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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, 1998.
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.
(Exact name of registrant as specified in its charter)
Delaware 38-3389456
(State or other jurisdiction of (IRS Employer Identification No.)
Incorporation or organization)
755 West Big Beaver Rd., Suite 800, Troy, MI 48084
(Address of principal executive offices) (Zip Code)
(248) 362-8800
(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 (ss. 229.405 of this chapter) 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. [ X ]
On March 16, 1999, the aggregate market value of the shares of voting stock of
Registrant held by non-affiliates was approximately $257,626,314 based on a
closing sales price on the NYSE of $29.00 per share.
At March 16, 1999, the Registrant had 15,171,666 shares of common stock
outstanding.
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DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement for the 1999 Annual Meeting of
Stockholders to be filed with the Securities and Exchange Commission, not later
than 120 days after the close of its 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
<S> <C> <C>
Item 1. Business....................................................................... 4
Item 2. Properties..................................................................... 21
Item 3. Legal Proceedings.............................................................. 21
Item 4. Submission of Matters to a Vote of Security Holders............................ 22
PART II
Item 5. Market of the Registrant's Common Equity and Related Stockholder Matters 22
Item 6. Selected Consolidated Financial Data........................................... 23
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operation.................................................. 25
Item 7A. Quantitative and Qualitative Disclosures About Market Risk..................... 34
Item 8. Financial Statements and Supplementary Data.................................... 34
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.................................................. 34
PART III
Item 10. Directors and Executive Officers of the Registrant............................. 34
Item 11. Executive Compensation......................................................... 34
Item 12. Security Ownership of Certain Beneficial Owners and Management................. 34
Item 13. Certain Relationships and Related Transactions................................. 35
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K................ 35
SIGNATURES 37
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PART I
ITEM 1: BUSINESS
THE REORGANIZATION
Championship Auto Racing Teams, Inc. was formed in December 1997, as a
Delaware corporation to serve as a holding company for CART, Inc., our racing
entity, and its subsidiaries. In connection with a reorganization, we acquired
all of the shares of CART, Inc. in exchange for our shares. The reorganization
was completed in anticipation of, and to facilitate our initial public offering
on March 10, 1998.
INTRODUCTION
We own, operate and sanction the premier open-wheel motorsports series
in North America--the CART Championship. We are responsible for organizing,
marketing and staging each of the races in the CART Championship. With speeds of
up to 240 miles per hour, and an average margin of victory during the 1998 race
season of less than three seconds, CART 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 Indy Lights
Championship and the Atlantic Championship, both development series for the CART
Championship.
The drivers and racing teams participating in CART racing events are
among the most recognized names in motorsports, with marquee drivers including:
o Michael Andretti
o Al Unser Jr.
o Jimmy Vasser
o Paul Tracy
o Dario Franchitti
o Adrian Fernandez
o Bryan Herta
o Greg Moore
The excitement and competition of CART racing also attracts well-known
racing legends, business leaders and sports and entertainment personalities as
team owners including:
o Chip Ganassi
o Carl Haas
o David Letterman
o Bruce McCaw
o Joe Montana
o Paul Newman
o U.E. "Pat" Patrick
o Walter Payton
o Roger Penske
o Bobby Rahal
Major sponsors of the CART Championship include:
o Federal Express and PPG Industries as the co-series sponsors
o MCI
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o Budweiser
o Mercedes-Benz
o Honda
o Craftsman
o Motorola
o Parke-Davis
In addition, other Fortune 500 companies sponsor particular race teams and
events.
Open-wheel racing is the oldest continually scheduled motorsports
competition in the world, tracing its history to 1904. The 1999 CART
Championship will include 20 races staged in five countries:
o United States
o Canada
o Australia
o Brazil
o Japan
Two new races were added in 1998, one in Motegi, Japan and one in
Houston, Texas. For the 1999 season, we added an additional series event in
Chicago, Illinois and will sanction a non-series event in Oahu, Hawaii. We
conduct our races on four different types of tracks, requiring teams and drivers
competing for the CART Championship to employ a variety of skills to master
different courses. Each race weekend in the CART Championship is an "event"
offering spectators the opportunity to enjoy a CART race, as well as a full
weekend of motorsports related entertainment. Most of our events include
additional races, such as events in the Indy Lights Championship or the Atlantic
Championship, 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 derive our revenues from five primary sources:
o sanction fees paid by track promoters
o corporate sponsorship fees
o television revenues
o engine leases and rebuilds
o licensing royalties
Our revenues have increased during the last four years from $25.0
million in 1994 to $62.5 million in 1998.
We were incorporated in Delaware in December 1997. Our principal
executive office is located at 755 West Big Beaver Road, Suite 800, Troy,
Michigan 48084, and our telephone number is (248) 362-8800.
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:
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o Formula One
o CART Championship
o Indy Racing League
o Formula 3000
o Indy Lights Championship
o Atlantic Championship
o FORMULA ONE. The Formula One World Championship was
founded in 1950. The Federation Internationale de L'Automobile
sanctions Formula One World Championship events consisting of
open-wheel races on road courses in Europe, South America, Asia,
Canada, and Australia. The 1999 season will include 16 races. The 1998
Formula One calendar included 15 events in 13 different countries.
o CART. The CART Championship started in 1978 and is the premier
open-wheel motorsports series in North America. The CART Championship
is sanctioned by CART and will include 20 races this year. The 1998
season included 19 races. CART events are staged on four different
types of tracks:
- superspeedways
- ovals
- temporary street courses
- 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 CART Championship.
o IRL. The IRL 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 11 races this year. The IRL's 1998 season
consisted of 11 races, including the Indianapolis 500.
o FORMULA 3000. The FIA sanctions the International Formula 3000
Championship. The championship season covers Europe between April and
September in a twelve race series. Success in Formula 3000 has been the
stepping stone for many drivers into Formula One.
o INDY LIGHTS CHAMPIONSHIP. We sanction the Indy Lights
Championship and have designated it as the "Official Development Series
of the CART Championship." Similar to CART, the Indy Lights
Championship is staged on four different types of tracks. The Indy
Lights Championship consisted of 14 races during the 1998 season in the
United States and Canada, with 13 events run in conjunction with CART
events and one stand alone race.
o ATLANTIC CHAMPIONSHIP. We also sanction the Atlantic
Championship. The Atlantic Championship is also a stepping stone to a
career in international motorsports competition. The 1998 Atlantic
Championship consisted of 12 races in the United States
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and Canada, with 10 events held in conjunction with CART events, one
race with an Indy Lights race and another race as a support series to a
Formula One race in Montreal, Canada.
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 National Hot Rod
Association is the most prominent organizing body in drag racing. Other, less
prominent, racing segments include various types of sports car racing and club
racing.
o NASCAR. Professional stock car racing developed in the Southeastern
United States in the 1930s, 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,
supervising the Winston Cup and Busch Grand National stock car race
series. The 1998 Winston Cup and Busch Grand National race series
included 33 and 31 races, respectively; all of which were held in the
United States, with two exhibition events in Japan.
o OTHER SANCTIONING BODIES. Sports car races are held on road courses
and temporary street circuits throughout the United States and are
sanctioned by SCCA and PSCR. The NHRA sanctions drag races in the
United States. ARCA sanctions stock car races that are less prominent
than those sanctioned by NASCAR.
Motorsports events are generally heavily promoted, with a number of
supporting events surrounding the main race event. Examples of supporting events
include:
o qualifying trials
o secondary racing events
o driver autograph sessions
o automobile and product expositions
o catered parties
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:
o spectators
o corporate sponsors
o track owners/race promoters
o drivers
o team owners
o sanctioning bodies
SPECTATORS. After soccer, motorsports is the most watched sport
worldwide. Motorsports is among the fastest growing spectator sports in the
United States. Total attendance at all motorsports events in the United States
in 1998 exceeded 16.8 million people. During 1998, approximately 2.5 million
people attended CART events. CART races were also televised in 195 countries in
1997, with aggregate television audiences approaching 1 billion viewers.
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
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in all phases of the industry. We believe that the demographic profile of our
growing spectator base has considerable appeal to sponsors, track owners,
television networks and advertisers. The mean household income of our spectators
is estimated to be $55,600, compared to $47,000 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.
Their revenue sources generally include:
o admissions
o sponsorships
o corporate hospitality (suites, chalets and tents for race
viewing and other amenities)
o advertising
o concessions and souvenir sales
DRIVERS. A majority of drivers contract independently with team owners,
while select drivers 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, 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 and a percentage of prize money won.
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 Federation Internationale de l'Automobile (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 seven member-sanctioning
organizations:
o CART
o NASCAR
o United States Auto Club ("USAC")
o Professional Sports Car Racing ("PSCR")
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o National Hot Rod Association ("NHRA")
o Sports Car Club of America ("SCCA")
o Indy Racing League ("IRL")
GROWTH STRATEGY
Our growth strategy is to increase revenues and net income by expanding
the worldwide audience for CART racing. We intend to build brand awareness by
capitalizing on the thrill and excitement of CART racing as well as our position
as a premier open-wheel racing series. We believe that these factors will
provide us with opportunities for increased overall:
o sanction fees
o corporate sponsorship fees
o television revenues
o royalties
We intend to implement our growth strategy by:
o INCREASING MARKET PENETRATION IN THE UNITED STATES. We will continue
to develop our race schedule in key markets in the United States. As
part of our plan, we will sanction a race in Chicago, Illinois during
the 1999 season. Because our races are conducted on superspeedways,
ovals, temporary street courses and permanent road courses, we believe
we have great flexibility in selecting future race venues.
o EXPAND INTERNATIONAL AUDIENCE. We believe that the world market for
motorsports is predisposed to CART's style of exciting, competitive,
open-wheel racing. The CART Championship spanned five countries in four
continents in 1998, with events in the United States, Canada,
Australia, Brazil and Japan. We typically receive higher sanction fees
from the race promoters of international race events. Our management
continues to explore additional opportunities to export our high-value,
American racing product throughout the world and to include more
international-based sponsors for the CART Championship and our race
teams.
o EXPAND MEDIA EXPOSURE. We plan to expand our overall television
presence on a worldwide basis. The acquisition of Indylights and the
Atlantics series, plus the addition of a new race in Chicago, results
in our company being the rights owner for over 85 hours of high quality
motorsports programming. We intend to build the worldwide distribution
base for all three race series in the future. In the United States, we
will focus on improving our television ratings on both network and
cable and on developing race programming focused on new audiences for
the sport.
We will continue to expand press coverage for all three series
- an area where we achieved substantial growth in 1998.
We will re-launch our successful web site CART.com. During
1998, we added E-Commerce and a business section to CART.com, and in
1999, we will re-launch the entire site with a new look and
presentation that will increase the immersive experience for visitors.
o INCREASE LICENSING OPPORTUNITIES. We will continue to seek out
opportunities to bring our brand to a broader market. We can provide
"one stop shopping" for potential licensees for our servicemarks and
trademarks, as well as for participating race teams, drivers and
tracks. This integrated approach allows licensees and retailers to work
with a
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single licensing entity rather than negotiating with the fragmented
licensing environment found in other sports.
o ACQUIRE AND DEVELOP RELATED BUSINESSES AND PROPERTIES. We will
selectively pursue opportunities to acquire and apply our brand name to
other race-related businesses and properties. We expect to vertically
integrate certain support-racing series to develop future racing talent
in the United States. We are also seeking opportunities to acquire and
develop race experience products which will provide potential and
existing race fans with an affordable and accessible opportunity to
experience the sport. These may include opportunities such as:
- Simulation or virtual reality products
- Indoor kart racing centers
- Race schools
As the first step in this strategy, in 1998 we acquired American Racing
Series ("ARS"), which operates Indy Lights, and BP Automotive ("BP"),
which provides certain equipment to the participants of Indy Lights, as
well as Pro-Motion Agency which operates the Atlantic Championship
series.
THE CART ADVANTAGE
The drivers, cars, venues and fans provide us with a world class
product for audiences and sponsors.
THE DRIVERS. The diversity of our drivers adds to our worldwide appeal.
In 1998, 24 of the 34 drivers who competed in at least one of our race events
were born outside of the United States. In total, these drivers represented 11
different countries.
THE CARS. The cars are developed by a variety of different chassis
manufacturers:
o Reynard
o Swift
o Eagle
o Lola
o Penske
These high-tech racecars are powered by state-of-the-art engines from:
o Mercedes-Benz
o Honda
o Ford
o Toyota
The cars ride on tires provided by Firestone and Goodyear.
THE VENUES. CART races are conducted on four different types of tracks:
o superspeedways
o ovals
o temporary street courses
o permanent road courses
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The variety of tracks require different set-ups for chassis, engines and tires,
requiring drivers and teams to adapt to the various courses.
THE FANS. The primary means for a fan to interface with the CART
Championship is through direct attendance at events or by television viewership.
Our spectators are demographically attractive to sponsors and advertisers. They
are generally young individuals with education and income levels above the U.S.
national average. This makes sponsorship of CART, our teams and events an
attractive advertising and promotional investment. Our television audience,
while closer to the national average for household income, encompasses an above
average proportion of males in the 25 to 54 age group. This is an attractive
demographic for advertisers since this age group tends to watch less television
than the average American. In the United States, CART's television ratings have
declined in recent years and mirror the overall decline in television ratings
for sports events in the United States. A positive factor going forward in 1999
is that CART will broadcast a record 13 of its 20 races via network television.
The balance of the races can be viewed on ESPN.
CART HISTORY
CART-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 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 CART Championship. The group included
teams 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, CART staged 13 races. PPG Industries became the title
sponsor of our Championship late in that inaugural year, and we crowned Rick
Mears as our first champion.
Since Mears' victory in the inaugural season, CART has had many other
memorable champions including:
o Al Unser, Sr.
o Johnny Rutherford
o Mario Andretti
o Danny Sullivan
o Emerson Fittipaldi
o Al Unser, Jr.
o Michael Andretti
o Bobby Rahal
o Nigel Mansell
o Jacques Villeneuve
o Jimmy Vasser
o Alex Zanardi
Competitive, close racing is the hallmark of CART. In 1991, we had six
different winners in the first six races. In 1993, we had six different race
winners and 13 different podium finishers. The 1994 through 1998 race seasons
were equally competitive. In 1998, we had seven different winners, including
first-time victories in the CART Championship for Dario Franchitti and Bryan
Herta.
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Due to starting position reservations and changes to equipment
specifications, CART teams have generally not competed in the Indianapolis 500
since 1995. Although the IRL removed starting position reservations after the
1997 Indianapolis 500, CART teams do not participate in the Indianapolis 500. We
continue to evaluate opportunities for an accommodation with the Indianapolis
Motor Speedway, but we can not assure you that a resolution will be reached or
of the timing of any such resolution. We are unable to predict what effect, if
any, the continued non-participation by CART teams at the Indianapolis 500 will
have on our future results.
Since 1995, we have added races in the United States in:
o Homestead, Florida
o Madison, Illinois
o Fontana, California
o Houston, Texas
Internationally, we added a race in Rio de Janeiro, Brazil in 1996 and Motegi,
Japan in 1998. We have scheduled a new race in Chicago, Illinois for 1999.
In 1999, our races will serve the important United States markets of:
o Miami
o St. Louis
o Los Angeles
o Houston
o Chicago
In addition, a non-championship series event has been added to the 1999
schedule. The Hawaiian Super Prix will be held on the island of Oahu in November
1999. The Hawaiian Super Prix will feature the largest single-day payout in the
history of motorsports, $10 million, with $5 million going to the winner. The
top 12 finishers in the CART Championship, as well as four additional drivers to
be selected by the promoter, will compete for this record payout. Showtime will
provide television coverage on a pay-per-view basis in the United States.
FRANCHISE SYSTEM AND RACE TEAMS
We have operated CART as a "franchise system" since 1984. We offered
franchises for each competing car, with owners limited to a maximum of two
franchise memberships. The number of franchises we have awarded has varied, but
we have never awarded more than 25 franchises. To become a CART franchise
member, a race team must have competed in all CART events for the prior race
year and be one of the 24 highest placed teams, based on points received from
competition.
The participation of race teams is critical to our ongoing success. Our
franchise system is the only race governing system to offer teams direct input
into race scheduling, rules and other racing activities. We believe that the
franchise system is a significant factor in encouraging entities who are
interested in auto racing to participate in our sanctioned events.
Prior to our becoming a public company, CART, Inc. was managed by a
board of directors composed of race team participants. We refer to this as the
franchise board. Each franchise owner was entitled to designate a member to the
franchise board. In addition, we paid certain benefits to franchise owners,
including reimbursement of travel expenses on a per race basis, directors fees
and other race-related expenses. The franchise and the stock were not
transferable without the approval of the franchise board and were subject to
redemption.
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Following our initial public offering, we have continued the franchise
system but without awarding any additional equity ownership in CART. Rather, the
24 race teams which have met participation requirements and have the highest
total of points from the prior season are permitted to designate a member to the
franchise board. The franchise board manages and oversees all racing-related
activities and makes all decisions with respect to specifications for engines
and chassis, race and venue participation, rules and related matters.
INDY LIGHTS CHAMPIONSHIP
On March 13, 1998, we acquired 100% of the outstanding common stock of
ARS and certain assets of BP. ARS operates the Indy Lights Championship series
and BP supplies certain equipment to the participants.
CART racing team owner and founding member, U.E. "Pat" Patrick, formed
the Indy Lights Championship in 1986 as a series in which team owners could
discover and develop the next generation of CART talent. Mr. Patrick designed
Indy Lights to emphasize driver and team talent, while reducing any advantage
gained through large monetary expenditures for equipment and technology. By
restricting competition to a single chassis design, powered by identical, sealed
engines and running a single brand of tires, Indy Lights offers a series in
which costs can be carefully controlled, creating a level playing field for
drivers, team managers and engineers.
We have designated the Indy Lights Championship the "Official
Development Series of the CART Championship," and we sanction its race events.
During the 1998 season, a record nine different drivers, representing seven
different race teams and six different countries, won races, making 1998 one of
the most competitive seasons in the series' history. During 1998, the series had
a total of 32 drivers, representing 13 countries, competing in at least one race
in the Indy Lights Championship. Graduates from the Indy Lights Championship who
have competed in the CART Championship include drivers:
o Paul Tracy
o Bryan Herta
o Greg Moore
o Andre Ribeiro
o Adrian Fernandez
o Tony Kanaan
o Helio Castro-Neves
o Cristiano da Matta
o Naoki Hattori
o Shigeaki Hattori
In 1998, four CART team owners, Steve Horne (Tasman Motorsports Group), Bruce
McCaw (PacWest Racing), Barry Green (Team KOOL Green) and Bobby Rahal (Team
Rahal), also had teams competing in the Indy Lights Championship.
Similar to the CART Championship, we stage the Indy Lights Championship
races on four different types of tracks. At certain venues we receive a sanction
fee from the promoter for staging the Indy Lights event. We believe that the
Indy Lights Championship can create significant revenue growth for us through:
o packaged sponsorships with our other race series
o extending our efforts to integrate category sponsorship
o additional sanction fees for "stand alone" Indy Lights
events, both in the United States and overseas
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With the growth and popularity of the series, we believe that Indy Lights will
play a significant role in our future revenue growth.
ATLANTIC CHAMPIONSHIP
On April 10, 1998, we acquired 100% of the outstanding common stock of
Pro-Motion Agency. Pro-Motion Agency operates the Atlantic Championship
open-wheel series, a support series to CART.
The Atlantic Championship has a rich history of providing a stepping
stone to a career in international motorsports competition. Graduates from the
Atlantic Championship and its predecessors include drivers:
o Bobby Rahal
o Jimmy Vasser
o Michael Andretti
o Richie Hearn
o Patrick Carpentier
o Alex Barron
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. In 1997, KOOL entered the series as co-title sponsor
with Toyota.
SANCTION FEES
For each race in the CART Championship, we enter into a multi-year
sanction agreement with the promoter, which provides for payment of a sanction
fee to CART. For the year ended December 31, 1997, promoters paid us sanction
fees of approximately $24.2 million, averaging $1.4 million per event and
representing approximately 59% of our total revenues. For the year ended
December 31, 1998, promoters paid us sanction fees of approximately $30.4
million, an average of $1.6 million per event, representing approximately 49% of
our revenues.
International events typically have higher sanction fees than events in
North America. So, as we have expanded internationally, our average sanction fee
has increased. Additionally, as we grow our sport, the opportunity to grow our
sanction fees may rise both by increases in sanction fees to reflect increased
value and by the inclusion of new international and domestic race venues. We
also believe that the popularity of the CART Championship will provide
additional domestic and international race venues willing to pay sanction fees
higher than our current average sanction fee.
RACING EVENTS
When staging a CART event, we provide all aspects of race management
necessary to "manufacture" the race event, including the required expertise and
personnel. We provide these race management services to track promoters in
exchange for the sanction fee.
As competition, support and interest in the CART Championship have
increased, we have increased the number of events we stage each race season. The
1979 CART Championship was comprised of 13 race events. In 1998, we managed 19
races - 14 in the United States, two in Canada and one each in Australia, Brazil
and Japan. These races included:
14
<PAGE> 15
o two superspeedway races
o six oval races
o seven temporary street course races
o four permanent road course races
The 1999 CART Championship will be comprised of 20 races in five different
countries. In 1999, we will stage a new race in Chicago, Illinois on a one-mile
oval at the Chicago Motor Speedway.
In 1998, the Indy Lights Championship was comprised of 14 races. Of the
14 races, 13 were held in conjunction with CART events, and one race was a
"stand alone" event. In 1999, the Indy Lights Championship will include 12
races, all held in conjunction with CART events.
In 1998, the Atlantic Championship was comprised of 13 races. Of the 13
races, 11 were held in conjunction with CART events and two were "stand alone"
events. In 1999, the Atlantic Championship will consist of 12 races, two of
which will be "stand alone" events.
15
<PAGE> 16
In the following table, we have provided the locations and venues for
the 1999 CART Championship, Indy Lights Championship and Atlantic Championship,
as well as the event dates for the 1999 seasons and a description of the racing
circuit:
<TABLE>
<CAPTION>
CART INDY
EVENT DATES LIGHTS ATLANTIC
LOCATION 1999 RACE RACE TRACK DESCRIPTION
-------- ---- ---- ---- -----------------
<S> <C> <C> <C> <C>
Homestead, Florida 3/21 Yes No 1.5 mile oval
Metro-Dade Homestead Motorsports Complex
Motegi, Japan 4/10 No No 1.5 mile oval
Twin Ring
Long Beach, California 4/18 Yes Yes 1.6 mile temporary street course
Long Beach
Nazareth, Pennsylvania 5/2 Yes Yes 1.0 mile tri-oval
Nazareth Speedway
Rio de Janeiro, Brazil 5/15 No No 1.8 mile oval
Emerson Fittipaldi Speedway at
Nelson Piquet International Raceway
Madison, Illinois 5/29 No Yes 1.3 mile banked oval
Gateway International Raceway
West Allis, Wisconsin 6/6 Yes Yes 1.0 mile oval
The Milwaukee Mile
Portland, Oregon 6/20 Yes No 2.0 mile permanent road course
Portland International Raceway
Cleveland, Ohio 6/27 Yes No 2.4 mile temporary street course
Burke Lakefront Airport
Elkhart, Wisconsin 7/11 No Yes 4.0 mile permanent road course
Road America
Toronto, Ontario, Canada 7/18 Yes No 1.8 mile temporary street course
Toronto
Brooklyn, Michigan 7/25 Yes No 2.0 mile tri-oval superspeedway
Michigan International Speedway
Detroit, Michigan 8/8 Yes No 2.1 mile temporary street course
The Raceway on Belle Isle
Lexington, Ohio 8/15 No Yes 2.3 permanent road course
Mid-Ohio Sports Car Course
Chicago, Illinois (1) 8/22 Yes Yes 1.0 mile oval
Chicago Motor Speedway
Vancouver, British Columbia, Canada 9/5 No Yes 1.7 mile temporary street course
Vancouver
Monterey, California 9/12 Yes Yes 2.2 mile permanent road course
Laguna Seca Raceway
Houston, Texas 9/26 No Yes 1.7 mile temporary street course
Houston
Gold Coast, Queensland, Australia 10/17 No No 2.8 mile temporary street course
Surfers Paradise, Queensland
Fontana, California 10/31 Yes No 2.0 mile banked oval superspeedway
California Speedway
Montreal, Quebec, Canada (6/12) -- -- Yes 2.7 mile temporary street course
Gilles-Villeneuve Circut
Trois-Rivieres, Quebec, Canada (8/1) -- -- Yes 2.1 mile temporary street course
Trois-Rivieres
</TABLE>
(1) Added to race schedule for 1999.
16
<PAGE> 17
A post-season invitational event will be held in Hawaii on November
13, 1999. The Hawaiian Super Prix is not part of the Championship series. The
event is open to the top 12 finishers of the CART Championship, as well as 4
additional drivers to be selected by the promoter. The Hawaiian Super Prix will
be held at Barbers Point Airport, outside of Honolulu, on the island of Oahu.
DRIVERS
During the 1998 season, 34 drivers competed in at least one of the CART
race events, including past champions:
o Michael Andretti
o Bobby Rahal
o Al Unser, Jr.
o Jimmy Vasser
o Alex Zanardi
In the following table, we have provided information regarding each of
the drivers who are expected to participate in the 1999 CART Championship:
<TABLE>
<CAPTION>
DRIVER BIRTH PLACE 1999 RACE TEAM
- ------ ----------- ----------------
<S> <C> <C>
MICHAEL ANDRETTI* Bethlehem, Pennsylvania Newman/Haas Racing
Alex Barron San Diego, California All American Racers
Mark Blundell Barnet, Hertforshire, England PacWest Racing Group
Raul Roesel Curitiba, Brazil Team KOOL Green
Patrick Carpentier Ville Lasalle, Quebec, Canada Player's Forsythe Racing
Helio Castro-Neves Sao Paulo, Brazil Hogan Racing
Cristiano da Matta Bela Harizonte, Brazil Arciero-Wells Racing
Gil de Ferran Paris, France Walker Racing
Adrian Fernandez Mexico City, Mexico Patrick Racing
Christian Fittipaldi Sao Paulo, Brazil Newman/Haas Racing
Dario Franchitti Edinburgh, Scotland Team KOOL Green
Robby Gordon Cerritos, California Team Gordon
Mauricio Gugelmin Joinville, Brazil PacWest Racing Group
Naoki Hattori Mie Presecture, Japan Walker Racing
Shigeaki Hattori Okayma, Japan Bettenhausen Motorsports
Richie Hearn Glendale, California Della Penna Motorsports
Bryan Herta Warren, Michigan Team Rahal
PJ Jones Torrance, California Patrick Racing
Michel Jourdain, Jr. Mexico City, Mexico Payton/Coyne Racing
Tony Kanaan Salvador, Bahia, Brazil Forsythe Championship Racing
Tarso Marques Curitiba, Brazil Payton/Coyne Racing
Hidishi Matsuda Kochi-ken, Japan Della Penna Motorsports
Juan Montoya Bogota, Columbia Target/Chip Ganassi Racing
Greg Moore British Columbia, Canada Player's Forsythe Racing
Max Papis Como, Italy Team Rahal
Scott Pruett Sacramento, California Arciero-Wells Racing
Andre Ribeiro Sao Paulo, Brazil Marlboro Team Penske
Paul Tracy Scarborough, Ontario, Canada Team KOOL Green
AL UNSER JR.* Albuquerque, New Mexico Marlboro Team Penske
JIMMY VASSER* Canoga Park, California Target/Chip Ganassi Racing
Dennis Vitolo Massapequa, New York Payton/Coyne Racing
</TABLE>
* Indicates past champion of the CART Championship.
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<PAGE> 18
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. For the year ended December 31, 1997, we
received sponsorship revenues of approximately $7.2 million, representing
approximately 17% of our total revenues. For the year ended December 31, 1998,
we received sponsorship revenues of approximately $16.4 million, representing
approximately 26% of our total revenues.
We believe that as we expand the audience for our events, we will see a
corresponding increase in sponsorship opportunities and sponsorship revenues. In
addition, we have taken a different approach to selling sponsorship from other
motorsports organizations by integrating the rights of the sanctioning body and
the race tracks. This approach provides series-wide exclusivity and a
centralized sponsorship program which increases the value and appeal of the
sponsorship opportunity. MCI was the first such integrated sponsor, becoming the
Official Communications Company in 1997. Federal Express also became an
integrated sponsor as our official co-series sponsor in 1998.
Beginning with the 1998 race season, Federal Express became the
co-series sponsor of the CART Championship, which has been officially designated
the "FedEx Championship Series." Under our agreement, Federal Express acquired a
comprehensive range of marketing benefits, as well as opportunities to supply
services to CART, our teams and our race promoters. A significant feature of
this sponsorship arrangement is the combination of the marketing rights of both
CART and our race promoters to provide an exclusive sponsorship involvement
through the entire CART Championship. PPG Industries, our long-time title
sponsor, continues to be involved as a co-series sponsor of the series and
continues to be the name sponsor of the CART Championship winner's trophy--the
"PPG Cup." PPG also continues with its successful pace car program at each race
event.
In June 1998, we entered into a nine-year agreement with ISL Worldwide.
Under the agreement, we appointed ISL as our exclusive worldwide marketing agent
for the sale of all sponsorships of our open wheel racing series, including:
o the CART Championship
o the Indy Lights Championship
o the Atlantic Championship
We have listed below some of our most significant sponsors for the 1999
CART Championship:
<TABLE>
<CAPTION>
YEARS AS
SPONSOR OFFICIAL DESIGNATION SPONSOR
- ------- -------------------- ---------
<S> <C> <C>
Federal Express Official Co-Series Sponsor 1
PPG Industries Official Co-Series Sponsor 19
MCI Telecommunications Official Communications Company 2
Budweiser Official Beer 4
Craftsman Tools Official Hand Tools 4
Featherlite Trailers and
Vantare Coach Official Trailer and Coach 4
Ford SVO Technology Official Safety Technology Provider 2
Holmatro Official Rescue Tool Official Rescue Tool 7
Honda Motorcycles Official Motorcycle 3
Honda Power Equipment Official Power Equipment 3
</TABLE>
18
<PAGE> 19
<TABLE>
<CAPTION>
<S> <C> <C>
K&K Insurance Official Insurance Provider 5
Mercedes-Benz Official Car 4
Racing Radios Official Two-Way Radio 9
Omega Official Watch and Timekeeper 2
Toyota Trucks Official Truck 3
The Valvoline Company Official Fuel and Oil 19
</TABLE>
In addition to the sponsors listed above, we have entered into various
sponsorship agreements with other companies which supply us with products and
services. Official sponsors of the CART Championship pay money and 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. No sponsorship agreement provided more than
10% of our revenues during 1996, 1997 or 1998.
ATTENDANCE, VIEWERSHIP AND BROADCAST RIGHTS
ATTENDANCE. CART spectator attendance has grown dramatically in the
1990s, with more than a 40% increase from 1991 to 1998, based upon figures
compiled by Goodyear Tire & Rubber Co. Race Reports. Average attendance per
event declined in 1998 due in large part to the number of races effected by
adverse weather conditions. In the following table, we have provided attendance
information for CART events, based upon the Goodyear Race Reports. The figures
do not include attendance at the Indianapolis 500, which was not a
CART-sanctioned event.
<TABLE>
<CAPTION>
1991 1992 1993 1994 1995 1996 1997 1998
---- ---- ---- ---- ---- ---- ---- ----
Total Attendance
<S> <C> <C> <C> <C> <C> <C> <C> <C>
at CART Events 1,803,601 1,890,327 1,964,180 2,015,417 2,259,751 2,366,440 2,491,050 2,529,995
Number of Race Events 16 15 15 15 16 16 17 19
Average Attendance
per Event 112,725 126,022 130,945 134,361 141,234 147,902 146,532 133,158
Total Attendance
Percentage Change 0.1% 4.8% 3.9% 2.6% 12.1% 4.7% 5.3% 1.6%
</TABLE>
VIEWERSHIP. In addition to the spectators at our race events, millions
of people around the world watch CART racing on television. According to the
Nielsen Season Summary for 1998, an aggregate of 23.9 million gross United
States households were delivered for the CART races, with gross United States
viewership of approximately 31.5 million. Our races are televised in 195
countries and territories through terrestrial and satellite broadcasts, in 19
languages. Based upon an independent study conducted by Sponsorship Research
International, the 1997 CART Championship had an average of 58 million viewers
per race with cumulative worldwide viewership of 981.8 million.
BROADCAST RIGHTS. In 1994, we entered into a long-term agreement with
ESPN, which was amended in 1996 to extend through 2001. Under the agreement,
ESPN provides broadcast coverage of each CART Championship race, with at least
50% of the races each year to be broadcast on one of the three major broadcast
networks - ABC, CBS or NBC. In 1999, a record 13 races will be broadcast on
network television. Our agreement with ESPN states that we receive 50% of the
net profits received by ESPN for distribution of the race programs, with an
escalating minimum guarantee provision.
We retained the television rights for Brazil, Canada and Australia. We
entered into exclusive agreements with:
19
<PAGE> 20
o Fittipaldi U.S.A., Inc. to provide television broadcasts in
Brazil of our race events through the 2002 race season
o Molstar for the distribution of television broadcasts in
Canada through the 2001 race season
o Gold Coast Motor Events for the distribution of television
broadcasts in Australia through the 2000 race season
None of these three agreements represent a material amount of revenue for us.
CART LICENSED PRODUCTS
As a part of our initiative to increase CART's brand awareness and
increase licensing opportunities, we formed CART Licensed Products, L.P. ("CLP")
in 1996. CLP is a Georgia limited partnership. We own a 55% interest in CLP. The
remaining 45% interest is owned by Top Gear, Inc., a company owned by Mr. Robert
E. Hollander, who until January 1999 was president of CLP. We have a right to
acquire Top Gear's ownership interest and are currently negotiating with Mr.
Hollander to do so.
CLP pays approximately 60% of the royalties it receives to the owners
of the licensed property, including CART. The remaining 40% of revenues are used
to fund the operations of CLP.
CLP has executed licensing agreements with 36 companies including:
o Action Performance
o Microsoft
o Sony
o Sega
o Antigua
o Warner Brothers
o VIA Marketing
None of the licensing agreements are material to our financial results.
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:
o Federation Internationale de L'Automobile
o National Association for Stock Car Auto Racing
o Indy Racing League
o United States Auto Club
o National Hot Rod Association
o Sports Car Club of America
o Professional Sports Car Racing
o Automobile Racing Club of America
Racing events sanctioned by other organizations are often held on the same dates
as CART events, at separate tracks, and compete for corporate sponsorship,
attendance as well as television viewership. In addition, we compete with other
racing bodies to sanction racing events at various motorsports facilities. We
believe that our events are distinguished from the racing events staged by other
racing bodies by:
20
<PAGE> 21
o the quality of the competition
o caliber of the events
o drivers and team owners participating in CART
o speed of the cars
We receive numerous requests to sanction racing events at venues throughout the
world. However, we can not assure you that we will maintain or improve our
position in light of such competition.
EMPLOYEES
As of December 31, 1998, we had 79 full-time employees and a roster of
approximately 101 people who serve as race officials and 204 volunteers for CART
events. None of our employees are represented by a labor union. We believe that
we enjoy a good relationship with our employees.
PATENTS AND TRADEMARKS
We have various registered and common law trademark rights to "CART"
and related logos. We have licenses from various drivers, teams, tracks and
industry sponsors to use names and logos for merchandising programs and product
sales. 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 Troy, Michigan; Atlanta, Georgia; and
Highland Park, Illinois. We do not own any real property. Our leases are through
the following dates:
o Michigan, May 31, 2002
o Georgia, December 31, 2002
o Illinois, May 31, 2000
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
Racing events can be dangerous to participants and spectators. During a
CART race at the Michigan Speedway in July 1998, a racecar was involved in a
racing incident that propelled tire and suspension parts into the grandstands.
Three spectators were killed and six other people reported minor injuries. No
claims have been made against CART, and we do not believe that we are liable for
this incident. We require each promoter to indemnify us against any liability
for personal injuries sustained at such promoter's racing event. In addition, we
require each promoter to carry a minimum of $10.0 million ($20.0 million in
1999) in liability insurance, naming us as a named insured. We also maintain a
$15.0 million umbrella policy. However, we cannot assure you that a claim will
not be made against us or, if a claim is made, what the outcome of any such
claim will be. We cannot assure you that the promoter will have liquid assets to
satisfy any indemnification requirement. Any claims and associated expenses
related to this incident (or future racing incidents), to the extent not covered
by insurance or satisfied by indemnification from the promoter, could adversely
affect our financial and business results.
21
<PAGE> 22
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
PART II
ITEM 5: MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
Our common stock is authorized for trading on the New York Stock Exchange under
the trading symbol "MPH". As of March 1999, we had 15,171,666 shares of common
stock outstanding and approximately 305 record holders of our common stock.
In the following table we have provided the high and low closing sales price for
our common stock, as reported by the NYSE for each calendar quarter of 1998.
<TABLE>
<CAPTION>
1998
QUARTER ENDED HIGH LOW
- ------------------------------------------------------------------------------------------------
<S> <C> <C>
First Quarter (from IPO on March 9 to March 31) $19.9375 $18.2500
Second Quarter (June 30) 21.3125 16.5625
Third Quarter (September 30) 24.4375 19.1875
Fourth Quarter (December 31) 29.6250 21.0000
</TABLE>
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.
In March 1998, we completed our initial public offering of 5,038,000
shares of common stock. The principal underwriters for the initial public
offering were Jefferies & Company, Inc. and A.G. Edwards & Sons, Inc. The
initial public offering price was $16 per share. The total offering raised $80.6
million less $5.6 million in underwriting discounts. We used a portion of the
net proceeds to acquire ARS and BP for $7.0 million. We acquired Pro-Motion
Agency for $534,000. We paid $9.5 million in accrued point awards to franchise
race teams for 1997. The remaining proceeds of $58 million are in short-term,
interest-bearing investments that are being used for working capital and general
corporate purposes, including expanding our business, through acquisition or
development of race related businesses and properties. The effective date of our
registration statement was March 9, 1998 and our registration number was
333-43141.
22
<PAGE> 23
ITEM 6: SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data as of and for the
three years ended December 31, 1998 are derived from our consolidated financial
statements which have been audited by our independent auditors, Deloitte &
Touche LLP. The financial statements for the two years ended December 31, 1995
are derived from our audited 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."
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1994 1995 1996 1997 1998
---- ---- ---- ---- ----
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS:
Revenues:
Sanction fees $16,299 $18,708 $21,078 $ 24,248 $30,444
U.S. 500(1) -- -- 7,054 -- --
Sponsorship revenue 4,104 4,780 5,501 7,221 16,388
Television revenue 2,343 3,177 4,373 5,604 5,148
Engine leases, rebuilds and
wheel sales -- -- -- -- 2,214
Other revenue 2,229 3,077 3,118 4,372 8,336
------- ------- ------- -------- -------
Total revenues 24,975 29,742 41,124 41,445 62,530
Expenses:
Race and franchise fund payments(2) 18,305 18,446 17,198 28,939 15,183
U.S. 500(1) -- -- 8,246 -- --
Race expenses(2) 2,621 4,612 6,055 6,970 4,818
Costs of engine rebuilds and
wheel sales -- -- -- -- 633
Administrative and indirect
expenses(2)(3) 3,977 5,832 8,570 14,295 20,658
Compensation expense(4) -- -- 1,167 12,200 --
Depreciation and amortization 202 306 685 549 779
Minority interest -- -- -- (232) --
------- ------- ------- -------- -------
Total expenses 25,105 29,196 41,921 62,721 42,071
------- ------- ------- -------- -------
Operating income (loss) (130) 546 (797) (21,276) 20,459
Interest income (net) 212 235 280 329 3,198
------- ------- ------- -------- -------
Income (loss) before income taxes 82 781 (517) (20,947) 23,657
Income tax benefit (expense) 344 204 179 3,423 (8,568)
------- ------- ------- -------- -------
Net income (loss) $ 426 $ 985 $ (338) $(17,524) $15,089
======= ======= ======= ======== =======
Net Income (loss) per share:
Basic $ .04 $ .10 $ (.04) $ (1.72) $ 1.06
======= ======= ======= ======== =======
Diluted $ .04 $ .10 $ (.04) $ (1.72) $ 1.05
======= ======= ======= ======== =======
Weighted average common shares outstanding:
Basic 10,200 10,200 9,400 10,200 14,190
======= ======= ======= ======== =======
Diluted 10,200 10,200 9,400 10,200 14,421
======= ======= ======= ======== =======
BALANCE SHEET DATA:
Cash and cash equivalents $ 1,393 $ 2,046 $ 630 $ 1,164 $15,080
Short-term investments -- -- -- -- 61,610
Working capital (deficit) (209) (1,182) (524) (5,325) 72,219
Total assets 2,974 5,613 6,600 12,348 97,186
</TABLE>
23
<PAGE> 24
<TABLE>
<S> <C> <C> <C> <C> <C>
Long-term debt (including
current portion) -- -- 574 444 314
Total stockholders' equity (deficit) (1,875) (1,250) (151) (3,045) 86,219
</TABLE>
(1) In 1996, we staged and acted as promoter of the inaugural U.S. 500.
Revenues attributable to the U.S. 500 included sponsorship fees,
television, admissions, program sales and other revenues associated
with promoting the event. Expenses included, among others, the race
purse, track rental, promotional and advertising costs and other
expenses necessary to promote the event. We continue to sanction the
event, but since 1996 we have not acted as the promoter.
(2) Expenses for the years ended December 31, 1994, 1995, 1996 and 1997
include certain payments to franchise race teams, including
reimbursement of travel expenses, director fees, purse awards and other
race related payments. Effective January 1, 1998, we no longer
reimburse the existing franchise race teams for travel expenses,
directors fees and race-related payments. We do not intend to resume
making such payments to franchise race teams unless we receive
additional revenue that was not contracted for at the end of 1997. We
do not believe that revenues will be materially impacted as a result of
our potential inability to retain existing or new race teams due to the
discontinuation of such payments.
(3) Administrative and indirect expenses for 1997 include $4,817,000 in
additional advertising, marketing and market research expenses incurred
in connection with the implementation of our growth strategy.
(4) Total expenses for the year ended December 31, 1996 and 1997 include
compensation expense of $1,167,000 and $12,200,000 which relates to the
issuance of Common Stock to franchise members below its fair value on
the date the Common Stock became eligible for purchase. You should read
"Management's Discussion and Analysis of Financial Condition and
Results of Operations," for a discussion of this compensation expense.
24
<PAGE> 25
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 as well as Item 6, "Selected Consolidated
Financial Data."
GENERAL
In December 1997, as part of our reorganization, each stockholder of
CART, Inc. exchanged their shares for stock of the Company. Prior to our
reorganization, the franchise race teams received reimbursement of travel
expenses, directors fees and franchise payments in an aggregate amount equal to
$8.5 million and $19.4 million for the years ended December 31, 1996 and 1997,
respectively. The franchise teams signed an agreement on December 19, 1997 to
discontinue these payments after January 1, 1998. The agreement will expire in
December 2000. This agreement is a related party transaction because each
franchise team owns shares of our stock. We do not intend to resume making such
payments to franchise race teams unless we receive additional revenue that was
not contracted for at the end of 1997.
Below are selected income and expense items for the years ended
December 31, 1996, 1997 and 1998. The percentage calculations are based on
total revenues.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1996 1997 1998
---- ---- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Sanction fees $21,078 51.3% $ 24,248 58.5% $30,444 48.7%
U.S. 500(1) 7,054 17.1 -- -- -- --
Sponsorship revenue 5,501 13.4 7,221 17.4 16,388 26.2
Television revenue 4,373 10.6 5,604 13.5 5,148 8.2
Engine leases, rebuilds, and wheel sales -- -- -- -- 2,214 3.6
Other revenue 3,118 7.6 4,372 10.6 8,336 13.3
------- ----- -------- ----- ------- -----
Total revenues $41,124 100.0% $ 41,445 100.0% $62,530 100.0%
======= ===== ======== ===== ======= =====
Expenses:
Race and franchise fund
payments(2) $17,198 41.8% $ 28,939 69.8% $15,183 24.3%
U.S. 500(1) 8,246 20.1 -- -- -- --
Race expenses(2) 6,055 14.7 6,970 16.8 4,818 7.7
Cost of engine rebuilds and wheel sales -- -- -- -- 633 1.0
Compensation expense 1,167 2.8 12,200 29.4 -- --
Administrative and other
indirect expenses(2) 8,570 20.8 14,295 34.5 20,658 33.0
Depreciation and amortization 685 1.7 549 1.3 779 1.3
Minority interest in loss of
subsidiaries -- -- (232) (0.5) -- --
------- ----- -------- ----- ------- -----
Total expenses 41,921 101.9 62,721 151.3 42,071 67.3
------- ----- -------- ----- ------- -----
Operating income (loss) (797) (1.9) (21,276) (51.3) 20,459 32.7
Interest income (net) 280 0.7 329 0.8 3,198 5.1
------- ----- -------- ----- ------- -----
Income (loss) before income taxes (517) (1.2) (20,947) (50.5) 23,657 37.8
Income tax benefit (expense) 179 0.4 3,423 8.3 (8,568) (13.7)
------- ----- -------- ----- ------- -----
Net income (loss) $ (338) (0.8)% $(17,524) (42.2)% $15,089 24.1%
======= ===== ======== ===== ======= =====
</TABLE>
(1) Our promotion of the U.S. 500 was a one-time event, and although we
continue to sanction the event, we no longer act as the promoter.
(2) Race expenses for 1996 and 1997 include our payments to franchise teams
as explained above.
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<PAGE> 26
REVENUES
Following is an explanation of our individual revenue items:
SANCTION FEES. We receive sanction fees from the promoters of each of
the races on the CART Championship schedule, as well as from selected races on
the Indy Lights and Atlantics schedule. The fees are based on contracts between
the promoters and CART. The contracts have terms which expire between 1999 and
2005. Currently contracted sanction fees range from $977,500 to $4.5 million per
event.
U.S. 500. In 1996, due to the reservation of starting positions at the
Indianapolis 500 for IRL competitors, we promoted and sanctioned the inaugural
U.S. 500 at Michigan International Speedway on May 26. Because we promoted the
event, we did not receive sanction fee revenue from the event but did receive
revenue from admissions, hospitality, television, sponsorship and licensing. Our
promotion of the U.S. 500 was a one-time event, and though we continue to
sanction the event, we do not anticipate acting as the promoter of the U.S. 500
in the future.
SPONSORSHIP REVENUE. We receive corporate sponsorship revenue based on
negotiated contracts. We currently have corporate sponsorship contracts with 15
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.
TELEVISION REVENUE. Our television revenue is derived from negotiated
contracts with:
o ESPN
o ESPN International
o Fittipaldi USA (Brazil)
o Gold Coast Motor Events Co. (Australia)
o Molstar (Canada)
A guaranteed rights fee is paid to us by each broadcast partner. Based on our
contract with ESPN/ESPN International, we receive 50% of the net profits
received by ESPN for distribution of the race programs, with an escalating
minimum guarantee provision. A provision of the ESPN contract requires that at
least 50% of the CART Championship events be broadcast on a major broadcasting
network in the United States. In 1996, 1997 and 1998, all CART Championship
races were broadcast on either ABC or ESPN. In addition, CART Championship races
are re-aired on ESPN and ESPN2. ESPN2 also broadcasts CART Championship
qualifying sessions and pre-race shows. In addition, we receive advertising
revenue from "Inside CART," our race magazine television show, and from video
footage sales.
ENGINE LEASES, REBUILDS AND WHEEL SALES. In March 1998, we purchased
all of the stock of the American Racing Series, which operates the Indy Lights
Series. ARS owns the engines that are used in the series and leases the engines
to the competitors for the season. The teams pay us a fee to rebuild the
engines. We also sell the wheels used on the race cars. Based on the rules of
the series, all teams are required to use our engines and wheels.
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 CART, Indy
Lights and 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 pay contingency awards money to
competitors upon satisfaction of specific criteria. We receive royalty revenue
for the use of the CART
26
<PAGE> 27
servicemarks 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
Following is an explanation of the expense line items. For an
explanation of certain expenses discontinued in connection with our
reorganization, you should read "Business--Franchise System and Race Teams."
RACE AND FRANCHISE FUND PAYMENTS. We pay the racing teams for their
on-track performance. Race and franchise fund payments include the following for
each event:
o fixed franchise fund payment to each franchise competitor
o event purse which is paid based on finishing position
o contingency award payments
We also pay awards to the teams based on their cumulative performance for the
season, out of the year-end point fund. After our reorganization, franchise fund
payments were discontinued. We do not intend to resume making such payments to
franchise race teams unless we receive additional revenue that was not
contracted for at the end of 1997.
U.S. 500. In addition to the race purse, expenses for the U.S. 500 in
1996 included:
o sales costs related to the sale of sponsorships
o track rental expenses
o compensation expenses related to contract staff
o promotional and advertising costs
o administrative expenses incurred solely with respect to the
U.S. 500 event
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:
o safety
o technical inspection
o race officiating and rules compliance
o medical services
o timing and scoring audit
o registration
o race administration
Prior to our reorganization, each franchise race team was paid a travel fee to
attend and participate in each event. These payments were discontinued after
January 1, 1998. Overseas event organizers are responsible for costs related to
cargo, air passenger travel and lodging for our staff and race participants.
COST OF ENGINE REBUILDS AND WHEEL SALES. These costs are associated
with rebuilding the engines and the cost of the wheels used in the Indy Lights
series.
ADMINISTRATIVE AND INDIRECT EXPENSES. All operating costs not directly
incurred for a specific event, primarily wages, Board of Directors fees and
other administrative expenses, are recorded as administrative and indirect
expenses.
27
<PAGE> 28
RESULTS OF OPERATIONS
Year Ended December 31, 1998 Compared to Year Ended December 31, 1997
REVENUES. Total revenues for 1998 were $62.5 million, an increase of
$21.1 million from 1997. This was due to increased sanction fees, sponsorship,
engine leases, rebuilds and wheel sales and other revenue as described below,
partially offset by a reduction in television revenue as described below.
Sanction fees for 1998 were $30.4 million, an increase of $6.2 million,
or 26%, from 1997. Of this increase, $5.0 million was attributable to the
addition of new events in Motegi, Japan and Houston, Texas. The balance of the
increase resulted from annual sanction fee escalation for certain other events
of $1.2 million.
Sponsorship revenue for 1998 was $16.4 million, an increase of $9.2
million, or 127%, from 1997. This increase was primarily attributable to a new
sponsorship agreement entered into with Federal Express, an agreement with ISL
Worldwide that guaranteed certain sponsorship income in 1998 and the additional
sponsorship revenues attributable to the acquisition of ARS in March 1998 and
Pro-Motion in April 1998.
Television revenue for 1998 was $5.1 million, a decrease of $456,000,
or 8%, from 1997. This decrease was due primarily to slightly lower revenues on
the profit sharing portion on our contract with ESPN due to having two fewer
network events in 1998.
Engine leases, rebuilds and wheel sales for 1998 was $2.2 million.
There was no corresponding revenue in the prior year as this revenue was earned
by ARS, which was acquired in March 1998.
Other revenue for 1998 was $8.3 million, an increase of $4.0 million,
or 91%, from 1997. Of this increase, $2.0 million was attributable to an
increase in membership and credential income, royalties and awards money. The
balance of the increase was attributable to the acquisition of ARS in March 1998
and Pro-Motion in April 1998.
EXPENSES. Total expenses for 1998 were $42.1 million, a decrease of
$20.7 million, or 33%, from 1997. This decrease was due to lower race and
franchise fund payments, race expenses and compensation expense as described
below, partially offset by an increase in administrative and indirect expenses,
and cost of engine rebuilds and wheel sales as described below.
Race and franchise fund payments for 1998 were $15.2 million, a
decrease of $13.8 million, or 48%, from 1997. This decrease was partially due to
our reorganization that was effective January 1, 1998. In 1997, certain payments
were made to franchise members that were discontinued for the 1998 season. The
decrease was partially offset by two additional races being held in 1998 and by
race distributions related to ARS and Pro-Motion that were not included in 1997
as these companies were acquired in 1998.
Race expenses for 1998 were $4.8 million, a decrease of $2.2 million,
or 31%, from 1997. This decrease is partially due to our reorganization that was
effective January 1, 1998. In 1997, certain payments were made to franchise
members that were discontinued for the 1998 season. The decrease was partially
offset by two additional races being held in 1998 and by race expenses related
to ARS and Pro-Motion that were not included in 1997 as these companies were
acquired in 1998.
Cost of engine rebuilds and wheel sales were $633,000. There was no
corresponding expense in the prior year as this expense was related to ARS,
which was acquired in 1998.
28
<PAGE> 29
Administrative and indirect expenses for 1998 were $20.7 million, an
increase of $6.4 million, or 45%, from 1997. This was primarily attributable to
an increase in marketing and advertising, sales costs related to sponsor sales
for Federal Express and MCI, development of a creative services department in
1998 and increased administrative expenses related to our expanded licensed
products venture. In addition, ARS and Pro-Motion administrative expenses
contributed to the increase, as there were no corresponding expenses in the
prior period since these companies were acquired in 1998.
Compensation expense was not incurred in 1998 compared to $12.2 million
incurred in 1997. This non-cash compensation expense relates to the issuance of
stock to race teams at below fair market value.
OPERATING INCOME. Operating income for 1998 was $20.5 million, an
increase of $41.7 million from 1997.
INTEREST INCOME (NET). Interest income (net) for 1998 was $3.2 million
compared to interest income (net) of $329,000 for 1997. The increase of $2.9
million was primarily attributable to interest earned on the invested proceeds
from the initial public offering that occurred in March 1998.
INCOME BEFORE INCOME TAXES. Income before income taxes for 1998 was
$23.7 million, compared to a loss before income taxes of $21.0 million for 1997.
INCOME TAX EXPENSE/BENEFIT. Income tax expense for 1998 was $8.6
million, compared to an income tax benefit of $3.4 million for 1997.
NET INCOME/LOSS. Net income for 1998 was $15.1 million compared to a
net loss of $17.5 million in 1997.
Year Ended December 31, 1997 Compared to Year Ended December 31, 1996
REVENUES. Total revenues for 1997 were $41.4 million, an increase of
$321,000 from 1996. This was due to increased sanction fees and sponsorship,
television and other revenue as described below, partially offset by a reduction
in revenue of $7.1 million due to the fact that we did not promote the U.S. 500
in 1997.
Sanction fees for 1997 were $24.2 million, an increase of $3.2 million,
or 15%, from 1996. Of this increase, $1.9 million was attributable to the
addition of new events in Madison, Illinois near St. Louis and Fontana,
California near Los Angeles. The balance of the increase resulted from annual
sanction fee escalation for certain other events of $1.3 million.
Sponsorship revenue for 1997 was $7.2 million, an increase of $1.7
million, or 31%, from 1996. This increase was primarily attributable to a new
sponsorship agreement entered into with MCI.
Television revenue for 1997 was $5.6 million, an increase of $1.2
million, or 28%, from 1996. This increase was due to the increase of
approximately $500,000 in the ESPN rights fee, and an increase of $400,000 in
rights fees from Fittipaldi USA, our Brazilian television partner. There was
also an increase in the sale of commercial time for Inside CART and video
footage sales of $379,000, partially offset by a reduction in Canadian rights
fees of $44,000.
29
<PAGE> 30
Other revenue for 1997 was $4.4 million, an increase of $1.3 million,
or 40%, from 1996. This increase was primarily attributable to $934,000 of
additional revenue from a CART-sanctioned support series. The balance was
attributable to royalty income from licensed merchandise sales.
EXPENSES. Total expenses for 1997 were $62.7 million, an increase of
$20.7 million, or 50%, from 1996. This increase was due to higher race and
franchise fund payments, race expenses, compensation expense and administrative
and indirect expenses as described below, partially offset by a reduction in
expenses of $8.2 million because we did not act as the promoter of the U.S. 500
in 1997.
Race and franchise fund payments for 1997 were $28.9 million, an
increase of $11.7 million, or 68%, from 1996. This increase was attributable to
a one-time increase of $9.5 million in the year-end point fund in 1997,
increases in purse distributions for the additional events in Madison, Illinois
and Fontana, California of $1.8 million and additional payments related to team
travel expenses of $266,000.
Race expenses for 1997 were $7.0 million, an increase of $915,000, or
15%, from 1996. This increase was the result of the addition of the events in
Madison, Illinois and Fontana, California.
Administrative and indirect expenses for 1997 were $14.3 million, an
increase of $5.7 million, or 67%, from 1996. Of this increase, $3.5 million was
attributable to increases in advertising, marketing and market research incurred
in connection with implementation of our growth strategy. An additional $1.3
million reflected costs associated with the implementation of the sponsorship
agreement entered into with MCI, and $1.0 million related to the establishment
of CART Licensed Products, L.P., a new partnership formed to enhance CART's
licensed product sales.
Compensation expense for 1997 was $12.2 million, an increase of $11.0
million, or 945%, from 1996. This non-cash compensation expense related to the
issuance of stock to race teams at below fair market value.
OPERATING LOSS. Operating loss for 1997 was $21.3 million, an increase
of $20.5 million from 1996.
INTEREST INCOME (NET). Interest income (net) for 1997 was $329,000
compared to interest income (net) of $280,000 for 1996.
LOSS BEFORE INCOME TAXES. Loss before income taxes for 1997 was $20.9
million, compared to loss before income taxes of $517,000 for 1996 for the
reasons cited above.
INCOME TAX BENEFIT. Income tax benefit for 1997 was $3.4 million,
compared to an income tax benefit of $179,000 for 1996 for the reasons cited
above.
NET LOSS. Net loss for 1997 was $17.5 million compared to a net loss
of $338,000 in 1996 for the reasons cited above.
30
<PAGE> 31
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. We have provided
unaudited quarterly financial data for each of the four quarters of 1997 and
1998 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 document 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 document.
<TABLE>
<CAPTION>
QUARTER ENDED
MARCH 31 JUNE 30 SEPT. 30 DEC. 31
-------- ------- --------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Total revenues
1997 5,363 18,704 15,507 1,871
1998 10,031 20,034 20,010 12,455
Income (loss) before taxes
1997 1,272 (1,695) (17,659) (2,865)
1998 4,481 7,800 6,277 5,099
Number of races
1997 1 8 8 0
1998 2 7 7 3
1999 1 8 9 2
</TABLE>
The revenues we receive for any race in the CART Championship can
significantly affect our 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.
LIQUIDITY AND CAPITAL RESOURCES
We have relied on the proceeds from our initial public offering and
cash flow from operations, supplemented by bank borrowings, to finance working
capital, investments and capital expenditures during the past year.
Our bank borrowing with a commercial bank consists of a fixed rate
installment note incurred in connection with the acquisition of a mobile medical
unit that we transport to each North American race. The note bears interest at
the rate of 8.25% per annum and matures on May 1, 2001. The note is secured by
our mobile medical unit. Interest is payable monthly. As of December 31, 1998,
the current portion of this note was $130,000, and the long-term portion was
$184,000.
We also have a $1.5 million revolving line of credit with a commercial
bank. As of December 31, 1998, 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
31
<PAGE> 32
demand and bear interest at the bank's prime rate. The line is secured by our
deposits with the bank.
In March 1998, we completed our initial public offering of 5,038,000
shares of stock. The initial offering price was $16.00 per share with proceeds
to us of $75.0 million, net of underwriting discount.
In December 1997, we sold 1,399,998 shares of our stock for aggregate
proceeds of $1.8 million of which 1,200,000 shares were sold to three race teams
for $1.13 per share and 199,998 shares were sold to three race teams for $2.25
per share. In January and February 1997, we sold 1,200,000 shares of our stock
for aggregate proceeds of $840,000 ($0.70 per share). In March 1998 we rescinded
the sale of 66,666 shares of stock we issued in December 1997 for an aggregate
price of $151,000. In January 1997, we redeemed 400,000 shares of stock for
$210,000 ($0.53 per share).
Our cash balance on December 31, 1998 was $15.1 million, a net increase
of $13.9 million from December 31, 1997. This increase was primarily the result
of net cash provided by operations of $15.1 million and net financing activities
of $73.7 million, which was offset by net cash used in investing activities of
$74.9 million. Our cash balance on December 31, 1997 was $1.2 million compared
to $630,000 at December 31, 1996, a net increase of $534,000. The increase was
primarily the result of net cash provided by operations of $1.5 million and net
financing activities of $125,000, offset by net cash used in investing
activities of $1.1 million.
We anticipate capital expenditures of approximately $1.5 million during
1999. We believe that existing cash, cash flow from operations and available
bank borrowings will be sufficient for capital expenditures and other cash
needs.
The economic crisis in Brazil provides some uncertainty in terms of
collectability of future sanction fees and payments of the note receivable from
our Brazilian promoter. The note receivable is to be repaid in five equal
installments over the life of the sanction agreement with a stated 5% per annum
interest rate. Letters of credit to be issued annually by the City of Rio De
Janeiro substantially cover the sanction fees and the note receivable. In
addition, in February 1999, ISL Worldwide signed an agreement with the Brazil
promoter where the two entities will be equal partners in promoting the Brazil
event for the next four years beginning in 1999. We received the initial
sanction fee payment for 1999 and the letter of credit for the 1999 event has
been issued.
YEAR 2000 COMPLIANCE
GENERAL. The Year 2000 compliance issue is primarily the result of
computer programs using a two-digit format, as opposed to four digits, to
indicate the year. Such computer systems will be unable to interpret dates
beyond the year 1999, which could cause a system failure or other computer
errors, leading to a disruption in the operation of such systems.
PROJECT. Our Y2K project covers both traditional computer systems and
infrastructure and computer-based hardware, such as fax machines, postage
machines and phone systems. The Y2K project has six phases:
o Awareness
o Assessment
o Detailed Analysis and Planning for Upgrades and Testing
o System Upgrades and Testing
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<PAGE> 33
o Implementation
o Post Implementation
Phases I, II and III have been completed. Phases IV and V are currently in
process and are approximately 50% complete. The Post Implementation Phase
includes our contingency plan where users will have developed fall back
procedures, and be ready to implement manual procedures for conducting company
business, record keeping, follow-up data entry and system recovery in the event
of system failure. The entire Y2K project is scheduled to be complete by June
30, 1999.
RISKS. Based on our assessment of our major information technology
systems, we expect that all necessary modifications and/or replacements will be
completed in a timely manner to ensure that all systems are Y2K compliant.
However, if we fail to be in compliance, we do not currently anticipate any
material disruption in our operations. We believe that the worse case scenario
would be for our financial operations to maintain its current level of
performance and customer service. Additional administrative expense could be
incurred if automated functions would need to be performed manually. We do not
believe race operations would be subject to material adverse effects from the
Y2K problem. Our race season does not start until approximately two months after
the 1999 year-end, and we anticipate that any unforeseen Y2K problems that are
encountered would be resolved during this period. In addition, manual back-up
systems for timing and scoring and other important race operation functions are
already in place as part of our normal contingency planning.
INTERFACES WITH THIRD PARTIES. Our Y2K project also considers the
readiness of significant vendors and suppliers. We do not have any suppliers or
vendors that are material to our operations as a whole. We are in the process of
contacting our vendors and suppliers concerning their Y2K compliance.
COSTS. Our total costs relating to Y2K compliance is expected to be
approximately $35,000 to $50,000 and will be funded through our normal operating
budget. Such cost estimates are based upon presently available information and
may change as we continue with our Y2K project. Currently, we have incurred
approximately $20,000 in expenses related to the Y2K project.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities" was issued by the FASB. SFAS No. 133 establishes accounting
and reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities. We have not
determined the impact on our consolidated financial statement disclosure. SFAS
No. 133 is effective for fiscal years beginning after June 15, 1999.
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
33
<PAGE> 34
statements. The following factors, and other factors not mentioned, could cause
the forward-looking statements to differ from actual results and plans:
o competition in the sports and entertainment industry
o participation by race teams
o continued industry sponsorship
o regulation of tobacco and alcohol advertising and sponsorship
o competition by the Indy Racing League
o liability for personal injuries
o Y2K compliance
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, 1998, our investments consisted of commercial paper, corporate
bonds, U.S. Agency issues and repurchase agreements. The weighted average
maturity of our portfolio is 192 days. Because of the relatively short-term
nature of our investments, our interest rate risk is immaterial.
ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Our consolidated financial statements and related notes are included in Item 14
of this document.
ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None
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 1999 Annual Meeting of Stockholders to be filed on or before
April 30, 1999, 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 1999 Annual Meeting of Stockholders to be filed on or before
April 30, 1999, and such information is incorporated herein by reference.
ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
Information required by this Item will be contained in our definitive Proxy
Statement for our 1999 Annual Meeting of Stockholders to be filed on or before
April 30, 1999, and such information is incorporated herein by reference.
ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
34
<PAGE> 35
Information required by this Item will be contained in our definitive Proxy
Statement for our 1999 Annual Meeting of Stockholders to be filed on or before
April 30, 1999, and such information is incorporated herein by reference.
PART IV
ITEM 14: 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*
3.2 Bylaws of the Company*
10.1 1997 Stock Option Plan* (Exhibit 10.1)
10.2 Director Stock Option Plan* (Exhibit 10.2)
10.3 Employment Agreement with Andrew Craig dated December 22, 1997*
(Exhibit 10.3)
10.4 Employment Agreement with Randy K. Dzierzawski dated December 22, 1997*
(Exhibit 10.4)
10.5 Form of Promoter Agreement*
10.6 Promoter Agreement with Wisconsin State Park Speedway related to West
Allis, Wisconsin dated June 5, 1996*
10.7 Promoter Agreement with Texaco Houston Grand Prix L.L.C. related to
Houston, Texas dated July 28, 1997*
10.9 Loan Agreement with Comerica Bank dated April 30, 1997*
10.10 Loan Agreement with Comerica Bank dated May 1,1996*
10.11 Form of Sponsorship Agreement*
10.15 Promoter Agreement with Ganassi Group, L.L.C. related to Chicago,
Illinois dated April 7, 1998**
10.16 Marketing Representation Agreement with ISL Marketing AG dated June 24,
1998***
10.17 Final Agreements for ARS Stock Purchase and BP Asset Purchase dated
March 13, 1998
27.1 Financial Data Schedule
(b) Reports on Form 8-K
We were not required to file a Form 8-K during the three months ended
December 31, 1998.
* Incorporated by reference to exhibit filed as part of our Registration
Statement on Form S-1 (Registration No. 333-43141)
35
<PAGE> 36
** Incorporated by reference to exhibit filed with our Quarterly Report on Form
10-Q for the quarter ended March 31, 1998.
*** Incorporated by reference to exhibit to the Current Report on Form 8-K filed
June 29, 1998.
36
<PAGE> 37
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 19, 1999 CHAMPIONSHIP AUTO RACING TEAMS, INC.
------------------ ------------------------------------
Registrant
By: /s/ Andrew Craig
-------------------------------
Andrew Craig
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/ Andrew Craig Chief Executive Officer March 19, 1999
- -------------------------------- and Director
Andrew Craig
/s/ Randy K. Dzierzawski Chief Financial and March 19, 1999
- -------------------------------- Accounting Officer
Randy K. Dzierzawski
/s/ Gerald Forsythe Director March 19, 1999
- --------------------------------
Gerald Forsythe
/s/ Floyd R.Ganassi, Jr. Director March 19, 1999
- --------------------------------
Floyd R.Ganassi, Jr.
/s/ Carl A. Haas Director March 19, 1999
- --------------------------------
Carl A. Haas
/s/ James F. Hardymon Director March 19, 1999
- --------------------------------
James F. Hardymon
/s/ Bruce R. McCaw Director March 19, 1999
- --------------------------------
Bruce R. McCaw
/s/ Don Ohlmeyer Director March 19, 1999
- --------------------------------
Don Ohlmeyer
/s/ Robert W. Rahal Director March 19, 1999
- --------------------------------
Robert W. Rahal
/s/ Derrick Walker Director March 19, 1999
- --------------------------------
Derrick Walker
37
<PAGE> 38
CHAMPIONSHIP AUTO RACING TEAMS, INC.
CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
CHAMPIONSHIP AUTO RACING TEAMS, INC.
Independent Auditors' Report................................................. F-2
Consolidated Balance Sheets as of December 31, 1997 and 1998................. F-3
Consolidated Statements of Operations for the Years
Ended December 31, 1996, 1997 and 1998.................................... F-4
Consolidated Statements of Stockholders' Deficit for
the Years Ended December 31, 1996, 1997 and 1998.......................... F-5
Consolidated Statements of Cash Flows for the Years
Ended December 31, 1996, 1997 and 1998.................................... F-6
Notes to Consolidated Financial Statements................................... F-8
</TABLE>
F-1
<PAGE> 39
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") at December 31, 1997 and
1998, and the related consolidated statements of operations, stockholders'
equity (deficit), and cash flows for each of the three years in the period ended
December 31, 1998. Our audits also included the financial statement schedule
listed in the index at Item 14. These consolidated financial statements and
financial statement schedule are the responsibility of the Company's management.
Our responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
consolidated 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 consolidated financial position of the Company at
December 31, 1997 and 1998, and the results of their operations and their cash
flows for each of the three years in the period ended December 31, 1998, in
conformity with generally accepted accounting principles. Also, in our opinion,
such financial statement schedule, when considered in relation to the basic
consolidated financial statements taken as a whole, present fairly in all
material respects the information set forth therein.
/s/ Deloitte & Touche LLP
- -------------------------
Deloitte & Touche LLP
Detroit, Michigan
February 5, 1999
F-2
<PAGE> 40
CHAMPIONSHIP AUTO RACING TEAMS, INC.
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
1997 1998
---- ----
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 1,164 $15,080
Short-term investments -- 61,610
Accounts receivable (net of allowance for doubtful accounts
of $306 in 1998. No allowance for doubtful accounts
deemed necessary in 1997) 3,156 4,708
Current portion of notes receivable -- 824
Inventory -- 71
Prepaid expenses 751 331
Deferred income taxes 4,683 119
-------- -------
Total current assets 9,754 82,743
NOTES RECEIVABLE 49 3,350
PROPERTY AND EQUIPMENT- Net 2,236 5,026
GOODWILL (net of accumulated amortization of $105 in 1998) -- 5,883
OTHER ASSETS (net of accumulated amortization
of $24 and $41 in 1997 and 1998, respectively) 309 184
-------- -------
TOTAL ASSETS $ 12,348 $97,186
======== =======
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 1,890 $ 1,946
Accrued liabilities:
Race expenses and point awards 9,500 --
Royalties 264 1,026
Payroll 431 482
Taxes 491 1,733
Other 21 934
Unearned revenue 2,352 4,273
Current portion of long-term debt 130 130
-------- -------
Total current liabilities 15,079 10,524
LONG-TERM DEBT 314 184
DEFERRED INCOME TAXES -- 259
COMMITMENTS AND CONTINGENCIES (Note 10) -- --
MINORITY INTEREST -- --
STOCKHOLDERS' EQUITY (DEFICIT):
Preferred Stock, $.01 par value; 5,000,000 shares
authorized, none issued and outstanding at
December 31, 1997 and 1998 -- --
Common stock, $.01 par value; 50,000,000 shares
authorized, 10,199,998 and 15,171,666 shares issued
and outstanding at December 31, 1997 and 1998,
respectively 102 151
Additional paid-in capital 15,975 89,771
Accumulated deficit (19,122) (4,033)
Unrealized gain on investments -- 330
-------- -------
Total stockholders' equity (deficit) (3,045) 86,219
-------- -------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) $ 12,348 $97,186
======== =======
The accompanying notes are an integral part of the consolidated financial
statements.
</TABLE>
F-3
<PAGE> 41
CHAMPIONSHIP AUTO RACING TEAMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT EARNINGS PER SHARE)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1996 1997 1998
---- ---- ----
<S> <C> <C> <C>
REVENUES:
Sanction fees $21,078 $ 24,248 $30,444
U.S. 500 7,054 -- --
Sponsorship revenue 5,501 7,221 16,388
Television revenue 4,373 5,604 5,148
Engine leases, rebuilds and wheel sales -- -- 2,214
Other revenue 3,118 4,372 8,336
------- -------- -------
Total revenues 41,124 41,445 62,530
EXPENSES:
Race and franchise fund payments 17,198 28,939 15,183
U.S. 500 8,246 -- --
Race expenses 6,055 6,970 4,818
Cost of engine rebuilds and wheel sales -- -- 633
Administrative and indirect expenses 8,570 14,295 20,658
Compensation expense 1,167 12,200 --
Depreciation and amortization 685 549 779
Minority interest in loss of subsidiaries -- (232) --
------- -------- -------
Total expenses 41,921 62,721 42,071
------- -------- -------
OPERATING INCOME (LOSS) (797) (21,276) 20,459
Interest income (net) 280 329 3,198
------- -------- -------
INCOME (LOSS) BEFORE INCOME TAXES (517) (20,947) 23,657
INCOME TAX BENEFIT (EXPENSE) 179 3,423 (8,568)
------- -------- -------
NET INCOME (LOSS) $ (338) $(17,524) $15,089
======= ======== =======
EARNINGS (LOSS) PER SHARE:
BASIC $ (.04) $ (1.72) $ 1.06
======= ======== =======
DILUTED $ (.04) $ (1.72) $ 1.05
======= ======== =======
WEIGHTED AVERAGE SHARES OUTSTANDING:
BASIC 9,400 10,200 14,190
======= ======== =======
DILUTED 9,400 10,200 14,421
======= ======== =======
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-4
<PAGE> 42
<TABLE>
<CAPTION>
CHAMPIONSHIP AUTO RACING TEAMS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(IN THOUSANDS)
ADDITIONAL UNREALIZED
COMMON STOCK PAID-IN ACCUMULATED GAIN ON STOCKHOLDERS' COMPREHENSIVE
SHARES AMOUNT CAPITAL DEFICIT INVESTMENTS EQUITY(DEFICIT) INCOME
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCES, JANUARY 1, 1996 8,800 $ 88 $ (78) $ (1,260) -- $ (1,250)
Net loss and comprehensive loss -- -- -- (338) -- (338) $ (338)
========
Compensation expense -- -- 1,167 -- -- 1,167
Stock redemption and
repayment of note (2,000) (20) (340) -- -- (360)
receivable
Stock issuance 1,200 12 618 -- -- 630
------ ---- ------- -------- ---- --------
BALANCES, DECEMBER 31, 1996 8,000 80 1,367 (1,598) -- (151)
Net loss and comprehensive loss -- -- -- (17,524) -- (17,524)
$(17,524)
========
Compensation expense -- -- 12,200 -- -- 12,200
Stock redemption (400) (4) (206) -- -- (210)
Stock issuance 2,600 26 2,614 -- -- 2,640
------ ---- ------- -------- ---- --------
BALANCES, DECEMBER 31, 1997 10,200 102 15,975 (19,122) -- (3,045)
Net income -- -- -- 15,089 -- 15,089 $ 15,089
Unrealized gain on investments -- -- -- -- $330 330 330
========
Comprehensive income $ 15,419
========
Stock redemption (67) (1) (150) -- -- (151)
Stock issuance 5,038 50 73,372 -- -- 73,422
Issuance of options -- -- 574 -- -- 574
------ ---- ------- -------- ---- --------
BALANCES, DECEMBER 31, 1998 15,171 $151 $89,771 $ (4,033) $330 $ 86,219
====== ==== ======= ======== ==== ========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-5
<PAGE> 43
<TABLE>
<CAPTION>
CHAMPIONSHIP AUTO RACING TEAMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
YEAR ENDED DECEMBER 31,
1996 1997 1998
---- ---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C> <C>
Net income (loss) $ (338) $(17,524) $ 15,089
Adjustments to reconcile net income (loss) to
net cash provided by (used in)
operating activities:
Depreciation and amortization 685 549 779
Compensation expense 1,167 12,200 --
Net loss (gain) from sale of property
and equipment (133) 160 92
Write-off of trademark 88 -- --
Deferred income taxes (226) (3,629) 4,823
Minority interest in loss
of subsidiaries -- (232) --
Changes in assets and liabilities that
provided (used) cash:
Accounts receivable (1,481) (854) (1,552)
Prepaid expenses (302) (328) 420
Inventory 37 16 (71)
Other assets (70) (23) 24
Accounts payable 134 959 56
Accrued liabilities 65 10,192 (6,532)
Unearned revenue (253) 21 1,921
------- -------- --------
Net cash provided by (used in) operating activities (627) 1,507 15,049
------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisitions of subsidiaries -- -- (5,881)
Investments -- -- (61,280)
Notes receivable -- (49) (4,125)
Acquisition of property and equipment (1,094) (999) (3,602)
Proceeds from sale of property
and equipment 194 13 62
Acquisition of trademark (101) (63) (22)
------- -------- --------
Net cash used in investing activities (1,001) (1,098) (74,848)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term debt 650 -- --
Payments on long-term debt (76) (130) (130)
Redemption of common stock (360) (210) (151)
Issuance of common stock (net of underwriting discount
and offering costs) 630 2,640 73,996
Proceeds from membership deposit 360 360 --
Payments on membership deposits -- (1,320) --
Payments on franchise fund liability (600) (1,440) --
Capital contributions to subsidiaries
by minority stockholder -- 225 --
Payments on line of credit (392) -- --
------- -------- --------
Net cash provided by financing activities 212 125 73,715
------- -------- --------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS (1,416) 534 13,916
CASH AND CASH EQUIVALENTS AT BEGINNING
OF PERIOD 2,046 630 1,164
------- -------- --------
CASH AND CASH EQUIVALENTS AT END
OF PERIOD $ 630 $ 1,164 $ 15,080
======= ======== ========
SUPPLEMENTAL DISCLOSURES OF CASH
FLOW INFORMATION:
Cash paid during the period for:
Income taxes $ 23 $ 15 $ 2,350
======= ======== ========
Interest $ 50 $ 43 $ 31
======= ======== ========
</TABLE>
F-6
<PAGE> 44
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCING ACTIVITIES--During
1996, 1997 and 1998, the Company received property and equipment worth
approximately $75,000, $79,000 and $69000, respectively, in exchange for
sponsorship privileges to the providers. In 1996, the Company redeemed 800,000
shares of common stock for $600,000 (including $240,000 representing a refund of
membership deposits or franchise fund liability), which was used to offset a
note receivable from a stockholder. During 1998, the acquisition price of ARS
included 100,000 options granted to the sellers. The value of these options on
the date of grant was $574,000. The amount to be received by the Company for the
options will be approximately $504,000 (see Note 2). During 1998, the Company
recorded $496,000 as goodwill related to the additional purchase price of ARS
(see Note 2).
The accompanying notes are an integral part of the consolidated financial
statements.
F-7
<PAGE> 45
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 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.
PRINCIPLES OF CONSOLIDATION. The 1997 and 1998 consolidated financial
statements include the financial statements of the Company, CART and its
wholly-owned subsidiary corporations CART Properties, Inc. and CART Licensed
Products, Inc. In addition, the 1997 and 1998 consolidated financial statements
include the financial statements of CART Licensed Products, L.P., a 55% owned
subsidiary. As of March 13, 1998 and April 1, 1998, the consolidated financial
statements also include the financial statements of American Racing Series, Inc.
("ARS") and Pro-Motion Agency Ltd. ("Pro-Motion"), respectively, wholly-owned
subsidiaries of the Company(see Note 2). All significant intercompany balances
have been eliminated in consolidation.
OPERATIONS. The Company is the sanctioning body responsible for
organizing, marketing and staging each of the racing events for the open-wheeled
motorsports series -- the CART Championship. 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.
Substantially all of the Company's revenue is derived from sanction
fees, sponsorship revenues, television revenues and licensing royalties, each of
which is dependent upon continued fan support and interest in CART race events.
Sanction fee revenues are fees paid to the Company by track promoters to
sanction a CART event at the race venue, and to provide the necessary race
management. The Company receives sponsorship revenues from companies who desire
to receive brand and product exposure in connection with CART 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. The
Company receives revenue from engine leases and rebuilds and wheel sales from
teams racing in the PPG-Dayton Indy Lights Championship ("Indy Lights"). 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.
F-8
<PAGE> 46
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 life of the related leases.
REVENUE RECOGNITION. Recognition of revenue from race sanction
agreements is deferred until the event occurs. Sponsorship revenue and engine
lease revenue are recognized on a monthly basis. Television revenue is
recognized ratably over the race schedule. Engine rebuilds and wheel sales are
recognized as earned. Other revenues include membership and entry fees,
contingency awards money and royalty income and are recognized ratably over the
race schedule.
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 until realized.
For the purpose of computing realized gains and losses, cost is identified on a
specific identification basis.
GOODWILL. Goodwill represents the excess of the purchase price of ARS
and B.P. Automotive, Ltd. ("BP") and Pro-Motion (see Note 2) over the fair value
of the net tangible and identifiable intangible assets of these acquisitions.
Goodwill is stated at cost and is amortized on a straight-line basis over 40
years.
MANAGEMENT ESTIMATES. The preparation of the consolidated financial
statements in conformity with generally accepted accounting principles 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, 1997 and 1998, and the reported amounts of revenues and expenses
during the periods presented. The actual outcome of the estimates could differ
from the estimates made in the preparation of the consolidated financial
statements.
ACCOUNTING PRONOUNCEMENTS. In 1998, the Company adopted SFAS No. 130,
"Reporting Comprehensive Income." Unrealized gains on investments is the
Company's only component of other comprehensive income.
In June 1998, SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities" was issued by the FASB. SFAS No. 133 establishes accounting
and reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities. The Company
has not determined the impact on its consolidated financial statement
disclosure. SFAS No. 133 is effective for fiscal years beginning after June 15,
1999.
RECLASSIFICATIONS. Certain reclassifications have been made to the
1996 and 1997 consolidated financial statements in order for them to conform to
the 1998 presentation.
F-9
<PAGE> 47
2. INITIAL PUBLIC OFFERING AND ACQUISITIONS
INITIAL PUBLIC OFFERING. In March 1998, the Company completed its
initial public offering ("IPO") of 5,038,000 shares of common stock. The IPO
provided proceeds of $75.0 million, net of underwriting discounts, to the
Company. A portion of the net proceeds from the IPO were used to acquire ARS and
BP for $10 million (see "Acquisition of ARS and BP"); and to pay accrued point
awards to franchise race teams aggregating $9.5 million. The remaining net
proceeds will be used for working capital and general corporate purposes,
including the expansion of the Company's business through the acquisition or
development of race related businesses and properties.
ACQUISITION OF ARS AND BP. On March 13, 1998, the Company acquired 100%
of the outstanding common stock of ARS and certain assets of BP, an entity
previously owned by a director, race team owner and stockholder. ARS operates
Indy Lights, a support series to CART. BP supplies certain equipment to Indy
Lights competitors and earns commission income on the sale of chassis and spare
parts to the teams. At closing of the acquisition, the Company paid $7 million
in cash and issued options to the sellers to purchase 100,000 shares of the
Company's common stock at an exercise price of $16.00 per share which vests one
year from closing if certain performance criteria are met for 1998. In the event
that ARS did not meet their performance criteria for 1998, they had the option
to make up the shortfall to receive the options and elected to do so. The fair
value of the options at the date of grant was approximately $574,000. The
sellers are expected to pay the shortfall amount of approximately $504,000 to
receive the options.
In addition, the Company will pay an additional purchase price of up to
$3 million, in three equal payments, upon satisfaction by ARS of certain
performance criteria during 1998-2000. In the event that ARS does not meet its
performance criteria in a given year, the additional payment will be reduced one
dollar for every dollar that ARS is short of the performance criteria. However,
if ARS exceeds its performance in a following year, it can make up the shortfall
from the prior year. Based on 1998 performance criteria, CART owes the former
shareholders of ARS a total of approximately $496,000 for 1998. The excess of
the initial purchase price of $7 million, plus any additional purchase price
payments, over the net book value of the net assets acquired has been allocated
to the tangible and intangible assets based on the Company's estimate of the
fair market value of the net assets acquired. The operating results of ARS and
BP have been included in the Company's consolidated financial statements since
the date of acquisition.
ACQUISITION OF PRO-MOTION. On April 10, 1998, the Company acquired 100%
of the outstanding common stock of Pro-Motion, an entity previously owned by a
director, race team owner and stockholder, for $534,000 in cash. Pro-Motion
operates the KOOL/Toyota Atlantic Championship open-wheel series, a support
series to CART. The excess of the initial purchase price over the net book value
of the net assets acquired has been allocated to the tangible and intangible
assets based on the Company's estimate of the fair market value of the net
assets acquired. The operating results of Pro-Motion have been included in the
Company's consolidated financial statements since the date of acquisition.
F-10
<PAGE> 48
PRO FORMA RESULTS. The following unaudited pro forma summary for the
year ended December 31, 1997 and 1998 assume the acquisitions of ARS, BP and
Pro-Motion occurred as of January 1, 1997 and 1998.
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1997 1998
(IN THOUSANDS,
EXCEPT EARNINGS PER SHARE)
- --------------------------------------------------------------------------
<S> <C> <C>
Revenues $49,628 $63,863
Net income (loss) (3,999) 15,196
Earnings per share:
Basic $ (.38) $ 1.06
======= =======
Diluted $ (.38) $ 1.05
======= =======
</TABLE>
Pro forma adjustments of $19.4 million ($12.6 million net of tax) for
1997 have also been made to reduce certain benefits paid to franchise members,
including the reimbursement of travel expenses for $2.2 million, director's fees
for $214,000 and other race related payments for $17 million in connection with
the Company's reorganization, effective January 1, 1998 (see Note 14).
3. SHORT-TERM INVESTMENTS
The following is a summary of the estimated fair value of available for
sale short-term investments by balance sheet classification:
<TABLE>
<CAPTION>
DECEMBER 31, 1998
GROSS UNREALIZED
(IN THOUSANDS) COST FAIR VALUE GAIN LOSS
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Commercial paper $ 33,168 $ 33,487 $ 319 $ -
U.S. agencies securities 20,034 20,047 13 -
Corporate bonds 8,078 8,076 - 2
-------- -------- -------- --------
Total short-term investments $ 61,280 $ 61,610 $ 332 $ 2
======== ======== ======== ========
</TABLE>
Contractual maturities range from less than one year to two years. The
weighted average maturity of the portfolio does not exceed one year.
4. NOTE RECEIVABLE
In May 1998, the Company entered into an agreement with a promoter
whereby the Company provided financing for certain expenses associated with a
CART sanctioned event in Brazil. The original amount of the note receivable of
$4.1 million related to costs incurred by the Company during the 1998 event and
will be repaid in five equal annual installments of $824,000 over the life of
the sanction agreement through the year 2003. The receivable has a stated 5% per
annum interest rate and approximately $1.0 million of the receivable and the
annual sanction fee will be substantially secured each year by a separate letter
of credit issued annually by the City of Rio de Janeiro, Brazil. The letter of
credit relating to the 1999 event has been issued. Based on estimated market
discount rates, the carrying value of this receivable approximates its fair
value.
F-11
<PAGE> 49
5. PROPERTY AND EQUIPMENT
Property and equipment consists of the following at December 31:
<TABLE>
<CAPTION>
(IN THOUSANDS)
1997 1998
---------- ----------
<S> <C> <C>
Engines $ - $ 2,296
Equipment 1,570 2,381
Furniture and fixtures 329 359
Vehicles 1,616 1,959
Other 228 121
---------- ----------
Total 3,743
7,116
Less accumulated depreciation (1,507) (2,090)
---------- ----------
Property and equipment (net) $ 2,236 $ 5,026
========== ==========
</TABLE>
During 1997 and 1998, the Company received vehicles worth approximately
$79,000 and $69,000, respectively, in exchange for sponsorship privileges to the
providers.
6. OPERATING LEASES
The Company has entered into various non-cancelable operating leases
for office space and equipment which expire through 2003. Total rent expense was
approximately $194,000, $345,000 and $421,000 for 1996, 1997 and 1998,
respectively.
Approximate future minimum lease payments under noncancelable operating
leases are as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
Year ending December 31:
1999 $ 443
2000 440
2001 352
2002 118
2003 2
--------
Total $1,355
</TABLE>
7. INCOME TAXES
Deferred income tax assets and liabilities are computed annually for
differences between the financial statement and tax basis 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.
F-12
<PAGE> 50
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.
The tax effects of temporary differences giving rise to deferred tax
assets and liabilities at December 31 are as follows:
<TABLE>
<CAPTION>
1997 1998
---- ----
(IN THOUSANDS)
Deferred tax assets:
<S> <C> <C>
Allowance for doubtful accounts $ -- $ 114
Accrued race expense and points award 3,446 --
Net operating loss carryforwards 1,186 --
Alternative minimum tax credit carryforwards 44 --
Pension liability 8 --
State taxes (22) 5
Other 21 --
------- -------
Total 4,683 119
Current portion 4,683 119
------- -------
Non-current portion $ -- $ --
======= =======
Deferred tax liabilities:
Basis difference in fixed assets $ -- $ (195)
Amortization of goodwill -- (64)
------- -------
Total -- (259)
Current portion -- --
------- -------
Non-current portion $ -- $ (259)
======= =======
</TABLE>
F-13
<PAGE> 51
The provision (credit) for income taxes consists of the following at December
31:
<TABLE>
<CAPTION>
1996 1997 1998
---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C>
Current $ 25 $ 158 $3,745
Deferred (Credit) (204) (3,581) 4,823
----- ------- ------
Total $(179) $(3,423) $8,568
===== ======= ======
</TABLE>
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:
<TABLE>
<CAPTION>
1996 1997 1998
---- ---- ----
<S> <C> <C> <C>
Tax at U.S. federal statutory rate (34.0)% (34.0)% 34.0%
State income tax -- -- 1.9
Meals and entertainment 6.5 0.1 0.3
Compensation expense -- 17.3 --
Other (7.1) 0.2 --
----- ----- ----
Total (34.6)% (16.4)% 36.2%
===== ===== ====
</TABLE>
Additional compensation expense recorded for consolidated financial
statement purposes in connection with common stock issued to race teams in
December 1997, exceeded the Company's deductible amount for federal income tax
purposes.
8. EMPLOYEE BENEFIT PLANS
During 1991, the Company indicated its intent to terminate its defined
benefit pension plan. The plan assets were frozen and remained in trust until
September 30, 1998, at which time the assets were distributed to the
participants of the plan. There was no liability at December 31, 1998. The
Company incurred no additional expense as a result of the termination.
In addition, the Company began a 401(k) savings plan (the "plan") in
1991. Contributions to the 401(k) are in the form of employee salary deferral,
subject to discretionary employer matching contributions. The Company's
contributions to the plan were approximately $25,000, $50,000 and $81,000 in
1996, 1997 and 1998, respectively.
9. DEBT
At December 31, 1997 and 1998, the Company had an unused bank line of
credit of $1.5 million. There were no amounts outstanding at December 31, 1997
and 1998. 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.
F-14
<PAGE> 52
At December 31, 1998, the Company has a five-year note payable to a
bank with an original face value of $650,000, with interest at 8.25%; payable in
monthly installments of $11,000, plus interest through May 2001. The note
payable is secured by the Company's mobile medical unit. The carrying amount of
the note payable approximates its fair value. Future payments under the above
agreement are as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
1999 $ 130
2000 130
2001 54
-----
Total 314
Less current portion 130
-----
Long-term portion $ 184
=====
</TABLE>
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 2007 racing season. Under the promoter agreements, the
Company is obligated to sanction CART Championship 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, sales and worldwide distribution of the Company's
events.
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 2001. 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.
LITIGATION. In January 1996, a lawsuit was filed against the Company by
one of its shareholders and a related company. The lawsuit alleged antitrust and
anti-competitive violations as well as damage of reputation. In December 1996,
the Company settled the lawsuit and other related litigation. Included in the
settlement amount was the redemption of common stock and related Franchise Fund
Liability. Expenses incurred in 1996 and included in administrative and indirect
expenses include approximately $1,734,000 related to litigation expense and the
settlement of lawsuits.
During a CART race at the Michigan Speedway in July 1998, a race car
was involved in a racing incident that propelled a tire and suspension parts
into the grandstands. Three spectators were killed and six other people reported
minor injuries. No claims have been made against the Company, and the Company
does not believe that it is liable for this incident. The Company requires each
promoter to indemnify the Company against any liability for personal injuries
sustained at such promoter's racing
F-15
<PAGE> 53
event. In addition, the Company requires each promoter to carry a minimum of
$10.0 million ($20.0 million in 1999) in liability insurance, naming the Company
as a named insured. The Company also maintains a $15.0 million umbrella policy.
11. 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 "Stock Option Plan").
Under the Stock Option Plan, key employees, outside consultants and advisors
(the "Participants") of the Company and its subsidiaries (as defined in the
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 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 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. Concurrent with the IPO, an aggregate 1,088,100 options to
acquire common stock were granted under the Stock Option Plan at the initial
offering price of $16.00 per share. In March 1999, 100,250 options to acquire
common stock were granted to employees under the Stock Option Plan at an
exercise price of $27.50 per share.
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, 1998, there were 10,000 Director
NQSOs issued and outstanding. In January 1999, an additional 10,000 Director
NQSOs were issued and outstanding.
In addition to the plans described above, 100,000 stock options were
issued in connection with the acquisition of ARS and BP (see Note 2).
F-16
<PAGE> 54
The following table summarizes information about stock options
outstanding at December 31, 1998:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
NUMBER OF REMAINING WEIGHTED AVERAGE
SHARES LIFE EXERCISE PRICE
---------------- ----------------- -------------------
<S> <C> <C> <C>
Options outstanding December 31, 1997 -- -- $ --
Granted 1,198,100 4.2 16.02
Exercised -- -- --
Forfeited 600 -- 16.02
---------- --- -------
Options outstanding December 31, 1998 1,197,500 4.2 $ 16.02
========== === =======
(10,000 are exercisable)
</TABLE>
The weighted average per share fair value of options granted at market
value was $5.74 in 1998.
At December 31, 1998, an additional 1,002,500 shares were reserved for
issuance under all Company plans.
SFAS No. 123 "Accounting for Stock Based Compensation" requires the
recognition of compensation expense for equity investments that are issued for
consideration other than employee services based upon the fair value of the
common stock issued. The fair value of the Company's Common Stock has been
measured on the date new Franchise Members become eligible to acquire such
stock. Compensation expense of $1.2 million and $12.2 million has been recorded
for the years ended 1996 and 1997 respectively, related to certain shares that
became eligible for purchase based upon eligibility requirements met during 1996
and 1997.
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, 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 30%, expected dividend yield of 0%, risk free interest rate of 5%,
and an expected life of 5 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 and earnings per share would have been reduced to the pro forma amounts
indicated below:
<TABLE>
<CAPTION>
(IN THOUSANDS,
EXCEPT EARNINGS PER SHARE)
NET EARNINGS 1998
----------------
<S> <C>
As reported $15,089
=======
Pro forma $14,054
=======
DILUTED EARNINGS PER SHARE
As reported $ 1.05
======
Pro forma $ .97
======
</TABLE>
F-17
<PAGE> 55
12. COMMON STOCK
During 1996, the Company redeemed 2,000,000 shares of common stock for
$1.4 million (including $480,000 representing a refund of Membership Deposits or
Franchise Fund Liability), and sold 1,200,000 shares of common stock for
$990,000 (including $360,000 representing Membership Deposits). A total of
800,000 of the shares of common stock were redeemed for $600,000 (including
$240,000 representing a refund of Membership Deposits or Franchise Fund
Liability), which was used to offset a note receivable from a stockholder as of
December 31, 1995.
In January 1997, CART redeemed 400,000 shares of common stock for
$330,000 (including $120,000 representing a refund of Membership Deposits or
Franchise Fund Liability). In January and February 1997, the Company issued
1,200,000 shares of common stock for $1.2 million (including $360,000
representing Membership Deposits). In December 1997, the Company issued
1,400,000 shares for $1.8 million.
In March 1998, at the request of a race team owner, the Company
rescinded the sale of an aggregate of 66,666 shares of common stock it issued in
December 1997 at a total price of $151,000.
13. SEGMENT REPORTING
The company has one reportable segment, racing operations.
This reportable segment encompasses all the business operations of organizing,
marketing and staging all of our open-wheel racing events.
The accounting policies of the segments are the same as those described in the
summary of significant accounting policies. The Company's long lived assets are
substantially used in the racing operations segment in the United States. The
Company evaluates performances based on income before income taxes.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------
($ in thousands) RACING OPERATIONS OTHER* TOTALS
- ---------------- ----------------- ------ ------
<S> <C> <C> <C>
1996
Revenues $ 41,124 $ -- $ 41,124
Interest income (net) 280 -- 280
Depreciation and amortization 685 -- 685
Segment loss before income taxes (517) -- (517)
1997
Revenues 40,867 578 41,445
Interest income (expense) (net) 331 (2) 329
Depreciation and amortization 531 18 549
Segment loss before income taxes (20,432) (515) (20,947)
1998
Revenues 61,056 62,530
1,474
Interest income (expense) (net) 3,234 (36) 3,198
Depreciation and amortization 750 29 779
Segment income before income taxes 23,657 -- 23,657
</TABLE>
F-18
<PAGE> 56
*Segment is below the quantitative thresholds for determining reportable
segments and commenced operations on January 1, 1997. This segment is related to
the Company's licensing royalties.
Reconciliations to consolidated financial statement totals are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------ -- -----------
1997 1998
------------ -----------
<S> <C> <C>
Total assets for reportable segment $11,599 $95,851
Other assets 749 1,335
------------ -----------
Total consolidated assets $12,348 $97,186
============ ===========
Total liabilities for reportable segment $14,996 $9,617
Other liabilities 397 1,350
------------ -----------
Total consolidated liabilities $15,393 $10,967
============ ===========
</TABLE>
Domestic and foreign revenues, which are allocated to each country based on
sanction fees, sponsorship revenues and television revenues, for each of the
three years ended December 31 were as follows:
<TABLE>
<CAPTION>
1996 1997 1998
----------- ------------ -----------
<S> <C> <C> <C>
United States $30,355 $28,888 $42,105
Canada 4,499 5,336 7,828
Other foreign countries 6,270 7,221 12,597
----------- ------------ -----------
Total $41,124 $41,445 $62,530
=========== ============ ===========
</TABLE>
14. EARNINGS (LOSS) PER SHARE
Basic earnings per share ("EPS") excludes dilution and is computed by
dividing earnings available to common shareholders 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 11) upon the assumed exercise of dilutive
stock options.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------
1996 1997 1998
-----------------------------------------------
(IN THOUSANDS, EXCEPT EARNINGS PER SHARE)
<S> <C> <C> <C>
Net income (loss) $ (338) $(17,524) $ 15,089
============ ============== ============
Basic EPS:
Weighted average common shares outstanding 9,400 10,200 14,190
============ ============== ============
Net earnings (loss) per common share, basic $ (.04) $ (1.72) $ 1.06
============ ============== ============
Diluted EPS:
Weighted average common shares outstanding 9,400 10,200 14,190
Shares contingently issuable -- -- 231
------------ -------------- ------------
Shares applicable to diluted earnings 9,400 10,200 14,421
============ ============== ============
Net earnings (loss) per common share, diluted $ (.04) $ (1.72) $ 1.05
============ ============== ============
</TABLE>
F-19
<PAGE> 57
15. RELATED PARTY TRANSACTIONS
The Company receives sanction fees from seven related parties. Total
sanction fee revenue related to these entities for 1996, 1997 and 1998 was
approximately $3.9 million, $5.2 million and $8.1 million, respectively. No
sanction fees from a single related entity provided more than 10% of the
Company's revenues in 1996, 1997 and 1998.
The Company rented track facilities from a related party. Total track
rental expense related to this entity for 1996, 1997 and 1998 was approximately
$1.2 million, $0 and $62,000, respectively.
At December 31, 1997 and 1998, the Company has accounts receivable of
approximately $190,000 and $1.7 million, respectively, due from related parties.
The Company receives entry fees and other race-related income to
participate in the CART Championship from certain related parties. Such fees
received from certain franchise members amounted to $80,000, $150,000 and $1.3
million in 1996, 1997 and 1998, respectively.
The Company disburses purse winnings and awards to nine related
parties. Total purse winnings related to these entities for 1996, 1997, and 1998
were $10.8 million, $9.0 million and $10.8 million, respectively.
The Company paid for at-track rights to six related parties in order to
satisfy contractual obligations with certain sponsors. Total at-track rights
related to these entities for 1996, 1997 and 1998 were $0, $500,000 and $1.2
million, respectively.
The Company paid royalties to nine related parties. Total royalties
paid to these entities for 1996, 1997 and 1998 were $0, $173,000 and $495,000,
respectively.
At December 31, 1997 and 1998, the Company has accounts payable and
royalties payable of approximately $6.6 million and $306,000, respectively, due
to related parties.
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 $129,000, $133,000 and $127,000 in 1996, 1997 and 1998,
respectively.
In connection with the Reorganization, effective January 1, 1998, the
Company and the existing franchise race teams entered into an agreement on
December 19, 1997 whereby reimbursements for travel expenses, directors fees and
race-related payments were discontinued. These payments approximated $8.5
million and $19.4 million for the years 1996 and 1997, respectively. Such
agreement expires in December 2000. Because each franchise member is also a
stockholder of the Company, the agreement constitutes a related party
transaction.
F-20
<PAGE> 58
16. SUBSEQUENT EVENTS (UNAUDITED)
Effective December 31, 1998, the president of CART Licensed Products,
L.P. resigned from his position. The Company is negotiating to purchase his 45
percent interest in CART Licensed Products, L.P.
F-21
<PAGE> 59
SCHEDULE II
CHAMPIONSHIP AUTO RACING TEAMS, INC.
VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996.
(IN THOUSANDS)
<TABLE>
<CAPTION>
CHARGED BALANCE
BEGINNING TO COSTS DEDUCTIONS AT END OF
DESCRIPTION OF PERIOD AND EXPENSES (1) OF PERIOD
- ------------------------------------------- ------------ ------------ ----------- -----------
<S> <C> <C> <C> <C>
Allowance for doubtful
accounts (deducted from
accounts receivable):
Year Ended December 31, 1998... $ -- $ 436 $ 130 $ 306
Year Ended December 31, 1997... -- -- -- --
Year Ended December 31, 1996... -- -- -- --
(1) Accounts deemed to be uncollectible.
</TABLE>
S-1
<PAGE> 1
EXHIBIT 10.17
STOCK PURCHASE AGREEMENT
This STOCK PURCHASE AGREEMENT ("AGREEMENT") is dated the ___ day of
March, 1998, between CHAMPIONSHIP AUTO RACING TEAMS, INC., a Delaware
corporation ("CART" or the "PURCHASER"), and the shareholders of AMERICAN
RACING SERIES, INC., a Michigan Corporation ("ARS"), U.E. PATRICK, STEVEN E.
PATRICK, MARK A. PATRICK, RICK L. PATRICK, SHERRY PATRICK-BURKE AND ROGER
BAILEY (individually and collectively, the "SELLERS").
WITNESSETH:
CART has filed a Registration Statement with the Securities and
Exchange Commission for the purpose of having an initial public offering of its
common stock ("IPO"); and in conjunction therewith, CART desires to purchase all
(but not less than all) of the outstanding stock of ARS ("SHARES") from the
Sellers, upon the terms and subject to the conditions hereinafter set forth;
NOW, THEREFORE, in consideration of the premises and the mutual
covenants, representations and agreements and warranties contained, the parties
agree as follows:
1. SALE OF SHARES; PURCHASE PRICE.
1.1. SALE OF SHARES. The Sellers agree to sell the Shares to the
Purchaser, and the Purchaser agrees to purchase and acquire the Shares from the
Sellers, free and clear of all liens, claims, encumbrances and rights of others.
Such Shares shall be evidenced by share certificates of ARS's Stock which shall
be duly endorsed or accompanied by appropriate stock transfer powers duly
executed.
1.2. PURCHASE PRICE. In consideration of the sale of the Shares, the
Purchaser shall pay to the Sellers a purchase price, (the "PURCHASE PRICE") for
all the shares for an amount equal to the following:
1.2.1. CASH PURCHASE PRICE. $5,500,000 which shall be paid
at Closing; plus
1.2.2. EARN OUT PURCHASE PRICE. An aggregate of $2,700,000
in three (3) equal
1
<PAGE> 2
annual payments each year for the three (3) years on the anniversary of
the closing, if and only if ARS shall achieve revenues equal to or
exceeding $3,943,800 in 1998 and in 1999, and $573,800 in 2000 from the
following:
1.2.2.1. Sponsorship agreements that are not
currently contracted for $522,500 each year for 1998, 1999,
and 2000. It is understood and agreed that "sponsorship
agreements that are not currently contracted" means any annual
revenues from sponsorships that are in excess of $2,175,000
for 1998, $2,140,000 for 1999, and $1,100,000 for 2000 (which
are the sponsorship revenues to be provided under current
contracts). The Sellers will be entitled to continue to
solicit sponsors in all categories until September 1, 1998.
After September 1, 1998, the Sellers agree to discontinue any
sales efforts
1.2.2.2. $200,000.00 each to Promoter fees for
Nazareth Speedway, Homestead Speedway, Michigan Speedway and
California Speedway for the 1998 and 1999 seasons.
1.2.2.3. Engine leases of $1,380,000 and engine
rebuilds of $1,440,000 for a total of $2,820,000 each for 1998
and 1999. ARS will use reasonable efforts to increase the
engine lease payments and engine rebuilds for the year 1999.
1.2.2.4. Wheel sales (net of cost of goods sold)
of $51,300.00 each year for 1998, 1999 and 2000.
1.2.2.5. Parts and chassis commissions of
$350,000.00 each year for 1998 and 1999.
1.2.2.6. Anything herein to the contrary
notwithstanding, ARS shall only be required to meet the TOTAL
annual dollar volume per year as set forth in Subsections
1.2.2.1 through 1.2.2.5 (the "REVENUES") and not any specific
amount for any of the above-described categories. Further, any
of the Revenues produced by BP Automotive, Ltd, a Michigan
corporation ("BP"), and an affiliate of ARS, shall be deemed
to have been produced by ARS.
1.2.3. SHORTFALL AND MAKE UP. In the event that there is a
shortfall in 1998 and/or 1999 in the ARS revenues, the annual payments
by CART will be reduced dollar for dollar (to not less than $0) by the
shortfall for that year, provided, however, if such shortfall is
subsequently made up in 1999 or 2000, the payment not made to the
Sellers the prior year shall be paid to them in the subsequent year on
a dollar for dollar basis to the extent made up.
1.2.4. CART LONG TERM STOCK OPTION. The Sellers shall be
granted options to purchase 97,883 shares of the common stock of CART
at a per share price equal to the price offered to the public in the
IPO if, and only if, ARS's 1998 Revenues exceed $3,943,800.
2
<PAGE> 3
Any shortfall for 1998 may be made up by the Sellers rendering a cash
contribution to CART for the amount of the shortfall within 30 days
after written determination of such shortfall has been delivered to the
Sellers. Upon rendering such payment, the Sellers shall be qualified
for the said stock options. These options shall vest one year after the
closing of the IPO and may be exercised at any time within five (5)
years after they vest. Shares issuable upon exercise of the option will
not be registered under the Securities Act of 1933 or any state
securities laws and will constitute restricted securities within the
meaning of Rule 144 under the Securities Act.
1.2.5. CART STOCK PURCHASE. The Sellers shall be granted the
right to subscribe for up to $960,000 of CART's common stock at a per
share price equal to the price offered to the public in the IPO
(rounded to the nearest whole shares). The stock shall be fully
registered and listed in connection with CART's IPO at the closing.
Each Seller who elects to purchase such shares shall pay for such
stock, in cash, at the closing, on the Closing Date, and shall
acknowledge that he or she has received a copy of the current final
prospectus for the IPO. None of those who elect to purchase have made
or will make any commitment to purchase such shares until such time as
the registration statement for the CART IPO has become effective.
2. WARRANTIES AND REPRESENTATIONS OF THE SELLERS. The Sellers warrant and
represent to the Purchaser as follows:
2.1. AUTHORITY AND CAPACITY. The Sellers have, and on the Closing Date
will have, all requisite power, authority and capacity to enter into this
Agreement and to perform the obligations required of them hereunder. This
Agreement is a valid and binding obligation of the Sellers, enforceable against
Sellers in accordance with its terms, subject, however, to the effect of
applicable bankruptcy, insolvency, reorganization, moratorium and similar laws
as now or hereafter are in effect or as to the application of equitable
principles in any proceeding, legal or equitable.
2.2. TITLE TO THE SHARES. The Sellers presently are the owner of record
and the beneficial owner of all of the issued and outstanding shares of ARS's
Stock (as set forth on Exhibit A). On the Closing Date the Sellers will be the
owner of record and the beneficial owner of all of the issued and outstanding
shares of ARS, and the transfer, assignment and delivery of the Shares by the
Sellers and each of them pursuant to the provisions of this Agreement will
transfer to the Purchaser legal and valid record and beneficial title thereto,
free and clear of all claims, liens, charges and encumbrances of any kind.
2.3. ORGANIZATION, GOOD STANDING AND POWER. ARS is a corporation duly
organized and validly existing as a corporation in good standing under the laws
of the State of Michigan and has the corporate power and authority to own its
properties and to carry on its business as the same is now being conducted.
Complete and correct copies of ARS's Articles of Incorporation (together with
all amendments thereto) and the Bylaws in effect on the date of this Agreement
have been delivered to the Purchaser. ARS is not required to qualify as a
foreign corporation under the laws of any jurisdiction.
3
<PAGE> 4
2.4. CAPITALIZATION; ABSENCE OF OPTIONS AND WARRANTS. The authorized
capital stock of ARS consists of 10,000 shares of common stock with a par value
of $5.00 per share, of which 300 shares of common stock are outstanding. All of
such outstanding shares have been duly and validly issued, and are fully paid
and nonassessable. There are no existing options, calls, agreements or
commitments of any character relating to any of the authorized or issued shares
of ARS's Stock.
2.5. NO SUBSIDIARIES. Other than its ownership of Patrick Group, LLC
(the "LLC"), and Melbourne Properties, a general partnership, ARS does not
directly or indirectly own any interest in or control any other corporation,
partnership, limited partnership, limited liability company or other entity.
2.6. EFFECTIVE AGREEMENT. The execution and performance of this
Agreement by the Sellers and compliance with the provisions hereof do not and
will not (i) violate, with or without the giving of notice and/or the passage of
time, any provision of law applicable to the Sellers or ARS, which such
violation could have a Material Adverse Effect on the operations or financial
condition of ARS, or (ii) conflict with, or result in a breach or termination
of, or constitute a default under, or result in the creation of any lien, charge
or encumbrance upon any of ARS's properties pursuant to any corporate charter,
by-law, or any other agreement or instrument to which the Sellers or ARS is a
party or by which they or any of their properties may be bound, the result of
which could have a Material Adverse Effect. As used in this Agreement, "Material
Adverse Effect" means any change, effect or circumstance that, individually or
when taken together with all other like changes, effects or circumstances that
have occurred prior to the date of determination of the occurrence of a Material
Adverse Effect, is or is reasonably likely to be materially adverse to the
revenues of ARS, or the ability of ARS to continue to operate its business and
affairs in the manner heretofore operated.
2.7. ABSENCE OF DEFAULTS. ARS is not in default under any contract,
agreement, lease or document to which it or any of its properties is bound (the
"Contracts"), and no event exists with respect thereto which, with or without
the giving of notice and/or the passage of time, would constitute a default or
would reasonably be expected to have a Material Adverse Effect. Except as set
forth on in the Disclosure Schedule, each of the Contracts is a valid and
binding agreement of ARS, enforceable against ARS in accordance with its terms
except as such enforceability may be limited by bankruptcy, insolvency,
reorganization or similar laws affecting creditors' rights generally, and by
principles of equity (whether considered in a proceeding at law or in equity)
and Sellers have no knowledge that any Contract is not a valid and binding
agreement of the other parties thereto. ARS has fulfilled all material
obligations required under each Contract to have been performed by it prior to
the date hereof, and Sellers have no reason to believe that ARS will not be able
to fulfill, when due, all of its obligations under the Contracts which remain to
be performed after the Closing Date. Except as set forth on the Disclosure
Schedule, the continuation, validity and effectiveness of each Contract would
not be affected by the consummation of the transactions contemplated by this
Agreement.
2.8. FINANCIAL STATEMENTS. The Sellers have delivered to the Purchaser
copies of the audited balance sheet of ARS as at December 31, 1997 (the "AUDITED
BALANCE SHEET") and the related statement of operations and retained earnings of
ARS for the year then ended (the "AUDITED
4
<PAGE> 5
INCOME STATEMENT"), including in each case the related notes and schedules
thereto, if any. The Audited Balance Sheet and Audited Income Statement fairly
present ARS's financial position at December 31, 1997 and results of operations
for period indicated, and have been prepared in accordance with generally
accepted accounting principles consistently applied and contain all adjustments
which are necessary to a fair statement of the results for the period covered.
Except as set forth on the Disclosure Schedule, since December 31, 1997 there
has been no change (not including world events or general economic conditions)
which has had a Material Adverse Effect. Sellers have no knowledge of any
existing or threatened occurrence, event or development which it believes will
have a Material Adverse Effect.
2.9. ABSENCE OF UNDISCLOSED LIABILITIES. Except to the extent shown or
provided for in the Audited Balance Sheet, at December 31, 1997, or disclosed in
the Disclosure Schedule (attached hereto as Exhibit B), ARS had no material
obligations or liabilities of any kind, fixed, accrued or contingent, except
obligations to perform after December 31, 1997 under open sales contracts,
supply contracts, purchase orders and other commitments incurred in the ordinary
course of business.
2.10. ABSENCE OF CERTAIN CHANGES.
2.10.1 Except as otherwise disclosed in the Disclosure Schedule, since
December 31, 1997, ARS has not:
2.10.1.1 incurred any obligation or liability, fixed, accrued
or contingent, except normal payroll obligations, and trade obligations
incurred in the ordinary course of business;
2.10.1.2 discharged or satisfied any lien or encumbrance or
paid any obligation or liability, fixed, accrued or contingent, except
current liabilities reflected in its Audited Balance Sheet, and current
liabilities incurred in the ordinary course of business subsequent to
the date of the Audited Balance Sheet;
2.10.1.3. mortgaged, pledged or subjected to lien, charge,
security interest or to any other encumbrance any of its assets or
properties;
2.10.1.4. transferred or leased any of its assets or
properties except in the ordinary course of business;
2.10.1.5. canceled or compromised any debt or claim, and
other than adjustments made with respect to contracts for the purchase
of supplies, the sale of products or the rendering of services in the
ordinary course of business which adjustments would not have a Material
Adverse Effect;
2.10.1.6. waived or released any rights;
2.10.1.7 transferred or granted any rights under any material
concessions, leases, licenses, agreements, patents, inventions,
trademarks, trade names, copyrights, or with
5
<PAGE> 6
respect to know-how;
2.10.1.8. made or entered into any employment contract
with any officer or employee or paid any bonus or increased the
compensation of any officer or employee;
2.10.1.9. entered into any transaction other than in the
ordinary course of business;
2.10.1.10. suffered any material casualty loss;
2.10.1.11. entered into any contract or commitment to make
any material capital expenditure;
2.10.1.12. declared any dividend or made any distribution
to its shareholders; or
2.10.1.13. issued or sold any shares of ARS's stock or any
other securities of ARS, or granted any options, warrants or rights for
the purchase of any shares of ARS's stock or other securities of ARS.
2.10.2 Since December 31, 1997, there has not occurred any
event which could reasonably be expected to cause or result in a
Material Adverse Effect.
2.11. TITLE TO PROPERTIES. Except to the extent shown in the Audited
Balance Sheet, ARS has, and except for those assets and properties described in
Section 7.6, on the Closing Date will have, good title to all of its properties
and assets reflected in the Audited Balance Sheet or acquired thereafter (except
those disposed of hereafter in the ordinary course of business), in each case
free and clear of all claims, liens, charges and encumbrances of any kind. All
of such properties and assets not distributed in accordance with Section 7.6
will be in good condition and repair on the Closing Date, reasonable wear and
tear excepted, and suitable for the uses for which intended.
2.12. INVENTORIES. The inventories reflected on the Audited Balance
Sheet were, and the inventories on hand at the Closing Date will be, as the case
may be, acquired in the ordinary course of business at not more than market
prices prevailing at the times of purchase and are usable in the normal
operation of ARS' business.
2.13. COMPLIANCE WITH LAWS. ARS is not in violation of any applicable
law, ordinance, regulation, order or requirement relating to its operations or
its properties which would have a material adverse effect upon its operations or
financial condition.
2.14. DOCUMENT LIST. The Disclosure Schedule includes a list of all
material contracts, licenses, permits, approvals, and other agreements, to which
ARS is a party (the "DOCUMENTS"). Complete copies of all such Documents have
been delivered or made available to the Purchaser. Except only as to such
Documents, ARS is not a party to or bound by any:
2.14.1. written or oral contract not made in the ordinary
course of business;
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2.14.2. contract which is not terminable by it without
cost or liability to it or to its successors upon 30 days notice or
less;
2.14.3. collective bargaining agreement;
2.14.4. bonus, deferred compensation, profit sharing,
pension, retirement, stock option, stock purchase, hospitalization,
insurance or other plan or arrangement providing for employee benefits;
2.14.5. lease with respect to any property, real or
personal, whether as lessor or lessee;
2.14.6. dealers', manufacturers', representatives' or
distributors' agreement which is not terminable by it without cost or
liability to it or its successors on thirty (30) days' notice or less;
2.14.7. contract requiring material capital expenditures;
2.14.8. material contract for the sale of goods or the
rendering of services continuing for a period of more than thirty (30)
days from the date of this Agreement;
2.14.9. contract for the purchase of supplies, materials or
services for delivery over a period of more than thirty (30) days from
the date of this Agreement;
2.14.10. contract or agreement of any kind continuing
for a period of more than 3 months from the date of this Agreement;
2.14.11. material governmental licenses, permits, approvals
or orders; or
2.14.12. loan agreements, indentures, mortgages or security
agreements.
2.15. EMPLOYEES. The Disclosure Schedule contains a list setting forth
the names of all employees of ARS, the current duties of such employees, the
total compensation paid to such employees during 1997, the current salary paid
to such employee and a description of existing compensation programs for various
categories of employees.
2.16. OBLIGATIONS TO EMPLOYEES. All obligations of ARS, whether arising
by operation of law or by contract for payment to trusts or other funds or to
any governmental agency, or to any individual employee or agent (or his heirs,
legatees or legal representatives) with respect to unemployment compensation
benefits, profit sharing, pension or retirement benefits, social security
benefits, or similar obligations have been paid, or shall have been paid on or
before the Closing Date, by ARS, except current amounts accrued but not yet due.
All obligations of ARS, whether arising by operation of law, by contract or by
past practice, for vacation and holiday pay, bonuses and other
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forms of compensation which are payable to employees or agents of ARS, have been
paid, or shall have been paid, by ARS, on or before the Closing Date, except
current amounts shown on the Disclosure Schedule which are accrued but not yet
due.
2.17. INSURANCE LIST. The Disclosure Schedule contains a list and brief
description of all policies of fire, extended coverage, business interruption,
public and product liability and all other kinds of insurance held by ARS (the
"INSURANCE LIST"). A copy of each such policy has been delivered or made
available to the Purchaser. All such insurance policies are in full force and
effect with all premiums due thereon paid in full (except those premiums which
are paid on an installment basis and indicated as such on the Disclosure
Statement). ARS has not received any notice or other communication from any
issuer of the policies listed on the Insurance List canceling or materially
amending any of such policy, materially increasing any deductibles or retained
amounts thereunder or rejecting any claim under any policy and, to the knowledge
of Sellers, no such cancellation, amendment or increase of deductibles is
threatened.
2.18. REAL PROPERTY; LEASES OF REAL PROPERTY. The Disclosure Schedule
contains a list and brief description of the location and approximate size of
each tract of real property owned or leased by ARS (the "PROPERTY LIST"). With
respect to the real property disclosed on the Property List, except as to
mortgages, liens and encumbrances reflected in the Audited Balance Sheet, or
existing utility easements which do not materially interfere with the present
use of the real properties or materially affect their value, all of the real
properties which are reflected as being owned by ARS in the Audited Balance
Sheet are owned in fee simple, free and clear of all claims, liens, charges and
encumbrances of any kind. Each of ARS's leases of real property is a valid and
binding lease obligation, in full force and effect, enforceable in accordance
with its terms and does not require the consent of any person to the
transactions contemplated by this Agreement (except for consents which have been
obtained in writing and delivered by Sellers to Purchaser).
2.19. LEASES OF PERSONAL PROPERTY. The Disclosure Schedule contains a
list and brief description of each lease with respect to personal property
leased by ARS (the "PERSONAL PROPERTY LIST"). Each of ARS's leases of personal
property is a valid and binding lease obligation, in full force and effect,
enforceable in accordance with its terms and does not require the consent of any
person to the transactions contemplated by this Agreement (except for consents
which have been obtained in writing and delivered by Sellers to Purchaser).
2.20. BOOKS AND RECORDS. The books and records of ARS are in all
material respects complete and correct and have been maintained in accordance
with sound business practices and the requirements of applicable law.
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2.21. LITIGATION. There is no litigation, proceeding or investigation
pending or, to the best knowledge of any Seller, threatened by or against ARS or
its properties or business or the transactions contemplated by this Agreement,
nor is any Seller aware of any fact or circumstance which they reasonably
believe would be the basis for any such litigation, proceeding or investigation.
Neither ARS nor Sellers are in violation of or in default with respect to any
judgment, order, award, writ, injunction, decree or rule of any court,
governmental authority or any regulation of any administrative agency or
governmental authority, where such violation or default would have a Material
Adverse Effect or would adversely affect the consummation of the transactions
contemplated hereby.
2.22. TAX RETURNS. ARS has prepared and filed with the appropriate
federal, state and local governmental agencies all tax returns required to be
filed, and has paid all assessments shown to be due and claims to be due
thereon. No claim for the assessment or collection of taxes has been asserted
against ARS by any federal, state or local governmental authority. To the
knowledge of the Sellers, the federal income tax returns of ARS are not being
audited by the Internal Revenue Service, and ARS has not received notice of any
such audit. The Sellers know of (i) no tax returns or reports which are required
to be filed by ARS which have not been so filed and (ii) no unpaid assessments
for any additional taxes of any fiscal period.
2.23. BENEFIT PLANS. ARS maintains a Simplified Employee Pension
("SEP"), an employee benefit plan subject to the Employee Retirement Income
Security Act of 1974. ARS makes annual contributions to the SEP, and it is
current with respect to all such contributions.
2.24. DISCLOSURE. No representation or warranty by Sellers in this
Agreement or in any Exhibit or Schedule hereto, or in any certificate delivered
or to be delivered pursuant to this Agreement, contains or will contain any
untrue statement of a material fact or omits or will omit any material fact
necessary in order to make the statements contained therein not misleading.
3. WARRANTIES AND REPRESENTATIONS OF PURCHASER. The Purchaser warrants and
represents to the Sellers as follows:
3.1. AUTHORITY AND CAPACITY. The Purchaser has, and on the Closing Date
will have, all requisite corporate power, authority and capacity to enter into
this Agreement and to perform the obligations required of it hereunder,
including, specifically, the delivery of the stock options and stock pursuant to
Sections 1.2.4 and 1.2.5. This Agreement is a valid and binding obligation of
the Purchaser, enforceable against Purchaser in accordance with its terms,
subject, however, to the effect of applicable bankruptcy, insolvency,
reorganization, moratorium and similar laws as now or hereafter are in effect or
as to the application of equitable principles in any proceeding, legal or
equitable.
3.2. ORGANIZATION, GOOD STANDING, POWER, ETC. The Purchaser is a
corporation duly organized, validly existing and in good standing under the laws
of Delaware and has the corporate power and authority to own its properties and
to carry on its business as the same is now being conducted.
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3.3. EFFECTIVE AGREEMENT. The execution and performance of this
Agreement by the Purchaser and compliance with the provisions hereof do not and
will not (i) violate, with or without the giving of notice and/or the passage of
time, any provision of law applicable to the Purchaser, which violation could
have a material adverse effect on the operations or financial condition of the
Purchaser, or (ii) conflict with, or result in a material breach or termination
of, or constitute a default under, or result in the creation of any material
lien, charge or encumbrance upon any of the Purchaser's properties pursuant to
any corporate charter, by-law, or any other material agreement or instrument to
which the Purchaser is a party or by which it or any of its properties may be
bound.
3.4. INVESTMENT REPRESENTATION. The Purchaser understands and
acknowledges that the Shares have not been, and on the Closing Date will not
have been, registered under the Securities Act of 1933, as amended (the
"SECURITIES ACT"), or under any applicable state securities law, and that this
transaction has not been reviewed by, passed on or submitted to any federal or
state agency or commission. The Purchaser will be acquiring the Shares for its
own account, for investment, and not with a view to, or for resale in connection
with, a distribution thereof, in whole or in part. The Purchaser has made and
will make such investigations of the financial statements, books, records and
other documents and information concerning ARS as is deemed by the Purchaser to
be necessary and appropriate in order to protect the Purchaser in connection
with the transactions contemplated by this Agreement, it being understood,
however, that no such investigation shall release the Sellers from any of their
representations and warranties contained herein.
3.5. GOOD FAITH ASSISTANCE. Purchaser will cause its officers,
employees and agents to utilize reasonable efforts to assist ARS to secure the
Revenues, including but not limited to, the additional sponsorship revenues
through the period ending September 1, 1998; and, in furtherance thereof, will
provide Sellers complete access to all books and records of ARS. Further, the
Purchaser shall elect as the Board of Directors of ARS for the years 1998, 1999,
and 2000, not more than five nor less than two directors, two of whom shall be
Sellers U.E. Patrick and Roger Bailey. If either U.E. Patrick or Roger Bailey
are unable to serve as a director, then a successor or successors shall be
selected by the Sellers. If Purchaser wishes to elect three additional
directors, these directors shall be the then acting Chairman of the Board of
CART, plus a CART team owner and a person who is neither an employee, agent or
advisor of CART. Failure of Purchaser to so utilize its reasonable efforts to
assist ARS or to elect the nominees of Sellers to ARS Board shall relieve the
Sellers from having to achieve any of the Revenues in order for the annual
payment of the balance of the purchase price to be paid as set forth in Section
1.2.2 to the extent that the failure to achieve such revenues is attributable to
Purchaser's failure to use such reasonable efforts.
4. COVENANTS OF THE SELLERS. The Sellers covenant and agree that:
4.1. CONDUCT OF ARS'S BUSINESS.
4.1.1. Subject to the provision of 7.6, from and after the
date of this Agreement until the Closing Date, the Sellers will cause
ARS to:
A. carry on its business in the normal and
ordinary course and consistent
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with the manner in which the same was
heretofore being conducted;
B. maintain and keep its properties in good
condition and repair, reasonable wear and
tear and damage due to casualty excepted;
C. keep in force and effect insurance
comparable in amount, scope and coverage to
that which it presently maintains;
D. perform in all material respects all of its
obligations and commitments; and
E. keep all of its material leases of real and
personal property in force and effect.
4.1.2. From and after the date of this Agreement until the
Closing Date, the Sellers will prohibit ARS from:
A. redeeming or repurchasing any outstanding
shares of ARS's Stock;
B. issuing or agreeing to issue any additional
shares of ARS's Stock or granting options or
issuing warrants to acquire such shares;
C. making any commitments or contracts of any
kind or nature, or incurring any
obligations or liabilities, exceeding
$25,000.00 in the aggregate, except in the
ordinary course of business;
D. increasing any salaries being paid to any
employees in excess of salaries being paid
to them at the date hereof;
E. making any loans to any officers or
directors; or
F. discharging or satisfying any lien or
encumbrance or paid any obligation or
liability, fixed, accrued or contingent,
except current liabilities reflected in its
Audited Balance Sheet, and current
liabilities incurred in the ordinary course
of business subsequent to the date of the
Audited Balance Sheet;
G. mortgaging, pledging or subjecting to lien,
charge, security interest or to any other
encumbrance any of its assets or properties;
H. transferring or leasing any of its assets or
properties except in the ordinary course of
business which adjustments would not have a
Material Adverse Effect;
I. canceling or compromising any debt or claim,
and other than
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adjustments made with respect to contracts
for the purchase of supplies, the sale of
products or the rendering of services in the
ordinary course of business which
adjustments would not have a Material
Adverse Effect;
J. waiving or releasing any rights;
K. transferring or granting any rights under
any material concessions, leases,
licenses, agreements, patents,
inventions, trademarks, trade names,
copyrights, or with respect to know-how;
L. entering into any transaction other than in
the ordinary course of business;
M. suffering any material casualty loss;
N. declaring any dividend or making any
distribution to its shareholders; or
O. entering into any transaction which would
cause any of the Sellers' warranties and
representations contained in this Agreement
not to be true and correct in all material
respects on and as of the Closing Date.
4.2. ACCESS TO DOCUMENTS. From the date of this Agreement until the
Closing Date, the Sellers will permit the Purchaser and its attorneys,
accountants, appraisers and other representatives access at all reasonable times
to the properties, files, books and records of ARS, as well as to all
information relating to its operations, financial condition, properties, taxes,
contracts and commitments.
4.3. FURTHER ACTIONS. At the closing, the Sellers will, at the request
of the Purchaser, execute and deliver to the Purchaser all such further
assignments, endorsements and such other documents as the Purchaser may
reasonably request in order to perfect the transfer, assignment and delivery to
the Purchaser of the Shares owned by it.
4.4. EXCLUSIVITY. Sellers grant to Purchaser the exclusive right to
acquire the shares until June 30, 1998. Sellers shall not (i) solicit, initiate
or encourage the submission of any proposal or offer from any person relating to
the acquisition of any capital stock or other voting securities, or any
substantial portion of the assets of, ARS (including any acquisition structured
as a merger, consolidation or share exchange) or (ii) participate in any
discussions or negotiations regarding, furnishing any information with respect
to, assist or participate in, or facilitate in any other manner any effort or
attempt by any person to do or seek any of the foregoing. Sellers will notify
Purchaser immediately if any person makes any proposal, offer, inquiry or
contact with respect to any of the foregoing.
5. COVENANTS OF THE PURCHASER. The Purchaser covenants and agrees that:
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5.1. CONDUCT OF BUSINESS. The Purchaser will not take any action which
would cause any of the Purchaser's warranties and representations contained in
this Agreement not to be true and correct in all material respects on and as of
the Closing Date.
5.2. FURTHER ACTIONS. The Purchaser will, at the request of the
Sellers, execute and deliver to the Sellers at the closing, all such further
assignments, endorsements and such other documents as the Sellers may reasonably
request in order to consummate the transactions contemplated by this Agreement.
6. CONDITIONS PRECEDENT TO OBLIGATIONS OF THE PURCHASER. The obligations of the
Purchaser to consummate the transactions contemplated by this Agreement are
subject, at the Purchaser's option, to the satisfaction at or prior to the
Closing Date of each of the following conditions:
6.1. CORRECTNESS OF WARRANTIES AND REPRESENTATIONS. The warranties and
representations of the Sellers contained in Section 2 of this Agreement shall be
true and correct in all material respects on and as at the Closing Date, with
the same force and effect as though the same had been made on and as of the
Closing Date, and the Sellers shall have delivered to the Purchaser a
certificate to such effect, signed by each of the Sellers, dated the Closing
Date.
6.2. COMPLIANCE WITH CONDITIONS. All of the terms, covenants and
conditions of this Agreement required to be complied with and performed by the
Sellers at or prior to the Closing Date shall have been duly complied with and
performed in all material respects.
6.3. OPINION OF COUNSEL FOR THE SELLERS. The Purchaser shall have
received an opinion of Cox, Hodgman & Giarmarco, P.C., counsel for the Sellers,
dated the Closing Date, in the form and to the effect set forth in Exhibit C
annexed hereto.
6.4. ABSENCE OF LEGAL PROCEEDINGS. No action or proceeding shall have
been instituted or affirmatively threatened before a court or any other
governmental body, or by any public authority or agency, seeking to restrict or
prohibit the sale by the Sellers to the Purchaser of the Shares or the operation
by the Purchaser of the business presently conducted by ARS.
6.5. ABSENCE OF MATERIAL DAMAGE TO PROPERTY. Between the date of this
Agreement and the Closing Date there shall not have occurred, (i) any casualty
(irrespective of any insurance relating thereto) to any of ARS's properties or
assets as a result of which the monetary amount of damage or destruction caused
thereby aggregates twenty-five percent (25%) or more of the aggregate book value
shown on ARS's books for all of its fixed assets.
6.6. DELIVERY OF FINANCIAL STATEMENTS. The Purchaser shall have
received from the Sellers, as and when prepared by ARS, the unaudited balance
sheets of ARS as at each month end after December 31, 1997 and the related
unaudited statements of operations and retained earnings of ARS for each such
period then ended, including, in each case, the related notes and schedules
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thereto, which financial statements shall fairly present (and delivery of which
shall constitute Sellers' representation that they do fairly present) ARS's
financial position as at each such month end and its results of operations for
each such period then ended, shall have been prepared in accordance with
generally accepted accounting principles consistently applied, shall contain all
adjustments which are necessary to a fair statement of the results for the
interim periods presented.
6.7. COVENANT NOT TO COMPETE. Sellers U.E. Patrick and Roger Bailey
each shall have entered into a Covenant Not to Compete (the "COVENANT") with
ARS, substantially in the form attached hereto as Exhibit D.
6.8. DELIVERY OF RESIGNATIONS, MINUTE BOOKS, STOCK BOOKS. The Purchaser
shall have received (i) the written resignation of the officers and directors
(other than U.E. Patrick and Roger Bailey as Directors and Roger Bailey as
President and Gary Donahoe as Vice President --as set forth in Sections 3.5 and
7.8) of ARS whose names are set forth in Exhibit E annexed hereto; (ii) all of
ARS's corporate minute books, stock books, stock transfer ledgers and corporate
seals; and (iii) such other items and documents of or relating to ARS as the
Purchaser may reasonably request as are consistent with the purposes of this
Agreement.
6.9. CERTIFIED ResolUTIONS. The Purchaser shall have received from the
Sellers certified copies of all resolutions adopted by the Board of Directors of
the ARS necessary in order to authorize the purchase of the Shares pursuant to
this Agreement.
6.10. SECTION 338(H)(10) ELECTION. The parties agree that in connection
with the sale of the Shares contemplated hereby, the parties shall cause an
express election pursuant to Section 338(h)(10) of the Internal Revenue Code (a
SECTION 338 "ELECTION") to be made, and shall comply with the rules and
regulations applicable to such Section 338 Election.
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6.10.1 For purposes of executing a Section 338 Election, on
or prior to the Closing Date, the Sellers and the Purchasers (and/or
ARS as necessary) jointly shall execute four (4) copies (three [3] for
the Purchaser and one [1] for the Sellers) of Internal Revenue Service
Form 8023 (or any successor form) and all attachments required to be
filed therewith pursuant to applicable Treasury regulations. The forms
relating to the Section 338 Election for federal, state and local tax
purposes hereinafter shall be referred to as the "FORMS". The Purchaser
and the Sellers agree that the Forms shall be filed with the
appropriate tax authorities not earlier than sixty (60) days before the
latest date for the filing thereof. At least one hundred twenty (120)
days prior to the latest date for the filing of such Form, the Sellers
shall prepare and submit to the Purchaser any necessary corrections,
amendments or supplements to such Form and the attachments thereto, as
executed the Sellers and the Purchaser (and/or ARS as necessary) on or
before the Closing Date. The Sellers shall not file any Form or the
attachments thereto as corrected, amended or supplemented unless they
shall have obtained the Purchaser's consent thereto, which consent
shall not be unreasonably withheld. On or prior to the thirtieth (30th)
day after the Purchaser's receipt of such corrections, amendments or
supplements from the Sellers, the Purchaser shall deliver to the
Sellers either (A) its consent to such filing or (B) a written notice
specifying in reasonable detail all disputed items and the basis
therefor. If, within thirty (30) days after Sellers' receipt of the
written notice described in clause (B) above, the Sellers and the
Purchaser have been unable to resolve their differences, any remaining
disputed issues shall be submitted to a nationally recognized
independent public accounting firm in the United States (other than a
firm which then serves, has been selected to serve in the future, or
has served within the past three [3] years as, the independent auditor
for the Sellers or any of their affiliates) selected by the Sellers,
and reasonably acceptable to the Purchaser, to resolve the disputed
issues in a final, binding manner after hearing the views of both
parties. In that event, the Sellers and the Purchaser shall execute and
consent to the filing of the corrected, amended or supplemented Form in
the manner determined by such accounting firm. In no event, however,
shall the Forms be filed later than fifteen (15) days before they are
due. The fees and expenses of the accounting firm shall be shared
equally.
6.10.2 For purposes of making a Section 338 Election, Exhibit
F shall set forth an allocation of the Purchaser's "ADJUSTED GROSSED-UP
BASIS" in the Shares (within the meaning of the Treasury Regulations
under Section 338 of the Internal Revenue Code) to the tangible and
intangible assets of ARS as of the Closing Date (the "ALLOCATION"). The
Allocation shall be binding upon the Purchaser and the Sellers for
purposes of allocating the "DEEMED SELLING PRICE" (within the meaning
of the Treasury Regulations) among the assets of ARS. Neither party
shall file any tax return, or take a position with a tax authority,
that is inconsistent with the Allocation.
6.11 NO CHANGE. Since December 31, 1997, no change in the business,
assets or financial condition of ARS shall have occurred which has or will have
a Material Adverse Effect.
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7. CONDITIONS PRECEDENT TO OBLIGATIONS OF THE SELLERS. The obligations of the
Sellers to consummate the transactions contemplated by this Agreement are
subject, at Sellers' option, to the satisfaction at or prior to the Closing Date
of each of the following conditions:
7.1. CORRECTNESS OF WARRANTIES AND REPRESENTATIONS. The warranties and
representations of the Purchaser contained in Section 3 of this Agreement shall
be true and correct in all material respects on and as at the Closing Date, with
the same force and effect as though the same had been made on and as of the
Closing Date, and the Purchaser shall have delivered to the Sellers a
certificate to such effect, signed by an authorized officer of the Purchaser,
dated the Closing Date.
7.2. COMPLIANCE WITH CONDITIONS. All of the terms, conditions and
covenants of this Agreement required to be complied with and performed by the
Purchaser on or prior to the Closing Date shall have been duly complied with and
performed in all material respects.
7.3. OPINION OF COUNSEL FOR THE PURCHASER. Sellers shall have received
an opinion of Butzel Long, counsel for the Purchaser, dated the Closing Date, in
the form and to the effect set forth in Exhibit G annexed hereto.
7.4. ABSENCE OF LEGAL PROCEEDINGS. No action or proceeding shall have
been instituted or affirmatively threatened before a court or any other
governmental body, or by any public authority or agency, seeking to restrict or
prohibit the sale by Sellers to the Purchaser of the Shares or the operation by
the Purchaser of the business presently conducted by ARS.
7.5. CERTIFIED RESOLUTIONS. The Sellers shall have received from the
Purchaser certified copies of all resolutions adopted by the Board of Directors
of the Purchaser necessary in order to authorize the purchase of the Shares
pursuant to this Agreement.
7.6. DISTRIBUTIONS PRIOR TO CLOSING. Anything to the contrary
notwithstanding, the parties agree that, prior to the Closing, ARS shall
distribute to its shareholders on February 28, 1998, by way of dividends or
otherwise, all cash, accounts receivable (subject to all accounts payable), its
entire interest in the LLC, and the partnership interests with respect to the
real estate located in Melbourne, Florida. The cash distributed shall be
adjusted to reflect any obligations that ARS may have with respect to engine
deposits, unearned income related to 1998 and beyond, or other matters recorded
on ARS's financial statements which reflect future obligations of ARS, all of
which shall be accounted for in accordance with past practices. In the event
that the distribution of cash is less than or greater than the amount as finally
determined by ARS's accountants, ARS or the Sellers, as the case may be, shall
correct such error by ARS distributing to Sellers or Sellers returning to ARS in
cash the amount so determined within thirty (30) days after the Closing. In
addition to the distributions described in this Section 7.6, in the event that
the Savannah Racetrack of Savannah, Georgia, or the trustee in bankruptcy for
said Track makes a distribution for unpaid sanction fees for the 1997 race to
CART and ARS, then fifty percent (50%) of such distribution shall be paid
immediately to the Sellers and shall be accounted for as if such amount were an
Account Receivable as set forth herein and distributed on February 28, 1998.
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7.7 ACCOUNTS RECEIVABLE. With respect to the Accounts Receivable being
distributed to Sellers as referred to in Section 7.6 (the "Assigned Accounts"),
all receipts from each of said accounts, however obtained, including but not
limited to the withholding of monies due such accounts by ARS, shall be deemed
to be a payment on the Assigned Account until all such accounts have been paid
in full, regardless of the intent of the obligor for such account. Such amounts
so collected shall be immediately paid to Sellers.
7.8. EMPLOYMENT CONTRACT. Purchaser shall have entered into
an Amendment to the Employment Contract of Roger Bailey in the form attached
hereto as Exhibit H.
8. SIMULTANEOUS CLOSING. Purchaser has entered into an agreement to purchase the
assets of BP immediately after the Closing contemplated by this Agreement. In
the event that for any reason whatsoever Purchaser does not purchase the assets
of BP contemporaneous with the Closing of this transaction pursuant to the terms
of the Asset Purchase Agreement attached hereto as Exhibit K, then this
transaction shall be null and void and of no force or effect and all of the
transfers and other actions taken pursuant to this Agreement shall be rescinded
and the parties shall be returned to their same status as existed immediately
prior to the Closing pursuant to this Agreement and the transactions
contemplated to sell and purchase as evidenced hereunder shall be cancelled and
of no further force or effect.
9. THE CLOSING
9.1. CLOSING AND CLOSING DATE. The closing hereunder (herein referred
to as the "CLOSING") shall take place at a mutually convenient location and at a
mutually convenient time simultaneously with the closing of the initial public
offering of CART's common stock, provided that all conditions to the obligations
of the Purchaser and of the Sellers set forth, respectively, in Sections 6 and 7
hereof shall have been satisfied or waived. The date of the Closing is referred
to in this Agreement as the "CLOSING DATE". Notwithstanding any other provision
of this Agreement, if the Closing fails to occur by June 30, 1998, then, in such
event, Purchaser or Sellers, in addition to any other rights they may have,
shall have the right, exercisable by written notice, to terminate this
Agreement, such termination to be effective upon the date set forth in such
notice; provided, however, that nothing contained in this Section 9.1 shall
affect or impair any rights or obligations arising prior to or at the time of
termination of this Agreement, or that may arise by an event causing the
termination of this Agreement.
9.2. PROCEEDINGS AT CLOSING.
9.2.1. All proceedings taken and all documents to be executed
and delivered by the parties at the Closing shall be deemed to have
been taken and executed simultaneously, and no proceedings shall be
deemed taken nor documents executed or delivered until all have been
taken, executed and delivered.
9.2.2. At the Closing, the Sellers shall deliver or cause to
be delivered to the
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Purchaser the following:
A. Share certificates evidencing the Shares,
duly endorsed or accompanied by
appropriate stock transfer powers duly
executed;
B. The certificate referred to in Section 6.1
hereof;
C. The opinion of counsel for the Sellers
referred to in Section 6.3 hereof;
D. The list of Sellers with the number of
options for each Seller and the purchase
price for the shares which any Seller has
elected to purchase pursuant to Sections
1.2.4 and 1.2.5, respectively;
E. A duly executed Option Agreement from each
Seller to whom options are to be granted as
referred to in Section 1.2.4;
F. The Covenant Not to Compete duly executed by
U.E. Patrick as referred to in Section 6.7;
G. The Covenant Not to Compete duly executed by
Roger Bailey as referred to in Section 6.7;
and
H. The executed Amendment to Employment
Agreement of Roger Bailey.
9.2.3. At the Closing, the Purchaser shall deliver or cause
to be delivered to the Sellers the following:
A. The Purchase Price, in the form of the
Purchaser's certified checks in the amounts
and to the respective Sellers as set forth
on Exhibit A.
B. The certificate referred to in Section 7.1
hereof;
C. The opinion of counsel for the Purchaser
referred to in Section 7.3;
D. The certified resolutions referred to in
Section 7.5 hereof;
E. A duly executed Option Agreement to each
Seller to whom options are to be granted as
referred to in Section 1.2.4 hereof and the
stock to be purchased as referred to in
Section 1.2.5 hereof; and
F. The executed Amendment to the Employment
Contract with Roger Bailey.
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10. INDEMNIFICATION.
10.1 INDEMNIFICATION OF PURCHASER BY SELLERS. The Sellers covenant and
agree that they will indemnify and hold the Purchaser and its officers,
directors, employees and agents harmless from and against any and all losses,
damages, liabilities, obligations, and reasonable costs and expenses incurred or
sustained by the Purchaser by reason or arising out of any material breach of
any warranty, representation, covenant, agreement or obligation of the Sellers
contained in this Agreement, including, but not limited to, any claim by any
taxing authority with respect to taxes (including penalties and interest) due
through the close of business the day prior to the Closing Date for which
adequate provisions for such taxes referred to in Sections 2.8 and 2.22 had not
been made.
10.2 INDEMNIFICATION OF SELLERS BY PURCHASER. The Purchaser covenants
and agrees that it will indemnify and hold the Sellers harmless from and against
any and all losses, damages, liabilities, obligations, and reasonable costs and
expenses incurred or sustained by the Sellers by reason or arising out of any
material breach of any warranty, representation, covenant, agreement or
obligation of the Purchaser contained in this Agreement.
10.3 CLAIMS FOR INDEMNITY. Promptly upon notice of any claim, suit or
demand which any person entitled to indemnity hereunder (the "INDEMNITEE")
believes will give rise to indemnity by the Sellers or the Purchaser, as the
case may be (the "INDEMNITOR"), under Sections 10.1 or 10.2, the Indemnitee
shall give the Indemnitor written notice thereof, and the Indemnitor shall
defend against any such claim, suit or demand, in its name or in the name of the
Indemnitee, as the case may be, at the Indemnitor's expense and with counsel of
its own choice at its own expense. The Indemnitor shall have no obligation or
liability to indemnify with respect to, or in connection with, any claim, suit
or demand which shall be paid, settled or compromised by the Indemnitee without
the prior written consent of the Indemnitor. No right or remedy conferred in
this Section 10.3 is intended to be exclusive of any other right or remedy
available, now or hereafter, at law or in equity or otherwise, to the parties
hereto.
10.4 RIGHT TO OFFSET. To the extent that the Purchaser has suffered any
loss or losses, damages, liabilities or obligations by reason of any breach of
any warranty, representation, covenant, agreement or obligation of the Sellers
contained in this Agreement, the Purchaser shall have the right to offset any
such amounts against any amounts due and owing Sellers.
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<PAGE> 20
11. ARBITRATION. In the event of any dispute among CART, ARS and Sellers under
this Agreement which they are unable to resolve, including but not limited to
whether the criteria as set forth in Section 1.2.2. has been met, or whether the
requirements as set forth in Section 3.5 have been met, the dispute shall be
submitted to arbitration at the request of any party. The party requesting
arbitration shall so notify the other party(ies) in writing and shall specify
the question or questions to be arbitrated. Within ten (10) days after receipt
of such notification, CART or ARS shall select one arbitrator and Sellers shall
select one arbitrator and each shall give the name and address thereof to the
other party. The two arbitrators shall select a third disinterested arbitrator
to complete a panel consisting of three arbitrators. In the event one party
fails to select an arbitrator within the required time period, the arbitrator
who has been selected may select one disinterested arbitrator and the two
arbitrators may proceed to resolve the dispute. Within ten (10) days of the
selection of the second arbitrator, or third arbitrator, as the case may be, the
panel of arbitrators shall schedule a hearing on the disputed issues to be held
within thirty (30) days after the selection of the final arbitrators. The
arbitrators shall render their written decision within thirty (30) days of the
last day of the hearing. The decision of a majority of the arbitrators shall be
final and conclusive on all parties. Such decision shall be entered as a final
judgement in a court of competent jurisdiction and shall be a final,
nonappealable order. The arbitration shall be conducted in accordance with the
commercial arbitration rules of the American Arbitration Association except as
specified herein. The arbitration shall take place in Troy, Michigan or such
other location as the parties may agree. The arbitrator shall substantially
comply with the Michigan rules of evidence; shall grant essential but limited
discovery; shall provide for the exchange of witness lists and exhibit copies;
and shall conduct a pretrial conference and consider dispositive motions. Each
party shall have the right to request the arbitrator to make findings of
specific factual issues. The arbitrator shall decide all issues and disputes in
conformity with applicable law and shall have no authority to alter the terms of
this Agreement. Each party shall cooperate with the arbitrator to comply with
procedural time requirements and the failure of either to do so shall entitle
the arbitrator to extend the arbitration proceedings accordingly and to impose
sanctions on the party responsible for the delay, payable to the other party. If
the arbitrator determines that a party has failed to act in good faith or with a
reasonable basis in connection with the dispute, the arbitrator shall be
entitled to award, against the party so acting, the fees and expenses of the
arbitration and the costs and expenses incurred by the other party in connection
with the arbitration, included but not limited to reasonable attorneys' fees. In
the absence of such a finding, the fees and expenses of the arbitration shall be
borne equally by Purchaser and Sellers (except that each party shall be solely
responsible for the fees and expenses of its counsel and other professionals and
experts retained by it).
12. MISCELLANEOUS.
12.1. ANNOUNCEMENTS. All announcements relating to the transactions
contemplated hereby shall be mutually approved by, and shall not be released
except with the mutual consent of the parties thereto, except where immediate
disclosure, in the opinion of counsel for the party concerned, is required by
law.
12.2. BROKERAGE. The Sellers warrant and represent to the Purchaser
that they have not incurred any obligation or liability, contingent or
otherwise, for brokerage or finder's fees or agent's
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<PAGE> 21
commissions or other like payment in connection with this Agreement or the
transactions contemplated hereby. The Sellers covenant and agree to indemnify
and hold the Purchaser harmless from and against any such obligation or
liability (and any reasonable expense or expenses incurred in investigating or
defending the same, including counsel fees) based in any way on any agreements,
arrangements or understandings claimed to have been made by the Sellers with any
third party. The Purchaser warrants and represents to the Sellers that it has
not incurred any obligation or liability, contingent or otherwise, for brokerage
or finder's fees or agent's commissions or other like payment in connection with
this Agreement or the transactions contemplated hereby. The Purchaser covenants
and agrees to indemnify and hold the Sellers harmless from and against any such
obligation or liability (and any reasonable expense or expenses incurred in
investigating or defending the same, including counsel fees) based in any way on
any agreements, arrangements or understandings claimed to have been made by the
Purchaser with any third party.
12.3. SURVIVAL OF WARRANTIES AND REPRESENTATIONS. Each party hereto
covenants and agrees that its warranties and representations contained in this
Agreement and in any document delivered or to be delivered pursuant hereto shall
survive the Closing Date hereunder until December 31, 2000.
12.4. EXPENSES. Whether or not the transactions contemplated by this
Agreement are consummated, each of the parties hereto shall pay the fees and
expenses of its counsel, accountants, other experts and all other expenses
incurred by such party incident to the negotiation, preparation and execution of
this Agreement.
12.5. NOTICES. All notices, requests, demands and other communications
which are required or permitted to be given under this Agreement shall be in
writing and shall be deemed to have been duly given upon the delivery or mailing
thereof, as the case may be, if delivered personally or sent by registered or
certified mail, return receipt requested, postage prepaid:
(a) If to the Seller, to: U.E. Patrick
Patrick Exploration Company
301 W. Michigan Ave.
P.O. Box 747
Jackson, MI 49204-0747
with a copy to: Basil M. Briggs, Esq.
Cox, Hodgman & Giarmarco,
P.C. - Suite 500
201 West Big Beaver Road
Troy, MI 48084-4160
(b) If to the Purchaser, to: Championship Auto Racing
Teams, Inc.
755 W. Big Beaver Road,
Suite 800
Troy, MI 48084-4160
with a copy to: Jack Bjerke, Esq.
21
<PAGE> 22
Capital Square, Suite 1800
65 East State Street
Columbus, OH 43215-4294
with a copy to: Justin. G. Klimko, Esquire
Butzel Long
150 W. Jefferson, Ste. 900
Detroit, MI 48226-4430
or to such other address as either the Sellers or the Purchaser shall have
specified by notice in writing to the other.
12.6. WAIVERS. Either the Sellers or the Purchaser may, by written
notice to the other, (a) extend the time for the performance of any of the
obligations or other actions of the other; (b) waive any inaccuracies in this
Agreement or in any document delivered pursuant hereto by the other; (c) waive
compliance with any of the terms, conditions or covenants required to be
complied with by the other hereunder; and (d) waive or modify performance of any
of the obligations of the other hereunder. The waiver by any party hereto of a
breach of any provision of this Agreement shall not operate or be construed as a
waiver of any other or subsequent breach.
12.7. ENTIRE AGREEMENT. This Agreement constitutes the entire
agreement between the parties with respect to the subject matter hereof.
12.8. BINDING EFFECT; BENEFITS. This Agreement shall inure to the
benefit of and be binding upon the parties hereto and their respective
successors and assigns. Nothing in this Agreement, expressed or implied, is
intended to confer on any person other than the parties hereto, or their
respective successors and assigns, any rights, remedies, obligations or
liabilities.
12.9. FULFILLMENT OF CONDITIONS. The parties hereby covenant and agree
to use their reasonable efforts to fulfill all of the terms and conditions
contained in this Agreement, and to take such action as may be reasonably
required to obtain all necessary consents, permits, authorizations and approvals
of third parties which are conditions of this Agreement.
12.10. LAW GOVERNING. This Agreement shall be governed by and construed
in accordance with the laws of the State of Michigan, without regard to choice
of law provisions which would require the application of the laws of any other
jurisdiction.
12.11. HEADINGS. Headings on the Articles and Sections in this
Agreement are for reference purposes only and shall not be deemed to have any
substantive effect.
12.12. COUNTERPARTS. This Agreement may be executed in any number of
counterparts, each of which shall be deemed an original but all of which
together shall be deemed to be one and the same instrument.
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<PAGE> 23
IN WITNESS WHEREOF, the Sellers have caused this Agreement to be duly
executed in each of their names, and the Purchaser has caused this Agreement to
be duly executed in its corporate name by one of its duly authorized officers,
all as of the date first above written.
Witnesses:
/s/ BASIL M. BRIGGS
- -------------------------------- /s/ U.E. PATRICK
------------------------------
/s/ JUSTIN G. KLIMKO U.E. PATRICK
- --------------------------------
/s/ BASIL M. BRIGGS
- -------------------------------- /s/ STEVEN E. PATRICK
------------------------------
/s/ JUSTIN G. KLIMKO STEVEN E. PATRICK
- --------------------------------
/s/ BASIL M. BRIGGS
- -------------------------------- /s/ MARK A. PATRICK
------------------------------
/s/ JUSTIN G. KLIMKO MARK A. PATRICK
- --------------------------------
/s/ BASIL M. BRIGGS
- -------------------------------- /s/ RICK L. PATRICK
------------------------------
/s/ JUSTIN G. KLIMKO RICK L. PATRICK
- --------------------------------
/s/ BASIL M. BRIGGS
- -------------------------------- /s/ SHERRY PATRICK-BURKE
------------------------------
/s/ JUSTIN G. KLIMKO SHERRY PATRICK-BURKE
- --------------------------------
/s/ BASIL M. BRIGGS
- -------------------------------- /s/ ROGER BAILEY
------------------------------
/s/ JUSTIN G. KLIMKO ROGER BAILEY
- --------------------------------
"SELLERS"
CHAMPIONSHIP AUTO RACING
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<PAGE> 24
TEAMS, INC., a Delaware corporation
- ------------------------------- /s/ Andrew Craig
By: -----------------------------
Chairman and CEO
Its: ----------------------------
- -------------------------------
"PURCHASER"
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<PAGE> 25
EXHIBITS:
A - List showing owners of record (Sellers) of ARS Stock
B - Disclosure Schedule - Documents
C - Opinion of counsel to Sellers - Cox, Hodgman & Giarmarco, P.C.
D - Covenant not to Compete - U.E. Patrick and Roger Bailey
E - List of Officers and Directors of the Corporation
F - Section 338 Allocation
G - Opinion of counsel to Purchaser - Butzel Long
H - Amendment of Employment Contract with Roger Bailey
I - Asset Purchase Agreement - CART / BP
25
<PAGE> 26
ASSET PURCHASE AGREEMENT
This ASSET PURCHASE AGREEMENT ("Agreement") is made this ___ day of
March, 1998, between CHAMPIONSHIP AUTO RACING TEAMS, INC., a Delaware
corporation ("CART" or the "PURCHASER"), and BP AUTOMOTIVE, LTD., a Michigan
corporation ("SELLER").
WITNESSETH: Seller is in the business of selling racing
wheels and related products (the "Business"); CART has filed a Registration
Statement with the Securities and Exchange Commission for the purpose of having
an initial public offering of its common stock ("IPO"); and in conjunction
therewith, CART desires to purchase the Business and certain assets from Seller
upon the terms and subject to the conditions hereinafter set forth; NOW,
THEREFORE, in consideration of the premises and the mutual covenants,
representations and agreements and warranties contained, the parties agree as
follows: 1 PURCHASE AND SALE OF ACQUIRED ASSETS 1.1 Purchase and Sale.
Upon the terms and subject to the conditions of this Agreement, Seller agrees to
sell, assign, transfer, convey and deliver, or cause to be sold, assigned,
transferred, conveyed and delivered, to Purchaser and Purchaser agrees to
purchase at the Closing, all the acquired assets free and clear of all liens,
liabilities or obligations.
1.2 Acquired Assets. The term "ACQUIRED ASSETS" means all the assets,
properties, goodwill and rights owned by Seller on the Closing Date and used or
usable in connection with the operation of the Business, of whatever kind and
nature, real or personal, tangible or intangible, other than the Excluded Assets
(as defined in Section 1.4), including, but not limited to the following:
(a) all machinery, equipment, tools, dies, jigs,
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patterns, trade fixtures, molds, spare parts, vehicles, furniture,
designs, drawings and supplies;
(b) all rights in, to and under all leases of tools,
furniture, machinery, supplies, vehicles, equipment and other items of
personal property listed on Exhibit A attached hereto;
(c) all of Seller's right, title and interest in and to the
Agreement between Lola Cars and American Racing Series, Inc., a
Michigan corporation ("ARS"), attached hereto as Exhibit B;
(d) all real property, leasehold and other interests in real
property of Seller, in each case together with all buildings,
improvements, fixtures and all appurtenances thereto;
(e) all right, title and interest of Seller in, to and under
the following, which shall be referred to herein collectively as the
"INTELLECTUAL PROPERTY RIGHTS";
(i) all inventions (whether patentable or
unpatentable and whether or not reduced to
practice), all improvements thereto, and all
patents, patent applications, and patent
disclosures, together with all reissuances,
continuations, continuations-in-part,
revisions, extensions, and reexaminations
thereof;
(ii) all trademarks, service marks, trade dress,
logos, trade names, together with all
translations, adaptations, derivations, and
combinations thereof and including all
goodwill associated therewith, and all
applications, registrations, and renewals in
connection therewith;
(iii) all copyrightable works, all copyrights, all
mask works, and all applications,
registrations, and renewals in connection
therewith;
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(iv) all trade secrets and confidential business
information (including ideas, research and
development, technology, know-how, formulas,
compositions, manufacturing and production
processes and techniques, technical data,
designs, drawings, specifications, customer
and supplier lists, pricing and cost
information, and business and marketing
plans and proposals); and
(v) all other proprietary rights, all copies and
tangible embodiments of any of the foregoing
(in whatever form or medium), and all
license agreements (as licensee or licensor)
relating to any of the foregoing;
(f) to the extent legally assignable, all right, title and
interest of Seller in, to and under all franchises, licenses, permits,
orders, certificates, approvals and other governmental authorizations
which are necessary to own or lease and operate the Acquired Assets and
to conduct the Business as it has been conducted by Seller ("PERMITS");
(g) all right, title and interest of Seller in, to and under
all contracts, agreements, including but not limited to purchase
orders, customer orders and work orders (the "Contracts");
(h) all computer programs, including but not limited to the
Peer-to-Peer Network, and a copy of the source code and object code of
all such programs, together with all additions, modifications, updates,
and enhancements thereto; all design specifications including, but not
limited to, program descriptions, system flow charts, file layouts,
report layouts, screen layouts, and all other computer program
documentation; and all user's manuals, training manuals, sales
literature, and other system and operations documentation relating to
such computer programs;
(i) all rights, claims, causes of action and chooses in action
against third parties (including, but not limited to, rights against
suppliers under warranties covering any inventory, machinery or
equipment) existing on the Closing Date, the benefits of which have
been assumed by or assigned
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<PAGE> 29
to Purchaser pursuant to this Agreement;
(j) all books and records relating to the Business, including,
but not limited to, financial, accounting and personnel records,
property records, production records, engineering records,
environmental compliance records, files, invoices, customer lists and
records, supplier lists and records and other data owned or used by
Seller relating to the Acquired Assets described in subparagraphs (a)
through (j) of this Section 1.2; and
(k) all other tangible and intangible assets of Seller
relating to the Business, whether or not carried at value or listed on
the books and records of Seller, and whether or not in the possession
of Seller or others.
1.3 Transfer of Title to Acquired Assets. The sale, assignment, conveyance,
transfer and delivery by Seller of the Acquired Assets shall be made at the
Closing by such bills of sale, assignments, licenses, endorsements and other
appropriate instruments of transfer as shall be necessary to vest in Purchaser,
as of the Closing Date, good and marketable title to the Acquired Assets, free
and clear of all liens.
1.4 Excluded Assets. The term "EXCLUDED ASSETS" means:
(a) minute books, stock records, tax returns, financial
statements and similar corporate records of Seller;
(b) the rights of Seller to any of Seller's claims for any
federal, state, local or foreign tax refunds; and
(c) cash, cash equivalents and accounts receivable
of Seller;
(d) Note Receivable from Ted Wayman to Seller;
(e) other Notes Receivable (if any) of Seller;
(f) Accounts Payable (if any); and
(g) the corporate name, "BP Automotive Ltd.".
1.5 ACCOUNTS RECEIVABLE. With respect to the Accounts Receivable
being Excluded Assets and retained by Seller as referred
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<PAGE> 30
to in Section 1.4(c), (the "Assigned Accounts"), all receipts from each of said
accounts, however obtained, including but not limited to the withholding of
monies due such accounts by Seller, shall be deemed to be a payment on the
Assigned Account until all such accounts have been paid in full, regardless of
the intent of the obligor for such account. Such amounts so collected shall be
immediately paid to Seller. Notwithstanding the foregoing, Buyer shall have no
obligation to collect or pursue the collection of Accounts Receivable retained
by Seller.
1.6 CERTAIN LIABILITIES ASSUMED. Upon the terms and subject to the
conditions of this Agreement, Purchaser shall assume and agree to pay, perform
and discharge all obligations and liabilities of Seller under the contracts and
agreements which are to be acquired by Purchaser pursuant to the provisions of
this Agreement, and with respect to which Purchaser succeeds to the rights of
Seller thereunder, to the extent that such obligations and liabilities accrue
from and after the Closing Date (the "Assumed Liabilities").
1.7 LIABILITIES NOT ASSUMED. Purchaser shall not assume and shall not
be responsible to pay, perform or discharge any other obligations, liabilities,
contracts or commitments of Seller of any kind or nature whatsoever.
1.8 PURCHASE PRICE. Purchaser shall pay to Seller at Closing a purchase
price, (the "PURCHASE PRICE") for all the Acquired Assets an amount equal to the
following:
1.8.1 CASH PURCHASE PRICE. $1,500,000 which shall be paid
at Closing; plus
1.8.2 EARN OUT PURCHASE PRICE. An aggregate of $300,000 in
three (3) equal annual payments each year for three (3) years on the anniversary
of the Closing, if and only if Purchaser shall achieve revenues equal to or
exceeding $401,300.00 (the "REVENUES") in 1998 and 1999, from wheel sales and
parts and chassis commissions, and $51,300.00 for year 2000 from wheel sales,
(net of cost of goods sold). Included in the revenues from wheel sales shall be
the revenues (net of cost of goods sold) from the sales of the 1993-20 Lola
wheels. Further, the earn out shall require total Revenues as set forth in
Sections 1.2.2.1. through 1.2.2.5. of the Stock Purchase Agreement (Exhibit G)
produced by both Seller and ARS of $3,943,800 for the years 1998-1999 and
$573,800 in the year 2000.
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<PAGE> 31
1.8.3 SHORTFALL AND MAKE UP. In the event that there is a
shortfall in 1998 and/or 1999 in the Revenues, the annual payments by CART will
be reduced dollar for dollar (to not less than $0) by the shortfall for that
year, provided, however, if such shortfall is subsequently made up in 1999 or
2000, the payment not made to the Seller the prior year shall be paid to it in
the subsequent year on a dollar-for-dollar basis to the extent made up.
1.8.4 CART LONG TERM STOCK OPTION. James McGee ("MCGEE"), a
Shareholder of Seller, shall be granted options to purchase 2,117 shares of the
common stock of CART at a per-share price equal to the price offered to the
public in the IPO if, and only if, 1998 Revenues equal or exceed the amounts
specified in Section 1.8.2. Any shortfall for 1998 may be made up by the Seller
and/or McGee rendering a cash contribution to CART for the amount of the
shortfall within 30 days after written determination of such shortfall has been
delivered to the Seller. Upon rendering such payment, the McGee shall be
qualified for the said stock options. These options shall vest one year after
the closing of the IPO and they may be exercised at any time within five (5)
years after they vest. Shares issuable upon exercise of the option will not be
registered under the Securities Act of 1933 or any state securities laws and
will constitute restricted securities within the meaning of Rule 144 under the
Securities Act.
1.8.5 CART STOCK PURCHASE. McGee shall subscribe for 2500
shares of CART's common stock at a per-share price equal to the price offered to
the public in the IPO. The stock shall be fully registered and listed in
connection with CART's IPO at the Closing. McGee shall pay for such stock, in
cash, at the Closing, on the Closing Date and shall acknowledge that he has
received a copy of the current final prospectus for the IPO. McGee has not made,
and will not make, any commitment to purchase such shares until such time as the
registration statement for the CART IPO has become effective.
1.8.6 ALLOCATION. The Purchase Price shall be allocated among
the Acquired Assets as set forth on Exhibit C. The Purchase Price shall be
allocated to the Assets (other than Goodwill) in an amount equal to their net
book value as carried on Seller's balance sheet and the balance of the Purchase
Price shall be allocated to Goodwill. Seller and Purchaser each hereby covenant
and agree that it will not take a position on any income tax return, before any
governmental agency charged with the
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<PAGE> 32
collection of any income tax, or in any judicial proceeding that is in any way
inconsistent with the terms of this Section 1.8.6.
2 WARRANTIES AND REPRESENTATIONS OF THE SELLER. Seller warrants and represents
to Purchaser as follows:
2.1 Authority and Capacity. Seller has, and on the Closing Date will have, all
requisite power, authority and capacity to enter into this Agreement and to
perform the obligations required of it hereunder. This Agreement is a valid and
binding obligation of Seller, enforceable against Seller in accordance with its
terms, subject, however, to the effect of applicable bankruptcy, insolvency,
reorganization, moratorium and similar laws as now or hereafter are in effect or
as to the application of equitable principles in any proceeding, legal or
equitable.
2.2 Authorization. The execution and delivery of this Agreement and all other
agreements, documents and instruments provided for herein by Seller, and the
consummation of all transactions contemplated hereby and thereby, has been duly
authorized by all requisite corporate action of Seller (including approval by
Seller's shareholders in accordance with applicable law and the provisions of
Seller's Articles of Incorporation and Bylaws).
2.3 Title to the Acquired Assets. Seller has good and marketable title to all of
the Acquired Assets free and clear of all Liens of any nature whatsoever, except
as set forth on the Disclosure Schedule attached hereto as Exhibit D. The
Acquired Assets include all the assets and properties which are necessary to
conduct the Business as presently conducted, and to perform all of the
contracts, leases, agreements, commitments, purchase orders, work orders,
customer orders, and other arrangements of Seller. The tools, machinery and
equipment included in the assets of Seller are in good operating condition and
are sufficient to enable Buyer to operate the Business as presently conducted.
2.4 Organization, Good Standing and Power. Seller is a corporation duly
organized and validly existing as a corporation in good standing under the laws
of the State of Michigan and has the corporate power and authority to own its
properties, to carry on its business as the same is now being conducted and to
execute and deliver this Agreement and perform its obligations hereunder. Seller
is not required to qualify as a foreign corporation under
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<PAGE> 33
the laws of any jurisdiction.
2.5 No Subsidiaries. Seller does not directly or indirectly own any interest in
or control any other corporation, partnership, limited partnership, limited
liability company, joint venture or other entity.
2.6 Effective Agreement. The execution and performance of this Agreement by the
Seller and compliance with the provisions hereof do not and will not (i)
violate, with or without the giving of notice and/or the passage of time, any
provision of law applicable to the Seller, which such violation could have a
Material Adverse Effect on the Business or the operations or financial condition
of Seller, or (ii) conflict with, or result in a breach or termination of, or
constitute a default under, or result in the creation of any lien, charge or
encumbrance upon any Acquired Assets pursuant to any corporate charter, by-law,
or any other agreement or instrument to which the Seller is a party or by which
it or any of its properties may be bound, the result of which could have a
Material Adverse Effect. As used in this Agreement, "Material Adverse Effect"
means any change, effect or circumstance that, individually or when taken
together with all other like changes, effects or circumstances that have
occurred prior to the date of determination of the occurrence of a Material
Adverse Effect, is or is reasonably likely to be materially adverse to the
Acquired Assets, business, financial condition or results of operations of
Seller, or the ability of Seller to perform its obligations under this
Agreement, or the ability of Buyer to operate the acquired assets and the
business in the manner heretofore operated by Seller.
2.7 Absence of Defaults. Seller is not in default under any of the contracts or
any other contract, agreement, lease or document to which it or any of its
properties is bound, and no event exists with respect thereto which, with or
without the giving of notice and/or the passage of time, would constitute a
default or would reasonably be expected to have a Material Adverse Effect.
Except as set forth on in the Disclosure Schedule, each of the Contracts is a
valid and binding agreement of Seller, enforceable against Seller in accordance
with its terms except as such enforceability may be limited by bankruptcy,
insolvency, reorganization or similar laws affecting creditors' rights
generally, and by principles of equity (whether considered in a proceeding at
law or in equity) and Seller has no knowledge that
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any Contract is not a valid and binding agreement of the other parties thereto.
Seller has fulfilled all material obligations required under each Contract to
have been performed by it prior to the date hereof, and Seller has no reason to
believe that Purchaser will not be able to fulfill, when due, all of its
obligations under the Contracts which remain to be performed after the Closing
Date. Except as set forth on the Disclosure Schedule, the continuation, validity
and effectiveness of each Contract would not be affected by the transfer thereof
to Purchaser under this Agreement and all such Contracts are assignable to
Purchaser without the consent of any other party.
2.8 Financial Statements. The Seller has delivered to the Purchaser copies of
its audited balance sheet as at December 31, 1997 (the "AUDITED BALANCE SHEET")
and its related statement of operations and retained earnings for the year then
ended (the "AUDITED INCOME STATEMENT"), including in each case the related notes
and schedules thereto, if any. The Audited Balance Sheet and Audited Income
Statement fairly present Seller's financial position at December 31, 1997 and
results of operations for period indicated, and have been prepared in accordance
with generally accepted accounting principles consistently applied and contain
all adjustments which are necessary to a fair statement of the results for the
period covered. Except as set forth on the Disclosure Schedule, since December
31, 1997, there has been no change (not including world events or general
economic conditions) which has had a Material Adverse Effect. Seller has no
knowledge of any existing or threatened occurrence, event or development which
it believes will have a Material Adverse Effect.
2.9 Absence of Undisclosed Liabilities. Except to the extent shown or provided
for in the Audited Balance Sheet at December 31, 1997, or disclosed in the
Disclosure Schedule, Seller had no material obligations or liabilities of any
kind, fixed, accrued or contingent, except obligations to perform after December
31, 1997 under open sales contracts, supply contracts, purchase orders and other
commitments incurred in the ordinary course of business.
2.10 Absence of Certain Changes.
(a) Except as otherwise disclosed in the Disclosure Schedule, since
December 31, 1997, Seller has not:
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<PAGE> 35
(i) incurred any obligation or liability, fixed, accrued or
contingent, except normal payroll obligations, and trade obligations
incurred in the ordinary course of business;
(ii) discharged or satisfied any lien or encumbrance or paid
any obligation or liability, fixed, accrued or contingent, except
current liabilities reflected in its Audited Balance Sheet, and current
liabilities incurred in the ordinary course of business subsequent to
the date of the Audited Balance Sheet;
(iii) mortgaged, pledged or subjected to lien, charge,
security interest or to any other encumbrance any of its assets or
properties;
(iv) transferred or leased any of its assets or properties
except in the ordinary course of business;
(v) canceled or compromised any debt or claim, other than
adjustments made with respect to contracts for the purchase of
supplies, the sale of products or the rendering of services in the
ordinary course of business which adjustments would not have a Material
Adverse Effect;
(vi) waived or released any rights;
(vii) transferred or granted any rights under any material
concessions, leases, licenses, agreements, patents, inventions,
trademarks, trade names, copyrights, or with respect to know-how;
(viii) made or entered into any employment contract with any
officer or employee or paid any bonus or increased the compensation of
any officer or employee;
(ix) entered into any transaction other than in the ordinary
course of business;
(x) suffered any material casualty loss; or
(xi) entered into any contract or commitment to make any
material capital expenditure.
(b) Since December 31, 1997, there has not occurred any event
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which could reasonably be expected to cause or result in a Material Adverse
Effect.
2.11 Inventories. The inventories reflected on the Audited Balance Sheet were,
and the inventories will be, on hand at the Closing Date and will be, as the
case may be, acquired in the ordinary course of business at not more than market
prices prevailing at the times of purchase and are usable in the normal
operation of the business (except for the 1993-20 Lola Wheels).
2.12 Products Liability and Warranty Claims. Except as set forth in the
Disclosure Schedule:
(a) Seller has not made any oral or written warranties with
respect to the quality or absence of defects of its products or
services which are in force as of the date of this Agreement;
(b) there are no liabilities of or claims against Seller and,
to the knowledge of Seller, no liabilities or claims are threatened
against Seller, with respect to any product liability (or similar
claim) of Seller or product warranty (or similar claim) of Seller that
relates to any product manufactured or sold by Seller;
(c) Seller has no knowledge of any facts or circumstances
which might reasonably give rise to such liabilities or claims.
2.13 Compliance with Laws. Seller is not in violation of any applicable law,
ordinance, regulation, order or requirement relating to its operations or its
properties which would have a material adverse effect upon its assets,
operations or financial condition.
2.14 Document List. The Disclosure Schedule includes a list of all material
contracts, licenses, permits, approvals, and other agreements, to which Seller
is a party (the "DOCUMENTS"). Complete copies of all such Documents have been
delivered or made available to the Purchaser. Except only as to such Documents,
Seller is not a party to or bound by any:
(a) written or oral contract not made in the ordinary course
of business;
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(b) contract which is not terminable by it without cost or
liability to it or to its successors upon 30 days notice or less;
(c) collective bargaining agreement;
(d) bonus, deferred compensation, profit sharing, pension,
retirement, stock option, stock purchase, hospitalization, insurance or
other plan or arrangement providing for employee benefits;
(e) lease with respect to any property, real or personal,
whether as lessor or lessee;
(f) dealers, manufacturers, representatives or distributors
agreement which is not terminable by it without cost or liability to it
or its successors on thirty (30) days notice or less;
(g) contract requiring material capital expenditures;
(h) material contract for the sale of goods or the rendering
of services continuing for a period of more than 30 days from the
date of this Agreement;
(i) contract for the purchase of supplies, materials or
services for delivery over a period of more than 30 days from the date
of this Agreement;
(j) contract or agreement of any kind continuing for a
period of more than 3 months from the date of this Agreement;
(k) material governmental licenses, permits, approvals or
orders; or
(l) loan agreements, indentures, mortgages or security
agreements
2.15 Employees. The Disclosure Schedule contains a list setting forth the names
of all employees of Seller, the current duties of such employees, the total
compensation paid to such employees during 1997, the current salary paid to such
employee and a description of existing compensation programs for various
categories of employees.
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2.16 Obligations to Employees. All obligations of Seller, whether arising by
operation of law or by contract for payment to trusts or other funds or to any
governmental agency, or to any individual employee or agent (or his heirs,
legatees or legal representatives) with respect to unemployment compensation
benefits, profit sharing, pension or retirement benefits, social security
benefits, or similar obligations have been paid, or shall have been paid on or
before the Closing Date, by Seller, except current amounts accrued but not yet
due. All obligations of Seller, whether arising by operation of law, by contract
or by past practice, for vacation and holiday pay, bonuses and other forms of
compensation which are payable to employees or agents of Seller, have been paid,
or shall have been paid, by Seller, on or before the Closing Date, except
current amounts shown on the Disclosure Schedule which are accrued but not yet
due.
2.17 Insurance List. The Disclosure Schedule contains a list and brief
description of all policies of fire, extended coverage, business interruption,
public and product liability and all other kinds of insurance held by Seller
(the "INSURANCE LIST"). A copy of each such policy has been delivered or made
available to the Purchaser. All such insurance policies are in full force and
effect with all premiums due thereon paid in full (except those premiums which
are paid on an installment basis and indicated as such on the Disclosure
Statement). Seller has not received any notice or other communication from any
issuer of the policies listed on the Insurance List canceling or materially
amending any of such policy, materially increasing any deductibles or retained
amounts thereunder or rejecting any claim under any policy and, to the knowledge
of Seller, no such cancellation, amendment or increase of deductibles is
threatened.
2.18 Real Property; Leases of Real Property. There is no real property owned
or leased by Seller.
2.19 Leases of Personal Property. There are no leases of personal property.
2.20 Books and Records. The books and records of Seller are in all material
respects complete and correct and have been maintained in accordance with sound
business practices and the requirements of applicable law.
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2.21 Litigation. There is no litigation, proceeding or investigation pending
or, to the best knowledge of Seller, threatened by or against Seller or its
properties or business or the transactions contemplated by this Agreement, nor
is Seller aware of any fact or circumstance which they reasonably believe would
be the basis for any such litigation, proceeding or investigation. Seller is not
in violation of or in default with respect to any judgment, order, award, writ,
injunction, decree or rule of any court, governmental authority or any
regulation of any administrative agency or governmental authority, where such
violation or default would have a Material Adverse Effect or would adversely
affect the consummation of the transactions contemplated hereby.
2.22 Tax Returns. Seller has prepared and filed with the appropriate federal,
state and local governmental agencies all tax returns required to be filed, and
has paid all assessments shown to be due and claims to be due thereon. No claim
for the assessment or collection of taxes has been asserted against Seller by
any federal, state or local governmental authority. To the knowledge of Seller,
the federal income tax returns of Seller are not being audited by the Internal
Revenue Service, and Seller has not received notice of any such audit. The
Seller knows of (i) no tax returns or reports which are required to be filed by
Seller which have not been so filed and (ii) no unpaid assessments for any
additional taxes of any fiscal period.
2.23 Benefit Plans. Seller does not maintain an employee benefit plan subject to
the Employee Retirement Income Security Act of 1974.
2.24 Disclosure. No representation or warranty by Seller in this Agreement or in
any Exhibit or Schedule hereto, or in any certificate delivered or to be
delivered pursuant to this Agreement, contains or will contain any untrue
statement of a material fact or omits or will omit any material fact necessary
in order to make the statements contained therein not misleading.
3 WARRANTIES AND REPRESENTATIONS OF PURCHASER. The Purchaser warrants and
represents to the Seller as follows:
3.1 Authority and Capacity. The Purchaser has, and on the Closing Date will
have, all requisite corporate power, authority and capacity to enter into this
Agreement and to perform the
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obligations required of it hereunder, including, specifically, the delivery of
the stock options and stock pursuant to Sections 1.8.4 and 1.8.5. This Agreement
is a valid and binding obligation of the Purchaser, enforceable against
Purchaser in accordance with its terms, subject, however, to the effect of
applicable bankruptcy, insolvency, reorganization, moratorium and similar laws
as now or hereafter are in effect or as to the application of equitable
principles in any proceeding, legal or equitable.
3.2 Organization, Good Standing, Power, Etc. The Purchaser is a corporation duly
organized, validly existing and in good standing under the laws of Delaware and
has the corporate power and authority to own its properties and to carry on its
business as the same is now being conducted.
3.3 Effective Agreement. The execution and performance of this Agreement by the
Purchaser and compliance with the provisions hereof do not and will not (i)
violate, with or without the giving of notice and/or the passage of time, any
provision of law applicable to the Purchaser, which such violation could have a
material adverse effect on the operations or financial condition of the
Purchaser, or (ii) conflict with, or result in a material breach or termination
of, or constitute a default under, or result in the creation of any material
lien, charge or encumbrance upon any of the Purchaser's properties pursuant to
any corporate charter, by-law, or any other material agreement or instrument to
which the Purchaser is a party or by which it or any of its properties may be
bound.
3.4 Good Faith Assistance. Purchaser will cause its officers, employees and
agents to utilize reasonable efforts to assist Seller to secure the Revenues,
including but not limited to, the wheel sales and chassis commission revenues
through the period ending December 31, 2000. In furtherance thereof, Seller, or
its attorneys and/or representatives, shall be permitted access to the documents
described in Section 4.2 through the period ending December 31, 2000. Failure of
Purchaser to so utilize reasonable efforts to assist Seller shall relieve Seller
from having to achieve any of the Revenues in order for the annual payment of
the balance of the purchase price to be paid as set forth in Section 1.8.2 to
the extent that the failure to achieve such revenues is attributable to
Purchaser's failure to use such reasonable efforts.
4 COVENANTS OF THE SELLER. The Seller covenants and agrees
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that:
4.1 Conduct of Business.
4.1.1 From and after the date of this Agreement until the Closing Date, the
Seller will:
(a) carry on its business in the normal and ordinary
course and consistent with the manner in which the same was
heretofore being conducted;
(b) maintain and keep its properties in good
condition and repair, reasonable wear and tear and damage due
to casualty excepted;
(c) keep in force and effect insurance comparable in
amount, scope and coverage to that which it presently
maintains;
(d) perform in all material respects all of its
obligations and commitments; and
(e) keep all of its material leases of real and
personal property in force and effect.
4.1.2 From and after the date of this Agreement until the Closing Date, the
Seller will not:
(a) incur any liability or obligation, fixed
contingent, accrued or otherwise, other than liabilities
incurred in the ordinary course of business consistent with
past practice, or discharge or satisfy any Lien or pay any
liabilities, other than in the ordinary course of business
consistent with past practice, or fail to pay or discharge
when due any material liabilities (individually or in the
aggregate), or fail to perform any material obligations
(individually or in the aggregate);
(b) mortgage, pledge or subject any of its assets to
any mortgage, lien, pledge, security interest, conditional
sales contract or other encumbrance of any nature whatsoever;
(c) make or suffer any amendment or termination of
any material agreement, contract, commitment, lease or
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plan, or cancel, modify or waive any material debts or claims
held by it or waive any rights material to the Business;
(d) sell or in any way transfer or otherwise dispose
of any of its assets or property except for sales of inventory
and other transfers and dispositions in the ordinary course of
business;
(e) suffer any casualty, damage, destruction or loss,
or any material interruption in use, of any material assets or
properties, whether or not covered by insurance, or suffer any
repeated, recurring or prolonged shortage, cessation or
interruption of supplies or utility or other services required
to conduct its business and operations;
(f) institute, settle, or agree to settle any
litigation, action, proceeding, or arbitration related to the
Acquired Assets or the Business;
(g) make any commitments or contracts of any kind or
nature, or incur any obligations or liabilities exceeding
$25,000.00 in the aggregate, except in the ordinary course of
business;
(h) increase any salaries being paid to any employees
in excess of salaries being paid to them at the date hereof;
(i) make any loans to any officers or directors; or
(j) cancel or compromise any debt or claim, other
than adjustments made with respect to contracts for the
purchase of supplies, the sale of products or the rendering of
services in the ordinary course of business which adjustments
would not have a Material Adverse Effect;
(k) transfer or grant any rights under any material
concessions, leases, licenses, agreements, patents,
inventions, trademarks, trade names, copyrights, or with
respect to know-how;
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(l) enter into any transaction which would cause any
of the Seller's warranties and representations contained in
this Agreement not to be true and correct in all material
respects on and as of the Closing Date.
4.2 Access to Documents. From the date of this Agreement until the Closing
Date, the Seller will permit the Purchaser and its attorneys, accountants,
appraisers and other representatives access at all reasonable times to the
properties, files, books and records of Seller, as well as to all information
relating to its operations, financial condition, properties, taxes, contracts
and commitments.
4.3 Bulk Sales Act. Purchaser waives compliance with the bulk sale
provisions of the Michigan Uniform Commercial Code, MCLA 440.1101 et seq (the
"Bulk Sales Law"). Seller agrees to pay when due all claims of creditors which
could be asserted by reason of noncompliance with the Bulk Sales Law, and to
the extent Purchaser may be held liable for any claims of Seller's creditors by
reason of noncompliance with the Bulk Sales Law, Purchaser shall be indemnified
against any such loss in accordance with Section 10.
4.4 Further Actions. At the closing, the Seller will, at the request of the
Purchaser, execute and deliver to the Purchaser all such further assignments,
endorsements and such other documents as the Purchaser may reasonably request in
order to perfect the transfer, assignment and delivery to the Purchaser of the
Acquired Assets being sold hereunder.
4.5 EXCLUSIVITY. Seller grants to Purchaser the exclusive right to acquire
the Business and the Acquired Assets until June 30, 1998. Seller shall not (i)
solicit, initiate or encourage the submission of any proposal or offer
from any person relating to the acquisition of any capital stock or other voting
securities, or any substantial portion of the assets of, Seller (including any
acquisition structured as a merger, consolidation or share exchange) or (ii)
participate in any discussions or negotiations regarding, furnishing any
information with respect to, assist or participate in, or facilitate in any
other manner any effort or attempt by any person to do or seek any of the
foregoing. Seller will notify Purchaser immediately if any person makes any
proposal, offer, inquiry or contact with respect to any of the foregoing.
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COVENANTS OF THE PURCHASER. the Purchaser covenants and agrees that:
5.1 Conduct of Business. The Purchaser will not take any action which would
cause any of the Purchaser's warranties and representations contained in this
Agreement not to be true and correct in all material respects on and as of the
Closing Date.
5.2 Further Actions. The Purchaser will, at the request of the Seller,
execute and deliver to the Seller at the closing, all such further assignments,
endorsements and such other documents as the Seller may reasonably request in
order to consummate the transactions contemplated by this Agreement.
6 CONDITIONS PRECEDENT TO OBLIGATIONS OF THE PURCHASER. The obligations of the
Purchaser to consummate the transactions contemplated by this Agreement are
subject, at the Purchaser's option, to the satisfaction at or prior to the
Closing Date of each of the following conditions:
6.1 Correctness of Warranties and Representations. The warranties and
representations of the Seller contained in Section 2 of this Agreement shall be
true and correct in all material respects on and as at the Closing Date, with
the same force and effect as though the same had been made on and as of the
Closing Date, and the Seller shall have delivered to the Purchaser a certificate
to such effect, signed by an officer of the Seller, dated the Closing Date.
6.2 Compliance with Conditions. All of the terms, covenants and conditions of
this Agreement required to be complied with and performed by the Seller at or
prior to the Closing Date shall have been duly complied with and performed in
all material respects.
6.3 Opinion of Counsel for the Seller. The Purchaser shall have received an
opinion of Cox, Hodgman & Giarmarco, P.C., counsel for the Seller, dated the
Closing Date, in the form and to the effect set forth in Exhibit E annexed
hereto.
6.4 Absence of Legal Proceedings. No action or proceeding shall have been
instituted or affirmatively threatened before a court or any other governmental
body, or by any public authority or agency, seeking to restrict or prohibit the
sale by the Seller to the Purchaser of the Acquired Assets or the operation by
the
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Purchaser of the business presently conducted by Seller.
6.5 Absence of Material Damage to Property. Between the date of this Agreement
and the Closing Date there shall not have occurred, (i) any casualty
(irrespective of any insurance relating thereto) to any of Seller's properties
or assets as a result of which the monetary amount of damage or destruction
caused thereby aggregates twenty-five percent (25%) or more of the aggregate
book value shown on Seller's books for all of its fixed assets.
6.6 Delivery of Financial Statements. The Purchaser shall have received from the
Seller, as and when prepared by Seller, the unaudited balance sheets of Seller
as at each month end after December 31, 1997 and the related unaudited
statements of operations and retained earnings of Seller for each such period
then ended, including, in each case, the related notes and schedules thereto,
which financial statements shall fairly present (and delivery of which shall
constitute Seller's representation that they do fairly present) Seller's
financial position as at each such month end and its results of operations for
each such period then ended, shall have been prepared in accordance with
generally accepted accounting principles consistently applied, shall contain all
adjustments which are necessary to a fair statement of the results for the
interim periods presented.
6.7 No Change. Since December 31, 1997, no change in the Business or the
financial condition of the Business shall have occurred which has or will have a
Material Adverse Effect. 6.8 Certified Resolutions. The Purchaser shall have
received from the Seller certified copies of all resolutions adopted by the
Board of Directors of the Seller necessary in order to authorize the purchase of
the Acquired Assets pursuant to this Agreement.
7 CONDITIONS PRECEDENT TO OBLIGATIONS OF THE SELLER. The obligations
of the Seller to consummate the transactions contemplated by this Agreement
are subject, at Seller's option, to the satisfaction at or prior to the
Closing Date of each of the following conditions:
7.1 Correctness of Warranties and Representations. The warranties and
representations of the Purchaser contained in Section 3 of this Agreement shall
be true and correct in all material respects on and as at the Closing Date, with
the same force and effect as though the same had been made on and as of the
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Closing Date, and the Purchaser shall have delivered to the Seller a certificate
to such effect, signed by an authorized officer of the Purchaser, dated the
Closing Date.
7.2 Compliance With Conditions. All of the terms, conditions and covenants of
this Agreement required to be complied with and performed by the Purchaser on or
prior to the Closing Date shall have been duly complied with and performed in
all material respects.
7.3 Opinion of Counsel for the Purchaser. Seller shall have received an opinion
of Butzel Long, counsel for the Purchaser, dated the Closing Date, in the form
and to the effect set forth in Exhibit F annexed hereto.
7.4 Absence of Legal Proceedings. No action or proceeding shall have been
instituted or affirmatively threatened before a court or any other governmental
body, or by any public authority or agency, seeking to restrict or prohibit the
sale by Seller to the Purchaser of the Acquired Assets or the operation by the
Purchaser of the business presently conducted by Seller.
7.5 Certified Resolutions. The Seller shall have received from the Purchaser
certified copies of all resolutions adopted by the Board of Directors of the
Purchaser necessary in order to authorize the purchase of the Acquired Assets
pursuant to this Agreement.
8 SIMULTANEOUS CLOSING. Purchaser has entered into an agreement to purchase all
outstanding shares of stock of ARS (the "Shares") immediately prior to the
Closing contemplated by this Agreement. In the event that for any reason
whatsoever Purchaser does not purchase the Shares contemporaneous with the
Closing of this transaction pursuant to the terms of the Stock Purchase
Agreement attached hereto as Exhibit G, then this transaction shall be null and
void and of no force or effect and all of the transfers and other actions taken
pursuant to this Agreement shall be rescinded and the parties shall be returned
to their same status as existed immediately prior to the Closing pursuant to
this Agreement and the transactions contemplated to sell and purchase as
evidenced hereunder shall be cancelled and of no further force or effect.
9 THE CLOSING.
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9.1 Closing and Closing Date. The closing hereunder (herein referred to as
the "CLOSING") shall take place at a mutually convenient location and at a
mutually convenient time simultaneously with the closing of the initial public
offering of CART's common stock, provided that all conditions to the obligations
of the Purchaser and of the Seller set forth, respectively, in Sections 6 and 7
hereof shall have been satisfied or waived. The date of the Closing is referred
to in this Agreement as the "CLOSING DATE". Notwithstanding any other provision
of this Agreement, if the Closing fails to occur by June 30, 1998, then, in such
event, Purchaser or Seller, in addition to any other rights it may have, shall
have the right, exercisable by written notice to the other, to terminate this
Agreement, such termination to be effective upon the date set forth in such
notice; provided, however, that nothing contained in this Section 9.1 shall
affect or impair any rights or obligations arising prior to or at the time of
termination of this Agreement, or that may arise by an event causing the
termination of this Agreement.
9.2 Proceedings at Closing.
9.2.1 All proceedings taken and all documents to be executed and delivered by
the parties at the Closing shall be deemed to have been taken and
executed simultaneously, and no proceedings shall be deemed taken nor
documents executed or delivered until all have been taken, executed and
delivered.
9.2.2 At the Closing, the Seller shall deliver or cause to be delivered to the
Purchaser the following:
(a) an appropriately executed general assignment and
bill of sale in the form attached hereto as Exhibit H ("Bill
of Sale") and such deeds, assignments and other instruments of
transfer relating to the Acquired Assets in form and substance
reasonably satisfactory to Purchaser and its counsel;
(b) such other documents as Purchaser or its counsel
may reasonably request to demonstrate satisfaction of the
conditions and compliance with the agreements set forth in
this Agreement;
(c) The certificate referred to in Section 6.1
hereof;
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(d) The opinion of counsel for the Seller referred to
in Section 6.3 hereof;
(e) McGee shall deliver payment for any shares
purchased pursuant to Section 1.8.5;
(f) McGee shall execute and deliver the Option
Agreement as referred to in Section 1.8.4 hereof.
9.2.3 At the Closing, the Purchaser shall deliver or cause to be delivered to
the Seller the following:
(a) The Purchase Price, in the form of the
Purchaser's certified check in the amount as set forth in
Section 1.8.1;
(b) The certificate referred to in Section 7.1
hereof;
(c) The opinion of counsel for the Purchaser referred
to in Section 7.3 hereof;
(d) The certified resolutions referred to in Section
7.5 hereof;
(e) To McGee certificates for any shares of stock
which McGee has elected to purchase pursuant to Section 1.8.5
hereof; and
(f) To McGee a duly executed Option Agreement as
referred to in Section 1.8.4 hereof.
10 INDEMNIFICATION.
10.1 Indemnification of Purchaser by Seller. The Seller covenants and agrees
that it will indemnify and hold the Purchaser and its officers, directors,
employees and agents harmless from and against any and all losses, damages,
liabilities, obligations, and reasonable costs and expenses incurred or
sustained by the Purchaser by reason or arising out of any material breach of
any warranty, representation, covenant, agreement or obligation of the Seller
contained in this Agreement, including, but not limited to, liabilities and
debts related to the Business (other than the Assumed Liabilities), failure to
comply with applicable bulk sales
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or similar laws, and any other liability (other than an Assumed Liability)
respecting the Business or any of the Acquired Assets which is attributable to
any period prior to the Closing Date.
10.2 Indemnification of Seller by Purchaser. The Purchaser covenants and agrees
that it will indemnify and hold the Seller harmless from and against any and all
losses, damages, liabilities, obligations, and reasonable costs and expenses
incurred or sustained by the Seller by reason or arising out of any material
breach of any warranty, representation, covenant, agreement or obligation of the
Purchaser contained in this Agreement.
10.3 Claims for Indemnity. Promptly upon notice of any claim, suit or demand
which any person entitled to indemnity hereunder (the "INDEMNITEE") believes
will give rise to indemnity by the Seller or the Purchaser, as the case may be
(the "INDEMNITOR"), under Sections 10.1 or 10.2, the Indemnitee shall give the
Indemnitor written notice thereof, and the Indemnitor shall defend against any
such claim, suit or demand, in its name or in the name of the Indemnitee, as the
case may be, at the Indemnitor's expense and with counsel of its own choice at
its own expense. The Indemnitor shall have no obligation or liability to
indemnify with respect to, or in connection with, any claim, suit or demand
which shall be paid, settled or compromised by the Indemnitee without the prior
written consent of the Indemnitor. No right or remedy conferred in this Section
10.3 is intended to be exclusive of any other right or remedy available, now or
hereafter, at law or in equity or otherwise, to the parties hereto.
10.4 Right to Offset. To the extent that the Purchaser has suffered any loss or
losses, damages, liabilities or obligations by reason of any breach of any
warranty, representation, covenant, agreement or obligation of the Seller
contained in this Agreement, the Purchaser shall have the right to offset any
such amounts against any amounts due and owing Seller.
11 ARBITRATION. In the event of any dispute among CART and Seller under this
Agreement which they are unable to resolve, including but not limited to whether
the criteria as set forth in Section 1.8.2 has been met, or whether the
requirements as set forth in Section 3.4 have been met, the dispute shall be
submitted to arbitration at the request of any party. The party requesting
arbitration shall so notify the other party(ies) in writing and shall specify
the question or questions to be arbitrated. Within
24
<PAGE> 50
ten (10) days after receipt of such notification, CART shall select one
arbitrator and Seller shall select one arbitrator and each shall give the name
and address thereof to the other party. The two arbitrators shall select a third
disinterested arbitrator to complete a panel consisting of three arbitrators. In
the event one party fails to select an arbitrator within the required time
period, the arbitrator who has been selected may select one disinterested
arbitrator and the two arbitrators may proceed to resolve the dispute. Within
ten (10) days of the selection of the second arbitrator, or third arbitrator, as
the case may be, the panel of arbitrators shall schedule a hearing on the
disputed issues to be held within thirty (30) days after the selection of the
final arbitrators. The arbitrators shall render their written decision within
thirty (30) days of the last day of the hearing. The decision of a majority of
the arbitrators shall be final and conclusive on all parties. Such decision
shall be entered as a final judgment in a court of competent jurisdiction and
shall be a final non-appealable order. The arbitration shall be conducted in
accordance with the commercial arbitration rules of the American Arbitration
Association except as specified herein. The arbitration shall take place in
Troy, Michigan or such other location as the parties may agree. The arbitrator
shall substantially comply with the Michigan rules of evidence; shall grant
essential but limited discovery; shall provide for the exchange of witness lists
and exhibit copies; and shall conduct a pretrial conference and consider
dispositive motions. Each party shall have the right to request the arbitrator
to make findings of specific factual issues. The arbitrator shall decide all
issues and disputes in conformity with applicable law and shall have no
authority to alter the terms of this Agreement. Each party shall cooperate with
the arbitrator to comply with procedural time requirements and the failures of
either to do so shall entitle the arbitrator to extend the arbitration
proceedings accordingly and to impose sanctions on the party responsible for the
delay, payable to the other party. If the arbitrator determines that a party has
failed to act in good faith or with a reasonable basis in connection with the
dispute, the arbitrator shall be entitled to award, against the party so acting,
the fees and expenses of the arbitration and the costs and expenses incurred by
the other party in connection with the arbitration, included but not limited to
reasonable attorneys' fees. In the absence of such a finding, the fees and
expenses of the arbitration shall be borne equally by Purchaser and Seller
(except that each party shall be solely responsible for the fees and expenses of
its counsel and other
25
<PAGE> 51
professionals and experts retained by it).
12 MISCELLANEOUS.
12.1 Announcements. All announcements relating to the transactions contemplated
hereby shall be mutually approved by, and shall not be released except with the
mutual consent of the parties thereto, except where immediate disclosure, in the
opinion of counsel for the party concerned, is required by law.
12.2 Brokerage. The Seller warrants and represents to the Purchaser that it has
not incurred any obligation or liability, contingent or otherwise, for brokerage
or finder's fees or agent's commissions or other like payment in connection with
this Agreement or the transactions contemplated hereby. The Seller covenants and
agrees to indemnify and hold the Purchaser harmless from and against any such
obligation or liability (and any reasonable expense or expenses incurred in
investigating or defending the same, including counsel fees) based in any way on
any agreements, arrangements or understandings claimed to have been made by the
Seller with any third party. The Purchaser warrants and represents to the Seller
that it has not incurred any obligation or liability, contingent or otherwise,
for brokerage or finder's fees or agent's commissions or other like payment in
connection with this Agreement or the transactions contemplated hereby. The
Purchaser covenants and agrees to indemnify and hold the Seller harmless from
and against any such obligation or liability (and any reasonable expense or
expenses incurred in investigating or defending the same, including counsel
fees) based in any way on any agreements, arrangements or understandings claimed
to have been made by the Purchaser with any third party.
12.3 Survival of Warranties and Representations. Each party hereto covenants and
agrees that its warranties and representations contained in this Agreement and
in any document delivered or to be delivered pursuant hereto shall survive the
Closing Date hereunder until December 31, 2000.
12.4 Expenses. Whether or not the transactions contemplated by this Agreement
are consummated, each of the parties hereto shall pay the fees and expenses of
its counsel, accountants, other experts and all other expenses incurred by such
party incident to the negotiation, preparation and execution of this Agreement.
26
<PAGE> 52
12.5 Notices. All notices, requests, demands and other communications which
are required or permitted to be given under this Agreement shall be in writing
and shall be deemed to have been duly given upon the delivery or mailing
thereof, as the case may be, if delivered personally or sent by registered or
certified mail, return receipt requested, postage prepaid:
(a) If to the Seller, to: BP Automotive, Ltd.
1395 Wheaton Avenue
Suite 700
Troy, MI 48083-1967
with a copy to: Basil M. Briggs, Esq.
Cox, Hodgman & Giarmarco,
P.C. - Suite 500
201 West Big Beaver Road
Troy, MI 48084-4160
(b) If to the Purchaser, to: Championship Auto Racing
Teams, Inc.
755 W. Big Beaver Road,
Suite 800
Troy, MI 48084-4160
with a copy to: Jack Bjerke, Esq.
Capital Square, Suite 1800
65 East State Street
Columbus, OH 43215-4294
with a copy to: Justin G.Klimko, Esquire
Butzel Long
150 W. Jefferson,
Suite 900
Detroit, M 48226-4430
or to such other address as either the Seller or the Purchaser shall have
specified by notice in writing to the other.
12.6 Waivers. Either Seller or the Purchaser may, by written notice to the
other, (a) extend the time for the performance of any of the obligations or
other actions of the other; (b) waive any inaccuracies in this Agreement or in
any document delivered pursuant hereto by the other; (c) waive compliance with
any of the terms, conditions or covenants required to be complied with by the
other hereunder; and (d) waive or modify performance of any of the
27
<PAGE> 53
obligations of the other hereunder. The waiver by any party hereto of a breach
of any provision of this Agreement shall not operate or be construed as a waiver
of any other or subsequent breach.
12.7 Entire Agreement. This Agreement constitutes the entire agreement
between the parties with respect to the subject matter hereof.
12.8 Binding Effect; Benefits. This Agreement shall inure to the benefit of and
be binding upon the parties hereto and their respective successors and assigns.
Nothing in this Agreement, expressed or implied, is intended to confer on any
person other than the parties hereto, or their respective successors and
assigns, any rights, remedies, obligations or liabilities.
12.9 Fulfillment of Conditions. The parties hereby covenant and agree to use
their reasonable efforts to fulfill all of the terms and conditions contained in
this Agreement, and to take such action as may be reasonably required to obtain
all necessary consents, permits, authorizations and approvals of third parties
which are conditions of this Agreement.
12.10 Law Governing. This Agreement shall be governed by and construed in
accordance with the laws of the State of Michigan, without regard to choice of
law principles which would require the application of the laws of any other
jurisdiction.
12.11 Headings. Headings on the Articles and Sections in this Agreement are for
reference purposes only and shall not be deemed to have any substantive effect.
12.12 Counterparts. This Agreement may be executed in any number of
counterparts, each of which shall be deemed an original but all of which
together shall be deemed to be one and the same instrument.
28
<PAGE> 54
IN WITNESS WHEREOF, the Seller has caused this Agreement to be duly
executed in its corporate name by one of its duly authorized officers, and the
Purchaser has caused this Agreement to be duly executed in its corporate name by
one of its duly authorized officers, all as of the date first above written.
CHAMPIONSHIP AUTO RACING
TEAMS, INC., a Delaware
corporation
- -------------------------------------------------------------------------------
By: /s/ ANDREW CRAIG
/s/ BASIL M. BRIGGS -----------------------------
- -------------------------
/s/ JUSTIN G. KLIMKO Its: Chairman
- ----------------------------------------------------------------- --------
& CEO
- -------------------------------------------------------------------------------
BP AUTOMOTIVE, LTD.,
a Michigan corporation
- ------------------------------------------------------------------------------
By: /s/ ROGER BAILEY
-----------------------------
- -------------------------
Its: President
- ---------------------------------------------------------------- ---------
- -------------------------------------------------------------------------------
Exhibits:
A: Personal Property
B: Lola Cars/ARS Agreement
C: Allocation of Purchase Price
D: Disclosure Schedule
E: Cox, Hodgman & Giarmarco, P.C. Opinion
F: Butzel Long's Opinion
G: ARS/CART Stock Purchase Agreement
H: Bill of Sale of Assets
29
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<S> <C>
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<PERIOD-START> JAN-01-1998
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0
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