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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
(X) Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the quarterly period ended June 30, 1999.
( ) Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period ______ to ______.
Commission File No. 1-13925
CHAMPIONSHIP AUTO RACING TEAMS, INC.
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(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
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(Address of principal executive offices)
(Zip Code)
(248) 362-8800
--------------
(Registrant's telephone number, including area code)
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 the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
COMMON STOCK $0.01 PAR VALUE 15,556,568 SHARES
---------------------------- -----------------
CLASS OUTSTANDING AT AUGUST 1, 1999
This report contains 19 pages.
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TABLE OF CONTENTS
<TABLE>
<CAPTION>
PART I - FINANCIAL INFORMATION PAGE
<S> <C>
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS.
Consolidated Balance Sheets at June 30, 1999 and December 31, 1998 3
Consolidated Statements of Operations for the Three and Six Months Ended
June 30, 1999 and 1998 4
Consolidated Statement of Stockholders' Equity for the Six
Months Ended June 30, 1999 5
Consolidated Statements of Cash Flows for the Six Months Ended
June 30, 1999 and 1998 6
Notes to Consolidated Financial Statements 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS. 11
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS 17
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. 18
SIGNATURES 19
</TABLE>
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CHAMPIONSHIP AUTO RACING TEAMS, INC.
CONSOLIDATED BALANCE SHEETS
AS OF JUNE 30, 1999 AND DECEMBER 31, 1998
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
JUNE 30, 1999 DECEMBER 31, 1998
------------- -----------------
(UNAUDITED)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 15,756 $ 15,080
Short-term investments 86,558 61,610
Accounts receivable (net of allowance for doubtful accounts
of $182 and $306 at June 30, 1999 and
December 31, 1998, respectively) 7,358 4,708
Current portion of notes receivable 824 824
Inventory 189 71
Prepaid expenses 465 331
Deferred income taxes 122 119
--------- ---------
Total current assets 111,272 82,743
NOTES RECEIVABLE 2,480 3,350
PROPERTY AND EQUIPMENT- Net 5,087 5,026
GOODWILL (net of accumulated amortization of $190 and $105
at June 30, 1999 and December 31, 1998, respectively) 6,600 5,778
OTHER ASSETS (net of accumulated amortization
of $50 and $41 at June 30, 1999 and December 31, 1998, respectively) 532 289
--------- ---------
TOTAL ASSETS $ 125,971 $ 97,186
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 2,623 $ 1,946
Accrued liabilities:
Race expenses and point awards 1,439 --
Royalties 520 1,026
Payroll 446 482
Taxes 3,646 1,733
Other 1,677 934
Unearned revenue 11,511 4,273
Current portion of long-term debt 130 130
--------- ---------
Total current liabilities 21,992 10,524
LONG-TERM DEBT 119 184
DEFERRED INCOME TAXES 334 259
COMMITMENTS AND CONTINGENCIES (NOTE 7)
STOCKHOLDERS' EQUITY:
Preferred Stock, $.01 par value; 50,000,000 shares authorized, none issued
and outstanding at June 30, 1999 and December 31, 1998 -- --
Common stock, $.01 par value; 50,000,000 shares
authorized, 15,526,061 and 15,171,666 shares issued and
outstanding at June 30, 1999 and December 31, 1998, respectively 155 151
Additional paid-in capital 98,484 89,771
Retained earnings (deficit) 5,072 (4,033)
Unrealized gain (loss) on investments (185) 330
--------- ---------
Total stockholders' equity 103,526 86,219
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 125,971 $ 97,186
========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
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CHAMPIONSHIP AUTO RACING TEAMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 1999 AND 1998
(UNAUDITED)
(IN THOUSANDS, EXCEPT EARNINGS PER SHARE)
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
1999 1998 1999 1998
------------ ------------ ----------- ------------
<S> <C> <C> <C> <C>
REVENUES:
Sanction fees $ 15,743 $ 10,251 $ 17,099 $ 15,243
Sponsorship revenue 5,141 4,603 9,338 7,763
Television revenue 2,024 2,080 2,289 2,682
Engine leases, rebuilds and wheel sales 563 755 1,085 954
Other 2,002 2,345 3,011 3,423
-------- -------- -------- --------
Total revenues 25,473 20,034 32,822 30,065
EXPENSES:
Race distributions 6,053 5,486 6,791 6,874
Race expenses 2,084 1,304 3,066 2,135
Cost of engine rebuilds and wheel sales 176 241 357 304
Administrative and indirect expenses 6,578 5,966 10,477 9,411
Depreciation and amortization 254 188 489 329
Minority interest -- 17 -- (37)
-------- -------- -------- --------
Total expenses 15,145 13,202 21,180 19,016
OPERATING INCOME 10,328 6,832 11,642 11,049
Interest income (net) 1,380 968 2,617 1,234
-------- -------- -------- --------
INCOME BEFORE INCOME TAXES 11,708 7,800 14,259 12,283
Income tax expense 4,242 2,847 5,154 4,465
-------- -------- -------- --------
NET INCOME $ 7,466 $ 4,953 $ 9,105 $ 7,818
======== ======== ======== ========
EARNINGS PER SHARE:
BASIC $ 0.49 $ 0.33 $ 0.60 $ 0.59
======== ======== ======== ========
DILUTED $ 0.47 $ 0.32 $ 0.58 $ 0.59
======== ======== ======== ========
WEIGHTED AVERAGE SHARES OUSTANDING:
BASIC 15,376 15,172 15,276 13,191
======== ======== ======== ========
DILUTED 15,936 15,336 15,806 13,291
======== ======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
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CHAMPIONSHIP AUTO RACING TEAMS, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL RETAINED UNREALIZED
---------------- PAID-IN EARNINGS GAIN (LOSS) ON STOCKHOLDERS' COMPREHENSIVE
SHARES AMOUNT CAPITAL (DEFICIT) INVESTMENTS EQUITY INCOME (LOSS)
------ ------ ------- --------- ----------- ------ -------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCES, DECEMBER 31, 1998 15,171 $151 $89,771 $(4,033) $ 330 $ 86,219
Net income -- -- -- 9,105 -- 9,105 $9,105
Comprehensive loss -- -- -- -- (515) (515) (515)
------
$8,590
======
Stock issuance (net of issuance
costs) 272 3 7,228 -- -- 7,231
Exercise of options 83 1 1,485 -- -- 1,486
------ ---- ------- ------- ----- --------
BALANCES, JUNE 30, 1999 15,526 $155 $98,484 $ 5,072 $(185) $103,526
====== ==== ======= ======= ===== ========
</TABLE>
See accompanying notes to consolidated financial statements.
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CHAMPIONSHIP AUTO RACING TEAMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND 1998
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
1999 1998
-------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 9,105 $ 7,818
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 489 329
Loss (gain) from sale of property and equipment 1 (6)
Deferred income taxes 72 4,361
Minority interest in loss of subsidiaries -- (37)
Changes in assets and liabilities that provided (used) cash:
Accounts receivable (2,650) (9,211)
Prepaid expenses (134) 84
Inventory (118) (110)
Other assets (238) 10
Accounts payable 677 1
Accrued liabilities 3,553 (6,562)
Unearned revenue 7,238 13,670
-------- --------
Net cash provided by operating activities 17,995 10,347
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisitions of subsidiaries (900) (7,913)
Investments (25,463) (32,005)
Notes receivable 870 (4,228)
Acquisition of property and equipment (464) (711)
Proceeds from sale of property and equipment -- 62
Acquisition of trademark (14) (15)
-------- --------
Net cash used in investing activities (25,971) (44,810)
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on long-term debt (65) (65)
Issuance of common stock (net) 8,717 73,446
Redemption of common stock -- (151)
-------- --------
Net cash provided by financing activities 8,652 73,230
-------- --------
NET INCREASE IN CASH AND
CASH EQUIVALENTS 676 38,767
CASH AND CASH EQUIVALENTS AT BEGINNING
OF PERIOD 15,080 1,164
-------- --------
CASH AND CASH EQUIVALENTS AT END
OF PERIOD $ 15,756 $ 39,931
======== ========
SUPPLEMENTAL DISCLOSURES OF CASH
FLOW INFORMATION:
Cash paid during the period for:
Income taxes $ 2,806 none
======== ========
Interest $ 21 $ 17
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
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CHAMPIONSHIP AUTO RACING TEAMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION. The accompanying unaudited consolidated
financial statements have been prepared by management and, in the opinion of
management, contain all adjustments, consisting of normal recurring adjustments,
necessary to present fairly the financial position of Championship Auto Racing
Teams, Inc. and subsidiaries (the "Company") as of June 30, 1999 and the results
of its operations and its cash flows for the three months and six months ended
June 30, 1999 and 1998.
The unaudited consolidated financial statements should be read in
conjunction with the consolidated financial statements included in the Company's
Form 10-K filed with the Securities and Exchange Commission.
Because of the seasonal concentration of racing events, the results of
operations for the three months and six months ended June 30, 1999 and 1998 are
not indicative of the results to be expected for the year.
PRINCIPLES OF CONSOLIDATION. The 1998 consolidated financial statements
include the financial statements of CART, Inc. (a Michigan corporation) and its
wholly-owned subsidiary corporations CART Properties, Inc. and CART Licensed
Products, Inc. In addition, the 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 unaudited
financial statements also include the financial statements of American Racing
Series, Inc. ("ARS"), a wholly-owned subsidiary and Pro-Motion Agency Ltd.
("Pro-Motion"), a wholly-owned subsidiary, respectively. Effective January 1,
1999, the Company purchased the 45% minority interest of CART Licensed Products,
L.P. for $900,000. All significant intercompany balances have been eliminated in
consolidation.
RECLASSIFICATIONS. Certain reclassifications have been made to the 1998
unaudited consolidated financial statements in order for them to conform to the
1999 presentation.
2. ACQUISITIONS - PRO FORMA RESULTS
The following unaudited pro forma summary for the three months and six
months ended June 30, 1998 assume the acquisitions of ARS and Pro-Motion
occurred as of January 1, 1998.
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, 1998 JUNE 30, 1998
(IN THOUSANDS, EXCEPT EARNINGS PER SHARE)
-------------------------------------------------------------------------------
<S> <C> <C>
Revenues $20,034 $31,398
Net income 4,980 8,084
Earnings per share:
Basic $ .33 $ .59
======= =======
Diluted $ .32 $ .59
======= =======
</TABLE>
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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>
GROSS UNREALIZED
JUNE 30, 1999 ----------------
(IN THOUSANDS) COST FAIR VALUE GAIN LOSS
- --------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Certificate of deposit $ 3,999 $ 4,000 $ 1 $ --
Commercial paper 18,429 18,417 -- 12
U.S. agencies securities 20,021 19,923 5 103
Corporate bonds 19,182 19,144 20 58
Municipal bonds 25,112 25,074 -- 38
------- ------- ------- -------
Total short-term investments $86,743 $86,558 $ 26 $ 211
======= ======= ======= =======
</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. PROPERTY AND EQUIPMENT
Property and equipment consists of the following at December 31, 1998
and June 30, 1999:
<TABLE>
<CAPTION>
(IN THOUSANDS)
JUNE 30, DECEMBER 31,
1999 1998
-------- ------------
<S> <C> <C>
Engines $ 2,296 $ 2,296
Equipment 2,695 2,381
Furniture and fixtures 389 359
Vehicles 2,069 1,959
Other 121 121
------- -------
Total 7,570 7,116
Less accumulated depreciation (2,483) (2,090)
------- -------
Property and equipment (net) $ 5,087 $ 5,026
======= =======
</TABLE>
5. COMMON STOCK
In May 1999, the Company completed the registered public offering of
1,816,500 shares of common stock that was sold by certain selling shareholders.
In addition, upon exercise of the underwriters' over-allotment option, 272,475
shares of common stock were sold by the Company for $28.00 per share with net
proceeds of approximately $7.2 million (less underwriting discounts and
commissions and offering expenses).
6. SEGMENT REPORTING
The Company has one reportable segment, racing operations.
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This reportable segment encompasses all the business operations of organizing,
marketing and staging all of our open-wheel racing events.
The accounting policies of the segments are the same as those described in the
summary of significant accounting policies. The Company's long-lived assets are
substantially used in the racing operations segment in the United States. The
Company evaluates performances based on income before income taxes.
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30,
---------------------------
($ in thousands) RACING OPERATIONS OTHER* TOTALS
- ---------------- ----------------- ------ ------
<S> <C> <C> <C>
1999
- ----
Revenues $25,054 $ 419 $25,473
Interest income (expense) (net) 1,389 (9) 1,380
Depreciation and amortization 229 25 254
Segment income (loss) before income taxes 11,726 (18) 11,708
1998
- ----
Revenues $19,601 $ 433 $20,034
Interest income (expense) (net) 982 (14) 968
Depreciation and amortization 180 8 188
Segment income before income taxes 7,789 11 $ 7,800
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
-------------------------
($ in thousands) RACING OPERATIONS OTHER* TOTALS
- ---------------- ----------------- ------ ------
<S> <C> <C> <C>
1999
- ----
Revenues $32,111 $ 711 $32,822
Interest income (expense) (net) 2,627 (10) 2,617
Depreciation and amortization 451 38 489
Segment income (loss) before income taxes 14,282 (23) 14,259
1998
- ----
Revenues $29,453 $ 612 $30,065
Interest income (expense) (net) 1,251 (17) 1,234
Depreciation and amortization 315 14 329
Segment income (loss) before income taxes 12,393 (110) $12,283
</TABLE>
*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>
SIX MONTHS ENDED JUNE 30,
-------------------------
1999 1998
-------- --------
<S> <C> <C>
Total assets for reportable segment $124,474 $ 99,425
Other assets 1,497 1,157
-------- --------
Total consolidated assets $125,971 $100,582
======== ========
Total liabilities for reportable segment $ 21,818 $ 21,199
Other liabilities 627 1,255
-------- --------
Total consolidated liabilities $ 22,445 $ 22,454
======== ========
</TABLE>
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7. COMMITMENTS AND CONTINGENCIES
During a race in 1998, a driver was involved in a racing incident that
propelled a tire and suspension parts into the grandstands. Three spectators
were killed and six other spectators reported minor injuries. In 1999, the
Company was joined as a co-defendant in two lawsuits originally filed in 1998.
Each of the lawsuits were filed separately by the estates of two of the
spectators killed and separately seek damages of unspecified amounts.
We have and will continue to have liability insurance to cover racing
incidents. We are also indemnified by track promoters for racing incidents. To
the extent not covered by insurance or indemnification from the track promoters,
any claims and associated expenses related to prior racing incidents, including
the incident at Michigan Speedway, could adversely affect our financial and
business results.
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ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
The following discussion and analysis of the financial condition and
results of operations should be read in conjunction with the consolidated
financial statements of the Company, including the respective notes thereto
which are included in this Form 10-Q.
RESULTS OF OPERATIONS
Three Months Ended June 30, 1999 Compared to Three Months Ended June 30, 1998
REVENUES. Total revenues for the quarter ended June 30, 1999 were $25.5
million, an increase of $5.4 million, or 27% from the same period in the prior
year. This increase was due to higher sanction fees and sponsorship revenue,
partially offset by a decrease in television revenue, engine leases, rebuilds
and wheel sales and other revenue, as described below.
Sanction fees for the quarter ended June 30, 1999 were $15.7 million,
an increase of $5.5 million, or 54%, from the same period in the prior year.
This increase was partially the result of eight events taking place in the
second quarter of 1999 compared to seven events in the same period in the prior
year, increases in the sanction fees for the Nazareth, Pennsylvania and
Milwaukee, Wisconsin events upon contract renewal in 1999 and annual escalation
of sanction fees for the other events.
Sponsorship revenue for the quarter ended June 30, 1999 was $5.1
million, an increase of $538,000, or 12%, from the same period in the prior
year. This increase was primarily attributable to a new sponsorship
representation agreement entered into with ISL Worldwide that guarantees certain
sponsorship income.
Television revenue for the quarter ended June 30, 1999 was $2.0
million, a decrease of $56,000, or 3%, from the same period in the prior year.
Television revenue is expected to remain flat for 1999 compared to 1998.
However, the total number of races has increased from 19 races in 1998 to 20
races in 1999, thereby decreasing the per race revenue amount. Also, the
decrease in television revenue was partially due to the elimination of ancillary
support programming.
Engine leases, rebuilds and wheel sales revenue for the quarter ended
June 30, 1999 was $563,000, a decrease of $192,000 or 25% from the same period
in the prior year. This decrease was primarily the result of having fewer
entries in the Indy Lights series due to increased competition with other race
series both domestically and internationally.
Other revenue for the quarter ended June 30, 1999 was $2.0 million, a
decrease of $343,000, or 15%, from the same period in the prior year. This
decrease was partially attributable to a decrease in membership revenue and
commissions from our support series due to fewer entries because of increased
competition both domestically and abroad.
EXPENSES. Total expenses for the quarter ended June 30, 1999 were $15.1
million, an increase of $1.9 million, or 15%, from the same period in the prior
year. This increase was due to an increase in race distributions, race expenses
and administrative and indirect expenses, as described below.
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Race distributions for the quarter ended June 30, 1999 were $6.1
million, an increase of $567,000, or 10%, from the same period in the prior
year. This increase is due to eight races being held in the second quarter of
1999 compared with seven races held in the same period in the prior year.
Race expenses for the quarter ended June 30, 1999 were $2.1 million, an
increase of $780,000, or 60%, from the same period in the prior year. This
increase is partially due to eight races being held in the second quarter of
1999 compared with seven races held in the same period in the prior year and
added personnel and operating expenses in the areas of race operations and
electronics.
Cost of engine rebuilds and wheel sales for the quarter ended June 30,
1999 were $176,000, a decrease of $65,000 or 27% from the same period in the
prior year. This decrease is due to decreased engine rebuild and wheel sales
revenues as noted above.
Administrative and indirect expenses for the quarter ended June 30,
1999 were $6.6 million, an increase of $612,000, or 10%, from the same period in
the prior year. This increase was primarily attributable to an increase in
marketing and advertising, sales costs related to sponsor sales and overhead
related to running an additional race in the quarter ended June 30, 1999, as
compared to the same period in the prior year.
OPERATING INCOME. Operating income for the quarter ended June 30, 1999
was $10.3 million, an increase in income of $3.5 million from the corresponding
period in the prior year due to the factors described above.
INTEREST INCOME (NET). Interest income (net) for the quarter ended June
30, 1999 was $1.4 million, an increase of $412,000, or 43%, from the same period
in the prior year. This is due to an increase in investments using our cash
flows from operations and the net proceeds from the secondary offering.
INCOME TAX EXPENSE. Income tax expense for the quarter ended June 30,
1999 was $4.2 million, compared to an income tax expense of $2.8 million for the
corresponding period in the prior year.
NET INCOME/LOSS. Net income for the quarter ended June 30, 1999 was
$7.5 million, an increase of $2.5 million from the corresponding period in the
prior year as a result of the factors described above.
Six Months Ended June 30, 1999 Compared to Six Months Ended June 30, 1998
REVENUES. Total revenues for the six months ended June 30, 1999 were
$32.8 million, an increase of $2.8 million from the same period in the prior
year. This was due to increased sanction fees, sponsorship revenue and engine
leases, rebuilds and wheel sales, partially offset by a decrease in television
revenue and other revenue, as described below.
Sanction fees for the six months ended June 30, 1999 were $17.1
million, an increase of $1.9 million, or 12%, from the same period in the prior
year. The increase was due to annual sanction fee escalation from existing
contracts and increases in the sanction fees for the Nazareth, Pennsylvania and
Milwaukee, Wisconsin events upon contract renewal in 1999.
Sponsorship revenue for the six months ended June 30, 1999 was $9.3
million, an increase of $1.6 million, or 20%, from the same period in the prior
year. This increase was primarily attributable to a new sponsorship
representation agreement we entered into with ISL Worldwide. Under the new ISL
sponsorship agreement, ISL has guaranteed certain sponsorship income in 1999.
Television revenue for the six months ended June 30, 1999 was $2.3
million, a decrease of $393,000, or 15%, from the same period in the prior year.
Television revenue is expected to remain flat for 1999 compared to 1998.
However, the total number of races has increased from 19 races in 1998 to 20
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<PAGE> 13
races in 1999, thereby decreasing the per race revenue amount. Also, the
decrease in television revenue was partially due to the elimination of ancillary
support programming.
Engine leases, rebuilds and wheel sales for the six months ended June
30, 1999 was $1.1 million, an increase of $131,000 from the same period in the
prior year. This increase was due to ARS being acquired in March 1998 and
therefore, we included only a portion of ARS' first quarter revenues in our
financial statements for the prior period. The increase was partially offset by
having less ARS entries due to increased competition with other race series both
domestically and internationally.
Other revenue for the six months ended June 30, 1999 was $3.0 million,
a decrease of $412,000, or 12%, from the same period in the prior year. This
decrease was primarily attributable to a decrease in membership and commissions
income in our support series due to having fewer number of entries in 1999
because of increased competition domestically and abroad, partially offset by an
increase in royalty income.
EXPENSES. Total expenses for the six months ended June 30, 1999 were
$21.2 million, an increase of $2.2, or 11%, from the same period in the prior
year. This increase was due to an increase in race expenses, cost of engine
rebuilds and wheel sales, administrative and indirect expenses partially offset
by a decrease in race distributions, as described below.
Race distributions for the six months ended June 30, 1999 were $6.8
million, a decrease of $83,000, or 1%, from the same period in the prior year.
The decrease was due to six ARS races being held in the six months ended June
30, 1999 compared to seven ARS races being held in the same period in the prior
year.
Race expenses for the six months ended June 30, 1999 were $3.1 million,
an increase of $931,000, or 44%, from the same period in the prior year. The
increase was due to our addition of two new departments, race operations and
electronics, during the second and fourth quarters of 1998, respectively, and
the addition of ARS and Pro-Motion Agency in March 1998 and April 1998,
respectively.
Cost of engine rebuilds and wheel sales for the six months ended June
30, 1999 were $357,000, an increase of $53,000 or 17% from the same period in
the prior year. This increase is due to ARS being acquired in March 1998 and
only a portion of the expense was reported in the same period in the prior year.
Administrative and indirect expenses for the six months ended June 30,
1999 were $10.5 million, an increase of $1.1 million, or 11%, from the same
period in the prior year. This increase was partially attributed to the addition
of ARS and Pro-Motion administrative expenses since these companies were
acquired in March and April 1998, respectively. In addition, marketing and
advertising and promotional expenses have increased when compared to the same
period in the prior year due to increased staff and the timing of certain
programs.
OPERATING INCOME. Operating income for the six months ended June 30,
1999 was $11.6 million, an increase of $593,000 from the same period in the
prior year.
INTEREST INCOME (NET). Interest income (net) for the six months ended
June 30, 1999 was $2.6 million compared to interest income (net) of $1.2 million
from the same period in the prior year. The increase of $1.4 million was
primarily attributable to six months of interest earned on the invested proceeds
from the initial public offering compared to only three months in the same
period in the previous year.
INCOME BEFORE INCOME TAXES. Income before income taxes for the six
months ended June 30, 1999 was $14.3 million, compared to income before income
taxes of $12.3 million from the same period in the prior year.
INCOME TAX EXPENSE. Income tax expense for the six months ended June
30, 1999 was $5.2 million, compared to an income tax expense of $4.5 million
from the same period in the prior year.
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NET INCOME/LOSS. Net income for the six months ended June 30, 1999 was
$9.1 million compared to net income of $7.8 million from the same period in the
prior year.
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. During the second
quarter ended June 30, 1999, we held eight races: Motegi, Japan; Long Beach,
California; Nazareth, Pennsylvania; Rio de Janeiro, Brazil; Madison, Illinois;
West Allis, Wisconsin; Portland, Oregon; and Cleveland, Ohio. During the second
quarter ended June 30, 1998, we held seven races: Long Beach, California;
Nazareth, Pennsylvania; Rio de Janeiro, Brazil; Madison, Illinois; West Allis,
Wisconsin; Detroit, Michigan; and Portland, Oregon. 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.
LIQUIDITY AND CAPITAL RESOURCES
We have relied on the proceeds from our initial public offering,
secondary 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 June 30, 1999, the
current portion of this note was $130,000, and the long-term portion was
$119,000.
We also have a $1.5 million revolving line of credit with a commercial
bank. As of June 30, 1999, there was no outstanding balance under the line of
credit. The line of credit contains no significant covenants or restrictions.
Advances on the line of credit are payable on demand and bear interest at the
bank's prime rate. The line is secured by our deposits with the bank.
Our cash balance on June 30, 1999 was $15.8 million, a net increase of
$676,000 from December 31, 1998. This increase was primarily the result of net
cash provided by operations of $18.0 million and net financing activities of
$8.7 million, which was offset by net cash used in investing activities of $26.0
million.
We anticipate capital expenditures of approximately $1.5 million during
the next twelve months. In April 1999, the Company entered into a letter of
agreement with Robert Hollander, who resigned as president of CART Licensed
Products, L.P., and his company to purchase the remaining 45% interest in CART
Licensed Products, L.P. for $900,000 which closed on May 19, 1999. We believe
that existing cash, short-term investments, 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 receivable from our
Brazilian promoter. The 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 will
substantially cover the sanction fees and the 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 entire sanction fee payment
and receivable payment for 1999. The letter of credit for the 2000 event will be
issued thirty days after the date the 2000 race is announced.
14
<PAGE> 15
In May 1999, we completed the registered public offering of 1,816,500
shares of common stock that were sold by certain selling shareholders with the
net proceeds being paid solely to the selling shareholders. In addition, 272,475
shares of common stock were sold upon exercise of the underwriters'
over-allotment option. We received net proceeds (after deducting the
underwriters' discount and commissions and offering expenses) of approximately
$7.2 million. We currently intend to use the net proceeds from this offering for
general corporate purposes. Pending these uses, we expect to invest these funds
in short-term, interest bearing, investment grade securities.
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:
I. Awareness
II. Assessment
III. Detailed Analysis and Planning for Upgrades and Testing
IV. System Upgrades and Testing
V. Implementation
VI. Post Implementation
Phases I through V have been completed. The Post Implementation Phase includes
our contingency plan where users will have developed fall back procedures, and
are ready to implement manual procedures for conducting company business, record
keeping, follow-up data entry and system recovery in the event of system
failure.
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.
15
<PAGE> 16
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
With the exception of historical information contained in this Form
10-Q, certain matters discussed are forward-looking statements. These
forward-looking statements involve risks that could cause the actual results and
plans for the future to differ from these forward-looking statements. The
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
16
<PAGE> 17
CHAMPIONSHIP AUTO RACING TEAMS, INC.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
During a race at Michigan Speedway in July 1998, a driver was involved
in a racing incident that propelled a tire and suspension parts into the
grandstands. Three spectators were killed and six other spectators reported
minor injuries. On July 12, 1999, we were joined as a co-defendant in a lawsuit
originally filed on September 11, 1998 in the Lenawee County Circuit Court under
the caption Thomas C. Fox, as Independent Personal Representative for the Estate
of Kenneth D. Fox, Plaintiff, vs. Michigan International Speedway, Inc., a
Michigan corporation, d/b/a/ Michigan Speedway Corporation, et al., Defendants,
File No. 98-8008-NO. This lawsuit was filed by the estate of one of the
spectators killed and seeks damages of an unspecified amount. On June 16, 1999,
we were joined as a co-defendant in a lawsuit originally filed on October 20,
1998 in the Lenawee County Circuit Court under the caption Mary Tautkus, as
Personal Representative for the Estate of Michael T. Tautkus, Deceased,
Plaintiff, vs. Michigan International Speedway, Inc., a Michigan corporation,
d/b/a/ Michigan Speedway Corporation, et al., Defendants, File No. 98-8050-NO.
This lawsuit was filed by the estate of one of the spectators killed and seeks
damages of an unspecified amount.
We have and will continue to have liability insurance to cover racing
incidents. We are also indemnified by track promoters for racing incidents. To
the extent not covered by insurance or indemnification from the track promoters,
any claims and associated expenses related to prior racing incidents, including
the incident at Michigan Speedway, could adversely affect our financial and
business results.
17
<PAGE> 18
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
The following exhibits are filed herewith.
EXHIBIT NUMBER DESCRIPTION OF EXHIBIT
-------------- ----------------------
10.1 Website Digital Media Agreement with CART Digital
Media Enterprises, LLC dated March 22, 1999
(incorporated by reference to the Company's 8-K
filed on April, 22, 1999 - portions of the
Agreement were filed separately with the
Securities and Exchange Commission with a request
for confidential treatment).
27.1 Financial Data Schedule
(b) Reports on Form 8-K.
A current report on Form 8-K was filed on April 22, 1999,
reporting the Website Digital Media Agreement with CART
Digital Media Enterprises, LLC and the Company (portions of
the Agreement were filed separately with the Securities and
Exchange Commission with a request for confidential
treatment).
18
<PAGE> 19
SIGNATURES
Pursuant to the requirements 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.
CHAMPIONSHIP AUTO RACING TEAMS, INC.
Date: 8-11-99 By: /s/ Randy K. Dzierzawski
----------------------------------
Randy K. Dzierzawski
Chief Financial Officer
19
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