
CERTIFICATIONS
EXHIBITS
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PART I
ITEM 1: BUSINESS
INTRODUCTION
We own, operate and sanction the premier open-wheel motorsports series in
North America-the Bridgestone Presents the Champ Car World Series Powered By
Ford, offering a marketing platform for the sponsors of our series, our teams,
our drivers and our events. We are responsible for organizing, marketing and
staging each of the races in the Champ Car World Series. At certain events, we
act as promoter or co-promoter of the event. With speeds of up to 240 miles per
hour, Champ Car open-wheel racing is the fastest form of closed-circuit auto
racing available to motorsports audiences, providing intense excitement and
competition. We also own and sanction the Toyota Atlantic Championship, a
development series for the Champ Car World Series.
We conduct our races on four different types of tracks, requiring teams and
drivers competing for the Champ Car World Series to employ a variety of skills
to master different courses. Each race weekend in the Champ Car World Series is
an "event" offering spectators the opportunity to enjoy a Champ Car race, as
well as a full weekend of motorsports related entertainment. Most of our events
include additional races, such as events in the Toyota Atlantic Championship and
the Barber Dodge Pro Series, practice and qualifying rounds for all racing
events and automotive and general entertainment demonstrations and displays.
Race weekends provide corporate sponsors and other businesses the opportunity to
entertain their customers and employees through hospitality areas and other
activities.
We were incorporated in Delaware in December 1997. Our principal executive
office is located at 5350 Lakeview Parkway Drive South, Indianapolis, Indiana
46268 and our telephone number is (317) 715-4100. Our filings with the
Securities and Exchange Commission, including our annual report of Form 10-K,
quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to
these reports, are available free of charge on our Internet website as soon as
reasonably practicable after we electronically file or furnish the report with
the SEC. Our Internet website address is www.champcarworldseries.com.
CHAMP CAR HISTORY
Champ Car-style, open-wheel racing stands as the longest continually
scheduled major motorsports championship in the world, dating back to the early
1900s. The first American automobile race took place in 1895, and the American
Automobile Association ("AAA") began sanctioning major races in 1904. The AAA
sanctioned races through the 1955 season at which time USAC became the official
sanctioning body.
In the 1970s, race team owners became increasingly concerned about
escalating costs, lack of promotional activities and concentration solely on the
Indianapolis 500. As a result, in November 1978, a group of 18 of the 21 team
owners left USAC to form CART and the Champ Car World Series. The group included
team owners who desired greater participation in the rule-making and
administrative processes concerning open-wheel racing in the United States. In
its 1979 inaugural season, Champ Car staged 13 races, and we crowned Rick Mears
as our first champion.
Since Mears' victory in the inaugural season, Champ Car has had many other
memorable champions including:
- Mario Andretti
- Michael Andretti
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- Cristiano da Matta
- Gil de Ferran
- Emerson Fittipaldi
- Nigel Mansell
- Juan Montoya
- Bobby Rahal
- Johnny Rutherford
- Danny Sullivan
- Al Unser, Jr.
- Al Unser, Sr.
- Jimmy Vasser
- Jacques Villeneuve
- Alex Zanardi
Competitive racing in some of the world's top urban markets is the hallmark
of Champ Car racing. In 2002, the series broke long-standing single event and
full-season attendance records, drawing more than 2.6 million fans to Champ Car
races. Cristiano da Matta had one of the most memorable seasons in series
history on his way to his first Champ Car title, winning seven races and seven
poles.
The series visited four new urban venues in 2002, running inaugural races
in Denver, Miami, Montreal and Mexico City. Two more new races are on the 2003
calendar, with stops in St. Petersburg, Florida and Kent, United Kingdom.
The diversity of our drivers adds to our worldwide appeal. In 2002, 20 of
the 23 drivers that competed in at least one event were born outside of the
United States. In total, these drivers represented 10 different countries. For
2003, we expect our entry list to include drivers from France, Great Britain,
Portugal, Spain, Mexico, Canada, Brazil, Switzerland and the United States.
INDUSTRY OVERVIEW
TYPES OF AUTO RACING. Auto racing consists of several distinct categories,
each with its own organizing body and racing events. Internationally, the most
recognized form of auto racing is open-wheel racing, utilizing an
aerodynamically designed chassis and technologically advanced equipment. The
most established open-wheel racing series are:
- Formula One
- Champ Car World Series
- Indy Car Series
- Formula 3000
- Toyota Atlantic Championship
- FORMULA ONE. The Formula One World Championship was founded in 1950.
The Federation Internationale de L'Automobile ("FIA") sanctions Formula One
World Championship events consisting of open-wheel races on road courses in
Europe, South America, Asia, United States of America, Canada and
Australia. The 2003 season will include 17 races. The 2002 Formula One
calendar included 17 events.
- CHAMP CAR WORLD SERIES. The Champ Car World Series started in 1978
and is the premier open-wheel motorsports series in North America. The
Champ Car World Series is sanctioned by CART, and we anticipate sanctioning
18 races this year. The 2002 season included 19 races. CART events are
staged on four different types of tracks:
- superspeedways
- ovals
- temporary street courses
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- permanent road courses
Superspeedways are banked ovals of two miles or more in distance. Oval
tracks are closed circuits, less than two miles in distance, which are
often "banked" at varying angles. Temporary street courses are typically
built on closed-off downtown streets of major cities, but can also be built
on airport runways or similar facilities that have a primary purpose other
than as a motorsports venue. Permanent road courses are raceways built
solely for motorsports racing and are designed with varying turns,
straight-aways and elevation changes to simulate driving on a road.
Racing on different types of tracks requires teams and drivers to employ a
variety of skills to master different courses to compete for the Champ Car
World Series.
- INDY CAR SERIES. The IRL, the sanctioning body of the Indy Car
Series, was formed as a rival United States open-wheel racing series,
competing with CART and began racing in 1996. The IRL sanctions its own
events. The IRL's events are staged solely on oval courses and will include
16 races this year, including the Indianapolis 500. The IRL's 2002 season
consisted of 14 races, including the Indianapolis 500.
- FORMULA 3000. The FIA sanctions the International Formula 3000
Championship. The 2002 championship season covered Europe and South America
between March and September in a 12 race series. The 2003 championship
season will cover Europe and South America between March and September in
an 11 race series. Success in Formula 3000 has been the stepping stone for
many drivers into Formula One.
- TOYOTA ATLANTIC CHAMPIONSHIP. We also sanction the Toyota Atlantic
Championship. The Toyota Atlantic Championship is also a stepping stone to
a career in international motorsports competition. The 2002 Toyota Atlantic
Championship consisted of 12 races in the United States, Canada and Mexico.
The 2003 Toyota Atlantic Championship will consist of 12 races in the
United States, Canada and Mexico, with 11 events held in conjunction with
Champ Car events, and one race as a stand alone event.
The largest auto racing category in the United States, in terms of
attendance, media exposure and sponsorships, is stock car racing. Stock car
racing utilizes equipment similar in appearance to standard passenger
automobiles and races are typically staged on oval courses. The most prominent
organizing body in stock car racing is NASCAR. Drag racing typically involves
short sprint races on a straight-line drag strip. The NHRA is the most prominent
organizing body in drag racing. Other, less prominent, racing segments include
various types of sports car racing and club racing.
- NASCAR. Professional stock car racing developed in the Southeastern
United States in the 1930's, and NASCAR has been influential in the growth
and development of the sport. NASCAR is the most recognized sanctioning
body of professional stock car racing in North America, sanctioning the
Winston Cup and Busch Grand National stock car race series. The 2003
Winston Cup and Busch Grand National race series will include 39 and 34
races, respectively, all of which will be held in the United States. The
2002 Winston Cup and Busch Grand National race series included 39 and 34
races, respectively, all in the United States.
- OTHER SANCTIONING BODIES. Sports car races are held on road courses
and temporary street circuits throughout the United States and are
sanctioned by Sports Car Club of America ("SCCA") and International Motor
Sports Association ("IMSA"). The NHRA sanctions drag races in the United
States. The Automobile Racing Club of America ("ARCA") sanctions stock car
races that are less prominent than those sanctioned by NASCAR.
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Motorsports events are generally heavily promoted, with a number of
supporting events surrounding the main race event. Examples of supporting events
include:
- qualifying trials
- secondary racing events
- driver autograph sessions
- automobile and product expositions
- catered parties
- concerts
These events are all designed to maximize the spectators' entertainment
experience and enhance the value of the sponsorship experience.
PARTICIPANTS. The primary participants in motorsports are:
- spectators
- corporate sponsors
- track owners/race promoters
- drivers
- team owners
- sanctioning bodies
- SPECTATORS. Motorsports is among the fastest growing spectator
sports in the United States. During 2002, we estimate that over 2.6 million
people attended Champ Car events. Champ Car races were also televised in
156 countries in 2002.
- CORPORATE SPONSORS. Corporate sponsors are drawn to motorsports by
the large number of spectators and television viewers and their attractive
demographics. Corporate sponsors are active in all phases of the industry.
We believe that the demographic profile of our spectator base has
considerable appeal to sponsors, track owners, and advertisers. According
to the 2002 Scarborough Research Report, the mean household income of our
spectators is estimated to be $75,100, compared to $69,009 for an average
United States household. We believe that the spectators are loyal to
motorsports and to its corporate sponsors. In addition to sponsoring the
various racing series, corporate sponsors support drivers and teams by
funding certain costs of their operations and race promoters and track
owners by sponsoring and promoting specific events. In return, corporate
sponsors receive advertising exposure on television and radio, through
newspapers and in printed materials. Corporate sponsors also receive
advertising, promotional and hospitality benefits at the track during the
race weekend. Finally, corporate sponsors benefit from the attractive
values of the high-speed, high technology competition that we provide.
These values can be used to add new values and points of difference to each
sponsor's brands. Companies negotiate sponsorship arrangements based on
factors including a series' or event's audience size, spectator
demographics and a team's racing success.
- TRACK OWNERS/RACE PROMOTERS. Race promoters, which include track
owners, government organizations and other groups, pay a fee to have an
event sanctioned at their race venue. Race promoters are responsible for
the local marketing and promotion of the event, and the expenses related to
hosting the event. In 2003, we will be acting as a promoter or co-promoter
for races in St. Petersburg, FL, Kent, United Kingdom, Lausitz, Germany,
Portland, OR, Cleveland, OH, Lexington, OH, Denver, CO, and Miami, FL.
Promoters' revenue sources generally include:
- admissions
- sponsorships
- corporate hospitality (suites, chalets and tents for race viewing
and other amenities)
- advertising
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- concessions and souvenir sales
- DRIVERS. A majority of drivers contract independently with team
owners, while some drivers may own their own teams. Principally, drivers
receive income from contracts with team owners, sponsorship fees and prize
money. Successful drivers may also receive income from personal endorsement
fees, sales of licensed merchandise and souvenir sales. The personality and
success of a driver can be an important marketing advantage for the
sanctioning body and team owners because it can help attract audiences and
corporate sponsorships and generate sales for licensed merchandise.
- TEAM OWNERS. In most instances, team owners underwrite the financial
risk of placing their teams in competition. They contract with drivers,
acquire racing vehicles and support equipment, employ pit crews and
mechanics and syndicate sponsorship of their teams. Team owners generally
receive income primarily from sponsorships, a percentage of prize money won
and support payments from the sanctioning body.
- SANCTIONING BODIES. Sanctioning bodies, such as us, sanction events
at various race venues in exchange for fees from race promoters.
Sanctioning bodies are responsible for all aspects of race management
necessary to "manufacture" the race event. They are responsible for
presenting racing cars, drivers and teams and providing race officials to
ensure fair competition, as well as providing the race and series' purses
and other prize payments.
The FIA, based in Paris, France, is the worldwide governing body for
auto racing, with "national sporting authority" members in more than 100
countries. The FIA's United States national sporting authority is the
Automobile Competition Committee of the United States ("ACCUS"). It, in
turn, is made up of eight member-sanctioning organizations:
- CART
- NASCAR
- United States Auto Club ("USAC")
- IMSA
- NHRA
- SCCA
- IRL
- Grand American Road Racing Association ("Grand-Am")
- MANUFACTURERS AND SUPPLIERS. In 2002, our teams competed with
chassis supplied by Lola and Reynard. Bridgestone was the single supplier
of race tires used in our series. The engine manufacturers that
participated in our series were Toyota, Honda and Ford.
In 2003, our Champ Car teams will again use Lola and Reynard supplied
chassis and Bridgestone will be the sole supplier of race tires. We have
purchased from Ford-Cosworth the engines that will be used in our series by
all competitors. We will lease the engines to the teams for use in the 2003
and 2004 Champ Car series.
In 2003, our Toyota Atlantic teams will again use Toyota engines,
Swift supplied chassis and Yokahama will be the sole supplier of race
tires.
OPERATIONS
Historically, we derived our revenues from three primary sources:
- sanction fees paid by track promoters
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- corporate sponsorship fees
- television revenues
Beginning in 2002, we began "co-promoting" certain events with the amount
of our sanction fees for these events determined by the success of the event. We
also began promoting certain races. For those races that we promote, we report
revenues as "Race Promotion Revenues," and expenses for the events we promote
will be reported as "Race Promotion Expenses." In 2003, we anticipate
co-promoting two events and promoting six events.
SANCTION FEES. For certain races in the Champ Car World Series (other than
those events we promote), we enter into a sanction agreement with the promoter,
which provides for the payment of a sanction fee to CART. Beginning in 2002,
certain of our sanction agreements provide for a sanction fee of a fixed amount,
and other sanction agreements provide for a sanction fee that is partially fixed
with a profit sharing component or the entire sanction fee may be determined by
profit sharing. For the year ended December 31, 2000, 20 promoters paid us
sanction fees of approximately $38.9 million, averaging $1.9 million per event
and representing approximately 52% of our total revenues. For the year ended
December 31, 2001, 20 promoters paid us sanction fees of approximately $47.2
million, an average of $2.4 million per event, representing approximately 67% of
our revenues. For the year ended December 31, 2002, 17 promoters paid us
sanction fees of $36.6 million, an average of $2.2 million per event
representing approximately 64% of our revenue.
CORPORATE SPONSORS. We receive sponsorship revenues pursuant to sponsorship
contracts. In exchange for sponsorship revenues, we provide our sponsors the
opportunity to receive brand and product exposure. Official sponsors of the
Champ Car World Series pay money and/or provide products and services to us in
return for being designated as an official sponsor. The payment obligations, as
well as the amount of advertising exposure and other benefits, vary
significantly among sponsors based on the negotiated terms of each sponsorship
agreement. For the year ended December 31, 2000, we received sponsorship
revenues of approximately $21.1 million, representing approximately 28% of our
total revenues. For the year ended December 31, 2001, we received sponsorship
revenues of approximately $12.3 million, representing approximately 18% of our
total revenues. For the year ended December 31, 2002, we received sponsorship
revenues of approximately $10.1 million, representing approximately 18% of our
total revenues. No sponsorship agreement provided more than 10% of our revenues
during 2002, 2001 or 2000.
As we begin to promote more of our own races, we can provide sponsorship
opportunities at the race venues where we act as promoters. Some of the
opportunities are title, presenting and official product category of the event.
Beginning in 2003, we have developed an Associate Sponsor Program. The new
program is part of an enhanced incentive program we developed with our teams,
whereby we will provide financial support to new and existing teams to run in
the Champ Car World Series, and in exchange, each team will provide logo space
on its cars for Champ Car-designated sponsors to advertise. Sponsorship fees
paid by these corporate sponsors will be retained by CART to offset the
financial support we are providing to the teams. The program will combine a
number of sponsorship opportunities in one package, which we believe will be
attractive to sponsors. The program will combine Champ Car World Series event
and team sponsorship opportunities, along with advertising in television and
print media. For more information on the Entrant Support Program and the
financial support we are providing our teams, see "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
We believe that as we expand the audience for our events, we will see a
corresponding increase in sponsorship opportunities and sponsorship revenues.
One of our key elements in this marketing platform is a multi-national
philosophy that focuses on the countries that agreed to the North American Free
Trade Agreement ("NAFTA") in 1994. We anticipate delivering ten races in the
United States in 2003, three in Canada and two in Mexico to provide our sponsors
with a profound advantage over other sports by potentially reaching more than
400 million consumers
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throughout North America. The NAFTA presence is integrated into a schedule of
race events in Australia, Germany and England to create a powerhouse platform
for our sponsors that visits the world's leading economies while reaching out to
a collective population of approximately 700 million. We also intend to focus on
reaching urban, major markets, rather than holding events in less-populated
areas.
ATTENDANCE. CART has consistently delivered an average attendance of over
2.4 million fans per year over the last ten years. According to the Joyce Julius
Sponsors Report for 2002, the 19 race 2002 season showed an increase in total
attendance over the previous season attendance record achieved during the 2000
season, with one less event.
VIEWERSHIP. In addition to the spectators at our race events, millions of
people around the world watch Champ Car racing on television. According to the
Nielsen Season Summary for 2002, total viewership for all races, re-airs and
support programming in the United States in 2002 was 21.3 million viewers. In
2002, our races were televised in 156 countries and territories through
terrestrial and satellite broadcasts.
BROADCAST RIGHTS. In 2002, we had contracts for domestic television rights
with:
- Fox
- Speed Channel
- CBS
The 2002 agreement provided for seven races to be broadcast on CBS, one
race on FOX and the balance of the races were on Speed Channel. In 2003, we plan
to broadcast six races on CBS and the balance on Speed Channel. We will buy the
air-time and pay for production for the CBS races. Speed Channel will provide
the air-time and we will pay for production for the races to be broadcast on
their network, including Champ Car practice and qualifying and a half-hour
pre-race show. We receive the advertising inventory for all shows aired on both
networks and we will be responsible for selling the advertising. For more
information on our revenues and expenses with respect to these contracts, you
should read "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
International television rights are with:
- Fittipaldi USA (Brazil)
- Gold Coast Motor Events Co. (Australia)
- Molstar (Canada)
- Promotion Entertainment of Mexico LLC (Mexico)
- Octagon CSI Limited (all others)
A rights fee will be paid to us by each international broadcast partner for
rights to air the Champ Car race either live, time-delayed or as a highlight
package, in the country where they hold our rights.
RACE PROMOTION. In 2002, we promoted the Chicago and Miami events. When we
promote an event, we do not receive a sanction fee. As promoters of the event we
assume all of the risk for the financial results of the event. We receive all of
the commercial rights to the event: ticket, sponsorship, hospitality and other
miscellaneous revenues. We also incur all of the expenses to promote, advertise
and stage the event.
In 2003, we anticipate promoting six of our events: Cleveland, OH,
Portland, OR, Miami, FL, Lexington, OH, Kent, UK and Lausitz, Germany. We have
entered into agreements with experienced event promotion companies to assist us
with all aspects of the promotion of these events. These companies will work
with our employees to enhance the success of the event.
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TOYOTA ATLANTIC CHAMPIONSHIP. In 1998, we acquired 100% of the outstanding
common stock of Pro-Motion Agency. Pro-Motion Agency operates the Toyota
Atlantic Championship open-wheel series.
Toyota Atlantic serves as the top rung on the Champ Car Driver Development
Ladder System. This system serves to help young drivers move from the grassroots
level of racing all the way to the Champ Car World Series.
Toyota Atlantic's international flavor is rooted in 30 years of drivers
from the United States, Canada, Great Britain, Australia, New Zealand, Asia,
Japan, Argentina, Brazil and South Africa.
The Toyota Atlantic Championship officially began in 1974. The series has a
rich 29-year history of providing one of the most recognized stepping stones to
a career in international motorsports competition. Notable racers such as Bobby
Rahal and Danny Sullivan were the stars in the late 1970's, followed by:
- Jaques Villeneuve
- Jimmy Vasser
- Michael Andretti
- Richie Hearn
- Patrick Carpentier
- Alex Barron
- Memo Gidley
- Alex Tagliani
The 2003 Champ Car World Series will include two drivers who have graduated
from the Toyota Atlantics Championship. Ryan Hunter-Reay and Rodolpho Lavin will
begin their Champ Car Rookie seasons in 2003.
In 1989, Toyota Motor Sales, USA joined the series as title sponsor,
creating the Toyota Atlantic Championship. With the introduction of the
race-tuned Toyota 4A-GE engine, Toyota along with their partner, TRD, USA, Inc.
set the standard for Atlantic competition worldwide. The Yokohama Tire
Corporation also joined the series in 1989 as an associate sponsor and tire
supplier to the series.
The growth of the series over the past decade and the successes of Toyota
Atlantic alumni in professional motorsports have elevated the Toyota Atlantic
Championship to the highest levels of prestige and stature within the
motorsports industry. On January 17, 2001, Toyota Motor Sales USA, Inc.
announced that it had extended its contract with the Toyota Atlantic
Championship for three more years, carrying its support through the 2004 season.
In addition, the Yokohama Tire Corporation has also extended its sponsorship for
the same period of time.
At certain venues, the series receives a sanction fee from the promoter for
staging a Toyota Atlantic event. Other revenue growth can be created through
packaged sponsorships with our race series, additional Toyota Atlantic series
specific sponsorships and sanction fees.
Throughout the 2003 12 race season, the Toyota Atlantic drivers will
compete on a variety of courses in the United States, Canada and Mexico,
including 11 races with the Champ Car World Series, and one stand alone event at
the historic Grand Prix Trois-Rivieres in Quebec. As with all CART series,
drivers must master racing on ovals, temporary street circuits and permanent
road courses. All Toyota Atlantic races are sprint events, between 60-100 miles
(100-161 km) long.
SKIP BARBER. In 2001, we entered into a multi-year agreement with Skip
Barber Racing School, LLC ("Barber"). The purpose of the agreement is to promote
racing from the grassroots-level up and to provide several rungs to the Champ
Car Driver Development Ladder System, all the way from karting through to
professional racing. Together, we are co-branding a series of
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scholarships totaling over $1.3 million designed to assist talented drivers
through the ranks, and we are working together to promote drivers' careers
through the professional series.
Barber organizes several amateur-level racing series, including the Formula
Dodge National Championship presented by RACER; the Skip Barber Race Series,
consisting of four regional racing series; and the Skip Barber Racing School,
which provides competitions in Formula Dodge cars. Barber also runs the world
renowned Skip Barber Driving School, which operates from several centers around
the United States. Each of these organizations are "official" race series and
schools of Champ Car and provide a clear path for drivers from their first
experiences in racing to the Champ Car World Series.
Barber also organizes the Barber Dodge Pro Series, the "official
entry-level professional racing series of Champ Car." This series has
traditionally provided drivers to the Toyota Atlantic Championship, and we
sanction their race events. Reflecting their partnership with Champ Car, the
Barber Dodge Pro Series races a 10-race season around the United States, Canada
and Mexico. The 2003 season will mark the first time that all events will be in
conjunction with the Champ Car World Series.
We do not own an equity interest in Barber, and the agreement does not have
a material effect on our financial position.
STARS OF TOMORROW. The Champ Car Stars of Tomorrow karting championship is
the official first step in the Champ Car Driver Development Ladder System.
Founded by former Champ Car driver Bryan Herta and now owned in conjunction with
a group of racing veterans, including 3-time Champ Car series champion Bobby
Rahal, the Stars of Tomorrow focuses on recognizing the skills of the drivers
over technological development while utilizing Federation Internationale de
l'Automobile/Commission Internationale de Karting ("FIA/CIK") international
standards. Comprised of six different national classes, over 1000 competitors
from across the United States, Mexico and Canada will compete in 2003 for
championships and top prizes, including a fully funded ride in the Formula Dodge
National Championship.
CART does not have an equity stake in the Stars of Tomorrow but does
sponsor the program as part of a grassroots marketing campaign. The series also
receives sponsorship from Snap-on.com and Bridgestone Tire Company, among
others.
COMPETITION
Our racing events compete not only with other sports and recreational
events scheduled on the same dates, but also with racing events sanctioned by
various other racing bodies such as the:
- FIA
- NASCAR
- IRL
- USAC
- NHRA
- SCCA
- IMSA
- ARCA
Racing events sanctioned by other organizations are often held on the same
dates as Champ Car events, at separate tracks, and compete for corporate
sponsorship, attendance and television viewership. In addition, we compete with
other racing bodies to sanction racing events at various motorsports facilities.
EMPLOYEES
As of December 31, 2002, we had 75 full-time business associates and a
roster of approximately 154 people who served as race officials. We also had
numerous volunteers that
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worked at one or more Champ Car events. None of our business associates are
represented by a labor union. We believe that we enjoy a good relationship with
our business associates.
PATENTS AND TRADEMARKS
We have various registered and common law trademark rights to "CART",
"Champ Car" and related logos. Our policy is to vigorously protect our
intellectual property rights to maintain our proprietary value in merchandise
and promotional sales.
ITEM 2: PROPERTIES
We lease our buildings in Indianapolis, Indiana and Highland Park,
Illinois. In 2003, we will lease office space in Miami, Florida. We did not
renew the lease on our warehouse in Michigan and consolidated that operation
into our corporate headquarters in Indiana. We do not own any real property. Our
leases are through the following dates:
- Michigan, January 31, 2003
- Illinois, May 31, 2003
- Indiana, October 31, 2010
- Florida, February 28, 2008
We will consolidate the Highland Park facility into our corporate
headquarters in Indiana during 2003 and therefore do not anticipate renewing the
lease in Illinois.
Our lease payments have no material effect on our consolidated financial
statements. We believe the leased space is adequate for our present needs.
ITEM 3: LEGAL PROCEEDINGS
On September 8, 2000, a complaint for damages was filed against the Company
in the Superior Court of the State of California, County of Monterey. This
lawsuit was filed by the heirs of Gonzolo Rodriguez, a race car driver who died
on September 11, 1999 while driving his race car at the Laguna Seca Raceway in a
practice session for the CART race event. The suit seeks damages in an
unspecified amount for negligence and wrongful death. On November 5, 2001, a
release signed by Mr. Rodriguez was upheld by the Court and the causes of action
for negligence were dismissed based on the defendants' motion for summary
judgment. The remaining count in the lawsuit was for willful and/or reckless
conduct. On March 13, 2003 a jury verdict completely exonerating the Company was
received.
On October 30, 2000, a complaint for damages was filed against the Company
in the Superior Court of the State of California, County of San Bernardino. This
lawsuit was filed by the estate of Greg Moore, a race car driver who died on
October 31, 1999 while driving his race car at the California Speedway during
the CART race event. The suit sought actual and punitive damages from the
Company in an unspecified amount for breach of duty, wanton and reckless
misconduct, breach of implied contract, battery, wrongful death and negligent
infliction of emotional distress. On a motion for Summary Judgment, the
complaint was dismissed on all counts on October 16, 2002. An appeal of the
dismissal was filed. Management does not believe that the outcome of this
lawsuit will have a material adverse effect on our financial position or future
results of operations.
On November 8, 2001, two former team owners, DellaPenna Motorsports and
Precision Preparation, Inc., filed suit against the Company in the Circuit Court
for the County of Wayne, State of Michigan, each alleging damages in excess of
$1.0 million for breach of contract, promissory estoppel, misrepresentation, and
tortious interference with contract and business expectancy. The Company intends
to vigorously defend itself in this lawsuit and does not believe the lawsuit has
merit. The suit is currently in the discovery phase. Management does not believe
13
that the outcome of this lawsuit will have a material adverse effect on the
Company's financial position or future results of operations.
On March 26, 2002, the Company filed a complaint against Joseph F.
Heitzler, a former director and former chairman, chief executive officer and
president of the Company in U.S. District Court, Eastern District of Michigan,
Southern Division. The complaint alleges that Mr. Heitzler breached his
employment contract, breached his fiduciary duties and intentionally or
recklessly omitted to disclose information to the Company in order to induce the
continuation of Mr. Heitzler's employment agreement. The suit seeks damages of
an unspecified amount. This lawsuit has been removed to California. On March 28,
2002, Mr. Heitzler filed a complaint against the Company in the Superior Court
of the State of California, County of Los Angeles. The suit seeks compensatory,
exemplary and punitive damages in excess of $2.0 million for breach of contract,
fraud, negligent misrepresentation, breach of covenant of good faith and fair
dealing and declaratory relief. An amended complaint adding a count for tortious
breach of contract in violation of public policy was filed on April 9, 2002. The
Company intends to vigorously defend itself in this lawsuit. Management does not
believe that the outcome of these lawsuits will have a material adverse effect
on the Company's financial position or future results of operations.
On July 9, 2002 a Demand for Arbitration was filed against the Company with
the American Arbitration Association in Indianapolis, Indiana by Engine
Developments Ltd. The Demand alleges that the Company breached an agreement to
purchase engines and seeks unspecified damages. The claim is currently in the
discovery stage. Management does not believe that an agreement was ever entered
into and intends to vigorously defend itself. Management does not believe that
the outcome of this Demand for Arbitration will have a material adverse effect
on the Company's financial position or future results of operations.
The Company is involved in other litigation not specifically identified
above and does not believe the outcome of any of this litigation will have a
material adverse effect on its financial position or future results of
operation.
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
14
PART II
ITEM 5: MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our common stock is traded on The New York Stock Exchange under the trading
symbol "MPH". As of March 24, 2003, we had 14,718,134 shares of common stock
outstanding and approximately 434 record holders of our common stock.
In the following table we have provided the high and low sales price for
our common stock, as reported by the NYSE for each calendar quarter of 2002 and
2001.
QUARTER ENDED HIGH LOW
- --------------------------------------------------------------------------------
2002
First Quarter $17.00 $13.78
Second Quarter 14.50 8.05
Third Quarter 9.42 3.54
Fourth Quarter 5.10 3.49
2001
First Quarter $21.31 $14.90
Second Quarter 18.71 14.58
Third Quarter 17.50 13.60
Fourth Quarter 17.12 12.37
- --------------------------------------------------------------------------------
We have not declared or paid any dividends on our common stock to date, and
we do not intend to pay dividends in the foreseeable future.
The information required by this Item concerning Securities authorized for
issuance under our equity compensation plans is set forth or incorporated by
reference into Part III, Item 12 of this annual report.
15
ITEM 6: SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data, as of and for the five
years ended December 31, 2002, are derived from our audited consolidated
financial statements. The selected consolidated financial data below should be
read in combination with our consolidated financial statements and related notes
contained elsewhere in this document and "Management's Discussion and Analysis
of Financial Condition and Results of Operations."
YEAR ENDED DECEMBER 31,
-----------------------
2002 2001 2000 1999 1998
---- ---- ---- ---- ----
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
STATEMENT OF OPERATIONS:
Revenues:
Sanction fees $36,607 $47,226 $38,902 $35,689 $30,444
Sponsorship revenue 10,150 12,314 21,063 19,150 16,388
Television revenue 4,538 5,228 5,501 5,018 5,148
Race promotion revenue 1,417 -- -- -- --
Engine leases, rebuilds and wheel sales -- 1,286 2,122 2,054 2,214
Other revenue 4,533 4,209 7,460 6,865 8,336
------- ------- ------- ------- -------
Total revenues 57,245 70,263 75,048 68,776 62,530
Expenses:
Race distributions (1) 19,797 18,599 15,370 15,334 15,183
Race expenses 10,823 10,618 9,869 6,670 4,818
Race promotion expense 9,687 -- -- -- --
Costs of engine rebuilds and wheel sales -- 348 652 610 633
Television expense 10,975 -- -- -- --
Administrative and indirect expenses (2) 27,756 35,605 25,275 20,646 20,658
Bad debt-sponsorship partner (3) -- -- 6,320 -- --
Litigation expenses (4) -- 3,547 -- -- --
Relocation Expense 1,422 -- -- -- --
Asset impairment and strategic charges (5) -- 8,548 -- -- --
Depreciation and amortization 1,436 1,493 1,352 1,048 779
------- ------- ------- ------- --------
Total expenses 81,896 78,758 58,838 44,308 42,071
------ ------ ------ ------ ------
Operating income (loss) (24,651) (8,495) 16,210 24,468 20,459
Realized gain (loss) on sale of investments 26 -- -- -- --
Interest income (net) 3,762 7,033 7,463 5,255 3,198
------- ------- ------- ------- -------
Income (loss) before income taxes (20,863) (1,462) 23,673 29,723 23,657
Income tax expense (benefit) (7,302) 512 (8,520) (10,865) (8,568)
------- -------- ------- ------- -------
Net income (loss) before effect of accounting change $(13,561) $ (950) $15,153 $18,858 $15,089
======== ======== ======= ======= =======
Cumulative effect of accounting change $ (956) $ -- $ -- $ -- $ --
Net income (loss) after effect of accounting change $(14,517) $ (950) $15,153 $18,858 $15,089
======== ======== ======= ======= =======
Earnings (loss) per share before cumulative effect of
accounting change:
Basic $ (0.92) $ (0.06) $ 0.97 $ 1.22 $ 1.06
======== ======== ======= ======= =======
Diluted $ (0.92) $ (0.06) $ 0.97 $ 1.22 $ 1.06
======== ======== ======= ======= =======
Net earnings (loss) per share:
Basic $ (0.99) $ (0.06) $ 0.97 $ 1.22 $ 1.06
======== ======== ======= ======= =======
Diluted $ (0.99) $ (0.06) $ 0.97 $ 1.19 $ 1.05
======== ======== ======= ======= =======
Weighted average shares outstanding:
Basic 14,718 15,289 15,624 15,427 14,190
======== ======== ======= ======= =======
Diluted 14,738 15,289 15,657 15,908 14,421
======== ======== ======= ======= =======
16
AS OF DECEMBER 31,
------------------
2002 2001 2000 1999 1998
---- ---- ---- ---- ----
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
BALANCE SHEET DATA:
Cash and cash equivalents $ 6,773 $27,765 $19,504 $7,216 $15,080
Short-term investments 79,489 87,621 98,206 91,758 61,610
Working capital (deficit) 92,288 111,604 119,953 99,480 72,219
Total assets 114,451 132,941 144,101 124,887 97,186
Long-term debt (including
current portion) -- -- -- -- 314
Total stockholders' equity $103,018 $117,936 $133,894 $114,330 $86,219
(1) Distributions for the year ended December 31, 2001 and December 31, 2002
include reimbursement of overseas travel expenses to race teams.
(2) Administrative and indirect expenses for the years ended December 31, 2001
and 2000 include severance payments to former employees of $4,329 and
$2,758, respectively.
(3) Bad debt expense relates to a charge associated with our sponsorship
agreement with ISL Marketing AG. You should read "Management's Discussion
and Analysis of Financial Condition and Results of Operations," for a
discussion of this bad debt expense.
(4) Litigation expense relates to the settlement with Texas Motor Speedway
("TMS") for the postponement of a race at TMS during 2001.
(5) Asset impairment and strategic charges relates to the discontinuance of
operations of the Dayton Indy Lights Championship effective at the
conclusion of the 2001 race season.
17
ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
As you read the following, you should also refer to the consolidated
financial statements and related notes contained in this report as well as Item
6, "Selected Consolidated Financial Data."
DISCONTINUANCE OF INDY LIGHTS
The financial results below include the operations of American Racing
Series ("ARS") which operated the Indy Lights Championship series. At the end of
the 2001 season, we discontinued the operations of ARS and the Indy Lights
Championship series. (See Footnote 9 to our consolidated financial statements
included in Item 15 of this report.) All revenues and expenses related to the
Indy Lights Championship series ceased for 2002 and beyond.
GENERAL
Below are selected income and expense items for the years ended December
31, 2002, 2001 and 2000. The percentage calculations are based on total
revenues.
YEAR ENDED DECEMBER 31,
-----------------------
2002 2001 2000
---- ---- ----
(DOLLARS IN THOUSANDS)
Revenues:
Sanction fees $ 36,607 64.0% $ 47,226 67.2% $ 38,902 51.8%
Sponsorship revenue 10,150 17.7 12,314 17.5 21,063 28.1
Television revenue 4,538 7.9 5,228 7.5 5,501 7.3
Race promotion revenue 1,417 2.5 -- 0.0 -- 0.0
Engine leases, rebuilds and wheel sales -- 0.0 1,286 1.8 2,122 2.8
Other revenue 4,533 7.9 4,209 6.0 7,460 10.0
-------- ----- -------- ------ -------- -----
Total revenues $ 57,245 100.0% $ 70,263 100.0% $ 75,048 100.0%
======== ===== ======== ===== ======== =====
Expenses:
Race distributions $ 19,797 34.6% $ 18,599 26.5% $ 15,370 20.5%
Race expenses 10,823 18.9 10,618 15.1 9,869 13.1
Race promotion expense 9,687 16.9 -- 0.0 -- 0.0
Cost of engine rebuilds and wheel sales -- 0.0 348 0.5 652 0.9
Television expense 10,975 19.2 -- 0.0 -- 0.0
Administrative and indirect expenses 27,756 48.5 35,605 50.7 25,275 33.7
Bad debt-sponsorship partner -- 0.0 -- 0.0 6,320 8.4
Litigation expenses -- 0.0 3,547 5.0 -- 0.0
Relocation expense 1,422 2.5 -- 0.0 -- 0.0
Asset impairment and strategic charges -- 0.0 8,548 12.2 -- --
Depreciation and amortization 1,436 2.5 1,493 2.1 1,352 1.8
-------- ----- -------- ------ -------- -----
Total expenses $81,896 143.1% $78,758 112.1% $58,838 78.4%
-------- ----- -------- ------ -------- -----
CRITICAL ACCOUNTING POLICIES
Use of Estimates
The following discussion and analysis of our financial condition and
results of operations are based upon our consolidated financial statements,
which have been prepared in accordance with accounting principles generally
accepted in the United States. The preparation of these financial statements
requires us to make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting periods.
18
Significant accounting estimates include accounting for allowance for
doubtful accounts for trade accounts receivable, impairment of fixed assets and
goodwill, income taxes and certain accrued liabilities.
We believe that the estimates, assumptions and judgments involved in the
accounting policies described below will not have a material impact on our
financial statements. These areas are subject to the risks and uncertainties we
describe in this report. Actual results, therefore, could differ from those
estimated.
Revenue Recognition
One of our most critical accounting policies is revenue recognition. We
recognize our revenues as they are earned, but the determination of when they
are earned depends on the source of the revenue. Our policy for each revenue
source is outlined below.
SANCTION FEE REVENUE. Generally, sanction fees are paid in advance of the
race and are recorded as deferred revenue. Revenue from sanction fees is not
recognized until the event is completed. In 2002, we entered into agreements
with certain promoters where all or or a portion of the contracted sanction fee
was reduced in exchange for a percentage of the profits from the event. The
sanction fee received and our share of any profits from these events is
recognized as sanction fee revenue when the event is completed.
SPONSORSHIP REVENUE. Generally, sponsorship agreements call for quarterly
payments, and each payment is recorded as deferred revenue when paid. Revenue is
recorded ratably over the life of the sponsorship agreement.
ENGINE LEASE, REBUILDS AND WHEEL SALES. Engine lease revenue, relating to
our discontinued Indy Lights series, was recognized ratably over the period
covered by the agreement. Engine rebuilds and wheel sales were recognized when
the product was delivered to the customer.
In 2003, we purchased the engines that will be used for the 2003 and 2004
Champ Car World Series race season. Each team is required to use these engines
in order to compete in the series. We will lease the engines to the teams for
$100,000 per car per year. The revenue will be realized ratably over the life of
the agreement.
TELEVISION REVENUE. We receive television revenue in the form of rights
fees and advertising sales. Revenue is not recognized until earned which is when
the show airs. Television revenue arising from minimum guarantees and rights
fees is recognized ratably over the race schedule. Advertising sales relate to
specific shows and is recognized when the show and advertisements air. Payments
related to television revenue that are received prior to when earned are
recorded as deferred revenue until earned.
RACE PROMOTION REVENUE. Consists of all commercial rights such as ticket
sales, event sponsorship, hospitality and all other revenues related to
promoting an event. Payments received prior to the event are recorded as
deferred revenue. Revenue is recorded when the event is completed.
OTHER REVENUES. Other revenues include membership and entry fees,
contingency awards money, royalty income and other miscellaneous revenues.
Membership and entry fees and contingency award money are recognized ratably
over the race schedule. Royalty income is recognized as the related product
sales occur or on a monthly basis based on a minimum guarantee.
Expense recognition
RACE PROMOTION EXPENSES. General and administrative expenses related to
races we promote are recognized when incurred. Expenses directly related to the
event are recognized when the event occurs. Any losses are recognized when
known.
19
Impairment
We adopted FASB Statement of Financial Accounting Standards (SFAS) No. 142,
"Goodwill and Intangible Assets," effective January 1, 2002. The statement
requires companies to stop amortizing goodwill and certain intangible assets
with an indefinite useful life. The statement also requires that we test our
goodwill and intangible assets for impairment upon adoption of the statement and
periodically thereafter. Our goodwill was associated with our acquisitions of
Pro-Motion Agency, Inc. and CART Licensed Products, LP, on April 10, 1998 and
January 1, 1999, respectively. Upon adoption of the statement, we recorded a
one-time, non-cash charge of $1.5 million, or $956,000 net of tax benefit of
$514,000, to write-off the value of the goodwill. The write-off of goodwill
results from the use of discounted cash flows in assessment of fair value for
each reporting unit as required by SFAS No. 142. Under SFAS No. 142, goodwill
impairment is deemed to exist if the carrying value of a reporting unit exceeds
its estimated fair value.
During 2001, we determined that the goodwill and certain long-lived assets
associated with ARS were impaired due to our strategic decision to discontinue
the operations of ARS at the conclusion of the 2001 season. As a result, we
recorded an impairment charge for the goodwill and long-lived assets.
Litigation
We are involved in litigation as a part of our normal course of business
(refer to Item 3: Legal Proceedings). Management's intention is to vigorously
defend ourselves against any litigation. When a complaint is filed by or against
the Company, we disclose the complaint in our financial statements. When a claim
against us is probable and estimable, we record the expense. When we are the
party filing the claim, we do not record income until a settlement for the claim
for damages is received.
REVENUES
We derive revenues primarily from (i) sanction fees, (ii) sponsorship,
(iii) television rights and (iv) race promotion. Following is an explanation of
our individual revenue items:
SANCTION FEES. We receive sanction fees from the promoters of our races
(other than races we promote). The fees are based on contracts between the
promoters and CART. We have entered into agreements with certain promoters of
the Champ Car World Series for a reduction in the previously contracted sanction
fees. In return, we will receive a share of the net income from the event. The
agreements provide for us to receive a majority of any net income from the event
until the reduction of the original sanction fee is recouped, and then we will
share equally with the promoter any remaining net income which will also be
included in sanction fees. Therefore, there is less visibility and less
predictability for CART's earnings than in the previous financial model as
CART's revenues will be affected by the success of these races.
SPONSORSHIP REVENUE. We receive corporate sponsorship revenue based on
negotiated contracts. For 2003, we anticipate having corporate sponsorship
contracts with 13 major manufacturing and consumer products companies. The
remaining terms of these contracts range from one to three years. An official
corporate sponsor receives status and recognition rights, event rights and
product category exclusivity.
Beginning in 2003, we have developed an Entrant Support Program. The new
program is part of an enhanced incentive program we developed with our teams,
whereby we will provide financial support to new and existing teams to run in
the Champ Car World Series and, in exchange, each team will provide logo space
on its cars for Champ Car-designated sponsors to advertise. Sponsorship fees
paid by these corporate sponsors will be retained by us to offset the financial
support we are providing to the teams. The program will combine a number of
20
sponsorship opportunities in one package, which we believe will be attractive to
sponsors. The program will combine Champ Car World Series event and team
sponsorship opportunities, along with advertising in television and print media.
TELEVISION REVENUE. In 2001, our television revenue was derived from
negotiated contracts with:
- ESPN
- ESPN International
- Fittipaldi USA (Brazil)
- Gold Coast Motor Events Co. (Australia)
- Molstar (Canada)
A guaranteed rights fee was paid to us by each broadcast partner. Based on
our contract with ESPN/ESPN International, we received an escalating minimum
guarantee or 50% of the net profits received by ESPN if they exceeded the
minimum guarantee, for distribution of the race programs. Our television
agreement with ESPN and ESPN International expired December 31, 2001.
In 2002, we had contracts for domestic television rights with:
- Fox
- Speed Channel
- CBS
We had seven races broadcast on CBS, one race broadcast on FOX and the
balance of the races were broadcast on Speed Channel. We bought the air-time and
paid for production (See "Television Expenses") for the CBS and Fox races and
received the advertising inventory. We, along with our agents, were responsible
for selling the advertising time. Speed Channel produced and provided the air
time, at their cost, for races to be broadcast on their network. In addition,
Speed Channel aired Champ Car practice and qualifying, a half-hour pre-race show
and a weekly magazine show. Speed Channel retained the advertising inventory and
income for all shows aired on their network.
In 2002, International television rights were with:
- Fittipaldi USA (Brazil)
- Gold Coast Motor Events Co. (Australia)
- Molstar (Canada)
- Promotion Entertainment of Mexico LLC (Mexico)
- Sports Television Incorporated (Japan)
- Octagon CSI
A rights fee was paid to us by each international broadcast partner for
rights to air the CART race either live, time-delayed or as a highlight package,
in the country where they held our rights.
In 2003, we have contracts for our domestic television rights with CBS and
Speed Channel. We plan to broadcast six races on CBS and the balance on Speed
Channel. We will buy the air-time and pay for production for the CBS races.
Speed Channel will provide the air-time for the races aired on their network,
including Champ Car practice and qualifying and a half-hour pre-race show. We
will pay for production for the races to be broadcast on their network. We will
receive the advertising inventory for all shows aired on both networks and we
will be responsible for selling the advertising.
In 2003, International television rights are with:
21
- Fittipaldi USA (Brazil)
- Gold Coast Motor Events Co. (Australia)
- Molstar (Canada)
- Promotion Entertainment of Mexico LLC (Mexico)
- Octagon CSI (all others)
A rights fee will be paid to us by each international broadcast partner for
rights to air the Champ Car race either live, time-delayed or as a highlight
package, in the country where they hold our rights.
RACE PROMOTION REVENUE. In 2002, we promoted the races in Chicago, Illinois
and Miami, Florida. In 2003, we anticipate promoting six of our races. Race
promotion revenue includes all the commercial rights associated with promoting a
Champ Car event, such as admissions, event sponsorship and hospitality sales. We
intend to partner with experienced race promoters to promote these events and we
will be responsible for selling all of the commercial rights of the event.
ENGINE LEASES, REBUILDS AND WHEEL SALES. ARS, which operated the Indy
Lights series, owned the engines that were used in the series and leased the
engines to the competitors for the season. The teams paid us a fee to rebuild
the engines. We also sold the wheels used on the race cars. Based on the rules
of the series, all teams were required to use our engines and wheels. We
discontinued the operations of the Indy Lights series at the conclusion of the
2001 race season.
In 2003, we purchased the engines that will be used for the 2003 and 2004
Champ Car World Series race season. Each team is required to use these engines
in order to compete in the series. We will lease the engines to the teams for
$100,000 per car per year.
OTHER REVENUE. Other revenue includes membership and entry fees,
contingency awards money, royalties, commissions and other miscellaneous revenue
items. Membership and entry fees are payable on an annual basis by Toyota
Atlantics Championship competitors. In addition, we charge fees to competitors
for credentials for all team participants and driver license fees for all
drivers competing in the series. We receive royalty revenue for the use of the
CART service marks and trademarks on licensed merchandise that is sold both at
tracks and at off-track sites. We receive commission income from the sale of
chassis and parts to our support series teams.
EXPENSES
Our expenses are incurred primarily in, (i) distributions to our race
teams: prize money, participation payments and team assistance, (ii) race
operations: expenses directly related to sanctioning the events (iii) race
promotion: expenses related to races we promote (iv) television: expenses
directly related to buying air time and production of our domestic and
international television programming and (v) administrative and indirect:
expenses related to administration, marketing, sales and public relations.
Following is an explanation of the individual expense line items:
RACE DISTRIBUTIONS. We pay the racing teams for their on-track performance.
Race distributions include the following for each event:
- event purse which is paid based on finishing position
- contingency award payments
- year-end point fund, which is paid on year end finishing position
- participation payments
- entrant support payments
- team assistance
We pay awards to the teams, based on their cumulative performance for the
season, out of the year-end point fund. Participation payments will be made in
2003 to each of our entries (to a
22
maximum of 20 cars) on a per car, per race basis. In addition, entrant support
payments will be made to participating teams as part of a financial incentive
plan to attract and retain teams to compete in our series. The payments will be
made to teams in exchange for logo advertising space on their cars. We will have
the opportunity to sell and retain the revenue from the advertising. Beginning
in 2003, we will provide assistance to certain teams to ensure that there are a
sufficient number of race cars competing in our series. We will spend up to
$30.0 million in team assistance, spread out over the race season, to make sure
there are a sufficient number of healthy competitors for the 2003 season. In
exchange for the team assistance we receive certain sponsorship rights from the
team.
RACE EXPENSES. We are responsible for officiating and administering all of
our events. Costs primarily include officiating fees, travel, per diem and
lodging expenses for the following officiating groups:
- medical services
- race administration
- race officiating and rules compliance
- registration
- safety
- technical inspection
- timing and scoring
RACE PROMOTION EXPENSES. In 2002, we co-promoted two races. In 2003, we
plan to promote six of our own events. Race promotion expenses relate to all
costs associated with staging a Champ Car event include track rental, personnel
costs and promotion of the event.
COST OF ENGINE REBUILDS AND WHEEL SALES. These costs were associated with
rebuilding the engines and the cost of the wheels used in the Indy Lights
series, which we discontinued at the conclusion of the 2001 race season.
TELEVISION EXPENSES. In 2002, we bought the air time at approximately
$235,000 per hour and paid approximately $3.4 million for production for our CBS
and FOX races. We also incurred expenses for our international production of
$2.3 million. For domestic television rights with respect to the CBS and FOX
broadcasts, we received the advertising inventory which we and our agents sold,
to partially offset these expenses. We also received a guaranteed rights fee
from our international broadcast partners to partially offset these costs. (See
"Television Revenue")
In 2003, we will again buy the air time at approximately $240,000 per hour
for our CBS races. Speed Channel will provide the air time for the races aired
on their network, including Champ Car practice and qualifying and a half-hour
pre-race show. We will pay for production costs associated with the races to be
broadcast on their network. We will also incur expenses for our international
production for all of our races.
ADMINISTRATIVE AND INDIRECT EXPENSES. Administrative and indirect expenses
include all operating costs not directly incurred for a specific event:
- administration
- marketing and advertising
- sponsorship sales and service
- public relations
RESULTS OF OPERATIONS
Year Ended December 31, 2002 Compared to Year Ended December 31, 2001
REVENUES. Total revenues for 2002 were $57.2 million, a decrease of $13.0
million, or 18%, from 2001. This was due to a decrease in sanction fee revenues,
sponsorship revenue,
23
television revenue and engine leases, rebuilds and wheel sales, partially offset
by race promotion revenue and other revenue as described below.
Sanction fees for 2002 were $36.6 million, a decrease of $10.6 million, or
22%, from 2001. The decrease was partially due to a decrease in the number of
races for which we received a sanction fee, in 2001, we staged 20 races and
received a sanction fee from each, compared to 2002 when we received a sanction
fee with respect to 17 races. In 2002, we promoted the race in Chicago and the
race in Miami and did not receive sanction fees for these events; the results
for these events are reported in race promotion revenue and race promotion
expense. In 2001, we also received sanction fees from races in Nazareth, PA,
Brooklyn, MI, Detroit, MI, Houston, TX and Lausitz, Germany. We did not race at
those venues in 2002 and therefore did not receive sanction fees. This was
partially offset in 2002 with new races in Denver, CO, Montreal, Canada and
Mexico City, Mexico for which we received sanction fees. In 2002, we also
entered into amended agreements with certain promoters pursuant to which we
reduced the originally contracted sanction fee in exchange for a percentage of
profits from the event. The sanction fees and/or percentage of profits we
received were less than the sanction fees received in the previous year at the
races in Corby, England, Elkhart Lake, WI, Portland, OR and Cleveland, OH.
Sponsorship revenue for 2002 was $10.2 million, a decrease of $2.2 million,
or 18%, from 2001. This decrease was primarily attributable to the loss of
sponsorship income from the Indy Lights series which we discontinued at the end
of the 2001 race season, as well as a reduction in sponsorship fees from one of
our sponsors, pursuant to a renegotiation clause in the applicable sponsorship
contract.
Television revenue for 2002 was $4.5 million, a decrease of $690,000, or
13%, from 2001. The decrease was due to a change in our television agreements
from the previous year. In 2001, we received a guaranteed rights fee for both
our domestic and international television rights. In 2002, we purchased the
air-time, and we received the advertising revenue for our races broadcast on
network television. We also received rights fees for the international
broadcasts of all of our races. The advertising revenue and rights fees received
in 2002 were less than the guaranteed rights fee received in 2001. The
corresponding expenses are reported below in television expenses.
Race promotion revenue for 2002 was $1.4 million, with no corresponding
amount in 2001. The revenue was due to our promotion of the Chicago race which
was our first self-promoted race.
There were no engine leases, rebuilds and wheel sales for 2002, a decrease
of $1.3 million from the same period in the prior year. This decrease was due to
the discontinuance of the Indy Lights Championship.
Other revenue for 2002 was $4.5 million, an increase of $324,000, or 8%,
from 2001. Other revenue includes membership and entry fees, contingency awards
money, royalty income, commission on parts sales and other miscellaneous
revenue. The increase was primarily due to an insurance settlement reimbursement
of $500,000. The increase was partially offset by decreased membership and entry
fees, and a decrease in award banquet revenue.
EXPENSES. Total expenses for 2002 were $81.9 million, an increase of $3.1
million, or 4%, from 2001. This increase was due to higher race distributions,
race expenses, television expenses, race promotion expenses and relocation
expense, partially offset by a reduction in depreciation and amortization, cost
of engine rebuilds and wheel sales and administrative and indirect expenses,
litigation and asset impairment and strategic charges as described below.
Race distributions for 2002 were $19.8 million, an increase of $1.2,
million or 6%, from 2001. The increase was primarily due to a $10,000 per race
participation payment that we made to all of our teams beginning in 2002. In
addition, during 2002 we have provided $2.0 million in assistance to certain
teams in order to ensure their necessary participation in our series. The
increase was also due to an increase in the purse and year-end points fund for
the Toyota Atlantics Series. The increase was partially offset by travel
payments made to teams in 2001 for European
24
travel that were not made in 2002 and a decrease in Champ Car and Indy Lights
purse payments due to holding one less Champ Car race in 2002 and discontinuing
the Indy Lights Championship at the conclusion of the 2001 race season.
Race expenses for 2002 were $10.8 million, an increase of $205,000, or 2%,
from 2001. This increase is primarily due to freight expenses related to the
race in Rockingham, England. In 2001, the freight expenses related to
transporting the cars and equipment to Europe were paid by the promoters. In an
amendment to the original agreement for the Rockingham race, CART agreed to pay
these freight charges. The increase is also due to increased salaries, fees and
travel expenses in regards to the competition and safety departments. The
increase was partially offset by the discontinuance of the Indy Lights
Championship.
Race promotion expenses for 2002 were $9.7 million, with no corresponding
amount in 2001. The expense was due to our promotion of the Chicago and Miami
races.
There was no cost of engine rebuilds and wheel sales for 2002, a decrease
of $348,000 from the same period in the prior year. This decrease was due to the
discontinuance of the Indy Lights Championship.
Television expense for 2002 was $11.0 million with no corresponding expense
in the prior period. The increase was due to a change in our television
agreements from the previous year. In 2001, we received a guaranteed rights fee
for both our domestic and international television rights with no corresponding
expense. In 2002, we bought the air-time and paid for production expenses for
our network races. In addition, we incurred expenses to provide an international
feed for all of our races.
Administrative and indirect expenses for 2002 were $27.8 million, a
decrease of $7.8 million, or 22%, from 2001. This decrease was primarily
attributable to a decrease in severance expense, marketing and advertising,
professional fees for strategic planning, TV consulting and employee recruitment
and the discontinuance of the Indy Lights Championship, partially offset by an
increase in bad debt expense, legal fees, public relations and the advance
program. Our new advance program team visits selected race venues prior to the
event weekend and invites local media and corporate guests to participate in
activities at the track in order to generate excitement in the market prior to
the event.
Litigation expense for 2001 was $3.5 million. There was no corresponding
expense from the current year. The charge was a result of a settlement with the
Texas Motor Speedway for the cancellation of a race that was to be held in April
2001.
Relocation expenses for 2002 were $1.4 million with no corresponding
expense in the prior year. This expense relates to our headquarters moving from
Troy, Michigan to Indianapolis, Indiana.
Asset impairment and strategic charges for 2001 were $8.5 million. There
was no corresponding expense in the current year. These charges related to the
formal exit plan for the discontinuance of the Indy Lights series. The charges
related to the impairment of goodwill ($5.6 million) and property and equipment
($2.0 million) and $885,000 relating to provisions for doubtful accounts,
severance payments and other settlement charges.
Depreciation and amortization for 2002 was $1.4 million, compared to
depreciation and amortization of $1.5 million for 2001.
OPERATING LOSS. Operating loss for 2002 was $24.7 million, compared to
operating loss of $8.5 million for 2001 due to the items discussed above.
25
INTEREST INCOME (NET). Interest income (net) for 2002 was $3.8 million,
compared to interest income (net) of $7.0 million for 2001. The decrease of $3.2
million was primarily attributable to a decrease in interest rates and available
cash balances.
LOSS BEFORE INCOME TAXES. Loss before income taxes for 2002 was $20.9
million, compared to a loss before income taxes of $1.5 million for 2001 due to
the items discussed above.
INCOME TAX BENEFIT. Income tax benefit for 2002 was $7.3 million, compared
to an income tax benefit of $512,000 in 2001. The effective tax rate for 2002 of
35% was comparable to that in 2001 of 35%.
LOSS BEFORE CUMULATIVE EFFECT OF ACCOUNTING CHANGE. Loss before cumulative
effect of accounting change for 2002 was $13.6 million compared to net loss
before cumulative effect of accounting change of $950,000 for the same period in
the prior year.
CUMULATIVE EFFECT OF ACCOUNTING CHANGE. Cumulative effect of accounting
change for 2002 was $1.5 million, or $956,000 net of tax benefit of $514,000.
There was no corresponding amount in the same period in the prior year. The
amount relates to our implementation of Statement of Financial Accounting
Standard No. 142 pursuant to which we wrote off our impaired goodwill.
NET LOSS. Net loss for 2002 was $14.5 million, compared to a net loss of
$950,000 in 2001 due to the items discussed above.
Year Ended December 31, 2001 Compared to Year Ended December 31, 2000
REVENUES. Total revenues for 2001 were $70.3 million, a decrease of $4.8
million, or 6%, from 2000. This was due to a decrease in sponsorship revenue,
television revenue, engine leases, rebuilds and wheel sales and other revenue,
partially offset by an increase in sanction fees as described below.
Sanction fees for 2001 were $47.2 million, an increase of $8.3 million, or
21% from 2000. This increase was due to higher sanction fees from three new
races held in 2001, Monterrey, Mexico; Lausitz, Germany and Corby, England,
compared to the races they replaced in Rio de Janeiro, Brazil, St. Louis,
Missouri, and Miami, Florida. The increase was also attributable to annual
sanction fee escalations.
Sponsorship revenue for 2001 was $12.3 million, a decrease of $8.7 million,
or 42%, from 2000. This decrease was primarily attributable to the loss of
guaranteed income from our former sponsor partner. The decrease was also
partially due to a $1.0 million reduction in sponsorship fees from one of our
sponsors, pursuant to a renegotiation clause in the applicable sponsorship
contract.
Television revenue for 2001 was $5.2 million, a decrease of $273,000, or
5%, from 2000. The decrease was due primarily to advertising revenue from our TV
Magazine show "Inside CART" received in 2000. The show did not air in 2001.
Engine leases, rebuilds and wheel sales for 2001 was $1.3 million, a
decrease of $836,000, or 39%, from 2000. This decrease was due to having fewer
Indy Lights entries in 2001 when compared to the prior year.
Other revenue for 2001 was $4.2 million, a decrease of $3.3 million, or
44%, from 2000. The decrease was partially attributable to a decrease in royalty
revenues and sales from licensed merchandise of $210,000 and a decrease in entry
fees and related income from our two support series of $315,000 due to fewer
entries. In addition, the decrease was partially attributable to certain
non-recurring revenue received in 2000 that was not received in the
corresponding period in 2001. The non-recurring revenue was from an insurance
settlement of $1.4 million (net of
26
expenses) received from Frontier Insurance Company related to settlement of
litigation concerning a performance bond that was provided with respect to the
Hawaiian Super Prix, pace car revenues of $539,000, movie rights fees of
$200,000, team testing revenue of $143,000 and other miscellaneous income.
EXPENSES. Total expenses for 2001 were $78.8 million, an increase of $19.9
million, or 34%, from 2000. This increase was due to higher race distributions,
race expenses, administrative and indirect expenses, litigation expenses, asset
impairment and strategic charges and depreciation and amortization, partially
offset by a reduction in cost of engine rebuilds and wheel sales and bad debt
expense as described below.
Race distributions for 2001 were $18.6 million, an increase of $3.2 million
or 21%, from 2000. This increase is due to distributions related to travel
reimbursements to teams for overseas travel. These payments were not made in
2000.
Race expenses for 2001 were $10.6 million, an increase of $749,000, or 8%,
from 2000. This increase is primarily due to added personnel, travel and
operating expenses in our race departments.
Cost of engine rebuilds and wheel sales were $348,000, a decrease of
$304,000, or 47%, from 2000. This decrease is due to decreased Indy Lights
entrants in 2001, as described above.
Administrative and indirect expenses for 2001 were $35.6 million, an
increase of $10.3 million, or 41% from 2000. This increase was partially
attributable to $4.3 million in severance payments to former employees,
including our President/CEO, television feed expenses for Germany and England
and expenses related to our live Eurosport broadcast of $1.3 million, a $500,000
charitable contribution to the September 11th relief funds and an increased
investment in strategic planning, personnel and marketing and advertising that
are focused on building our strategic plan and branding awareness.
Bad debt-sponsorship partner was not incurred in 2001, compared to $6.3
million incurred in 2000. The expense resulted from the uncertainty of
collectability of guaranteed minimum sponsorship revenues from ISL Marketing AG
(ISL) for 2000. In 1998, ISL signed a nine (9) year contract to become our
exclusive marketing agent for solicitation of sponsorship agreements. The
contract guaranteed a minimum amount of sponsorship revenue for each year of the
agreement. Following discussions with ISL, we determined that ISL did not intend
to fulfill its commitment with respect to the remaining years of the agreement
under its original terms and collectability of the guarantee for 2000 was
uncertain. In June 2001, ISL declared bankruptcy in Switzerland.
Asset impairment and strategic charges for 2001 were $8.5 million. There
was no corresponding expense in the prior year. These charges related to the
formal exit plan for the discontinuance of the Indy Lights series. The charges
related to the impairment of goodwill ($5.6 million) and property and equipment
($2.0 million) and $885,000 relating to provisions for doubtful accounts,
severance payments and other settlement charges.
Litigation expense for 2001 was $3.5 million. There was no corresponding
expense from the prior year. The charge was a result of a settlement with the
Texas Motor Speedway for the cancellation of a race that was to be held in April
2001.
Depreciation and amortization for 2001 (exclusive of the impairment of
goodwill and write-down of property and equipment in connection with Indy
Lights) was $1.5 million, compared to depreciation and amortization of $1.4
million for 2000.
OPERATING LOSS. Operating loss for 2001 was $8.5 million, compared to
operating income of $16.2 million for 2000 due to the items discussed above.
27
INTEREST INCOME (NET). Interest income (net) for 2001 was $7.0 million,
compared to interest income (net) of $7.5 million for 2000. The decrease of
$430,000 was primarily attributable to a decrease in interest rates.
LOSS BEFORE INCOME TAXES. Loss before income taxes for 2001 was $1.5
million, compared to income before income taxes of $23.7 million for 2000 due to
the items discussed above.
INCOME TAX BENEFIT. Income tax benefit for 2001 was $512,000, compared to
income tax expense of $8.5 million in 2000. The effective tax rate for 2001 of
35% was comparable to that in 2000 of 36%.
NET LOSS. Net loss for 2001 was $950,000, compared to net income of $15.2
million in 2000 due to the items discussed above.
SEASONALITY AND QUARTERLY RESULTS
A substantial portion of our total revenues during the race season is
expected to remain seasonal, based on our race schedule. Our quarterly results
vary based on the number of races held during the quarter. In addition, the mix
between the type of race (street course, superspeedway, etc.) and the sanction
fees attributed to those races will affect quarterly results. Consequently,
changes in race schedules from year to year, with races held in different
quarters, will result in fluctuations in our quarterly results and affect
comparability. We have provided unaudited quarterly revenues for each of the
four quarters of 2002 and 2001 in the following table. The information for each
of these quarters is prepared on the same basis as our consolidated financial
statements and related notes included elsewhere in this report and include, in
the opinion of management, all adjustments (consisting of normal recurring
adjustments) necessary to fairly present the data for such periods. You should
read this table with "Selected Consolidated Financial Data," and the
consolidated financial statements and the related notes included elsewhere in
this report.
QUARTER ENDED
-------------
MARCH 31 JUNE 30 SEPT. 30 DEC. 31
-------- ------- --------- -------
(DOLLARS IN THOUSANDS)
Total revenues
2002 $ 5,603 $ 19,292 $ 18,537 $ 13,813
2001 $ 6,439 $ 19,785 $ 29,559 $ 14,480
Number of races
2002 1 6 8 4
2001 1 6 9 4
LIQUIDITY AND CAPITAL RESOURCES
We have relied on our cash reserves generated in previous years to finance
working capital, investments and capital expenditures during the past year. We
anticipate that in 2003, we will use available funds to fund certain
expenditures that are planned for the year 2003 as discussed below. We believe
that existing cash, cash flow from operations and available bank borrowings will
be sufficient for capital expenditures and other cash needs.
We have a $1.5 million revolving line of credit with a commercial bank. As
of December 31, 2002, there was no outstanding balance under the line of credit.
The line of credit contains no significant covenants or restrictions. Advances
on the line of credit are payable on demand and bear interest at the bank's
prime rate. The line is secured by our deposits with the bank.
Our cash balance on December 31, 2002 was $6.8 million, a net decrease of
$21.0 million from December 31, 2001. This decrease was primarily the result of
net cash used in operating activities of $22.0 million and net cash proceeds in
investing activities of $708,000.
28
Capital spending for 2002 was approximately $7.0 million. In October 2002,
the Company paid $4.0 million for the purchase of engines for use in our series
in 2003 and 2004. Also in 2002, we acquired additional race equipment, leasehold
improvements related to our new headquarters in Indianapolis, IN, semi-trailers
for our advance program, technical inspection equipment, timing and scoring
equipment and other miscellaneous equipment. We anticipate capital expenditures
of approximately $2.0 million in 2003. The capital expenses will be for computer
equipment, a new semi-trailer, timing and scoring equipment, safety truck
conversions and competition related equipment for technical inspection and data
acquisition.
In April 2002, we entered into a lease for our new corporate headquarters
in Indianapolis, Indiana. The lease commenced on May 1, 2002 and expires October
31, 2010. The total amount due through the life of the lease is $2.6 million.
We have implemented a stock repurchase program that was authorized by our
Board of Directors in April 2001. The program allows us to repurchase up to
2,500,000 shares of our outstanding stock, of which 1,054,000 shares have been
repurchased for an aggregate of $15.5 million through December 31, 2001. We did
not repurchase any shares in the 12 months ended December 31, 2002. Repurchases
under the program will be made at the discretion of management based upon
market, business, legal, accounting and other factors. Currently, the company
has no intention to purchase any of its outstanding shares.
The following table summarizes our contractual obligations.
Payments due by Period
----------------------
Less Than 1-3 4-5 After 5
Contractual Obligations Total 1 Year Years Years Years
- ---------------------------------------------------------------------------------------------------------------
Operating Leases $ 3,111,613 $ 422,496 $ 846,952 $ 868,127 $ 974,038
Team Assistance Payments 30,000,000 30,000,000 -- -- --
Entrant Support Program 13,770,000 13,770,000 -- -- --
Television Buys 7,050,000 3,525,000 3,525,000 -- --
Other Long-Term Obligations 3,878,060 3,325,051 551,153 1,856 --
----------- ----------- ---------- ----------- ----------
Total Contractual Cash Obligations $57,809,673 $51,042,547 $4,923,105 $ 869,983 $ 974,038
=========== =========== ========== =========== ==========
On March 7, 2003, we acquired 100% of the equity in Raceworks, LLC. The
purchase price was $1.2 million, including $473,000 of cash and a promissory
note of $722,000, without interest, and assumption of liabilities of $4.6
million.
FUTURE TRENDS IN OPERATING RESULTS
An important part of our overall strategy is to make our races major events
in large urban markets. In markets where there are no established race tracks,
we will establish street races. These races may be promoted by us or we may
partner with experienced race promoters to stage these events.
In 2002, we promoted the races in Chicago and Miami. In addition, we
entered into one new agreement and amended four existing sanction agreements
with promoters to include revenue sharing arrangements with promoters at their
events.
In 2003, we will promote six of our events: Cleveland, OH, Portland, OR,
Miami, FL, Lexington, OH, Kent, UK and Lausitz, Germany and we have entered into
agreements with promoters that include revenue sharing arrangements for five
events. The financial success of each of the events we promote or in which we
share in revenues, is dependent on the sale of tickets, sponsorship,
hospitality, signage and other commercial rights associated with the events. Our
increased focus on these activities means that our revenues related to our
sanction fee and race promotion income will be subject to a number of factors,
including consumer and corporate spending and the overall economic conditions
affecting advertising and promotion in the motorsports and entertainment
business.
29
Since we funded substantially all of the expenses associated with the race
in Miami, we have recognized such expense in excess of revenues received from
the race of $5.5 million in 2002. On March 7, 2003, we acquired 100% of the
equity in Raceworks, LLC. The purchase price was $1.2 million, including
$473,000 of cash and a promissory note of $722,000, without interest, and
assumption of liabilities of $4.6 million. Beginning in 2002, we started funding
the events we will promote in 2003. We will continue in 2003 to fund these
events.
With the four tracks where we amended our sanction agreement to share in
the net revenue for the events, we received net sanctioning fees of $4.6
million, which represented an aggregate 35% reduction in sanctioning fees
compared to 2001 fees for the same events.
In 2002, our television contracts required us to purchase airtime and
produce the shows at our expense for the races we broadcast on CBS and Fox. We
retained the advertising revenues for these races. Our costs for 2002 were $11.1
million for purchasing the air time and productions expenses for domestic and
international programming. These television expenses were offset by our sales of
television advertising and rights fees of $4.9 million.
In 2003, our television contracts require us to purchase airtime on CBS and
we will pay for production for our shows on CBS and Speed Channel. We will
retain the advertising revenues for all of our races. The estimated cost for
purchasing airtime and production for domestic and international programming is
$16.1 million. We are unable to predict the sales of our television advertising
for domestic programming or our sale of rights fees for our international
programming for 2003. The amount of advertising will be based upon a number of
economic factors over which we have no control. The overall state of the
economy, the popularity of our sport and other factors make it more uncertain as
to the ultimate profitability or loss related to our television package.
In August 2002, the Company announced an entry support program to retain
and attract teams for the 2003 season and beyond. This program will provide up
to $42,500 in cash payments to teams, per race, for each car entered in the 2003
Championship, up to a maximum of twenty (20) cars. These payments are in
addition to prize money and other non-monetary benefits that accrue to teams
participating in the Champ Car Series. In return for receipt of these funds,
each team will allocate to CART advertising space on its race cars and other
equipment, which CART will use in packaging advertising that it will market to
potential sponsors. The advertising packages offered to sponsors would include
not only advertising on racecars, but also television, at-track advertising and
additional media opportunities. We are unable to predict how successful our
efforts will be in marketing these packages.
The Company announced in October 2002, a commitment to spend up to an
additional $30.0 million in team assistance to ensure that there is adequate
participation by race teams in the 2003 season. We have entered into contractual
agreements with 18 teams who have committed to be full season participants in
the 2003 Champ Car World Series. We anticipate that an additional one or two
teams will participate in selected events. We believe that it was necessary to
provide this additional funding to ensure that there would be 18 to 20
competitive racecars in the field for the 2003 season. Without this additional
funding, it was unlikely that there would have been 18 teams, which would result
in defaults under certain of the Company's agreements with promoters and
television. This could result in the Company not being able to complete the 2003
race season. In exchange for this assistance, the teams provide us with
associate sponsor or in some instances primary sponsorship opportunities with
their team to offset these costs. We are unable to predict how successful our
efforts will be in marketing these packages. In addition, if the teams' efforts
to sell sponsorship reach certain levels, they are required to repay a
percentage of the assistance they have received from us.
In October 2002, the Company purchased 100 race engines from Cosworth
Racing, Inc. for a total purchase price of $4.0 million and agreed to pay for
track support in the amount of
30
$1.5 million. The Company in turn has leased these engines to each team on the
basis of $100,000 per entrant per race season.
In light of current events and the overall state of the economy, we are
uncertain whether we or our teams will be able to maintain the same levels of
sponsorship income that we have reported in the past or secure additional
sponsorship. In addition, we are unable to determine what effect these factors
will have on our new television package and our ability to sell television
advertising for our races. We are also unable to assess what impact a decrease
in the disposable income of our fans will have on our promoters and, ultimately,
our races.
As we have previously reported, we are party to several lawsuits. We cannot
predict the outcome of the litigation, and at this time, management is unable to
estimate the impact that ultimate resolution of these matters may have on the
Company's financial position or future results of operations.
OFF-BALANCE SHEET ARRANGEMENTS
In October 2002, we provided a deposit of $550,000 and a letter of credit
in the amount of $1.7 million in regards to the production of conversion kits
for race car chassis for the 2003 season. The letter of credit guarantees that
at least 20 of the kits would be purchased by our race teams. As the kits are
purchased, the letter of credit will be reduced accordingly. If 20 kits were not
purchased by our teams, we would have been required to purchase the remaining
kits and continue to sell the kits to teams as they are needed. All 20 race kits
have been purchased by our race teams; consequently, the deposit was refunded on
February 27, 2003 and the letter of credit will be canceled.
We have guaranteed a $2 million loan from the Miami Sports Entertainment
Authority to Raceworks, LLC, an entity that holds the license to race in Miami.
The loan is for the purchase of capital items needed to construct the race
track. The loan is a 5 year agreement, payable in $200,000 installments per
year, beginning in October 2002, with a balloon payment in the final year. The
initial installment was paid by CART in the fourth quarter of 2002.
RELATED PARTY TRANSACTIONS
We have historically entered into transactions with related parties,
because several of our directors and one of our significant shareholders are
team owners. We believe that it is necessary and appropriate to have team owners
involved as directors or significant shareholders of the Company because of
their unique knowledge of our business. We believe that all the transactions
which we have entered into with our directors or significant shareholders, are
comparable to the terms that we have in the past or could in the future enter
into with third parties with respect to each of these transactions. In order to
avoid conflicts of interest, any of our directors who are affiliated with an
entity that is entering into a transaction with us have not and will not vote on
any matters related to such transactions and may, in certain circumstances,
refrain from participating in any discussions related to such transactions.
The related party transactions under "Purse Distributions, Entry Support
Program and Lease Arrangements" are all payments or transactions that are made
on the identical basis to all race teams, whether they are affiliated with
directors or significant shareholders or not affiliated. The payments payable to
related parties under the caption "Team Assistance Program" relate to further
assistance that the Company is providing to race teams to assure their
participation in the 2003 race season. The amounts payable to each race team
vary, depending upon the team's ability to raise third party sponsorship, the
number of cars that the team will race in 2003, their budget and other factors.
The Company has determined that these payments are necessary in order to assure
a proper field for 2003 and believes that the amounts payable to each of the
race teams affiliated with a director is consistent with arrangements that the
Company could enter into with third parties. Both of these programs were
developed to insure the necessary participation in the series. Without this
additional funding, it is unlikely that there would have been 18 teams,
31
which would result in defaults under certain of the Company's agreements with
promoters and television and could have resulted in severe financial
consequences to the Company.
PURSE DISTRIBUTIONS, ENTRY SUPPORT PROGRAM AND TEAM ASSISTANCE. We have
entered into, and we will continue to enter into, transactions with entities
that are affiliated with our directors and/or 5% stockholders who are owners of
our race teams. Race teams that participate in the Champ Car World Series
receive purse distributions on a per race basis and from the year end point
fund, which amounts have been paid based solely upon their performance in
specific races. All of these payments are made to our race teams regardless of
the affiliation with our directors or significant stockholders. During 2002, we
also paid a participation payment to our race teams, including those affiliated
with directors (or directors who have resigned during the year) and/or 5%
stockholders. The following table provides information with respect to payments
made during 2002 by us to race teams that are or were affiliated with directors
and/or significant stockholders of CART:
RACE TEAM/AFFILIATED PERSON PURSE DISTRIBUTIONS PARTICIPATION PAYMENTS
- --------------------------- ------------------- ----------------------
Newman/Haas Racing/Carl A. Haas $ 2,677,500 $ 380,000
Team Green/Barry E. Green 2,013,500 570,000
Chip Ganassi Racing Teams, Inc./Chip Ganassi 2,185,000 540,000
Forsythe Racing, Inc./Gerald R. Forsythe 1,532,250 380,000
Patrick Racing, Inc./U.E. Patrick 317,250 190,000
Derrick Walker Racing, Inc./Derrick Walker 317,750 190,000
In 2003, we will lease engines and provide financial assistance to every
team that participates in the Champ Car World Series, including teams affiliated
with our directors and/or 5% stockholders. The financial assistance payments
relate to two programs instituted for the 2003 season, the Entry Support Program
(ESP) and the Team Assistance Program. ESP will provide up to $42,500 in cash
payments to teams, per race, for each car entered into the series.
The Company has entered into a sponsorship agreement with Ford Motor
Company, which provides in part, that Ford will lease to each of the teams Ford
vehicles for their use in 2003. For ease of administration, Ford has leased
these vehicles to the Company and the Company has subleased the vehicles to each
team on a net net basis. There is no net cost or benefit to the Company related
to this arrangement.
The Company purchased one hundred (100) race engines from Cosworth Racing,
Inc. for a total purchase price of $4.0 million and agreed to pay for track
support in the amount of $1.5 million. The Company in turn has leased these
engines to each team on the basis of $100,000 per entrant per year.
The following table lists the estimated amount of engine lease income we
will receive and Entry Support Payments we will make to related parties for the
2003 race season.
ENGINE LEASE INCOME ESP PAYMENTS
RACE TEAM/AFFILIATED PERSON FROM TEAMS TO TEAMS
- --------------------------- ---------- --------
Newman/Haas Racing/Carl A. Haas $200,000 $1,530,000
Forsythe Racing, Inc./Gerald R. Forsythe 200,000 1,530,000
Patrick Racing, Inc./U.E. Patrick 100,000 765,000
Derrick Walker Racing, Inc./Derrick Walker 200,000 1,530,000
TEAM ASSISTANCE PROGRAM. The Team Assistance Program will supply an
additional $30.0 million in team assistance spread over the 2003 race season as
described above. The following table sets forth the Team Assistance Program
payments to teams affiliated with directors and/or 5% stockholders.
32
RACE TEAM/AFFILIATED PERSON TEAM ASSISTANCE PAYMENTS
- --------------------------- ------------------------
Newman/Haas Racing/Carl A. Haas* $ 2,000,000
Patrick Racing, Inc./U.E. Patrick* 1,400,000
Derrick Walker Racing, Inc./Derrick Walker 5,925,000
* These agreements would put the Company over the $30.0 million in total team
assistance the board of directors approved. The board has approved these
contracts contingent on reducing the overall team assistance so as not to exceed
$30.0 million.
PROMOTER AGREEMENTS
Some of our directors or stockholders either control or are affiliated with
others who control racing venues which stage CART and other racing events. We
have entered into the following agreements with entities associated with
directors or 5% stockholders:
Carl A. Haas, a director of the Company and a race team owner, is a
principal owner of Carl Haas Racing Teams, Ltd. and Texaco Houston Grand Prix
L.L.C. ("HGP"), each of which have entered into Promoter Agreements with respect
to Champ Car World Series races at the Wisconsin State Park Speedway in
Milwaukee, Wisconsin and at a temporary road course in Houston, Texas. In the
second quarter of 2002 the Promoter Agreement for the Milwaukee race was renewed
for the 2002 event with the promoter having the option to extend for the 2003
and 2004 years. The sanction fees payable to CART under this agreement is
similar to those paid by independent race promoters. Pursuant to the Promoter
Agreement, entities affiliated with Mr. Haas have paid sanction fees to CART of
$1.7 million. We are currently in negotiations regarding the option for the 2003
and 2004 events. In addition, we have incurred a total of $100,000 in sales
costs and $100,000 in marketing expenses in relation to our race at Wisconsin
State Park Speedway during 2002. The promoter agreement in regards to the
Houston, Texas event provided for races to be held starting in 1998 through
2003. The Houston, Texas race was not held in 2002 and will not be held in 2003
due to construction on the temporary circuit in downtown Houston. Therefore, the
promoter agreement has been terminated by mutual agreement. Carl Haas Racing
Teams, Ltd. paid a $500,000 termination fee to CART and CART has received an
option to acquire certain assets of HGP, used in operating the Houston event,
for $750,000. This option was exercised and payment was made in January 2003.
Gerald R. Forsythe, a race team owner and 24.9% stockholder, is a principal
owner of the entities which entered into Promoter Agreements with respect to
Champ Car World Series races in Monterrey, Mexico and Mexico City, Mexico. These
entities affiliated with Mr. Forsythe have paid sanction fees to CART in the
aggregate amount of $6.1 million for 2002. We are currently renegotiating the
remaining years of the agreements.
In addition, we have paid a total of $200,000 in sales costs and $200,000
in marketing expenses to these entities during 2002.
In order to change the date of the Mexico City race as requested by Mr.
Forsythe's affiliated entity, we have paid another promoter $250,000. Mr.
Forsythe's affiliated entity reimbursed us for $125,000 of that expense.
Gerald R. Forsythe is also a principal owner of an entity which entered
into a Promoter Agreement with respect to Champ Car World Series races in
Rockingham, England. The agreement provided for a race to be held beginning in
2001 through 2006. Following the cancellation of the race scheduled to be run in
Germany, officials at Rockingham expressed concern regarding the viability of
running a single event in Europe. In order to assure that the Rockingham event
could move forward in 2002, we negotiated an amendment to the Promoter Agreement
which reduced the sanction fee to $2.8 million and we assumed certain costs,
33
including freight and transportation, in the amount of $900,000. In addition,
the terms of the future years of the agreement, 2003-2006, were subject to
renegotiation. This renegotiation has subsequently resulted in the cancellation
of the remaining years of the agreement. In addition, we have paid a total of
$100,000 in sales costs and $400,000 in marketing expenses to this entity during
2002.
Floyd R. Ganassi Jr., a former director of the Company and a race team
owner, is a principal owner of Chicago Motor Speedway, LLC and has entered into
a Promoter Agreement with respect to a Champ Car World Series race at Chicago
Motor Speedway in Cicero (Chicago), Illinois. Pursuant to the terms thereof, a
Championship race was to be held through 2003. The Chicago Motor Speedway, LLC
was to pay sanction fees to CART of $2.0 million for 2002 and $2.1 million for
2003. In 2002, the Chicago Motor Speedway, LLC announced the suspension of all
race events at Chicago Motor Speedway. We then entered into an agreement with
the Chicago Motor Speedway, LLC where we rented the track for $850,000 in 2002
and promoted the race ourselves.
OTHER TRANSACTIONS
In addition to the above, we have entered into the following transactions
with related parties:
Mr. Forsythe is also a principal owner of the entity that holds our Mexican
television rights through 2004. In return for these rights, we received a
minimum guarantee of $300,000 in 2002 and will receive a minimum guarantee of
$325,000 and $350,000 for each of the two years ending 2003 and 2004,
respectively. In addition, we will receive 70% of the net profits, if any, until
we reach $500,000, $550,000 and $600,000 for each of the three years ending
2002, 2003 and 2004, respectively.
Mr. Ganassi is also principal owner of Target Chip Ganassi Racing, Inc.,
which entered into an agreement by which Target Chip Ganassi Racing Inc. ran a
third car for a portion of the 2002 season. Pursuant to the terms thereof, we
paid Target Chip Ganassi Racing, Inc. $1.7 million for running the third car,
and we received the right to sell certain sponsorship space on that car.
Ralph Sanchez, a director of the Company, is a principal owner of RAS
Development, Inc. which has entered into a five year lease agreement with the
Company for office space in Miami, Florida. Payments for this lease total
$80,292, $97,957, $99,081, $100,045, $101,008 and $16,861 for 2003, 2004, 2005,
2006, 2007 and 2008, respectively.
PAYMENTS TO CART
In addition to the payments described above, CART receives revenues from
its race teams, including those affiliated with CART directors and/or 5%
stockholders, for entry fees, equipment leases and other payments based solely
on participation in CART events and CART's self-promoted event. During 2002,
race teams affiliated with CART directors and/or 5% stockholders made such
payments to CART as follows:
Team Green/Barry E. Green $ 187,360
Forsythe Racing, Inc./Gerald R. Forsythe 106,636
Chip Ganassi Racing Teams, Inc./Chip Ganassi 94,805
Newman/Haas Racing/Carl A. Haas 142,368
Patrick Racing, Inc./U.E. Patrick 71,500
Derrick Walker Racing, Inc./Derrick Walker 50,050
FACTORS THAT MAY AFFECT OPERATING RESULTS
Reliance on Participation by Teams - Our future success is dependent upon
the continued participation of racing teams in CART-sanctioned race events. A
minimum number of teams are
34
required to participate in order to provide a quality racing event. If teams
that currently participate in our events terminate their participation, or if we
are unable to attract new teams then that could adversely affect our financial
and business results. Certain sanction agreements with promoters require a
minimum number of cars in a particular CART-sanctioned race event. Two of these
agreements require a minimum of 20 cars, and if less than 20 cars will
participate, then the promoter may have the right to cancel the event or reduce
the sanction fee. If the promoter intends to exercise their right to cancel the
event, due to the minimum car count not being met, they are required to give us
written notice of their intent to cancel the event and we have seven days from
receipt of the written notice to provide the additional entries as required by
the contract.
Historically, the teams participating in our events derive substantially
all of their funding for race operations from their sponsors and engine
manufacturers (see "Reliance on Participation by Suppliers"). Generally, team
sponsors measure advertising exposure to determine future sponsorship
commitments. A decrease in our attendance or television viewership could
adversely affect the level of funding by some team sponsors. In 2003, most of
our events will be televised domestically on Speed Channel and seven events are
anticipated to be on the CBS network. If sponsorship revenues are not available
to teams, then those teams may not have the necessary funding to participate in
our events.
In 2002, due to general economic conditions and other factors, certain
teams did not have sufficient funding to participate in our series. To ensure
that a sufficient number of teams would compete in our series, we will provide
financial incentives to certain teams to ensure their participation in our
series for 2003. We may not be able to continue such financial incentives beyond
the 2003 season, and therefore certain teams may not be able to participate in
our series in the future if they are unable to obtain sufficient funding through
sponsors and other alternatives.
Beginning in 2003, certain teams and drivers that participated in our
series in 2002, elected to participate in our rival series beginning in 2003. We
are unable to assess what impact the loss of these teams and drivers will have
on our series.
We can not assure you that the current race teams will participate in
future years or that we will be able to provide funding for teams to participate
in future years. In addition, teams may elect to participate in a competing
series rather than CART.
RELIANCE ON INDUSTRY SPONSORSHIPS - A SIGNIFICANT DECLINE IN SPONSORSHIP,
PROMOTION AND ADVERTISING DOLLARS AVAILABLE TO US, OUR RACE PROMOTERS AND THE
RACING TEAMS PARTICIPATING IN OUR EVENTS IN THE FUTURE COULD ADVERSELY AFFECT
OUR FINANCIAL AND BUSINESS RESULTS. We generate significant revenue each year
from the sponsorship, promotion and advertising of various companies and their
products. The revenue generated from such sponsorship, promotion and advertising
substantially depends upon the level of advertising expenditures by sponsors or
prospective sponsors. The level of advertising expenditures depends in part on
the financial condition of such companies and the availability and cost of
alternative promotional outlets. It also depends on their perception of the
benefits of using us, our events or race teams as an advertising medium.
Television viewership, spectator attendance and race venues for our events
significantly impact the advertising and promotional value to sponsors. The
economic slowdown over the past 36 months has had a negative effect on our
ability to attract new sponsors and renew existing sponsors.
RELIANCE ON PARTICIPATION BY SUPPLIERS - WITHOUT THE PARTICIPATION OF
SUPPLIERS IN PROVIDING ENGINES, CHASSIS AND TIRES, WE MAY NOT BE ABLE TO
CONTINUE SOME OF OUR RACING SERIES. We are dependent upon the continued
participation of suppliers of engines, tires and chassis to teams competing in
our events.
The engines and tires for our race cars are designed specifically for our
racing. In 2002, one tire manufacturer supplied tires to competitors in the
Champ Car Series, and we will have one tire manufacturer in 2003.
35
We had three major engine manufacturers in 2002. We have purchased the
engines that will be used by the teams for the 2003 and 2004 seasons and we will
lease the engines to the teams. Although we are currently in discussions with
several engine manufacturers to provide engines beginning in 2005, we cannot
assure you we will be successful in attracting engine manufacturers to our
series and this could affect our financial and business results.
We believe that the costs to some industry suppliers are greater than the
revenues generated from the sale or lease of such products, and therefore, they
must derive advertising or technical benefits from such participation.
Historically, the engine manufacturers have provided monetary incentives to
certain teams that use their engines. These benefits will not be available in
2003 and 2004, and this will increase the costs to the teams which could result
in teams not having sufficient funding to compete in 2003 and 2004.
SUBSTANTIAL COMPETITION - OUR RACING EVENTS FACE INTENSE COMPETITION FOR
ATTENDANCE, TELEVISION VIEWERSHIP AND SPONSORSHIP. Our industry is highly
competitive. We cannot assure you that we will be able to maintain or improve
our market position. Our racing events compete with other events for television
viewership, attendance and sponsorship funding. Our racing events compete with
racing events sanctioned by other racing bodies, including:
- Formula One
- National Association of Stock Car Automobile Racing ("NASCAR")
- Indy Racing League ("IRL")
- National Hot Rod Association ("NHRA")
- Sports Car Club of America ("SCCA")
- International Motor Sports Association ("IMSA")
In addition, our racing events compete with other sports, entertainment and
recreational events, including:
- Football
- Basketball
- Baseball
- Golf
RELIANCE ON EVENT PROMOTERS -- WE DERIVE A SUBSTANTIAL PORTION OF OUR TOTAL
REVENUES FROM SANCTION FEES WHICH ARE PAID TO US BY PROMOTERS. If several
promoters incur financial losses or restrictions that prohibit future events
from taking place or if such promoters elect not to promote our events in the
future, we believe this could adversely affect our financial and business
results. In 2002, we restructured our sanction fees with several promoters to
share the risks and rewards.
CART PROMOTED EVENTS - WE ARE THE PROMOTER OF CERTAIN EVENTS AND WITH
RESPECT TO CERTAIN OTHER EVENTS, OUR SANCTION FEE IS BASED IN PART ON THE
SUCCESS OF THE EVENT. The events are dependent on the sale of tickets,
sponsorship, hospitality, signage and other commercial rights associated with
the event for its financial success. If we fail to promote or co-promote these
events effectively, then this could have an adverse affect on our financial and
business results because our sanction fees have been decreased or replaced with
revenue sharing arrangements and race promotion revenues.
OUR FINANCIAL RESULTS DEPEND SIGNIFICANTLY ON CONSUMER SPENDING. Our
financial success depends significantly on a number of factors relating to
discretionary consumer spending, including factors such as:
- employment
36
- business conditions
- interest rates
- taxation rates
These factors can impact attendance at our events and the amount of money
spent on merchandise and concessions.
POSTPONEMENT AND/OR CANCELLATION OF EVENTS COULD EFFECT OUR FINANCIAL
RESULTS. If one or more of our events is postponed or canceled because of
factors such as weather, terrorist attacks, war or the bankruptcy of one of our
promoters, we could incur increased expenses or lost revenue due to the
postponement or cancellation of such event. If the event is postponed, we could
incur increased expenses related to conducting the rescheduled event. If an
event is canceled, we could lose revenues from sanction fees and television
advertising and, in the case of a CART co-promoted or promoted event, lose
revenue from the ticket sales, sponsorship, hospitality, signage and other
commercial rights associated with the event, while still incurring expenses for
such event.
NEW RACE VENUES - WE MAY NOT BE ABLE TO SUCCESSFULLY INTEGRATE NEW RACE
VENUES AND EXTEND OR RENEW CURRENT VENUES. The 2003 Champ Car World Series is
anticipated to include two races at new venues, one of which is in Europe. Our
operational success depends upon the success of our racing events. If these new
events and new venues are not successfully implemented, then our financial and
business results will be adversely affected.
TELEVISION CONTRACTS - If we are not successful in selling advertising for
our race broadcasts, our financial results will be adversely affected. We have
entered into television contracts with Speed Channel and CBS to air our races.
Speed Channel will provide air time on their network and we will purchase the
air-time on CBS. We will produce the shows at our expense, and we will retain
the advertising inventory.
LIMITATIONS ON SPONSORSHIP - THE LOSS OF MOTORSPORTS INDUSTRY SPONSORSHIPS
FROM TOBACCO AND ALCOHOL COMPANIES COULD HAVE ADVERSE EFFECTS ON US.
Governmental authorities in many countries regulate advertising by companies in
the alcohol and tobacco industries. Companies involved in these industries have
been significant sponsors of race teams, racing series and events. Governmental
authorities have taken steps to further restrict sponsorship by tobacco
companies. We do not derive significant sponsorship revenue from the tobacco and
alcohol industries, but certain of the race teams participating in our events
derive a substantial portion of their operating revenues from such industry
sponsors. In addition, several of our race events are sponsored in part by
companies in the tobacco or alcohol industries, with such sponsorship fees paid
to the track promoters. If these race teams and track promoters lose sponsorship
fees from tobacco or alcohol industry sponsors without locating another sponsor,
then we could lose that team as a participant or that promoter, and it could
adversely affect our financial and business results.
In 1998, Phillip Morris, Brown & Williamson, Lorillard, R.J. Reynolds and
the Liggett Group entered into a settlement agreement with 46 states and the
District of Columbia (collectively, the "States"). The settlement agreement
restricts tobacco product advertising and marketing within the States. Among
other restrictions, the settlement agreement:
- prohibits tobacco product brand name sponsorship of concerts, events
in which the intended audience is comprised of a significant
percentage of youth under age 18, events in which any paid
participants or contestants are youths, or any athletic event between
opposing teams in any football, basketball, baseball, soccer or hockey
league; and
- limits each participating manufacturer to one tobacco product brand
name sponsorship in one series during any twelve-month period.
37
We cannot assure you that a tobacco company will choose a motorsports event
as its one annual event to sponsor. If a tobacco company does choose to do so,
the settlement agreement permits the use of a tobacco product brand name for a
race car series and a single race team within that series. If the tobacco
company is not a sponsor of the race series in which the race team is competing,
it can use the tobacco product brand name only for a single race team.
WEATHER - BAD WEATHER COULD ADVERSELY AFFECT US. Poor weather conditions
could have a negative affect on us. Weather conditions affect fan attendance,
which can affect venues where we act as a promoter or co-promoter. In addition,
we cannot run our race cars on oval tracks that are wet, and delays or
cancellation of events due to inclement weather could also have a negative
financial impact on our operations.
INDIANAPOLIS 500 - PARTICIPATION BY CART TEAMS AND DRIVERS IN THE
INDIANAPOLIS 500 COULD HAVE AN ADVERSE EFFECT. The Indianapolis 500 is a major
racing event in the United States. It draws substantial television viewership.
For these reasons, many companies that sponsored race teams historically
regarded an involvement at the Indianapolis 500 as being an extremely important
part of their sponsorship. Corporations have spent a considerable sum of money
to sponsor racing teams participating at the Indianapolis 500 and for
advertising and promotions for such sponsorship. We are unable to predict what
effect the continued limited participation by our teams at the Indianapolis 500
will have on our financial and business results.
GROWTH STRATEGY - WE MAY NOT BE ABLE TO SUCCESSFULLY IMPLEMENT OUR GROWTH
STRATEGY. A factor in our growth strategy is to stage races in the largest urban
markets domestically and internationally. These races may be in partnership with
experienced race promoters and/or may also be owned and promoted by us. We
cannot assure you that we will be able to find suitable partners and/or venues
in which to stage races in the markets we desire to be in. Our ability to manage
our future growth and to successfully implement this growth strategy could
require enhanced operational, financial and management systems. In addition, we
will need to successfully hire, train, retain and motivate additional employees.
If we fail to manage our growth effectively, then this could have an adverse
affect on our financial and business results.
LIABILITY FOR RACING-RELATED INCIDENTS - WE FACE THE INHERENT RISKS AND
EXPOSURE TO CLAIMS IN THE EVENT THAT SOMEONE IS INJURED AT A CART-SANCTIONED
EVENT. Racing events can be dangerous to participants and spectators. We have
and will continue to have liability insurance to cover past and any future
racing incidents. There is no assurance, however, that the insurance will be
adequate or available at all times and in all circumstances. We are also
indemnified by track promoters for racing incidents and obtain waivers from
those participating in our events. To the extent not covered by insurance, any
claims and associated expenses related to prior racing incidents could adversely
affect our financial and business results. In addition, any claims and
associated expenses related to future potential racing incidents, to the extent
not covered by insurance, could adversely affect our financial and business
results.
In 1999, two of our drivers died in racing related incidents. In 2000, we
were named as defendants in lawsuits filed by representatives of each of the
drivers. For additional information, you should read Item 3: Legal Proceedings.
CONFLICTS - SOME OF OUR CURRENT STOCKHOLDERS AND DIRECTORS HAVE CONFLICTS
OF INTEREST. Some of our current stockholders and directors are affiliated with
a race team that participates in the Champ Car World Series. These stockholders
and directors, affiliated with race teams receive prize money, entry support
payments and may receive other team assistance payments. These factors result in
an inherent conflict of interest for certain matters to be considered by the
stockholders or directors. In addition, some of our stockholders and directors
either control or are affiliated with others who control racing venues which
stage CART and other racing events. Therefore, a conflict of interest may arise
when we determine the location and dates of CART events and the amount of
sanction fees paid. Under Delaware law, all directors owe a fiduciary duty to
our stockholders.
38
INTERIM RESULTS - OUR QUARTERLY RESULTS ARE SUBJECT TO FLUCTUATION AND
SEASONALITY AS A RESULT OF THE SCHEDULING OF OUR RACES. Historically, our
revenues are higher in the second and third quarters of the year due to the
number of races that we stage in those quarters. The scheduling of any race in
the Champ Car World Series can significantly affect our quarterly results of
operations when compared to a previous quarter, if races are scheduled during
different quarters from year to year. You may be unable to usefully compare our
results in one quarter to our results in a prior period due to these timing
differences. This may affect your ability to analyze our results on a quarterly
basis and could also affect the market price of our stock. You should see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Seasonality and Quarterly Results" for a discussion of our
quarterly results.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 142, "Goodwill and
Intangible Assets." The statement requires companies to stop amortizing goodwill
and certain intangible assets with indefinite useful lives. Instead, goodwill
and intangible assets with indefinite useful lives will be tested for impairment
upon adoption of the statement and annually thereafter. The Company will perform
its annual impairment review for intangible assets during the fourth quarter of
each year, commencing with the fourth quarter of 2002. The Company determined
its goodwill was impaired and recognized a loss of $1.5 million in the second
quarter of 2002.
On April 30, 2002, the FASB issued SFAS No. 145, "Rescission of FASB
Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections." The statement is intended to update, clarify and simplify existing
accounting pronouncements. Management does not believe this statement will have
a material effect on its consolidated financial statements.
On July 30, 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities". The statement addresses financial
accounting and reporting for costs associated with exit or disposal activities
and nullifies Emerging Issues Task Force (EITF) Issue No. 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity (including Certain Costs Incurred in a Restructuring)." SFAS 146 is
effective for exit or disposal activities that are initiated after December 31,
2002. Management does not believe this statement will have a material effect on
its consolidated financial statements.
In November 2002, the FASB issued FASB Interpretation No. 45 ("FIN 45"),
"Guarantor's Accounting and Disclosure Requirements for Guarantees Including
Indirect Guarantees of Indebtedness of Others." FIN 45 requires that upon
issuance of certain guarantees, a guarantor must recognize a liability for the
fair value of the obligation assumed under the guarantee. FIN 45 also requires
additional disclosures by a guarantor in its interim and annual financial
statements regarding certain guarantees and product warranties. The recognition
provisions of FIN 45 will be effective for guarantees issued or modified after
December 31, 2002. The Company does not expect the recognition provisions of FIN
45 will have a material impact on the Company's consolidated financial
statements.
On December 31, 2002, the FASB issued SFAS No. 148, "Accounting for
Stock-Based Compensation-Transition and Disclosure." This statement amends SFAS
Statement No. 123, "Accounting for Stock-Based Compensation" and provides
alternative methods of transition for a voluntary change to the fair value based
methods of accounting for stock-based employee compensation. In addition, this
Statement amends the disclosure requirements of SFAS 123 to require prominent
disclosures in both annual and interim financial statements about the method of
accounting for stock-based employee compensation and the effect of the method
used on reported results.
39
In January 2003, the FASB issued FASB Interpretation No. 46 ("FIN 46")
"Consolidation of Variable Interest Entity". The term "variable interest" is
defined in FIN 46 as "contractual, ownership or other pecuniary interests in an
entity that change with changes in the entity's net asset value." Variable
interests are investments or other interests that will absorb a portion of an
entity's expected losses if they occur or receive portions of the entity's
expected residual returns if they occur. The Company does not expect the
recognition provisions of FIN 46 will have a material impact on the Company's
financial position or results of operations.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
With the exception of historical information contained in this Form 10-K,
certain matters discussed are forward-looking statements. These forward-looking
statements involve risks that could cause the actual results and plans for the
future to differ from these forward-looking statements. The factors listed below
and other factors not mentioned, could cause the forward-looking statements to
differ from actual results and plans:
- competition in the sports and entertainment industry
- participation by race teams
- continued industry sponsorship
- regulation of tobacco and alcohol advertising and sponsorship
- competition by the IRL
- liability for personal injuries
- success of television contract
- renewal of sanction agreements
- participation by suppliers
- success of co-promoted and self-promoted races
- current uncertain economic environment and weak advertising market
- impact of engine specifications
ITEM 7A: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
INTEREST RATE RISK. Our investment policy was designed to maximize safety
and liquidity while maximizing yield within those constraints. At December 31,
2002, our investments consisted of corporate bonds, U.S. Agency issues, letters
of credit, and money market funds. The weighted average maturity of our
portfolio is 278 days. At December 31, 2001, our investments consisted of
corporate bonds, U.S. Agency issues, letters of credit, and money market funds.
The weighted average maturity of the portfolio was 136 days. Because of the
relatively short-term nature of our investments, our interest rate risk is not
considered significant.
ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Our consolidated financial statements and related notes are included in Item 15
of this document.
ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
40
PART III
ITEM 10: DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information required by this Item will be contained in our definitive Proxy
Statement for our 2003 Annual Meeting of Stockholders to be filed on or before
April 30, 2003, and such information is incorporated herein by reference.
ITEM 11: EXECUTIVE COMPENSATION
Information required by this Item will be contained in our definitive Proxy
Statement for our 2003 Annual Meeting of Stockholders to be filed on or before
April 30, 2003, and such information is incorporated herein by reference.
ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
Information required by this Item will be contained in our definitive Proxy
Statement for our 2003 Annual Meeting of Stockholders to be filed on or before
April 30, 2003, and such information is incorporated herein by reference.
ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information required by this Item will be contained in our definitive Proxy
Statement for our 2003 Annual Meeting of Stockholders to be filed on or before
April 30, 2003, and such information is incorporated herein by reference.
ITEM 14. CONTROLS AND PROCEDURES
(a) Within the 90 days prior to the date of filing of this report, we carried
out an evaluation, under the supervision and with the participation of the
Company's management, including the Company's Chief Executive Officer and Chief
Financial Officer, of the effectiveness of the design and operation of our
disclosure controls and procedures pursuant to Exchange Act Rule 13a-14. Based
upon that evaluation, the Company's Chief Executive Officer and Chief Financial
Officer concluded that our disclosure controls and procedures are effective in
timely alerting them to material information relating to the Company (including
its consolidated subsidiaries) required to be included in our periodic SEC
filings.
(b) There have been no significant changes in our internal controls or in other
factors that could significantly affect internal controls subsequent to the date
we carried out this evaluation.
41
PART IV
ITEM 15: EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) List of Documents Filed as Part of this Report:
(1) Consolidated Financial Statements start on page F-1
(2) Financial Statement Schedule
Schedule II Valuation and Qualifying Accounts is on page S-1
(3) Exhibits
3.1 Certificate of Incorporation of the Company filed December 8, 1997 (1)
3.2 Bylaws of the Company (1)
10.1 2001 Long Term Stock Incentive Plan (6)
10.5 Form of Promoter Agreement (1)
10.6 Promoter Agreement with Wisconsin State Park Speedway related to West
Allis, Wisconsin dated June 5, 1996 (1)
10.7 Promoter Agreement with Texaco Houston Grand Prix L.L.C. related to Houston,
Texas dated July 28, 1997 (1)
10.11 Form of Sponsorship Agreement (1)
10.15 Promoter Agreement with Ganassi Group, L.L.C. related to Chicago, Illinois
dated April 7, 1998 (2)
10.19 Promoter Agreement with Monterrey Grand Prix related to Monterrey, Mexico
dated March 30, 2000 (3)
10.20 Promoter Agreement with Rockingham Motor Speedway related to Rockingham,
England dated July 3, 2000 (4)
10.21 Employment Agreement with Joseph F. Heitzler dated December 4, 2000 (5)
10.22 First Amendment to Championship Auto Racing Teams, Inc. Employment
Agreement with Joseph F. Heitzler, dated December 4, 2001 (6)
10.23 Employment Agreement with Christopher R. Pook as of December 18, 2001 (6)
10.24 Promoter Agreement with Grupo Automouilistico Nacional y Deportiuo, S. de
R.L. de C.V. related to Mexico City, Mexico dated November 20, 2001 (6)
10.25 Television Agreement Promotion Entertainment of Mexico, LLC related to
Mexican television rights dated February, 28, 2002 (6)
10.26 Letter of Agreement with Chicago Motor Speedway, LLC related to
the lease of Chicago Motor Speedway (the track) dated February 21, 2002 (6)
10.27 Amendment to the Sanction Agreement by and between the Company and
Rockingham Motor Speedway dated as of August 16, 2002 (7)
10.28 Form of Engine Lease Agreement
10.29 Form of Entrant Support and Participation Agreement
10.30 Form of FORD Vehicle Agreement
10.31 Team Assistance Agreement with Newman/Haas Racing, Inc.
10.32 Team Assistance Agreement with Newman/Haas Racing, Inc.
10.33 Team Assistance Agreement with Patrick Racing, Inc.
10.34 Team Assistance Agreement with Walker Racing, Inc. dated February 14, 2003
10.35 Team Assistance Agreement with Walker Racing, Inc. dated February 14, 2003
10.36 Chassis Upgrade Agreement with Walker Racing, Inc. dated January 29, 2003
10.37 Show Car Agreement with Walker Racing, Inc. dated February 19, 2003
10.38 Race Car Lease Agreement with Walker Racing, Inc. dated February 25, 2003
10.39 Office Lease Agreement with RAS Development, Inc. dated March 2003
42
21.1 Subsidiaries of the Registrant
23.1 Consent of Deloitte & Touche LLP.
99.1 Certification Pursuant to 18 U.S.C Section 1350
99.2 Certification Pursuant to 18 U.S.C Section 1350
(b) Reports on Form 8-K We did not file a form 8-K during the three months
ended December 31, 2002.
(1) Incorporated by reference to exhibit filed as part of our Registration
Statement on Form S-1 (Registration No. 333-43141)
(2) Incorporated by reference to exhibit filed with our Quarterly Report on
Form 10-Q for the quarter ended March 31, 1998.
(3) Incorporated by reference to exhibit filed with our Quarterly Report on
Form 10-Q for the quarter ended June 30, 2000.
(4) Incorporated by reference to exhibit filed with our Annual Report on Form
10-K for the year ended December 31, 2000.
(5) Incorporated by reference to exhibit filed with our Quarterly Report on
Form 10-Q for the quarter ended September 30, 2001.
(6) Incorporated by reference to exhibit filed with our Annual Report on Form
10-K for the year ended December 31, 2001.
(7) Incorporated by reference to exhibit filed with our Quarterly Report on
Form 10-Q for the quarter ended September 30, 2002.
43
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
DATED: March 26, 2003 CHAMPIONSHIP AUTO RACING TEAMS, INC.
------------------------------------
Registrant
By: /s/ Christopher R. Pook
------------------------------
Christopher R. Pook
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated:
/s/ Christopher R. Pook Chief Executive Officer March 26, 2003
----------------------------------------- and Director
Christopher R. Pook
/s/ Thomas L. Carter Chief Financial and March 26, 2003
----------------------------------------- Accounting Officer
Thomas L. Carter
/s/ Mario Andretti Director March 26,2003
-----------------------------------------
Mario Andretti
/s/ Carl A. Haas Director March 26, 2003
-----------------------------------------
Carl A. Haas
/s/ James A. Henderson Director March 26, 2003
-----------------------------------------
James A. Henderson
/s/ Rafael A. Sanchez Director March 26, 2003
-----------------------------------------
Rafael A. Sanchez
/s/ Frederick T. Tucker Director March 26, 2003
-----------------------------------------
Frederick T. Tucker
/s/ Derrick Walker Director March 26, 2003
-----------------------------------------
Derrick Walker
44
CERTIFICATIONS
I, Christopher R. Pook, Chief Executive Officer, certify that:
1. I have reviewed this annual report on Form 10-K of Championship Auto
Racing Teams, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report.
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this annual report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit committee
of registrant's board of directors (or persons performing the equivalent
functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in this
annual report whether there were significant changes in internal controls or in
other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: March 26, 2003
/s/ Christopher R. Pook
- -----------------------
Christopher R. Pook
Chief Executive Officer
45
CERTIFICATIONS
I, Thomas L. Carter, Chief Financial Officer, certify that:
1. I have reviewed this annual report on Form 10-K of Championship Auto
Racing Teams, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report.
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this annual report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit committee
of registrant's board of directors (or persons performing the equivalent
functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in this
annual report whether there were significant changes in internal controls or in
other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: March 26, 2003
/s/ Thomas L. Carter
- --------------------
Thomas L. Carter
Chief Financial Officer
46
CHAMPIONSHIP AUTO RACING TEAMS, INC.
CONSOLIDATED FINANCIAL STATEMENTS
PAGE
CHAMPIONSHIP AUTO RACING TEAMS, INC.
Independent Auditors' Report........................................... F-2
Consolidated Balance Sheets as of December 31, 2002 and 2001........... F-3
Consolidated Statements of Operations for the Years
Ended December 31, 2002, 2001 and 2000........................... F-4
Consolidated Statements of Stockholders' Equity for
the Years Ended December 31, 2002, 2001 and 2000................. F-5
Consolidated Statements of Cash Flows for the Years
Ended December 31, 2002, 2001 and 2000........................... F-6
Notes to Consolidated Financial Statements............................. F-7
F-1
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of Championship Auto Racing Teams,
Inc.:
We have audited the accompanying consolidated balance sheets of Championship
Auto Racing Teams, Inc. (the "Company") as of December 31, 2002 and 2001, and
the related consolidated statements of operations, stockholders' equity, and
cash flows for each of the three years in the period ended December 31, 2002.
Our audits also included the financial statement schedule listed in the Index at
Item 15. These financial statements and financial statement schedule are the
responsibility of the Corporation's management. Our responsibility is to express
an opinion on the financial statements and consolidated financial statement
schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Championship Auto Racing Teams,
Inc. as of December 31, 2002 and 2001, and the results of its operations and its
cash flows for each of the three years in the period ended December 31, 2002, in
conformity with accounting principles generally accepted in the United States of
America. Also, in our opinion, such financial statement schedule, when
considered in relation to the basic consolidated financial statements taken as a
whole, presents fairly in all material respects the information set forth
therein.
As discussed in Note 1 to the consolidated financial statements, in 2002, the
Company changed its method of accounting for goodwill and other intangible
assets.
DELOITTE & TOUCHE LLP
Indianapolis, Indiana
February 27, 2003
(March 7, 2003 as to Note 18)
F-2
CHAMPIONSHIP AUTO RACING TEAMS, INC.
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
AS OF DECEMBER 31,
------------------
2002 2001
---- ----
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 6,773 $ 27,765
Short-term investments 79,489 87,621
Accounts receivable (net of allowance for doubtful accounts
of $1,282 and $7,388 in 2002 and 2001, respectively) 4,657 5,195
Inventory -- 70
Prepaid expenses and other current assets 1,474 2,805
Income tax refundable 10,087 --
Deferred income taxes 1,184 2,856
-------- --------
Total current assets 103,664 126,312
PROPERTY AND EQUIPMENT-NET 10,403 4,832
GOODWILL (net of accumulated amortization of $133 in 2001) -- 1,470
OTHER ASSETS (net of accumulated amortization
of $116 and $116 in 2002 and 2001, respectively) 384 327
-------- --------
TOTAL ASSETS $114,451 $132,941
======== =======
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 1,703 $ 3,009
Accrued liabilities:
Royalties 173 222
Payroll 2,455 4,298
Taxes 743 110
Other 4,879 5,558
Deferred revenue 1,423 1,511
-------- --------
Total current liabilities 11,376 14,708
DEFERRED INCOME TAXES 57 297
COMMITMENTS AND CONTINGENCIES (Note 10) -- --
STOCKHOLDERS' EQUITY:
Preferred Stock, $.01 par value; 5,000,000 shares
authorized, none issued and outstanding at
December 31, 2002 and 2001 -- --
Common stock, $.01 par value; 50,000,000 shares
authorized, 14,718,134 and 14,718,134 shares issued
and outstanding at December 31, 2002 and 2001, respectively 147 147
Additional paid-in capital 87,765 87,765
Retained earnings 14,511 29,028
Accumulated other comprehensive income 595 996
-------- --------
Total stockholders' equity 103,018 117,936
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $114,451 $132,941
======== ========
See accompanying notes to consolidated financial statements.
F-3
CHAMPIONSHIP AUTO RACING TEAMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT EARNINGS PER SHARE)
YEAR ENDED DECEMBER 31,
-----------------------
2002 2001 2000
---- ---- ----
REVENUES:
Sanction fees $ 36,607 $ 47,226 $38,902
Sponsorship revenue 10,150 12,314 21,063
Television revenue 4,538 5,228 5,501
Race promotion revenue 1,417 -- --
Engine leases, rebuilds and wheel sales -- 1,286 2,122
Other revenue 4,533 4,209 7,460
--------- -------- -------
Total revenues 57,245 70,263 75,048
EXPENSES:
Race distributions 19,797 18,599 15,370
Race expenses 10,823 10,618 9,869
Race promotion expense 9,687 -- --
Cost of engine rebuilds and wheel sales -- 348 652
Television expense 10,975 -- --
Administrative and indirect expenses (includes severance expense
of $0, $4,329 and $2,758 for 2002, 2001 and 2000, respectively) 27,756 35,605 25,275
Bad debt-sponsorship partner (Note 11) -- -- 6,320
Asset impairment and strategic charges (Note 9) -- 8,548 --
Litigation expenses (Note 10) -- 3,547 --
Relocation expense 1,422 -- --
Depreciation and amortization 1,436 1,493 1,352
--------- -------- -------
Total expenses 81,896 78,758 58,838
--------- -------- -------
OPERATING INCOME (LOSS) (24,651) (8,495) 16,210
Realized gain on sale of investments 26 -- --
Interest income 3,762 7,033 7,463
--------- -------- -------
INCOME (LOSS) BEFORE INCOME TAXES (20,863) (1,462) 23,673
INCOME TAX EXPENSE (BENEFIT) (7,302) (512) 8,520
--------- -------- -------
NET INCOME (LOSS) BEFORE CUMULATIVE EFFECT OF ACCOUNTING CHANGE (13,561) (950) 15,153
CUMULATIVE EFFECT OF ACCOUNTING CHANGE (NET OF TAX) (956) -- --
--------- -------- -------
NET INCOME (LOSS) $ (14,517) $ (950) $15,153
========= ======== =======
EARNINGS (LOSS) PER SHARE BEFORE CUMULATIVE
EFFECT OF ACCOUNTING CHANGE:
BASIC $ (0.92) $ (0.06) $ 0.97
========= ======== =======
DILUTED $ (0.92) $ (0.06) $ 0.97
========= ======== =======
NET EARNINGS (LOSS) PER SHARE:
BASIC $ (0.99) $ (0.06) $ 0.97
========= ======== =======
DILUTED $ (0.99) $ (0.06) $ 0.97
========= ======== =======
WEIGHTED AVERAGE SHARES OUTSTANDING:
BASIC 14,718 15,289 15,624
========= ======== =======
DILUTED 14,718 15,289 15,657
========= ======== =======
See accompanying notes to consolidated financial statements.
F-4
CHAMPIONSHIP AUTO RACING TEAMS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
COMMON STOCK ADDITIONAL RETAINED
------------ PAID-IN EARNINGS
SHARES AMOUNT CAPITAL (DEFICIT)
------ ------ ------- ---------
BALANCES, JANUARY 1, 2000 15,586 $ 156 $99,671 $14,825
Net income -- -- -- 15,153
Unrealized gain on investments -- -- -- --
Comprehensive income -- -- -- --
Exercise of options 179 2 3,459 --
-------- ------ ------- -------
BALANCES, DECEMBER 31, 2000 15,765 158 103,130 29,978
Net loss -- -- -- (950)
Unrealized gain on investments -- -- -- --
Comprehensive loss -- -- -- --
Exercise of options 7 -- 109 --
Acquisition and retirement of
common stock (1,054) (11) (15,474) --
-------- ------ ------- -------
BALANCES, DECEMBER 31, 2001 14,718 147 87,765 29,028
Net loss -- -- -- (14,517)
Unrealized loss on investments -- -- -- --
Reclassification adjustment -- -- -- --
Comprehensive loss -- -- -- --
-------- ------ ------- -------
BALANCES, DECEMBER 31, 2002 14,718 $ 147 $87,765 $14,511
======== ====== ======= =======
ACCUMULATED OTHER
COMPREHENSIVE STOCKHOLDERS' COMPREHENSIVE
INCOME (LOSS) EQUITY INCOME (LOSS)
------------- ------ -------------
BALANCES, JANUARY 1, 2000 $ (322) $ 114,330
Net income -- 15,153 $ 15,153
Unrealized gain on investments 950 950 950
-------------
Comprehensive income -- -- $ 16,103
=============
Exercise of options -- 3,461
------ ---------
BALANCES, DECEMBER 31, 2000 628 133,894
Net loss -- (950) $ (950)
Unrealized gain on investments 368 368 368
-------------
Comprehensive loss -- -- $ (582)
=============
Exercise of options -- 109
Acquisition and retirement of
common stock -- (15,485)
------ ---------
BALANCES, DECEMBER 31, 2001 996 117,936
Net loss -- (14,517) $(14,517)
Unrealized loss on investments (384) (384) (384)
Reclassification adjustment (17) (17) (17)
-------------
Comprehensive loss -- -- $(14,918)
------ --------- ============
BALANCES, DECEMBER 31, 2002 $ 595 $ 103,018
====== =========
See accompanying notes to consolidated financial statements.
F-5
CHAMPIONSHIP AUTO RACING TEAMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
YEAR ENDED DECEMBER 31,
-----------------------
2002 2001 2000
---- ---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $(14,517) $ (950) $ 15,153
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Cumulative effect of accounting change (net of tax) 956 -- --
Depreciation and amortization 1,436 1,493 1,352
Bad debt-sponsorship partner -- -- 6,320
In-kind revenue -- -- (1,084)
Net loss (gain) from sale/disposal of property and equipment 16 1,975 (29)
Impairment of goodwill -- 5,628 --
Deferred income taxes 1,946 (1,208) (2,014)
Changes in assets and liabilities that provided (used) cash:
Accounts receivable 538 383 (3,118)
Inventory 70 81 160
Prepaid expenses and other assets 1,274 (2,240) (188)
Refundable income tax (10,087) -- --
Accounts payable (1,306) 1,034 (156)
Accrued liabilities (1,938) 6,320 1,100
Deferred revenue (88) (941) (2,429)
Deposits -- (778) 778
-------- -------- --------
Net cash provided by (used in) operating activities (21,700) 10,797 15,845
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of investments (138,698) (60,950) (90,255)
Proceeds from sale of investments 146,429 71,903 84,757
Notes receivable -- 2,682 622
Acquisition of property and equipment (7,050) (880) (2,353)
Proceeds from sale of property and equipment 27 86 235
Acquisition of trademark -- (1) (24)
-------- -------- --------
Net cash provided by (used in) investing activities 708 12,840 (7,018)
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of common stock -- 109 3,461
Repurchase of common stock -- (15,485) --
-------- -------- --------
Net cash provided by (used in) financing activities -- (15,376) 3,461
-------- -------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (20,992) 8,261 12,288
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 27,765 19,504 7,216
-------- -------- --------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 6,773 $ 27,765 $ 19,504
======== ======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Income taxes $ 1 $ 3,189 $ 8,934
======== ======== ========
Interest $ -- $ 5 $ --
======== ======== ========
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCING ACTIVITIES--During
2000, the Company received property and equipment of approximately $1.1 million
in exchange for sponsorship privileges to the providers.
See accompanying notes to consolidated financial statements.
F-6
CHAMPIONSHIP AUTO RACING TEAMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION. CART, Inc., ("CART") (a Michigan corporation) was organized
as a not-for-profit corporation in 1978, with its main purpose being to promote
the sport of automobile racing, primarily open-wheel type racing cars. As of
January 1, 1992, the entity became a for-profit corporation and continued to use
the CART name.
In December 1997, Championship Auto Racing Teams, Inc., (a Delaware
corporation) was formed to serve as a holding company for CART and its
subsidiaries (the "Reorganization"). Each outstanding share of common stock of
CART was acquired in exchange for 400,000 shares of common stock of the Company.
References to the "Company" mean Championship Auto Racing Teams, Inc. and its
subsidiaries.
The Company is the sanctioning body responsible for organizing, marketing
and staging each of the racing events for the open-wheel motorsports series --
the Champ Car World Series. The Company also acts as a promoter at certain
events. The Company stages events at four different types of tracks, including
superspeedways, ovals, temporary road courses and permanent road courses, each
of which require different skills and disciplines from the drivers and teams.
PRINCIPLES OF CONSOLIDATION. The consolidated financial statements of the
Company include the financial statements of Championship Auto Racing Teams, Inc.
and its wholly-owned subsidiaries - CART, Inc., American Racing Series, Inc.
("ARS"), Pro-Motion Agency, Ltd. and CART Licensed Products, Inc. At the end of
the 2001 season, the Company discontinued the operations of American Racing
Series, Inc. All significant intercompany balances have been eliminated in
consolidation.
INVENTORY. Inventory consists of wheels, parts and merchandise, which are
stated at the lower of cost or market on a first-in, first-out basis.
PROPERTY AND EQUIPMENT. Property and equipment are stated at cost and are
depreciated using the straight-line and accelerated methods over their estimated
useful lives which range from 3 to 20 years. Leasehold improvements are
amortized over the shorter of the life of the leases or the remaining useful
life of the leasehold improvements.
REVENUE RECOGNITION. Substantially all of the Company's revenue is derived
from sanction fees, promotion revenues, sponsorship revenues, television
revenues, and engine leases, each of which is dependent upon continued fan
support and interest in Champ Car race events. Sanction fee revenues are fees
paid to the Company by track promoters to sanction a Champ Car event at the race
venue and to provide the necessary race management. In 2002, the Company
self-promoted certain events. Revenues received for events the Company promotes
are recorded as promotion revenues. The Company receives sponsorship revenues
from companies who desire to receive brand and product exposure in connection
with Champ Car races. Pursuant to broadcast agreements, the Company generates
revenues for the right to broadcast the races, with revenues based upon
viewership with a minimum guarantee for contracts through 2001 and for certain
international contracts in 2002. In 2002, the Company bought the air-time and
paid for production for certain races and received the advertising inventory for
certain races. The Company also receives revenues from royalty fees paid for
licenses to use servicemarks of the Company, various drivers, teams, tracks and
industry sponsors for merchandising programs and product sales.
Recognition of revenue from race sanction agreements is deferred until the
event occurs. Sponsorship revenue and engine lease revenue are recognized
ratably over the period covered by the agreement. Barter revenue is recognized
at the time of the event. Television revenue is recognized ratably over the race
schedule. Other revenues include membership and entry fees, contingency awards
money, rights fees and royalty income. Membership and entry fees and contingency
award money are recognized ratably over the race schedule. Royalty income is
recognized as the related product sales occur or on a monthly basis based on a
minimum guarantee.
F-7
CASH AND CASH EQUIVALENTS. Cash and cash equivalents include investments
with original maturities of three months or less at the date of original
acquisition.
SHORT-TERM INVESTMENTS. The Company's short-term investments are
categorized as available-for-sale, as defined by Statement of Financial
Accounting Standards ("SFAS") No. 115, "Accounting for Certain Investments in
Debt and Equity Securities". Unrealized holding gains and losses are reflected
as a net amount in a separate component of stockholders' equity as accumulated
other comprehensive income until realized. For the purpose of computing realized
gains and losses, cost is identified on a specific identification basis.
GOODWILL. In June 2001, the FASB issued SFAS No. 142, "Goodwill and
Intangible Assets". The statement requires companies to stop amortizing goodwill
and certain intangible assets with indefinite useful lives. Instead, goodwill
and intangible assets with indefinite useful lives will be tested for impairment
upon adoption of the statement and annually thereafter. The Company performs its
annual impairment review for intangible assets during the fourth quarter of each
year, commencing with the fourth quarter of 2002. As a result of adoption, the
Company no longer records amortization expense related to goodwill or intangible
assets with indefinite useful lives.
The Company adopted SFAS No. 142, effective January 1, 2002, which resulted
in a one-time, non-cash charge of $1.5 million, or $956,000 net of tax benefit
of $514,000, to write-off the value of its goodwill. The goodwill was recorded
under the purchase method of accounting for the purchases of Pro-Motion Agency,
Inc. and CART Licensed Products, LP, on April 10, 1998 and January 1, 1999,
respectively. Such charge is non-recurring in nature and is reflected as a
cumulative effect of an accounting change in the accompanying consolidated
statements of operations. Previous to the adoption of SFAS No. 142, the Company
had accounted for its goodwill and intangible assets in accordance with the
accounting standards existing at the time, and the Company's analyses did not
result in recognition of any impairment loss prior to the adoption of SFAS No.
142, except as discussed in Note 9.
Under SFAS No. 142, goodwill impairment is deemed to exist if the carrying
value of a reporting unit exceeds its estimated fair value. In calculating the
impairment charge, the fair values of the reporting units were estimated using a
discounted cash flow methodology.
A reconciliation of net loss and loss per share, adjusted to exclude
amortization expense, net of tax, for the period prior to adoption and the
cumulative effect of accounting change recognized in the current year, is as
follows:
(In Thousands,
Except Per Share Data)
For The Years Ended
December 31, 2002 December 31, 2001 December 31, 2000
------------------- ------------------ -----------------
Reported net loss $ (14,517) $ (950) $ 15,153
Add back: Goodwill amortization, net of tax - 27 --
Add back: Trademark amortization, net of tax - 17 18
Cumulative effect of accounting change, net of tax 956 -- --
------------------- ------------------ -----------------
Adjusted net loss $ (13,561) $ (906) $ 15,171
=================== ================== =================
Basic and Diluted:
Reported net loss per share $ (0.99) $ (0.06) $ 0.97
Amortization, net of tax -- -- --
Cumulative effect of accounting change, net of tax 0.07 -- --
------------------- ------------------ -----------------
Adjusted loss per share $ (0.92) $ (0.06) $ 0.97
=================== ================== =================
MANAGEMENT ESTIMATES. The preparation of the consolidated financial
statements in conformity with accounting principles generally accepted in the
United States of America requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at December 31, 2002 and 2001, and the
reported amounts of revenues and expenses during the periods presented. The
actual outcome of the estimates could differ from the
F-8
estimates made in the preparation of the consolidated financial statements.
FINANCIAL INSTRUMENTS. The fair values and carrying amounts of certain of
the Company's financial instruments, primarily accounts receivable, accounts
payable and accrued liabilities, are approximately equivalent due to the
short-term nature of the instruments.
ACCOUNTING PRONOUNCEMENTS. In July 2001, the Financial Accounting Standards
Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No.
141, "Accounting for Business Combinations." The statement changes the
accounting for business combinations by, among other things, prohibiting the
prospective use of pooling-of-interests accounting. The Company adopted this
statement on January 1, 2002 and there was no impact on the financial statements
upon adoption.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." This Statement supersedes SFAS No.
121, "Accounting for the Impairment of Long-Lived Assets to be Disposed Of."
This statement retains the impairment loss recognition and measurement
requirements of SFAS No. 121. In addition, it requires that one accounting model
be used for long-lived assets to be disposed of by sale, and broadens the
presentation of discontinued operations to include more disposal transactions.
The Company adopted this statement on January 1, 2002, and there was no impact
on the financial statements upon adoption.
On April 30, 2002, the FASB issued SFAS No. 145, "Rescission of FASB
Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections." The statement is intended to update, clarify and simplify existing
accounting pronouncements. The Company adopted this statement in May 2002, and
there was no impact on the financial statements upon adoption.
On July 30, 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities". The statement addresses financial
accounting and reporting for costs associated with exit or disposal activities
and nullifies Emerging Issues Task Force (EITF) Issue No. 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity (including Certain Costs Incurred in a Restructuring)." SFAS 146 is
effective for exit or disposal activities that are initiated after December 31,
2002. Management does not believe this statement will have a material effect on
its consolidated financial statements.
In November 2002, the FASB issued FASB Interpretation No. 45 ("FIN 45"),
"Guarantor's Accounting and Disclosure Requirements for Guarantee Including
Indirect Guarantees of Indebtedness of Others." FIN 45 requires that upon
issuance of certain guarantees, a guarantor must recognize a liability for the
fair value of the obligation assumed under the guarantee. FIN 45 also requires
additional disclosures by a guarantor in its interim and annual financial
statements regarding certain guarantees and product warranties. The recognition
provisions of FIN 45 will be effective for guarantees issued or modified after
December 31, 2002. The Company does not expect the recognition provisions of FIN
45 will have a material impact on the Company's financial position or results of
operations.
In January 2003, the FASB issued FASB Interpretation No. 46 ("FIN 46")
"Consolidation of Variable Interest Entity". The term "variable interest" is
defined in FIN 46 as "contractual, ownership or other pecuniary interests in an
entity that change with changes in the entity's net asset value." Variable
interests are investments or other interests that will absorb a portion of an
entity's expected losses if they occur or receive portions of the entity's
expected residual returns if they occur. The Company does not expect the
recognition provisions of FIN 46 to have a material impact on the Company's
financial position or results of operations.
On December 31, 2002, the FASB issued SFAS No. 148, "Accounting for
Stock-Based Compensation-Transition and Disclosure." This statement amends SFAS
Statement No. 123, "Accounting for Stock-Based Compensation," to provide
alternative methods of transition for a voluntary change to the fair value based
methods of accounting for stock-based employee compensation. In addition, this
Statement amends the disclosure requirements of SFAS 123 to require prominent
disclosures in both annual and interim financial statements about the method of
accounting
F-9
for stock-based employee compensation and the effect of the method used on
reported results.
As permitted by SFAS No. 123, the Company has chosen to follow Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees"
("APB No. 25") in accounting for its stock options granted to employees and
directors. Under APB No. 25, the Company does not recognize compensation expense
on the issuance of its stock options because the option terms are fixed, and the
exercise price equals the market price of the underlying stock on the grant
date.
However, as required by SFAS No. 123, the Company has calculated pro forma
information as if it had determined compensation cost based on the fair value at
the grant date for its stock options granted to employees and directors. In
accordance with SFAS No.123, for the year ended December 31, 2002, the fair
value of option grants is estimated on the date of grant using the Black-Scholes
option pricing model for pro-forma purposes with the following assumptions used
for all grants: expected volatility of 71%, expected dividend yield of 0%,
risk-free interest rate of 3% and an expected life of 10 years. For the year
ended December 31, 2001, the fair value of option grants is estimated on the
date of grant using the Black-Scholes option-pricing model for pro forma
purposes with the following assumptions used for all grants: expected volatility
of 30%, expected dividend yield of 0%, risk-free interest rate of 4% and an
expected life of 10 years. For the year ended December 31, 2000, the fair value
of option grants was estimated on the date of grant using the Black-Scholes
option-pricing model for pro forma purposes with the following assumptions used
for all grants: expected volatility of 27%, expected dividend yield of 0%,
risk-free interest rate of 5% and an expected life of 10 years. Had the Company
determined compensation cost based on the fair value at the grant date for its
stock under SFAS No. 123, net earnings (loss) and diluted earnings (loss) per
share would have been reduced to the pro forma amounts indicated below for the
years ended December 31:
(IN THOUSANDS, EXCEPT PER SHARE DATA)
NET EARNINGS (LOSS) 2002 2001 2000
------------ ------------ ------------
As reported $(14,517) $ (950) $15,153
Total stock-based employee compensation expense determined under
the fair value based method, net of related tax effects (56) (837) (720)
-------- ------ -------
Pro forma $(14,573) $(1,787) $14,433
======== ======= =======
DILUTED EARNINGS (LOSS) PER SHARE
As reported $ (0.99) $ (0.06) $ 0.97
Total stock-based employee compensation expense determined under
the fair value based method, net of related tax effects -- (0.06) (0.05)
-------- ------ -------
Pro forma $ (0.99) $ (0.12) $ 0.92
======== ======= =======
RECLASSIFICATIONS. Certain reclassifications have been made to the 2001 and
2000 consolidated financial statements in order for them to conform to the 2002
presentation.
2. SHORT-TERM INVESTMENTS
The following is a summary of the estimated fair value of
available-for-sale short-term investments by balance sheet classification at
December 31:
GROSS UNREALIZED
(IN THOUSANDS) COST FAIR VALUE GAIN LOSS
---------- ---------- ---------- ----------
2002
Letters of credit $ 30 $ 30 $ -- $ --
Corporate bonds 2,538 2,556 18 --
U.S. agencies securities 76,003 76,903 900 2
---------- ---------- ---------- ----------
Total short-term investments $78,571 $79,489 $ 918 $ 2
========== ========== ========== ==========
2001
Letters of credit $ 8,167 $ 8,167 $ -- $ --
Corporate bonds 507 511 4 --
U.S. agencies securities 77,951 78,943 992 --
---------- ---------- ---------- ----------
Total short-term investments $86,625 $87,621 $ 996 $ --
========== ========== ========== ==========
F-10
Proceeds from sales of investments were approximately $146.4 million and
$71.9 million in 2002 and 2001, respectively. In 2002 and 2001, gross gains and
losses on such sales were not significant.
Contractual maturities range from less than one year to two years. The
weighted average maturity of the portfolio does not exceed one year.
3. PROPERTY AND EQUIPMENT
Property and equipment consists of the following at December 31:
(IN THOUSANDS) USEFUL LIFE
2002 2001 (IN YEARS)
------------- -------------- ---------------------------
Engines $ 4,000 $ 2,456 * 2
Equipment 7,242 4,890 5-20
Furniture and fixtures 425 413 10
Vehicles 4,065 3,553 5-7
Other 268 215 5 (except leasehold
improvements)
------------- --------------
Total 16,000 11,527
Less accumulated depreciation (5,597) (6,695)
------------- --------------
Property and equipment (net) $ 10,403 $ 4,832
============= ==============
* 2001 engines are no longer in service and have been fully depreciated and
disposed.
4. CAPITAL STOCK
In 2002, there were no repurchases or retirements of common stock.
During the year ended December 31, 2001, the Company repurchased and
retired 1,054,000 shares of its common stock for an aggregate cost of $15.5
million, pursuant to its stock repurchase program authorized by the Board of
Directors in April 2001. The program allows the Company to repurchase up to 2.5
million shares of its outstanding common stock from time to time in open market
or privately negotiated transactions. Repurchases under the program will be made
at the discretion of management based upon market, business, legal, accounting
and other factors. Currently, the Company has no intention to purchase any of
its outstanding shares.
5. OPERATING LEASES
The Company has entered into various non-cancelable operating leases for
office space and equipment which expire through 2010. Total rent expense for
these operating leases were approximately $491,173, $638,000 and $594,000 for
2002, 2001 and 2000, respectively.
Approximate future minimum lease payments under non-cancelable operating
leases are as follows:
Years Ending December 31: (In Thousands)
2003 $ 503
2004 521
2005 523
2006 529
2007 540
2008 and thereafter 991
-------
Total $ 3,607
=======
F-11
6. INCOME TAXES
Deferred income tax assets and liabilities are computed annually for
differences between the financial statement and tax bases of assets and
liabilities that will result in taxable or deductible amounts in the future
based on enacted tax laws and rates applicable to the periods in which the
differences are expected to affect taxable income. Valuation allowances are
established when necessary to reduce deferred tax assets to the amount expected
to be realized.
Realization of the Company's deferred tax assets is dependent on generating
sufficient taxable income. Although realization is not assured, management
believes it is more likely than not that all of the deferred tax assets will be
realized, except for the state tax net operating loss carryforward.
The tax effects of temporary differences giving rise to deferred tax assets
and liabilities at December 31 are as follows:
2002 2001
---- ----
(IN THOUSANDS)
Current deferred tax assets (liabilities):
Allowance for doubtful accounts $ 586 $ 2,853
Net capital loss carryforwards 45 55
State taxes -- (52)
Deferred compensation 874 --
Unrealized investment gains (321) --
----------- ----------
Net current deferred tax asset $ 1,184 $ 2,856
=========== ==========
Non-current deferred tax assets (liabilities):
Basis difference in fixed assets $ (678) $ (628)
State tax net operating loss carryforward 682 --
Valuation allowance, state tax net operating loss carryforward (682) --
Goodwill 438 (64)
Charitable contribution carryforwards 150 186
Tax credit carryforwards -- 209
State taxes (34) --
Indianapolis lease deferral 67 --
----------- ----------
Net non-current deferred tax liability $ (57) $ (297)
=========== ==========
The provision (benefit) for income taxes consists of the following for the years
ended December 31:
2002 2001 2000
---- ---- ----
(IN THOUSANDS)
Current $ (8,927) $ 671 $ 10,534
Deferred 1,111 (1,183) (2,014)
--------- --------- ---------
Total $ (7,816) $ (512) $ 8,520
========= ========= =========
Tax expense (benefit) from operations $ (7,302) $ (512) $ 8,520
Tax expense (benefit) from accounting change (514) -- --
--------- --------- ---------
Total $ (7,816) $ (512) $ 8,520
========= ========= =========
F-12
The reconciliation of income tax expense (benefit) computed at the U.S. federal
statutory tax rate to the Company's effective income tax rate is as follows:
2002 2001 2000
------------- -------------- ------------
Tax at U.S. federal statutory rate (35.0%) (35.0%) 35.0%
State income tax, net of federal benefit (0.9) (0.3) 1.9
Meals and entertainment 0.6 8.9 0.5
Tax exempt interest -- -- (1.2)
Valuation allowance 3.0 --
Other (2.7) (8.6) (0.2)
------------- -------------- ------------
Total (35.0%) (35.0%) 36.0%
============= ============== ============
7. EMPLOYEE BENEFIT PLANS
The Company offers a 401(k) savings plan. Contributions to the plan are in
the form of employee salary deferral, subject to discretionary employer-matching
contributions. The Company's contributions to the plan were approximately
$81,000, $86,000, and $95,000 in 2002, 2001, and 2000, respectively.
8. DEBT
At December 31, 2002 and 2001, the Company had an unused bank line of
credit of $1.5 million. There were no amounts outstanding at December 31, 2002
and 2001. Advances on the line of credit are payable on demand, with interest at
the bank's prime rate. The line of credit is secured by the Company's deposits
with the bank.
9. ASSET IMPAIRMENT AND STRATEGIC CHARGES
During the third quarter of 2001, the Board of Directors of the Company
adopted a formal exit plan with respect to the discontinuance of the Dayton Indy
Lights Championship ("DILC") effective at the conclusion of the 2001 race
season. This decision resulted from an in-depth analysis of the Company's
development series conducted by management of the Company and Bain & Company, an
independent consulting company. The analysis was initiated to determine the
future viability of the DILC, operated by ARS. This analysis included
discussions with DILC team owners and employees and discussions with Toyota
Atlantics Championship ("TAC") team owners and employees. The TAC is operated by
Pro-Motion. The analysis was completed in July, 2001.
The Company reviewed the financial and operational performance of the DILC
and the TAC. Based upon such analysis, and based upon the information gathered
in discussions with team owners and employees, management of the Company
concluded that due to the current environment for open-wheel racing in the
United States, CART can only support one development series at this level. CART
had many discussions with sponsors of the DILC and the TAC and concluded that
the support of Toyota with the TAC and the equipment contracts in place for TAC
supported the decision to discontinue the DILC at the conclusion of the 2001
race season to focus its support and efforts on one development series.
In 2001, the Company recorded charges of $8.5 million related to the formal
exit plan for the discontinuance of operations of the DILC. The Company recorded
charges of $7.6 million related to the impairment of goodwill ($5.6 million) and
a write-down of the carrying value of property and equipment ($2.0 million). The
carrying value of the property and equipment that has been impaired primarily
relates to engines owned by ARS and used in the DILC. The Company has fully
depreciated and disposed of the engines.
The Company also recorded charges of $885,000 in 2001 resulting from
management's estimate of certain expenses following the decision by the Company
to discontinue the DILC operations. These charges included provisions for
doubtful accounts, severance payments and other settlement charges.
F-13
10. COMMITMENTS AND CONTINGENCIES
REVENUE AGREEMENTS. The Company has entered into promoter, sponsorship and
television agreements that extend through various dates, with the longest date
expiring in the 2008 racing season. Under the promoter agreements, the Company
is obligated to sanction Champ Car World Series racing events and provide
related race management functions. Under the sponsorship agreements, the Company
grants certain corporations official sponsorship status. In return the
corporations receive recognition and status rights, event rights and product
category exclusivity rights. Television agreements with various broadcast
companies include production, time buys, sales and worldwide distribution of the
Company's events.
TEAM ASSISTANCE. Beginning in 2003 the Company will provide assistance to
certain teams to ensure that there are a sufficient number of race cars
competing in the Company's series. The Company will spend up to $30.0 million in
team assistance, spread out over the race season, to make sure there are a
sufficient number of healthy competitors for the 2003 season. In exchange for
the team assistance the Company receives certain sponsorship rights from the
team.
ENTRANT SUPPORT PROGRAM. Beginning in 2003, the Company will provide
financial assistance to teams that participate in the Champ Car World Series,
including teams affiliated with our directors and/or 5% stockholders. The
Entrant Support Program ("ESP") will provide up to $42,500 in cash payments to
teams, per race, for each car entered into the series. In exchange for ESP
payments, the Company receives certain sponsorship rights from the team.
TELEVISION TIME BUYS. In 2003, the Company will buy the air time at
approximately $240,000 per hour for the Company's CBS races. The Company
anticipates having six two-and-one-half-hour shows in 2003.
OFF BALANCE SHEET ARRANGEMENTS. In October 2002, the Company provided a
deposit of $550,000 and a letter of credit in the amount of $1.7 million for the
production of conversion kits for race car chassis for the 2003 season. The
letter of credit guarantees that at least 20 of the kits would be purchased by
the Company's race teams. As the kits are purchased, the letter of credit will
be reduced accordingly. All 20 race kits have been purchased by the Company's
race teams, and therefore, the deposit was refunded on February 27, 2003 and the
letter of credit was canceled.
INSURANCE. The Company is self-insured for the deductible amount ($50,000)
on an insurance policy which provides accident medical expense benefits for
participants of CART sanctioned races. Losses above the deductible amount are
covered by the insurance policy.
EMPLOYMENT AGREEMENTS. The Company has employment agreements with several
of its officers. The employment agreements expire at various dates through
December 2005. Certain of the employment agreements provide for a multiple of
the individual's base salary in the event there is a termination of their
employment as a result of a change in control in the Company.
GUARANTY. The Company has unconditionally guaranteed the full and prompt
payment of a loan of Raceworks, LLC (see Note 18). This guaranty will remain in
effect until the guaranteed obligation terminates, which is currently estimated
to be July 2007. The maximum potential amount of future payments (undiscounted)
the Company could be required to make under the guaranty include principal and
accrued interest of $1,824,000 as of December 31, 2002, and reasonable costs of
collections incurred by the lender, which cannot be reasonably estimated.
The Company has not incurred any liability relative to its obligation under
the guaranty as of December 31, 2002
LITIGATION. On September 8, 2000, a complaint for damages was filed against
the Company in the Superior Court of the State of California, County of
Monterey. This lawsuit was filed by the heirs of Gonzolo Rodriguez, a race car
driver who died on September 11, 1999 while driving his race car at the Laguna
Seca Raceway in a practice session for the CART race event. The suit seeks
damages in
F-14
an unspecified amount for negligence and wrongful death. On November 5, 2001, a
release signed by Mr. Rodriguez was upheld by the Court and the causes of action
for negligence were dismissed based on the defendants' motion for summary
judgment. The remaining count in the lawsuit was for willful and/or reckless
conduct. On March 13, 2003 a jury verdict completely exonerating the Company was
received.
On October 30, 2000, a complaint for damages was filed against the Company
in the Superior Court of the State of California, County of San Bernardino. This
lawsuit was filed by the estate of Greg Moore, a race car driver who died on
October 31, 1999 while driving his race car at the California Speedway during
the CART race event. The suit sought actual and punitive damages from the
Company in an unspecified amount for breach of duty, wanton and reckless
misconduct, breach of implied contract, battery, wrongful death and negligent
infliction of emotional distress. On a motion for Summary Judgment, the
complaint was dismissed on all counts on October 16, 2002. An appeal of the
dismissal was filed. Management does not believe that the outcome of this
lawsuit will have a material adverse affect on the Company's financial position
or future results of operations.
On November 8, 2001, two former team owners, DellaPenna Motorsports and
Precision Preparation, Inc., filed suit against the Company in the Circuit Court
for the County of Wayne, State of Michigan, each alleging damages in excess of
$1.0 million for breach of contract, promissory estoppel, misrepresentation, and
tortious interference with contract and business expectancy. The Company intends
to vigorously defend itself in this lawsuit and does not believe the lawsuit has
merit. The suit is currently in the discovery phase. Management does not believe
that the outcome of this lawsuit will have a material adverse affect on the
Company's financial position or future results of operations.
On March 26, 2002, the Company filed a complaint against Joseph F.
Heitzler, a former director and former chairman, chief executive officer and
president of the Company in U.S. District Court, Eastern District of Michigan,
Southern Division. The complaint alleges that Mr. Heitzler breached his
employment contract, breached his fiduciary duties and intentionally or
recklessly omitted to disclose information to the Company in order to induce the
continuation of Mr. Heitzler's employment agreement. The suit seeks damages of
an unspecified amount. This lawsuit has been removed to California. On March 28,
2002, Mr. Heitzler filed a complaint against the Company in the Superior Court
of the State of California, County of Los Angeles. The suit seeks compensatory,
exemplary and punitive damages in excess of $2.0 million for breach of contract,
fraud, negligent misrepresentation, breach of covenant of good faith and fair
dealing and declaratory relief. An amended complaint adding a count for tortious
breach of contract in violation of public policy was filed on April 9, 2002. The
Company intends to vigorously defend itself in this lawsuit. Management does not
believe that the outcome of these lawsuits will have a material adverse affect
on the Company's financial position or future results of operations.
On July 9, 2002 a Demand for Arbitration was filed against the Company with
the American Arbitration Association in Indianapolis, Indiana by Engine
Developments Ltd. The Demand alleges that the Company breached an agreement to
purchase engines and seeks unspecified damages. The claim is currently in the
discovery stage. Management does not believe that an agreement was ever entered
into and intends to vigorously defend itself. Management does not believe that
the outcome of this Demand for Arbitration will have a material adverse affect
on the Company's financial position or future results of operations.
The Company is involved in other litigation not specifically identified
above and does not believe the outcome of any of this litigation will have a
material adverse affect on its financial position or future results of
operation.
11. BAD DEBT - SPONSORSHIP PARTNER
Bad debt expense in 2000 of $6.3 million relates to a charge associated
with the Company's sponsorship agreement with ISL Marketing AG ("ISL"). In 1998,
ISL signed a nine (9) year contract to become the Company's exclusive marketing
agent for solicitation of sponsorship agreements. The contract guaranteed the
Company a minimum amount of sponsorship revenue for each year of the agreement.
Following discussions with ISL, it was determined that ISL did not intend to
fulfill its
F-15
commitment with respect to the remaining years of the agreement under its
original terms and collectability of the guarantee for 2000 was uncertain. In
June 2001, ISL declared bankruptcy in Switzerland.
12. SEVERANCE EXPENSE
During 2001, the Company recorded severance expense relating to the
voluntary and involuntary resignation of certain employees, including the
Company's President/CEO. These expenses amounted to $4.3 million and are
included in administrative and indirect expenses.
In June 2000, the Company's President/CEO announced his resignation. The
former President/CEO entered into a severance agreement where the Company
recorded a one-time severance payment of $2.8 million.
At December 31, 2002 and 2001, severance payments of $2.3 million and $3.8
million, respectively, are accrued.
13. STOCK OPTION PLANS
1997 STOCK OPTION PLAN. In December 1997, the Board of Directors of the
Company (the "Board") authorized, and the stockholders of the Company approved,
a stock incentive plan for executive and key management employees of the Company
and its subsidiaries, including a limited number of outside consultants and
advisors, effective as of the completion of the initial public offering ("IPO")
(the "1997 Stock Option Plan"). Under the 1997 Stock Option Plan, key employees,
outside consultants and advisors (the "Participants") of the Company and its
subsidiaries (as defined in the 1997 Stock Option Plan) may receive awards of
stock options (both Nonqualified Options and Incentive Options, as defined in
the Stock Option Plan). A maximum of 2,000,000 shares of common stock are
subject to the 1997 Stock Option Plan. Options granted vest pro-rata over a
three-year period. No stock option is exercisable after ten years from the date
of the grant, subject to certain conditions and limitations. The purpose of the
1997 Stock Option Plan is to provide the Participants (including officers and
directors who are also key employees) of the Company and its subsidiaries with
an increased incentive to make significant contributions to the long-term
performance and growth of the Company and its subsidiaries.
In addition, in December 1997, the Board and the stockholders of the
Company approved a Director Option Plan permitting the granting of non-qualified
stock options ("Director NQSOs") for up to 100,000 shares of common stock to
directors of the Company who are neither employees of the Company nor affiliates
of a race team which participates in CART race events (an "Independent
Director"). Each person who is first elected or appointed to serve as an
Independent Director of the Company is automatically granted an option to
purchase 10,000 shares of Company common stock. In addition, each individual who
is re-elected as an Independent Director is automatically granted an option to
purchase 5,000 shares of Company common stock each year on the date of the
annual meeting of stockholders. Each of the options automatically granted upon
election, appointment or re-election as an Independent Director are exercisable
at a price equal to the fair market value of the common stock on the date of
grant. In addition, each Independent Director may elect to receive stock options
in lieu of any director's fees payable to such individuals.
All Director NQSOs are immediately exercisable upon grant. The exercise
price for all options may be paid in cash, shares of common stock of the Company
or other property. If an Independent Director dies or becomes ineligible to
participate in the Director Option Plan due to disability, his Director NQSOs
expire on the first anniversary of such event. If an Independent Director
retires with the consent of the Company, his Director NQSOs expire 90 days after
his retirement. In no event may a Director NQSO be exercised more than ten years
from the date of grant. As of December 31, 2002 and 2001, there were 25,000 and
72,500, respectively, Director NQSOs issued and outstanding.
No further options will be granted under either the 1997 Stock Option Plan
or the Director's Stock Option Plan.
F-16
The following table summarizes information about stock options under the
1997 Stock Option Plan and Directors Stock Option Plan during 2002, 2001 and
2000 as follows:
WEIGHTED
AVERAGE WEIGHTED
NUMBER OF REMAINING LIFE AVERAGE
1997 DIRECTOR & STOCK OPTION PLAN SHARES LIFE EXERCISE PRICE
- ------------------------------------------------------------------------------------------------------
Options outstanding December 31, 1999 1,166,288 3.4 $17.20
(357,559 are exercisable)
Granted 439,650 9.6 21.28
Exercised (178,899) -- 16.00
Forfeited* (721,550) -- 16.26
------------------ ---------------- ----------------
Options outstanding December 31, 2000 705,489 7.6 $20.99
(274,157 are exercisable)
Exercised (6,667) -- 16.00
Forfeited (96,250) -- 24.18
------------------ ---------------- ----------------
Options outstanding December 31, 2001 602,572 6.6 $20.50
(402,477 are exercisable)
Forfeited 337,302 -- 21.16
------------------ ---------------- ----------------
Options outstanding December 31, 2002 265,270 4.1 19.67
================== ================ ================
(256,287 are exercisable)
*600,000 options were forfeited in exchange for a severance payment made to the
Company's former CEO.
The weighted average exercise price of exercisable options at December 31,
2002 was $19.67. Options outstanding at December 31, 2002 range in exercise
price from $16.00 to $29.00.
At December 31, 2002, 2001 and 2000, an additional 0, 0 and 1,173,185,
respectively, shares were reserved for issuance under the 1997 Stock Option Plan
and Directors Stock Option Plan.
2001 STOCK OPTION PLAN. In May 2001, the Company's Board of Directors
authorized and the stockholders of the Company approved a 2001 Long Term Stock
Incentive Plan ("2001 Stock Option Plan"), which provides for grants of stock
options to eligible participants including employees, officers, directors,
consultants and other key persons. The 2001 Long Term Stock Incentive Plan
authorizes the grant to participants of options to purchase up to 1,500,000
shares of the Company's common stock.
No officer may be granted more than 500,000 options during any one fiscal
year. Options are granted only to employees, officers, directors, consultants
and other persons providing key services to the Company or a subsidiary and the
purchase price of each option granted cannot be less than 100% of the fair
market value of the common stock on the date of grant.
Options granted under the Plan are incentive stock options or non-qualified
stock options as defined under the Internal Revenue Code of 1986, as amended.
The shares issued upon the exercise of options granted may be previously
unissued shares, reacquired shares, or shares bought in the market. The purchase
price for all shares purchased pursuant to options exercised must be either paid
in cash, or paid in full in common stock of the Company valued at fair market
value on the date of exercise, or a combination of cash and common stock.
The term of each option may not exceed ten years and, additionally, may not
exceed twelve months following the termination of providing services to the
Company, unless modified by the Compensation Committee.
F-17
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
NUMBER REMAINING EXERCISE FAIR
2001 STOCK OPTION PLAN OF SHARES LIFE PRICE VALUE
- ---------------------------------------------- ------------- -------------- ------------ -------------
Options outstanding December 31, 2000 -- -- -- --
(0 are exercisable)
Granted 851,250 9.8 $15.35 $7.47
Forfeited 2,800 -- 14.68 --
Options outstanding December 31, 2001 848,450 9.8 $15.30 --
(40,000 are exercisable)
Granted 553,250 9.5 $7.38 $5.71
Forfeited 265,650 -- $15.26 --
Options outstanding December 31, 2002 1,136,050 9.2 $11.49 --
(217,016 are exercisable)
The weighted average price of exercisable options at December 31, 2002 was
$14.14. Options outstanding at December 31, 2002 range in exercise price from
$4.90 to $16.64. At December 31, 2002, 363,950 shares were reserved for issuance
under the 2001 Stock Option Plan.
14. SEGMENT REPORTING
The Company has one reportable segment, racing operations.
This reportable segment encompasses all the business operations of
organizing, marketing and staging all of the Company's open-wheel racing events.
The accounting policies of the segments are the same as those described in
the summary of significant accounting policies. The Company's long-lived assets
are substantially used in the racing operations segment in the United States.
YEARS ENDED DECEMBER 31,
------------------------
(In Thousands) RACING OPERATIONS OTHER* TOTALS
- -------------- ----------------- ------ ------
2002
Revenues $ 57,146 $ 99 $ 57,245
Interest income 3,749 13 3,762
Depreciation and amortization 1,361 75 1,436
Segment loss before income taxes (20,725) (138) (20,863)
2001
Revenues $69,915 $ 348 $ 70,263
Interest income 7,013 20 7,033
Depreciation and amortization 1,395 98 1,493
Segment loss before income taxes (1,421) (41) (1,462)
2000
Revenues $ 74,425 $ 623 $ 75,048
Interest income 7,447 16 7,463
Depreciation and amortization 1,250 102 1,352
Segment income (loss) before income taxes 24,135 (462) 23,673
*Segment is below the quantitative thresholds for presentation as a reportable
segment. This segment is related to the Company's licensing royalties.
Reconciliations to the consolidated balance sheets totals at December 31
are as follows:
(In Thousands)
2002 2001
------------- ------------
Total assets for reportable segment $ 114,194 $ 131,901
Other assets 257 1,040
------------- ------------
Total consolidated assets $ 114,451 $ 132,941
============= ============
F-18
Domestic and foreign revenues, which are allocated to each country based on
sanction fees, sponsorship revenues and television revenues, the three years
ended December 31 were as follows:
(In Thousands)
------------
2002 2001 2000
---------- ---------- -----------
United States $ 33,820 $ 40,717 $ 53,261
Canada 6,500 7,032 7,618
Mexico 6,704 2,590 --
Other foreign countries 10,221 19,924 14,169
-------- -------- --------
Total $ 57,245 $ 70,263 $ 75,048
======== ======== ========
Revenues from one promoter in 2002 were $6.5 million, which exceeded 10% of
total revenues.
15. EARNINGS (LOSS) PER SHARE
Basic earnings (loss) per share ("EPS") excludes dilution and is computed by
dividing net income (loss) by the weighted average number of common shares
outstanding for the period. Diluted EPS reflects the potential dilution of
securities that could share in the earnings. Shares contingently issuable relate
to shares that would have been outstanding under certain stock option plans (see
Note 13) upon the assumed exercise of dilutive stock options.
YEARS ENDED DECEMBER 31,
------------------------
2002 2001 2000
---- ---- ----
(IN THOUSANDS, EXCEPT EARNINGS PER SHARE)
Net income (loss) $ (14,517) $ (950) $ 15,153
============ =========== ============
Basic EPS:
Weighted average common shares outstanding 14,718 15,289 15,624
============ =========== ============
Net earnings (loss) per common share, basic $ (0.92) $ (0.06) $ 0.97
============ =========== ============
Diluted EPS:
Weighted average common shares outstanding 14,718 15,289 15,624
Shares contingently issuable -- -- 33
------------ ----------- ------------
Shares applicable to diluted earnings 14,718 15,289 15,657
============ =========== ============
Net earnings (loss) per common share, diluted $ $(0.92) $ (0.06) $ 0.97
============ =========== ============
In 2002, due to a loss from operations, 20,000 incremental shares relating
to the dilutive effect of stock options were excluded from the calculation of
diluted loss per share due to their anti-dilutive effect. In 2001, 1,000
incremental shares were excluded from the calculation of diluted loss per share
due to their anti-dilutive effect.
16. RELATED PARTY TRANSACTIONS
The Company has entered into, and will continue to enter into transactions
with entities that are affiliated with the Company's directors and/or 5%
stockholders (related parties).
The Company receives sanction fees from promoters affiliated with related
parties. Total sanction fee revenue related to these entities for 2002, 2001 and
2000 was approximately $10.6 million, $12.7 million and $6.4 million,
respectively. No sanction fees from a single related entity provided more than
10% of the Company's revenues in 2002, 2001 and 2000.
The Company rented track facilities from promoters affiliated with related
parties. Total track rental expense related to these entities for 2002, 2001,
and 2000 was approximately $853,000, $59,000 and $28,000, respectively.
F-19
At December 31, 2002 and 2001, the Company has accounts receivable of
approximately $566,000 and $1.7 million, respectively, due from related parties.
The receivables relate to billings associated with sanction fees and
miscellaneous team and promoter charges.
The Company receives entry fees and other race-related income to
participate in the Champ Car Series from teams affiliated with related parties.
Such fees received from teams amounted to $655,000, $710,000 and $1.4 million in
2002, 2001 and 2000, respectively.
The Company disburses purse winnings, awards and participation payments to
teams affiliated with related parties. Total purse winnings and awards related
to these teams for 2002, 2001 and 2000 were $11.3 million, $6.4 million and
$10.1 million, respectively.
In 2003, the Company has committed to lease engines and provide financial
assistance to teams affiliated with related parties. Total engine lease income
and financial assistance related to the entities will be $700,000 and $14.7
million, respectively.
The Company paid for at-track rights to promoters affiliated with related
parties in order to satisfy contractual obligations with certain sponsors. Total
at-track rights related to these entities for 2002, 2001 and 2000 were $400,000,
$500,000 and $800,000, respectively.
The Company paid for marketing expenses to promoters affiliated with
related parties. Total marketing expenses related to these promoters for 2002,
2001 and 2000 were $700,000, $616,000 and $0, respectively.
In 2001, the Company subsidized overseas travel expense for teams
affiliated with related parties. Total travel reimbursements for those teams
were $1.7 million.
The Company pays royalties to teams and promoters affiliated with related
parties. Total royalty expense for these entities for 2002, 2001 and 2000 were
$46,000, $40,000 and $69,000, respectively.
At December 31, 2002 and 2001, the Company has accounts payable and
royalties payable of approximately $46,000 and $442,000, respectively, due to
teams and promoters affiliated with related parties.
In 2001, the Company repurchased 80,000 shares at the market price of
$14.50 per share from a Director of the Company. The repurchase was made in
compliance with the Company's repurchase program that was authorized by the
Board of Directors in April 2001.
An officer of the Company is a principal in a law firm which received fees
for legal services provided to the Company. Such fees amounted to approximately
$125,000, $126,000 and $172,000 in 2002, 2001 and 2000, respectively.
F-20
17. SUMMARIZED QUARTERLY DATA (UNAUDITED)
Following is a summary of the quarterly results of operations for the years
ended December 31, 2002 and 2001.
(In Thousands, Except Earnings Per Share) First Second Third Fourth Total
- -------------------------------------------------------------------------------------------------------------------------------
2002
Total revenues $ 5,603 $19,292 $ 18,537 $ 13,813 $ 57,245
Operating income (loss) (2,001) (6,759) (13,667) (2,224) (24,651)
Net income (loss) before effect of accounting change (594) (3,668) (8,310) (989) (13,561)
Cumulative effect of accounting change 956) -- -- -- (956)
-------- ------- -------- -------- --------
Net income (loss) after effect of accounting change $ (1,550) $(3,668) $ (8,310) $ (989) $(14,517)
======== ======= ======== ======== ========
Earnings (loss) per share before cumulative effect
of accounting change:
Basic $ (0.04) $ (0.25) $ (0.56) $ (0.07) $ (0.92)
======== ======= ======== ======== ========
Diluted $ (0.04) $ (0.25) $ (0.56) $ (0.07) (0.92)
======== ======= ======== ======== ========
Earnings (loss) per share after before cumulative
effect of accounting change:
Basic $ (0.11) $ (0.25) $ (0.56) $ (0.07) $ (0.99)
======== ======= ======== ======== ========
Diluted $ (0.11) $ (0.25) $ (0.56) $ (0.07) $ (0.99)
======== ======= ======== ======== ========
(In Thousands, Except Earnings Per Share) First Second Third Fourth Total
- -------------------------------------------------------------------------------------------------------------------------------
2001
Total revenues $ 6,439 $19,785 $ 29,559 $ 14,480 $ 70,263
Operating income (loss) (1,849) 4,157 (4,439) (6,364) (8,495)
-------- ------- -------- -------- --------
Net income (loss) $ 81 $ 3,949 $ (1,710)(1) $ (3,270) $ (950)
======== ======= ======== ======== ========
Basic earnings (loss) per share $ 0.01 $ 0.25 $ (0.11) $ (0.21) $ (0.06)
======== ======= ======== ======== ========
Diluted earnings (loss) per share $ 0.01 $ 0.25 $ (0.11) $ (0.21) $ (0.06)
======== ======= ======== ======== ========
(1) Includes asset impairment and strategic charges of $8.5 million relating to
the discontinuance of our Indy Lights series and litigation expense of $3.5
million that was a result of a settlement with Texas Motor Speedway for the
cancellation of a race that was to be held in April 2001.
18. ACQUISITION OF RACEWORKS, LLC
On March 7, 2003, the Company acquired 100 percent (100%) of the membership
interests in Raceworks, LLC ("Raceworks"). The aggregate purchase price was $1.2
million including $473,000 of cash and a promissory note of $722,000 without
interest. Raceworks is a motorsports promotion company and holds a revocable
license agreement to annually conduct a street race in downtown Miami through
2017, with an option to extend for an additional ten (10) years.
F-21
SCHEDULE II
CHAMPIONSHIP AUTO RACING TEAMS, INC.
VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
(IN THOUSANDS)
CHARGED BALANCE
BEGINNING TO COSTS DEDUCTIONS AT END OF
DESCRIPTION OF PERIOD AND EXPENSES (1) OF PERIOD
- ------------------------------------------- ------------ ------------ ----------- -----------
Allowance for doubtful
accounts (deducted from
accounts receivable):
Year Ended December 31, 2002... $ 7,388 $ 1,223 $ 7,329 $ 1,282
Year Ended December 31, 2001... 6,539 1,077 328 7,388
Year Ended December 31, 2000... 250 6,546 257 6,539
Allowance for doubtful
notes (deducted from
notes receivable):
Year Ended December 31, 2002... $ 219 $ 0 $ 198 $ 21
Year Ended December 31, 2001... 0 219 0 219
(1) Accounts deemed to be uncollectible.
S-1