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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, 1999.
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _________________ TO ________________.
COMMISSION FILE NUMBER 1-13925
CHAMPIONSHIP AUTO RACING TEAMS, INC.
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(Exact name of registrant as specified in its charter)
Delaware 38-3389456
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(State or other jurisdiction of (IRS Employer Identification No.)
Incorporation or organization)
755 West Big Beaver Rd., Suite 800, Troy, MI 48084
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(Address of principal executive offices) (Zip Code)
(248) 362-8800
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(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
Common Stock, $.01 par value New York Stock Exchange
Securities registered pursuant to section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (Section 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 15, 2000 the aggregate market value of the shares of voting stock of
Registrant held by non-affiliates was approximately $219,126,951 based on a
closing sales price on the NYSE of $20.4375 per share.
At March 15, 2000, the Registrant had 15,586,568 shares of common stock
outstanding.
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DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement for the 2000 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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<TABLE>
FORM 10-K TABLE OF CONTENTS
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PAGE
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PART I
Item 1. Business.................................................................. 4
Item 2. Properties................................................................ 24
Item 3. Legal Proceedings......................................................... 24
Item 4. Submission of Matters to a Vote of Security Holders....................... 24
PART II
Item 5. Market of the Registrant's Common Equity and Related Stockholder Matters.. 25
Item 6. Selected Consolidated Financial Data...................................... 26
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operation............................................. 28
Item 7A. Quantitative and Qualitative Disclosures About Market Risk................ 36
Item 8. Financial Statements and Supplementary Data............................... 36
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure............................................. 36
PART III
Item 10. Directors and Executive Officers of the Registrant........................ 37
Item 11. Executive Compensation.................................................... 37
Item 12. Security Ownership of Certain Beneficial Owners and Management............ 37
Item 13. Certain Relationships and Related Transactions............................ 37
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K........... 38
SIGNATURES
</TABLE>
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PART I
ITEM 1: BUSINESS
INTRODUCTION
We own, operate and sanction the premier open-wheel motorsports series
in North America--the CART FedEx 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, 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 Jimmy Vasser
o Paul Tracy
o Dario Franchitti
o Adrian Fernandez
o Juan Montoya
o Christian Fittipaldi
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 Paul Newman
o U.E. "Pat" Patrick
o Roger Penske
o Bobby Rahal
Major sponsors of the CART Championship include:
o Federal Express, Title Sponsor
o MCI Worldcom
o Budweiser
o Mercedes-Benz
o Honda
o Craftsman
o Motorola
o PPG
In addition, other Fortune 500 companies sponsor particular race teams and
events.
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Open-wheel racing is the oldest continually scheduled motorsports
competition in the world, tracing its history to 1904. The 2000 CART
Championship will include 20 races staged in five countries:
o United States
o Canada
o Australia
o Brazil
o Japan
One new race was added in 1999 at Cicero, Illinois, a suburb of
Chicago. 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 for the Indy Lights series
o licensing royalties
Our revenues have increased during the last five years from $29.7
million in 1995 to $68.8 million in 1999.
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.
RISK FACTORS
SUBSTANTIAL COMPETITION - OUR RACING EVENTS FACE INTENSE COMPETITION
FOR ATTENDANCE, TELEVISION VIEWERSHIP AND SPONSORSHIP. Our industry is highly
competitive. We cannot assure you that we will be able to maintain or improve
our market position. Our racing events compete with other events for television
viewership, attendance and sponsorship funding. Our racing events compete with
racing events sanctioned by other racing bodies, including:
o Formula One
o National Association of Stock Car Automobile Racing ("NASCAR")
o Indy Racing League ("IRL")
o National Hot Rod Association ("NHRA")
o Sports Car Club of America ("SCCA")
o Professional Sports Car Racing ("PSCR")
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In addition, our racing events compete with other sports, entertainment and
recreational events, including:
o Football
o Basketball
o Baseball
o Golf
RELIANCE ON PARTICIPATION BY TEAMS - OUR FUTURE SUCCESS IS DEPENDENT
UPON THE CONTINUED PARTICIPATION OF RACING TEAMS IN CART-SANCTIONED RACE EVENTS.
If teams that currently participate in our events terminate their participation,
then that could adversely affect our financial and business results. The teams
participating in our events derive substantially all of their funding for race
operations from their sponsors. Generally, team sponsors measure advertising
exposure to determine future sponsorship commitments. A decrease in our
attendance or television viewership could adversely affect the level of funding
by some team sponsors. If sponsorship revenues are not available to teams, then
those teams may not have the necessary funding to participate in our events. In
addition, teams may elect to participate in a competing series rather than CART.
We can not assure you that the current race teams will participate in future
events.
RELIANCE ON INDUSTRY SPONSORSHIPS - A SIGNIFICANT DECLINE IN
SPONSORSHIP, PROMOTION AND ADVERTISING DOLLARS AVAILABLE TO US, OUR RACE
PROMOTERS AND THE RACING TEAMS PARTICIPATING IN OUR EVENTS IN THE FUTURE COULD
ADVERSELY AFFECT OUR FINANCIAL AND BUSINESS RESULTS. We generate significant
revenue each year from the sponsorship, promotion and advertising of various
companies and their products. The revenue generated from such sponsorship,
promotion and advertising substantially depends upon the level of advertising
expenditures by sponsors or prospective sponsors. The level of advertising
expenditures depends in part on the financial condition of such companies and
the availability and cost of alternative promotional outlets. It also depends on
their perception of the benefits of using us, our events or race teams as an
advertising medium. Television viewership, spectator attendance and race venues
for our events significantly impact the advertising and promotional value to
sponsors.
RELIANCE ON PARTICIPATION BY SUPPLIERS - WITHOUT THE PARTICIPATION OF
SUPPLIERS IN PROVIDING ENGINES, CHASSIS AND TIRES, WE MAY NOT BE ABLE TO
CONTINUE SOME OF OUR RACING SERIES. We are dependent upon the continued
participation of suppliers of engines, tires and chassis to teams competing in
our events. The engines and tires for our race cars are designed specifically
for our racing. Beginning in 2000, only one tire manufacturer will supply tires
to competitors in the CART Championship. We believe that the costs to some
industry suppliers are greater than the revenues generated from the sale or
lease of such products and therefore they must derive advertising or technical
benefits from such participation.
RELIANCE ON EVENT PROMOTERS - WE DERIVE A SUBSTANTIAL PORTION OF OUR
TOTAL REVENUES FROM SANCTION FEES WHICH ARE PAID TO US BY EACH PROMOTER. If
several promoters incur financial losses or restrictions that prohibit future
events from taking place or if such promoters elect not to promote our events in
the future, we believe this could adversely affect our financial and business
results.
LIMITATIONS ON SPONSORSHIP - THE LOSS OF MOTORSPORTS INDUSTRY
SPONSORSHIPS FROM TOBACCO AND ALCOHOL COMPANIES COULD HAVE ADVERSE EFFECTS ON
US. Governmental authorities in many countries regulate advertising by companies
in the alcohol and tobacco industries. Companies involved in these industries
have been significant sponsors of race teams, racing series and events.
Recently, governmental authorities have taken steps to further restrict
sponsorship by
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tobacco companies. We do not derive significant sponsorship revenue from the
tobacco and alcohol industries, but many of the race teams participating in our
events derive a substantial portion of their operating revenues from such
industry sponsors. In addition, many of our race events are sponsored in part by
companies in the tobacco or alcohol industries, with such sponsorship fees paid
to the track promoters. If these race teams and track promoters lose sponsorship
fees from tobacco or alcohol industry sponsors without locating another sponsor,
then we could lose that team as a participant or that promoter and it could
adversely affect our financial and business results.
In 1998, Phillip Morris, Brown & Williamson, Lorillard, R.J. Reynolds
and the Liggett Group entered into a settlement agreement with the 46 states and
the District of Columbia (collectively, the "States"). The settlement agreement
restricts tobacco product advertising and marketing within the States. Among
other restrictions, the settlement agreement:
o prohibits tobacco product brand name sponsorship of concerts, events
in which the intended audience is comprised of a significant
percentage of youth under age 18, events in which any paid
participants or contestants are youths, or any athletic event
between opposing teams in any football, basketball, baseball, soccer
or hockey league; and
o limits each participating manufacturer to one tobacco product brand
name sponsorship during any twelve-month period.
We cannot assure you that a tobacco company will choose a motorsports
event as its one annual event to sponsor. If a tobacco company does choose to do
so, the settlement agreement permits the use of a tobacco product brand name for
a race car series and a single race team within that series. If the tobacco
company is not a sponsor of the race series in which the race team is competing,
it can use the tobacco product brand name only for a single race team.
EXPANSION - WE HAVE A LIMITED ABILITY TO EXPAND OUR RACE SCHEDULE.
Expansion of the number of races we stage each year will require additional
personnel and resolution of logistical issues such as transportation and
availability of equipment. Our ability to expand the race schedule will also be
limited by the availability of funding and equipment to teams for participation
in additional events and by the teams' willingness to participate in an expanded
schedule.
INDIANAPOLIS 500 - NON-PARTICIPATION BY CART TEAMS AND DRIVERS IN THE
INDIANAPOLIS 500 COULD HAVE AN ADVERSE EFFECT. We are unable to predict what
effect the continued non-participation by substantially all of our teams at the
Indianapolis 500 will have on our financial and business results. The IRL was
formed in 1995 as a rival open-wheel racing league to compete directly with us.
The IRL was founded by affiliates of the Indianapolis Motor Speedway. Since the
creation of the IRL and certain rule changes at the Indianapolis 500, almost all
of the CART teams and drivers have not competed at the Indianapolis 500.
The Indianapolis 500 is a major racing event in the United States. It
draws substantial television viewership. For these reasons, many companies that
sponsored race teams historically regarded an involvement at the Indianapolis
500 as being an extremely important part of their sponsorship. Corporations have
spent a considerable sum of money to sponsor racing teams participating at the
Indianapolis 500 and for advertising and promotions for such sponsorship.
GROWTH STRATEGY - WE MAY NOT BE ABLE TO SUCCESSFULLY IMPLEMENT OUR
GROWTH STRATEGY. A factor in our growth strategy is to acquire and develop
race-related businesses and properties. We cannot assure you that we will be
able to identify and acquire race-related businesses and properties. Our ability
to effectively manage our future growth and to successfully implement this
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growth strategy will require us to successfully integrate the operations of
acquired businesses and properties with our operations. We will also need to
enhance our operational, financial and management systems. In addition, we will
need to successfully hire, train, retain and motivate additional employees. If
we fail to manage our growth effectively, then this could have an adverse affect
on our financial and business results.
LIABILITY FOR RACING-RELATED INCIDENTS - WE FACE THE INHERENT RISKS AND
EXPOSURE TO CLAIMS IN THE EVENT THAT SOMEONE IS INJURED AT A CART-SANCTIONED
EVENT. Racing events can be dangerous to participants and spectators. We have
and will continue to have liability insurance to cover past and any future
racing incidents. We are also indemnified by track promoters for racing
incidents and obtain waivers from those participating in our events. To the
extent not covered by insurance, any claims and associated expenses related to
prior racing incidents could adversely affect our financial and business
results. In addition, any claims and associated expenses related to future
potential racing incidents, to the extent not covered by insurance, could
adversely affect our financial and business results.
CONTROL - OUR DIRECTORS AND OFFICERS CONTROL THE VOTING POWER. Our
current directors and officers own approximately 25% of the outstanding shares
of common stock. As a group, along with those affiliated with our race teams,
they will control the outcome of substantially all issues submitted to our
stockholders, including the election of directors. The interests of this group
could conflict with the interests of the other stockholders.
CONFLICTS - SOME OF OUR CURRENT STOCKHOLDERS AND DIRECTORS HAVE
CONFLICTS OF INTEREST. Some of our current stockholders and most of our
directors are affiliated with a race team that participates in the CART
Championship. These factors result in an inherent conflict of interest for
certain matters to be considered by the stockholders or directors. In addition,
some of our stockholders and directors either control or are affiliated with
others who control racing venues which stage CART and other racing events.
Therefore, a conflict of interest may arise when we determine the location and
dates of CART events and the amount of sanction fees paid. Under Delaware law,
all directors owe a fiduciary duty to our stockholders.
KEY PERSONNEL - WE ARE DEPENDENT ON OUR KEY PERSONNEL. Our continued
success will depend upon the availability and performance of Messrs. Andrew
Craig and Randy Dzierzawski, and the other members of our senior management
team. If we lose key personnel or if we are unable to attract and retain key
employees in the future, then it could adversely affect our operations and
business plans. Although we have entered into employment agreements with key
executive officers, we cannot assure you that each of these individuals will
continue in his present capacity for a particular period of time.
INTERIM RESULTS - OUR QUARTERLY RESULTS ARE SUBJECT TO FLUCTUATION AND
SEASONALITY AS A RESULT OF THE SCHEDULING OF OUR RACES. Historically, our
revenues are higher in the second and third quarters of the year due to the
number of races that we stage in those quarters. The scheduling of any race in
the CART Championship can significantly affect our quarterly results of
operations when compared to a previous quarter if races are scheduled during
different quarters from year to year. You may be unable to usefully compare our
results in one quarter to our results in a prior period due to these timing
differences. This may affect your ability to analyze our results on a quarterly
basis and could also affect the market price of our stock. You should see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Seasonality and Quarterly Results" for a discussion of our
quarterly results.
SALES OF SHARES - SALES OF SHARES BY EXISTING STOCKHOLDERS COULD
ADVERSELY EFFECT THE MARKET PRICE OF OUR COMMON STOCK. Sales of significant
amounts of common stock in the public market by the team owners, or the
perception that such sales may occur, could cause the market
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price of the common stock to drop. As of March 15, 2000, 15,586,568 shares of
common stock were outstanding.
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:
o Formula One
o CART Championship
o IRL
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 ("FIA")
sanctions Formula One World Championship events consisting of
open-wheel races on road courses in Europe, South America, Asia, Canada
and Australia. The 2000 season will include 17 races. The 1999 Formula
One calendar included 16 events in 15 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 1999 season included 20 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 10 races this year, including the Indianapolis
500. The IRL's 1999 season consisted of 10 races, including the
Indianapolis 500.
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o FORMULA 3000. The FIA sanctions the International Formula
3000 Championship. The 2000 championship season covers Europe between
April and September in a ten 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 12 races during the 1999 season in the
United States and Canada. In 2000, the Indy Lights Championship will be
comprised of 12 races in the United States, Canada and the Dutch
Antilles.
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 1999 Atlantic
Championship consisted of 12 races in the United States and Canada,
with 10 events held in conjunction with CART events, one race as a
support series to a Formula One race in Montreal, Canada, and another
as a stand alone race. The 2000 Atlantic Championship will consist of
12 races in the United States and 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 1999 Winston Cup and Busch Grand National
race series included 34 and 32 races, respectively; all of which were
held in the United States.
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. The Automobile Racing Club of America ("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.
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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. During 1999, approximately 2.5 million people attended CART
events. CART races were also televised in 195 countries in 1998, 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 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
$62,400, compared to $47,600 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 may own their own teams. Principally, drivers receive
income from contracts with team owners, sponsorship fees and prize money.
Successful drivers may also receive income from personal endorsement fees, sales
of licensed merchandise and souvenir sales. The personality and success of a
driver can be an important marketing advantage for the sanctioning body and team
owners because it can help attract audiences, 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.
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SANCTIONING BODIES. Sanctioning bodies such as us sanction events at
various race venues in exchange for fees from race promoters. Sanctioning bodies
are responsible for all aspects of race management necessary to "manufacture"
the race event. They are responsible for presenting racing cars, drivers and
teams and providing race officials to ensure fair competition, as well as
providing the race and series' purses and other prize payments.
The FIA, based in Geneva, Switzerland, 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 PSCR
o NHRA
o SCCA
o 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. 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 on four continents in 1999, 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 Indy
Lights 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.
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In 2000, we are going to re-launch "Inside CART," our
magazine-type show that will be aired on ESPN 2. We intend to produce
25 episodes of "Inside CART." We will explore additional media
opportunities in 2000. We are also expanding our radio race coverage
and will be broadcasting all 20 races in all of our North American race
markets, plus the Phoenix, Las Vegas and Indianapolis markets. In
addition, we will be launching our "CART Hotline," a radio call-in show
that will air in the above-mentioned markets every Friday evening
during our race season. Television and radio programming that is in
addition to race coverage is an important element in our strategy to
increase brand awareness and educate our fans.
We will continue to expand press coverage for all three series
- an area where we achieved substantial growth in 1999.
We have experienced significant growth with our web site
CART.com. During 1998, we added E-Commerce and a business section to
CART.com, and in 1999, we entered into an agreement with CART Digital
Media Enterprises, LLC where they redeveloped the entire site with a
new look and presentation that has increased the immersive experience
for visitors. During 1999, our website received nearly 8 million
visits, up by 130% from 1998.
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 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 certain assets of 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 1999, 25 of the 36 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. In 1999, the top seven drivers in the CART Championship
each represented a different country.
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<PAGE> 14
THE CARS. The cars are developed by a variety of different chassis
manufacturers:
o Lola
o Reynard
o Swift
These high-tech race cars are powered by state-of-the-art engines from:
o Ford
o Honda
o Mercedes-Benz
o Toyota
Beginning with the 2000 race season, all cars will ride on tires provided by
Firestone.
THE VENUES. CART races are conducted on four different types of tracks:
o superspeedways
o ovals
o temporary street courses
o permanent road courses
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 adult males. This is an attractive demographic for
advertisers since this age group tends to watch less television than the average
American.
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
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<PAGE> 15
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
o Juan Montoya
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 1999 race seasons
were equally competitive. In 1999, we had a series record ten different winners,
including first-time victories in the CART Championship for Christian
Fittipaldi, Tony Kanaan and rookie, Juan Montoya. The 1999 Championship was one
of our most intense competitions, with the CART champion not being determined
until the finish of our last race, when Juan Motoya and Dario Franchitti
finished tied with 212 Championship points each. It was the first time in CART
history where a tiebreaker was implemented, using the number of races won as the
determining factor. Juan Montoya won the title with his seven victories to Dario
Franchitti's three victories.
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, the majority of CART teams do not participate in the
Indianapolis 500. In 2000, we have elected not to schedule a race during the
weekend the Indianapolis 500 is run. We cannot predict the number of our race
teams, if any, that will participate in the Indianapolis 500 this year. 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
o Cicero, Illinois
Internationally, we added a race in Rio de Janeiro, Brazil in 1996 and Motegi,
Japan in 1998.
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
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<PAGE> 16
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.
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 1999 season, eight different drivers, representing seven different
race teams and seven different countries, won races, making 1999 one of the most
competitive seasons in the series' history. During 1999, the series had a total
of 24 drivers, representing 10 countries, competing in at least one race in the
Indy Lights Championship. Some 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 Luiz Garcia Jr.
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<PAGE> 17
In 1999, three CART team owners, Gerald Forsythe (Forsythe Championship Racing),
Bruce McCaw (PacWest Racing) and Barry Green (Team KOOL Green), 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
In 2000, the Indy Lights Championship will include a stand-alone race
event on the island of Aruba.
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.
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, 1999, promoters paid us sanction
fees of approximately $35.5 million, an average of $1.8 million per event,
representing approximately 52% of our revenues. For the year ended December 31,
1998, promoters paid us sanction fees of approximately $30.4 million, averaging
$1.6 million per event and representing approximately 49% of our total 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
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<PAGE> 18
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. However, when we determine our race venues, we consider many factors such
as the market, the history, promoter stability, racing facilities and our race
mix, and do not solely determine our race venues based upon sanction fees.
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 1999, we managed 20
races - 15 in the United States, two in Canada and one each in Australia, Brazil
and Japan. These races included:
o two superspeedway races
o seven oval races
o seven temporary street course races
o four permanent road course races
In 1999, the Indy Lights Championship was comprised of 12 races. In
2000, the Indy Lights Championship will include 12 races, eleven held in
conjunction with CART events and one "stand alone" event in the Dutch Antilles.
In 1999, the Atlantic Championship was comprised of 12 races. Of the 12
races, 10 were held in conjunction with CART events, one event was held in
conjunction with a Formula One race and one was a "stand alone" event. In 2000,
the Atlantic Championship will consist of 12 races, with one "stand alone" event
and one race in conjunction with a Formula One race.
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<PAGE> 19
In the following table, we have provided the locations and venues for
the 2000 CART Championship, Indy Lights Championship and Atlantic Championship,
as well as the event dates for the 2000 seasons and a description of the racing
circuit:
<TABLE>
<CAPTION>
CART INDY
EVENT DATES LIGHTS ATLANTIC
LOCATION 2000 RACE RACE TRACK DESCRIPTION
-------- ---- ---- ---- -----------------
<S> <C> <C> <C> <C>
Homestead, Florida 3/26 No Yes (2 races) 1.5 mile oval
Metro-Dade Homestead Motorsports Complex
Nazareth, Pennsylvania 4/9 No No 1.0 mile tri-oval
Nazareth Speedway
Long Beach, California 4/16 Yes Yes 1.6 mile temporary street course
Long Beach
Rio de Janeiro, Brazil 4/30 No No 1.8 mile oval
Emerson Fittipaldi Speedway at
Nelson Piquet International Raceway
Motegi, Japan 5/13 No No 1.5 mile oval
Twin Ring
West Allis, Wisconsin 6/4 Yes Yes 1.0 mile oval
The Milwaukee Mile
Detroit, Michigan 6/18 Yes No 2.1 mile temporary street course
The Raceway on Belle Isle
Portland, Oregon 6/25 Yes No 2.0 mile permanent road course
Portland International Raceway
Cleveland, Ohio 7/2 No Yes 2.4 mile temporary street course
Burke Lakefront Airport
Toronto, Ontario, Canada 7/16 No Yes 1.8 mile temporary street course
Toronto
Brooklyn, Michigan 7/23 Yes No 2.0 mile tri-oval superspeedway
Michigan International Speedway
Chicago, Illinois 7/30 Yes No 1.0 mile oval
Chicago Motor Speedway
Lexington, Ohio 8/13 Yes No 2.3 permanent road course
Mid-Ohio Sports Car Course
Elkhart, Wisconsin 8/20 No Yes 4.0 mile permanent road course
Road America
Vancouver, British Columbia, Canada 9/3 Yes No 1.7 mile temporary street course
Vancouver
Monterey, California 9/10 Yes Yes 2.2 mile permanent road course
Laguna Seca Raceway
Madison, Illinois 9/17 Yes Yes 1.3 mile banked oval
Gateway International Raceway
Houston, Texas 10/1 No Yes 1.7 mile temporary street course
Houston
Gold Coast, Queensland, Australia 10/15 No No 2.8 mile temporary street course
Surfers Paradise, Queensland
Fontana, California 10/29 Yes No 2.0 mile banked oval superspeedway
California Speedway
Montreal, Quebec, Canada (6/17) -- No Yes 2.7 mile temporary street course
Gilles-Villeneuve Circut
Trois-Rivieres, Quebec, Canada (7/30) -- No Yes 2.1 mile temporary street course
Trois-Rivieres
Island of Aruba (12/3) -- Yes No 2.6 mile road course
Aruba Motorsports Complex
</TABLE>
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<PAGE> 20
DRIVERS
During the 1999 season, 36 drivers competed in at least one of the CART
race events, including past champions:
o Michael Andretti
o Al Unser, Jr.
o Jimmy Vasser
In the following table, we have provided information regarding each of
the drivers who are expected to participate in the 2000 CART Championship:
<TABLE>
<CAPTION>
DRIVER BIRTH PLACE 2000 RACE TEAM
------ ----------- --------------
<S> <C> <C>
MICHAEL ANDRETTI* Bethlehem, Pennsylvania Newman/Haas Racing
Mark Blundell Barnet, Hertforshire, England PacWest Racing Group
Kenny Brack Arvika, Sweden Shell Team Rahal
Patrick Carpentier Ville Lasalle, Quebec, Canada Player's Forsythe Racing
Helio Castro-Neves Sao Paulo, Brazil Marlboro Team Penske
Cristiano da Matta Bela Harizonte, Brazil PPI Motorsports
Gil de Ferran Paris, France Marlboro Team Penske
Adrian Fernandez Mexico City, Mexico Patrick Racing
Christian Fittipaldi Sao Paulo, Brazil Newman/Haas Racing
Dario Franchitti Edinburgh, Scotland Team KOOL Green
Mauricio Gugelmin Joinville, Brazil PacWest Racing Group
Richie Hearn Glendale, California Della Penna Motorsports
Bryan Herta Warren, Michigan Forsythe Championship Racing
Michel Jourdain, Jr. Mexico City, Mexico Bettenhausen Motorsports
Tony Kanaan Salvador, Bahia, Brazil Mo Nunn Racing
Takuya Kurosawa Gotenba, Shizuoka, Japan Dale Coyne Racing
JUAN MONTOYA* Bogota, Columbia Target/Chip Ganassi Racing
Roberto Moreno Rio de Janeiro, Brazil Patrick Racing
Shinji Nakano Toyko, Japan Walker Racing
Max Papis Como, Italy Miller Team Rahal
Oriol Servia Pals, Catalonia, Spain PPI Motorsports
Alexandre Tagliani Lachenaie, Quebec, Canada Player's Forsythe Racing
Paul Tracy Scarborough, Ontario, Canada Team KOOL Green
JIMMY VASSER* Canoga Park, California Target/Chip Ganassi Racing
</TABLE>
* Indicates past champion of the CART Championship.
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, 1999, we
received sponsorship revenues of approximately $19.2 million, representing
approximately 28% 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
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<PAGE> 21
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.
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 2000
CART Championship:
<TABLE>
<CAPTION>
YEARS AS
SPONSOR OFFICIAL DESIGNATION SPONSOR
------- -------------------- -------
<S> <C> <C>
Federal Express Official Series Sponsor 2
MCI Telecommunications Official Communications Company 3
Budweiser Official Beer 5
Craftsman Tools Official Hand Tools 5
Featherlite Trailers and
Vantare Coach Official Trailer and Coach 5
Ford SVO Technology Official Safety Technology Provider 3
Holmatro Official Rescue Tool 8
Honda Motorcycles Official Motorcycle 4
Honda Power Equipment Official Power Equipment 4
K&K Insurance Official Insurance Provider 6
Mercedes-Benz Official Car 5
Motorola Official Communications Hardware 1
PPG Industries Official Automotive Paint and Refinishing
Supplier 20
Racing Radios Official Two-Way Radio 10
Toyota Trucks Official Truck 4
</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 1999, 1998 or 1997.
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ATTENDANCE, VIEWERSHIP AND BROADCAST RIGHTS
ATTENDANCE. CART spectator attendance has grown dramatically in the
1990s, with more than a 50% increase from 1990 to 1998, based upon figures
compiled by Goodyear Tire & Rubber Co. Race Reports. However, at the end of the
1998 season, Goodyear ceased compiling attendance figures. The only other known
third-party source for this data is Joyce Julius and Associates who publishes
Sponsors Report. According to this report, total of 2.5 million spectators
attended our races in 1999, an increase of 6.4% over their reported 1998
cumulative attendance figure of 2.4 million.
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 1999, an aggregate of 29.5 million gross United
States viewers were delivered for the CART races. Total viewership for all
races, re-airs and support programming in 1999 was 43.7 million viewers. 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 1998 CART Championship had a
cumulative worldwide viewership of 987 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 were 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:
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 was a Limited Partnership, which we owned a 55% interest in. The
remaining 45% interest was owned by Top Gear, Inc., a company owned by Mr.
Robert E. Hollander. Effective January 1, 1999, we purchased the remaining 45%
in CLP that was formerly owned by Top Gear, Inc. Simultaneous with the
acquisition, CLP was reorganized into a Michigan corporation.
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 40 companies including:
o Action Performance
o Midway Amusement Games
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o Microsoft
o Sony
o Sega
o Antigua
o Warner Brothers
o VIA Marketing
o Roox Corporation
o Enginewear
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 FIA
o NASCAR
o IRL
o USAC
o NHRA
o SCCA
o PSCR
o ARCA
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:
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, 1999, we had 83 full-time employees and a roster of
approximately 144 people who serve as race officials. We also had numerous
volunteers that worked at one or more 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.
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<PAGE> 24
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. In
1999, we were 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 seeked damages of unspecified amounts. All
litigation was settled in January 2000. Neither we, nor our insurance carrier
contributed to any settlement amounts paid in connection with this litigation.
Frontier Insurance Company ("Frontier") filed a declaratory judgment
action against us, on December 17, 1999. The complaint seeks a judgment
declaring that Frontier has no liability to us under a performance bond issued
by Frontier in the amount of $5 million. We intend to file a counterclaim
against Frontier seeking judgment declaring that the bond is valid and
enforceable and that we are entitled to a judgment in the amount of at least $5
million pursuant to a liquidated damages provision. The performance bond was
issued in connection with an Organizer/Promoter Agreement between us and
Hawaiian Super Prix, LLC, ("HSP") whereby, HSP would promote an automobile race
event known as the Hawaiian Super Prix in November 1999. The racing event never
took place and HSP is now in a Chapter 7 bankruptcy proceeding in the United
States Bankruptcy Court for the District of Hawaii.
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
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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 15, 2000, we had 15,586,568
shares of common stock outstanding and approximately 367 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
1999 and 1998.
<TABLE>
<CAPTION>
QUARTER ENDED HIGH LOW
- -------------------------------------------------------------------------------
<S> <C> <C>
1999
First Quarter $29.38 $25.56
Second Quarter 35.19 27.44
Third Quarter 33.94 26.00
Fourth Quarter 25.75 19.25
1998
First Quarter (from initial public offering on March 10) $19.94 $18.25
Second Quarter 21.31 16.56
Third Quarter 24.44 19.19
Fourth Quarter 29.63 21.00
- -------------------------------------------------------------------------------
</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 May 1999, we completed a registered secondary public offering of
1,816,500 shares of common stock that was sold by certain race team owners. In
addition, upon exercise of the underwriters' over-allotment option, 272,475
shares of our common stock was sold for $28.00 per share with proceeds of
approximately $7.2 million, net of underwriting discounts and commissions and
offering expenses. The effective date of our registration statement was April
28, 1999 and our registration number was 333-76091.
The net proceeds are in short-term, interest-bearing investments and
will be used for working capital and general corporate purposes, including
expanding our business, through acquisition or development of race related
businesses and properties.
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ITEM 6: SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data as of and for the
five years ended December 31, 1999 are derived from our consolidated financial
statements which have been audited by our independent auditors, Deloitte &
Touche LLP. 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,
-----------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS:
Revenues:
Sanction fees $ 35,479 $30,444 $ 24,248 $21,078 $18,708
U.S. 500(1) -- -- -- 7,054 --
Sponsorship revenue 19,150 16,388 7,221 5,501 4,780
Television revenue 4,950 5,148 5,604 4,373 3,177
Engine leases, rebuilds and
wheel sales 2,054 2,214 -- -- --
Other revenue 7,143 8,336 4,372 3,118 3,077
-------- ------- -------- ------- -------
Total revenues 68,776 62,530 41,445 41,124 29,742
Expenses:
Race and franchise fund payments(2) 15,334 15,183 28,939 17,198 18,446
U.S. 500(1) -- -- -- 8,246 --
Race expenses(2) 6,670 4,818 6,970 6,055 4,612
Costs of engine rebuilds and
wheel sales 610 633 -- -- --
Administrative and indirect
expenses(2) 20,646 20,658 14,295 8,570 5,832
Compensation expense(3) -- -- 12,200 1,167 --
Depreciation and amortization 1,048 779 549 685 306
Minority interest -- -- (232) -- --
-------- ------- -------- ------- -------
Total expenses 44,308 42,071 62,721 41,921 29,196
-------- ------- -------- ------- -------
Operating income (loss) 24,468 20,459 (21,276) (797) 546
Interest income (net) 5,255 3,198 329 280 235
-------- ------- -------- ------- -------
Income (loss) before income taxes 29,723 23,657 (20,947) (517) 781
Income tax benefit (expense) (10,865) (8,568) 3,423 179 204
-------- ------- -------- ------- -------
Net income (loss) $ 18,858 $15,089 $(17,524) $ (338) $ 985
======== ======= ======== ======= =======
Net income (loss) per share:
Basic $ 1.22 $ 1.06 $ (1.72) $ (.04) $ .10
======== ======= ======== ======= =======
Diluted $ 1.19 $ 1.05 $ (1.72) $ (.04) $ .10
======== ======= ======== ======= =======
Weighted average shares outstanding:
Basic 15,427 14,190 10,200 9,400 10,200
======== ======= ======== ======= =======
Diluted 15,908 14,421 10,200 9,400 10,200
======== ======= ======== ======= =======
BALANCE SHEET DATA:
Cash and cash equivalents $ 7,216 $15,080 $ 1,164 $ 630 $ 2,046
Short-term investments 91,758 61,610 -- -- --
Working capital (deficit) 99,480 72,219 (5,325) (524) (1,182)
Total assets 124,887 97,186 12,348 6,600 5,613
Long-term debt (including
current portion) -- 314 444 574 --
Total stockholders' equity (deficit) 114,330 86,219 (3,045) (151) (1,250)
</TABLE>
26
<PAGE> 27
(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, 1997, 1996 and 1995 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) Total expenses for the years ended December 31, 1997 and 1996 include
compensation expense of $12,200,000 and $1,167,000 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.
27
<PAGE> 28
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
$19.4 million for the year ended 1997. 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, 1999, 1998 and 1997. The percentage calculations are based on total
revenues.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1999 1998 1997
---- ---- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Sanction fees $ 35,479 51.6% $ 30,444 48.7% $ 24,248 58.5%
Sponsorship revenue 19,150 27.8 16,388 26.2 7,221 17.4
Television revenue 4,950 7.2 5,148 8.2 5,604 13.5
Engine leases, rebuilds and wheel sales 2,054 3.0 2,214 3.6 -- --
Other revenue 7,143 10.4 8,336 13.3 4,372 10.6
-------- ----- -------- ----- -------- -----
Total revenues $ 68,776 100.0% $ 62,530 100.0% $ 41,445 100.0%
======== ===== ======== ===== ======== =====
Expenses:
Race and franchise fund
payments(1) $ 15,334 22.3% $ 15,183 24.3% $ 28,939 69.8%
Race expenses(1) 6,670 9.7 4,818 7.7 6,970 16.8
Cost of engine rebuilds and wheel sales 610 0.9 633 1.0 -- --
Compensation expense -- -- -- -- 12,200 29.4
Administrative and other
indirect expenses(1) 20,646 30.0 20,658 33.0 14,295 34.5
Depreciation and amortization 1,048 1.5 779 1.3 549 1.3
Minority interest in loss of
subsidiaries -- -- -- -- (232) (0.5)
-------- ----- -------- ----- -------- -----
Total expenses 44,308 64.4 42,071 67.3 62,721 151.3
-------- ----- -------- ----- -------- -----
Operating income (loss) 24,468 35.6 20,459 32.7 (21,276) (51.3)
Interest income (net) 5,255 7.6 3,198 5.1 329 0.8
-------- ----- -------- ----- -------- -----
Income (loss) before income taxes 29,723 43.2 23,657 37.8 (20,947) (50.5)
Income tax benefit (expense) (10,865) (15.8) (8,568) (13.7) 3,423 8.3
-------- ----- -------- ----- -------- -----
Net income (loss) $ 18,858 27.4% $ 15,089 24.1% $(17,524) (42.2)%
======== ===== ======== ===== ======== =====
</TABLE>
(1) Race expenses for 1997 include our payments to franchise teams as
explained above.
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<PAGE> 29
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 2000 and
2005. Currently contracted sanction fees range from $1.0 million to $4.5 million
per event.
SPONSORSHIP REVENUE. We receive corporate sponsorship revenue based on
negotiated contracts. We currently have corporate sponsorship contracts with 19
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 1999, 1998 and 1997, 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 will receive advertising
revenue from "Inside CART," our race magazine television show to be broadcast in
2000, 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 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."
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<PAGE> 30
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.
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.
RESULTS OF OPERATIONS
Year Ended December 31, 1999 Compared to Year Ended December 31, 1998
REVENUES. Total revenues for 1999 were $68.8 million, an increase of
$6.2 million, or 10%, from 1998. This was due to increased sanction fees and
sponsorship fees, partially offset by a reduction in television revenue, engine
leases, rebuilds and wheel sales and other revenue as described below.
Sanction fees for 1999 were $35.5 million, an increase of $5.0 million,
or 17%, from 1998. This increase was attributable to the addition of a new event
in Cicero, Illinois, as well as, annual sanction fee escalation for certain
other events.
Sponsorship revenue for 1999 was $19.2 million, an increase of $2.8
million, or 17%, from 1998. This increase was primarily attributable to an
annual escalation of our agreement with ISL Worldwide that guaranteed certain
sponsorship income in 1999. New sponsors in 1999 included Motorola, Parke-Davis,
Automobile Magazine, Sears Mechanical and Computer Associates.
30
<PAGE> 31
Television revenue for 1999 was $5.0 million, a decrease of $198,000,
or 4%, from 1998. This decrease was due primarily to slightly lower revenues on
the profit sharing portion of our contract with ESPN.
Engine leases, rebuilds and wheel sales for 1999 was $2.1 million, a
decrease of $160,000, or 7%, from 1998. This decrease was due to having fewer
Indy Lights entries in 1999, due to increased competition with other race series
both domestically and internationally. This decrease was also attributed to two
fewer Indy Lights races in 1999 compared to 1998.
Other revenue for 1999 was $7.1 million, a decrease of $1.2 million, or
14%, from 1998. This decrease was partially attributable to a decrease in
membership and credential income, royalties and awards money. The decrease was
also attributed to a one time insurance settlement of $400,000 received in 1998.
EXPENSES. Total expenses for 1999 were $43.3 million, an increase of
$2.0 million, or 5%, from 1998. This increase was due to higher race payments
and race expenses as described below.
Race payments for 1999 were $15.3 million, an increase of $151,000, or
1%, from 1998. This increase was due to one additional CART race and two fewer
races for Indy Lights and Atlantics when comparing 1999 to 1998.
Race expenses for 1999 were $6.7 million, an increase of $1.9 million,
or 38%, from 1998. This increase is partially due to one additional CART race
and the addition of a new department, Race Operations. The increase was also due
to new programs and personnel in the Electronics, Logistics and Safety
departments.
Cost of engine rebuilds and wheel sales were $610,000, a decrease of
$23,000, or 4%, from 1998. The decrease was due to having fewer Indy Lights
entries as noted above. This decrease was also attributed to two fewer Indy
Lights races in 1999 compared to 1998.
Administrative and indirect expenses for 1999 were $20.6 million, a
decrease of $12,000 from 1998.
Depreciation and amortization for 1999 was $1.0 million, compared to
depreciation and amortization of $779,000 for 1998.
OPERATING INCOME. Operating income for 1999 was $24.5 million, compared
to operating income of $20.5 million for 1998.
INTEREST INCOME (NET). Interest income (net) for 1999 was $5.3 million,
compared to interest income (net) of $3.2 million for 1998. The increase of $2.1
million was primarily attributable to interest earned on the invested proceeds
from the initial public offering, additional operating income and proceeds from
the secondary offering in May 1999.
INCOME BEFORE INCOME TAXES. Income before income taxes for 1999 was
$29.7 million, compared to income before taxes of $23.7 million for 1998.
INCOME TAX EXPENSE. Income tax expense for 1999 was $10.9 million,
compared to income tax expense of $8.6 million for 1998.
NET INCOME. Net income for 1999 was $18.9 million, compared to net
income of $15.1 million in 1998.
31
<PAGE> 32
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, or 51%, 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 $41.3 million, a decrease of
$20.9 million, or 34%, 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.
32
<PAGE> 33
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.
Depreciation and amortization for 1998 was $779,000, compared to
depreciation and amortization of $549,000 for 1997.
OPERATING INCOME (LOSS). Operating income for 1998 was $20.5 million,
compared to operating loss of $21.3 million in 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 (LOSS) BEFORE INCOME TAXES. Income before income taxes for 1998
was $23.7 million, compared to a loss before income taxes of $20.9 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.
SEASONALITY AND QUARTERLY RESULTS
A substantial portion of our total revenues during the race season is
expected to remain seasonal, based on our race schedule. Our quarterly results
vary based on the number of races held during the quarter. In addition, the mix
between the type of race (street course, superspeedway, etc.) and the sanction
fees attributed to those races will affect quarterly results. Consequently,
changes in race schedules from year to year, with races held in different
quarters, will result in fluctuations in our quarterly results and affect
comparability. We have provided unaudited quarterly financial data for each of
the four quarters of 1998 and 1999 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.
33
<PAGE> 34
<TABLE>
<CAPTION>
QUARTER ENDED
-------------
MARCH 31 JUNE 30 SEPT. 30 DEC. 31
-------- ------- --------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Total revenues
1999 $ 7,349 $25,473 $24,915 $11,039
1998 10,031 20,034 20,010 12,455
Income before taxes
1999 $ 2,551 $11,708 $10,501 $ 4,963
1998 4,481 7,800 6,277 5,099
Number of races
2000 1 7 9 3
1999 1 8 9 2
1998 2 7 7 3
</TABLE>
LIQUIDITY AND CAPITAL RESOURCES
We have relied on the proceeds from our initial public offering, our
secondary offering and cash flow from operations, to finance working capital,
investments and capital expenditures during the past year.
Our bank borrowing with a commercial bank consists of a $1.5 million
revolving line of credit. As of December 31, 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.
At the end of 1999, we paid the balance of $173,000 on our fixed rate
installment note incurred in connection with the acquisition of a mobile medical
unit that we transport to each North American race. We did not incur any gain or
loss for early extinguishment of the debt.
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).
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 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) of approximately $7.3 million. We
currently intend to use the net proceeds from this offering for general
corporate purposes. Pending these uses, we have invested these funds in
short-term, interest bearing, investment grade securities.
34
<PAGE> 35
Our cash balance on December 31, 1999 was $7.2 million, a net decrease
of $7.9 million from December 31, 1998. This decrease was primarily the result
of net cash used in investing activities of $32.9 million which was offset by
net cash provided by operations of $15.4 million and net financing activities of
$9.6 million. Our cash balance on December 31, 1998 was $15.1 million, a net
increase of $13.9 million from December 31, 1997. The increase was primarily the
result of net cash provided by operations of $15.0 million and net financing
activities of $73.7 million, offset by net cash used in investing activities of
$74.8 million.
We anticipate capital expenditures of approximately $2.5 million during
2000. We believe that existing cash, cash flow from operations and available
bank borrowings will be sufficient for capital expenditures and other cash
needs. In addition, we may incur additional expenditures to increase our
marketing budget, and expand our TV relationships or otherwise to increase the
visibility and appeal of our products.
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 entire sanction
fee payment and note receivable for 1999. We've received the first sanction fee
installment for the 2000 event, and the letter of credit for the 2000 event has
been issued.
YEAR 2000 COMPLIANCE
We have completed our Y2K project to ensure that our computer systems
would be able to interpret four digit calendar years for the Year 2000 and
beyond. Our Y2K project covered both traditional computer systems and
infrastructure and computer-based hardware, such as fax machines, postage
machines and phone systems. Our Y2K project also considered the readiness of
significant vendors and suppliers.
We expected total costs relating to Y2K compliance to be approximately
$35,000 to $50,000. We have incurred approximately $20,000 in expenses related
to the Y2K project, and we do not anticipate any future costs. To date, we have
not experienced any significant operational problems related to the Y2K issue,
and we do not anticipate any such problems in the future.
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 January 1, 2001.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
With the exception of historical information contained in this Form
10-K, certain matters discussed are forward-looking statements. These
forward-looking statements involve risks that could cause the actual results and
plans for the future to differ from these forward-looking statements. The
factors listed in Item 1: Business - Risk Factors, and other factors not
mentioned,
35
<PAGE> 36
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 IRL
o liability for personal injuries
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, 1999, our investments consisted of commercial paper, corporate
bonds, U.S. Agency issues, municipal bonds, certificate of deposits and
repurchase agreements. The weighted average maturity of our portfolio is 189
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
36
<PAGE> 37
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 2000 Annual Meeting of Stockholders to be filed on or before
April 30, 2000, 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 2000 Annual Meeting of Stockholders to be filed on or before
April 30, 2000, 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 2000 Annual Meeting of Stockholders to be filed on or before
April 30, 2000, and such information is incorporated herein by reference.
ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information required by this Item will be contained in our definitive Proxy
Statement for our 2000 Annual Meeting of Stockholders to be filed on or before
April 30, 2000, and such information is incorporated herein by reference.
37
<PAGE> 38
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*
10.11 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*****
10.18 Website Digital Media Agreement with CART Digital Media
Enterprise, LLC dated March 22, 1999****
23.1 Consent of Deloitte & Touche LLP dated March 20, 2000 for Form
S-8 Registration Statement filed on March 23, 1999.
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, 1999.
* Incorporated by reference to exhibit filed as part of our Registration
Statement on Form S-1 (Registration No. 333-43141)
** Incorporated by reference to exhibit filed with our Quarterly
Report on Form 10-Q for the quarter ended March 31, 1998.
38
<PAGE> 39
*** Incorporated by reference to exhibit to the Current Report on Form 8-K
filed June 29, 1998.
**** Incorporated by reference to exhibit to the Current Report on Form 8-K
filed April 22, 1999.
***** Incorporated by reference to exhibit filed with our Annual Report on
Form 10-K for the year ended December 31, 1998.
39
<PAGE> 40
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 20, 2000 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:
<TABLE>
<S> <C> <C>
/s/ Andrew Craig Chief Executive Officer March 20, 2000
- ---------------------------------- and Director
Andrew Craig
/s/ Randy K. Dzierzawski Chief Financial and March 20, 2000
- ---------------------------------- Accounting Officer
Randy K. Dzierzawski
/s/ Gerald Forsythe Director March 20, 2000
- ----------------------------------
Gerald Forsythe
/s/ Floyd R. Ganassi, Jr. Director March 20, 2000
- ----------------------------------
Floyd R. Ganassi, Jr.
/s/ Carl A. Haas Director March 20, 2000
- ----------------------------------
Carl A. Haas
/s/ James F. Hardymon Director March 20, 2000
- ----------------------------------
James F. Hardymon
/s/ Bruce R. McCaw Director March 20, 2000
- ----------------------------------
Bruce R. McCaw
/s/ Don Ohlmeyer Director March 20, 2000
- ----------------------------------
Don Ohlmeyer
/s/ U. E. Patrick Director March 20, 2000
- ----------------------------------
U.E. Patrick
/s/ Robert W. Rahal Director March 20, 2000
- ----------------------------------
Robert W. Rahal
/s/ Derrick Walker Director March 20, 2000
- ----------------------------------
Derrick Walker
</TABLE>
40
<PAGE> 41
CHAMPIONSHIP AUTO RACING TEAMS, INC.
CONSOLIDATED FINANCIAL STATEMENTS
PAGE
----
CHAMPIONSHIP AUTO RACING TEAMS, INC.
Independent Auditors' Report.......................................... F-2
Consolidated Balance Sheets as of December 31, 1999 and 1998.......... F-3
Consolidated Statements of Operations for the Years
Ended December 31, 1999, 1998 and 1997............................. F-4
Consolidated Statements of Stockholders' Equity (Deficit) for
the Years Ended December 31, 1999, 1998 and 1997................... F-5
Consolidated Statements of Cash Flows for the Years
Ended December 31, 1999, 1998 and 1997............................. F-6
Notes to Consolidated Financial Statements............................ F-8
F-1
<PAGE> 42
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, 1999 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, 1999. 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, 1999 and 1998, and the results of their operations and their cash
flows for each of the three years in the period ended December 31, 1999, 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
January 28, 2000
F-2
<PAGE> 43
<TABLE>
CHAMPIONSHIP AUTO RACING TEAMS, INC.
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<CAPTION>
DECEMBER 31,
------------
1999 1998
---- ----
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 7,216 $15,080
Short-term investments 91,758 61,610
Accounts receivable (net of allowance for doubtful accounts
of $250 and $306 in 1999 and 1998, respectively) 8,780 4,708
Current portion of notes receivable 819 824
Inventory 311 71
Prepaid expenses 262 331
Deferred income taxes 114 119
-------- -------
Total current assets 109,260 82,743
NOTES RECEIVABLE 2,485 3,350
PROPERTY AND EQUIPMENT- Net 5,228 5,026
GOODWILL (net of accumulated amortization of $299 and $105
in 1999 and 1998, respectively) 7,442 5,778
OTHER ASSETS (net of accumulated amortization
of $62 and $41 in 1999 and 1998, respectively) 472 289
-------- -------
TOTAL ASSETS $124,887 $97,186
======== =======
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 2,131 $ 1,946
Accrued liabilities:
Royalties 949 1,026
Payroll 660 482
Taxes 358 1,733
Other 801 934
Unearned revenue 4,881 4,273
Current portion of long-term debt -- 130
-------- -------
Total current liabilities 9,780 10,524
LONG-TERM DEBT -- 184
DEFERRED INCOME TAXES 777 259
COMMITMENTS AND CONTINGENCIES (Note 10) -- --
STOCKHOLDERS' EQUITY:
Preferred Stock, $.01 par value; 5,000,000 shares
authorized, none issued and outstanding at
December 31, 1999 and 1998 -- --
Common stock, $.01 par value; 50,000,000 shares
authorized, 15,586,568 and 15,171,666 shares issued
and outstanding at December 31, 1999 and 1998, respectively 156 151
Additional paid-in capital 99,671 89,771
Retained earnings (deficit) 14,825 (4,033)
Unrealized gain (loss) on investments (322) 330
-------- -------
Total stockholders' equity 114,330 86,219
-------- -------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $124,887 $97,186
======== =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE> 44
<TABLE>
CHAMPIONSHIP AUTO RACING TEAMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT EARNINGS PER SHARE)
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
REVENUES:
Sanction fees $ 35,479 $30,444 $ 24,248
Sponsorship revenue 19,150 16,388 7,221
Television revenue 4,950 5,148 5,604
Engine leases, rebuilds and wheel sales 2,054 2,214 --
Other revenue 7,143 8,336 4,372
-------- ------- --------
Total revenues 68,776 62,530 41,445
EXPENSES:
Race and franchise fund payments 15,334 15,183 28,939
Race expenses 6,670 4,818 6,970
Cost of engine rebuilds and wheel sales 610 633 --
Administrative and indirect expenses 20,646 20,658 14,295
Compensation expense -- -- 12,200
Depreciation and amortization 1,048 779 549
Minority interest in loss of subsidiaries -- -- (232)
-------- ------- --------
Total expenses 44,308 42,071 62,721
-------- ------- --------
OPERATING INCOME (LOSS) 24,468 20,459 (21,276)
Interest income (net) 5,255 3,198 329
INCOME (LOSS) BEFORE INCOME TAXES 29,723 23,657 (20,947)
INCOME TAX BENEFIT (EXPENSE) (10,865) (8,568) 3,423
-------- ------- --------
NET INCOME (LOSS) $ 18,858 $15,089 $(17,524)
======== ======= ========
EARNINGS (LOSS) PER SHARE:
BASIC $ 1.22 $ 1.06 $ (1.72)
======== ======= ========
DILUTED $ 1.19 $ 1.05 $ (1.72)
======== ======= ========
WEIGHTED AVERAGE SHARES OUTSTANDING:
BASIC 15,427 14,190 10,200
======== ======= ========
DILUTED 15,908 14,421 10,200
======== ======= ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE> 45
<TABLE>
CHAMPIONSHIP AUTO RACING TEAMS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(IN THOUSANDS)
<CAPTION>
COMMON STOCK ADDITIONAL RETAINED UNREALIZED STOCKHOLDERS'
------------ PAID-IN EARNINGS GAIN (LOSS) ON EQUITY COMPREHENSIVE
SHARES AMOUNT CAPITAL (DEFICIT) INVESTMENTS (DEFICIT) INCOME (LOSS)
------ ------ ------- --------- ----------- --------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCES, JANUARY 1, 1997 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
Net income -- -- -- 18,858 -- 18,858 $ 18,858
Unrealized loss on investments -- -- -- -- (652) (652) (652)
--------
Comprehensive income -- -- -- -- -- -- $ 18,206
========
Stock issuance 272 3 7,264 -- -- 7,267
Exercise of options 143 2 2,636 -- -- 2,638
------ ---- ------- -------- ----- --------
BALANCES, DECEMBER 31, 1999 15,586 $156 $99,671 $ 14,825 $(322) $114,330
====== ==== ======= ======== ===== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE> 46
<TABLE>
CHAMPIONSHIP AUTO RACING TEAMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 18,858 $ 15,089 $(17,524)
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Depreciation and amortization 1,048 779 549
Compensation expense -- -- 12,200
Net loss from sale of property and equipment 1 92 160
Deferred income taxes 523 4,823 (3,629)
Minority interest in loss
of subsidiaries -- -- (232)
Changes in assets and liabilities that
provided (used) cash:
Accounts receivable (4,072) (1,552) (854)
Prepaid expenses 69 420 (328)
Inventory (240) (71) 16
Other assets (160) 24 (23)
Accounts payable 185 56 959
Accrued liabilities (1,407) (6,532) 10,192
Unearned revenue 608 1,921 21
-------- -------- --------
Net cash provided by operating activities 15,413 15,049 1,507
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisitions of subsidiaries (1,858) (5,881) --
Investments (30,800) (61,280) --
Notes receivable 870 (4,125) (49)
Acquisition of property and equipment (1,037) (3,602) (999)
Proceeds from sale of property
and equipment -- 62 13
Acquisition of trademark (43) (22) (63)
-------- -------- --------
Net cash used in investing activities (32,868) (74,848) (1,098)
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on long-term debt (314) (130) (130)
Redemption of common stock -- (151) (210)
Issuance of common stock (net of underwriting discount and
offering costs) 9,905 73,996 2,640
Proceeds from membership deposits -- -- 360
Payments on membership deposits -- -- (1,320)
Payments on franchise fund liability -- -- (1,440)
Capital contributions to subsidiaries
by minority stockholder -- -- 225
-------- -------- --------
Net cash provided by financing activities 9,591 73,715 125
-------- -------- --------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS (7,864) 13,916 534
CASH AND CASH EQUIVALENTS AT BEGINNING
OF YEAR 15,080 1,164 630
-------- -------- --------
CASH AND CASH EQUIVALENTS AT END
OF YEAR $ 7,216 $ 15,080 $ 1,164
======== ======== ========
SUPPLEMENTAL DISCLOSURES OF CASH
FLOW INFORMATION:
Cash paid during the year for:
Income taxes $ 11,046 $ 2,350 $ 15
======== ======== ========
Interest $ 24 $ 31 $ 43
======== ======== ========
</TABLE>
F-6
<PAGE> 47
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCING ACTIVITIES--During
1999, 1998 and 1997, the Company received property and equipment worth
approximately $2,000, $69,000 and $79,000 respectively, in exchange for
sponsorship privileges to the providers. During 1998, the Company recorded
$496,000 as goodwill related to the additional purchase price of ARS (see Note
2). 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. In
1999, the amount received by the Company for the options was approximately
$504,000 (see Note 2).
See accompanying notes to consolidated financial statements.
F-7
<PAGE> 48
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 1998 and 1997 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 1998 and 1997 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). Effective January 1, 1999, the Company
purchased the 45% minority interest of CART Licensed Products, L.P. for
$900,000. The partnership was terminated and the assets of the partnership were
rolled up in CART Licensed Products, Inc. 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, engine leases, rebuilds and
wheels sales 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 Indy
Lights Championship ("Indy Lights"). The Company also receives revenues from
royalty fees paid for licenses to use servicemarks of the
F-8
<PAGE> 49
Company, various drivers, teams, tracks and industry sponsors for merchandising
programs and product sales.
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. Membership and entry fees and
contingency award money are recognized ratably over the race schedule. Royalty
income is recognized on a monthly basis.
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.
Also included in goodwill is the purchase of the 45% minority interest of CART
Licensed Products, L.P.. 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, 1999 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 June 1998, SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities" was issued by the Financial
Accounting Standards Board. 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 January 1, 2001.
F-9
<PAGE> 50
RECLASSIFICATIONS. Certain reclassifications have been made to the 1998
and 1997 consolidated financial statements in order for them to conform to the
1999 presentation.
2. PUBLIC OFFERINGS 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.
SECONDARY OFFERING. 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).
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 would vest
one year from closing if certain performance criteria were met for 1998. The
sellers had the option to make up the shortfall on the 1998 performance criteria
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 paid 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 1999 and 1998 performance criteria, the Company
paid the former shareholders of ARS a total of approximately $0 and $1.0 million
for 1999 and 1998, respectively. 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 Atlantic Championship open-wheel
F-10
<PAGE> 51
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.
PRO FORMA RESULTS. The following unaudited pro forma summary for the
year ended December 31, 1998 and 1997 assume the acquisitions of ARS, BP and
Pro-Motion occurred as of January 1, 1998 and 1997.
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1998 1997
---- ----
(IN THOUSANDS,
EXCEPT EARNINGS PER SHARE)
-------------------------------------------------------------
<S> <C> <C>
Revenues $63,863 $ 49,628
Net income (loss) 15,196 (3,999)
Earnings per share:
Basic $ 1.06 $ (.38)
======= ========
Diluted $ 1.05 $ (.38)
======= ========
</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 at
December 31:
<TABLE>
<CAPTION>
GROSS UNREALIZED
----------------
(IN THOUSANDS) COST FAIR VALUE GAIN LOSS
------- ---------- ---- ----
<S> <C> <C> <C> <C>
1999
- ----
Commercial paper $35,936 $35,941 $ 5 $ --
Municipal bonds 21,598 21,494 -- 104
Corporate bonds 19,047 18,891 -- 156
U.S. agencies securities 11,500 11,432 -- 68
Certificate of deposit 3,999 4,000 1 --
------- ------- ---- ----
Total short-term investments $92,080 $91,758 $ 6 $328
======= ======= ==== ====
1998
- ----
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>
F-11
<PAGE> 52
Proceeds from sales of investments were approximately $10.4 million in
1999. There were no sales of investments in 1998. In 1999, gross gains and
losses on such sales were not significant.
Contractual maturities range from less than one year to two years. The
weighted average maturity of the portfolio does not exceed one year.
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 $819,000 over the life of
the sanction agreement through the year 2003. The balance of the note receivable
at December 31, 1999 and 1998 was $3.3 million and $4.1 million, respectively.
The receivable has a stated 5% per annum interest rate and the entire receivable
plus the annual sanction fee will be secured each year by a separate letter of
credit issued annually by the City of Rio de Janeiro, Brazil. The first sanction
fee installment for the 2000 event has been received, and the letter of credit
relating to the 2000 event has been issued. Based on estimated market discount
rates, the carrying value of this receivable approximates its fair value.
5. PROPERTY AND EQUIPMENT
Property and equipment consists of the following at December 31:
<TABLE>
<CAPTION>
(IN THOUSANDS)
1999 1998
------- -------
<S> <C> <C>
Engines $ 2,296 $ 2,296
Equipment 3,037 2,381
Furniture and fixtures 396 359
Vehicles 2,240 1,959
Other 181 121
------- -------
Total 8,150 7,116
Less accumulated depreciation (2,922) (2,090)
------- -------
Property and equipment (net) $ 5,228 $ 5,026
======= =======
</TABLE>
During 1999 and 1998, the Company received vehicles worth approximately
$2,000 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 $458,000, $421,000 and $345,000 for 1999, 1998 and 1997,
respectively.
F-12
<PAGE> 53
Approximate future minimum lease payments under noncancelable operating
leases are as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
Year ending December 31:
2000 $ 521
2001 429
2002 150
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.
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>
1999 1998
---- ----
(IN THOUSANDS)
<S> <C> <C>
Deferred tax assets:
Allowance for doubtful accounts $ 95 $ 114
State taxes 19 5
----- -----
Total 114 119
Current portion 114 119
----- -----
Non-current portion $ -- $ --
===== =====
Deferred tax liabilities:
Basis difference in fixed assets $(607) $(195)
Amortization of goodwill (170) (64)
----- -----
Total (777) (259)
Current portion -- --
----- -----
Non-current portion $(777) $(259)
===== =====
</TABLE>
F-13
<PAGE> 54
The provision (credit) for income taxes consists of the following at December
31:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C>
Current $10,342 $3,745 $ 158
Deferred (credit) 523 4,823 (3,581)
------- ------ -------
Total $10,865 $8,568 $(3,423)
======= ====== =======
</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>
1999 1998 1997
---- ---- ------
<S> <C> <C> <C>
Tax at U.S. federal statutory rate 35.0% 34.0% (34.0)%
State income tax 2.0 1.9 --
Meals and entertainment -- 0.3 0.1
Compensation expense -- -- 17.3
Other (0.4) -- 0.2
---- ---- -----
Total 36.6% 36.2% (16.4)%
==== ==== =====
</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
In 1991, the Company began a 401(k) savings plan (the "plan").
Contributions to the plan are in the form of employee salary deferral, subject
to discretionary employer-matching contributions. The Company's contributions to
the plan were approximately $90,000, $81,000 and $50,000 in 1999, 1998 and 1997,
respectively.
9. DEBT
At December 31, 1999 and 1998, the Company had an unused bank line of
credit of $1.5 million. There were no amounts outstanding at December 31, 1999
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.
At December 31, 1998, the Company had 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 balance of
the note payable at December 31, 1998 was $314,000 and was secured by the
Company's mobile medical unit. During December 1999, the Company paid the
balance of the note payable and incurred no gain or loss from early
extinguishment of the debt.
F-14
<PAGE> 55
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. During a CART race at the Michigan Speedway in July 1998, a
racecar 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. 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 seeked
damages of unspecified amounts. All litigation was settled in January 2000.
Neither CART, nor its insurance carrier contributed to any settlement amounts
paid in connection with this litigation.
Frontier Insurance Company ("Frontier") filed a declaratory judgment
action against CART, Inc., on December 17, 1999. The complaint seeks a judgment
declaring that Frontier has no liability to CART under a performance bond issued
by Frontier in the amount of $5 million. CART intends to file a counterclaim
against Frontier seeking judgment declaring that the bond is valid and
enforceable and that CART is entitled to a judgment in the amount of at least $5
million pursuant to a liquidated damages provision. The performance bond was
issued in connection with an Organizer/Promoter Agreement between CART and
Hawaiian Super Prix, LLC ("HSP") whereby, HSP would promote an automobile race
event known as the Hawaiian Super Prix in November 1999. The racing event never
took place, and HSP is now in a Chapter 7 bankruptcy proceeding in the United
States Bankruptcy Court for the District of Hawaii.
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
F-15
<PAGE> 56
"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 were granted to employees under the
Stock Option Plan at an exercise price of $27.50 per share. In February 2000,
62,150 options were granted to employees under the stock option plan at an
exercise price of $20.00 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, 1999 and 1998, there were 37,500 and
10,000, respectively, Director NQSOs 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).
The following table summarizes information about stock options during
1999 and 1998 as follows:
F-16
<PAGE> 57
<TABLE>
<CAPTION>
WEIGHTED WEIGHTED
NUMBER OF AVERAGE WEIGHTED AVERAGE AVERAGE
SHARES REMAINING LIFE EXERCISE PRICE FAIR VALUE
--------- -------------- ---------------- ----------
<S> <C> <C> <C> <C>
Options outstanding December 31, 1997 -- -- -- --
Granted 1,203,100 4.2 $16.03 $ 5.74
Exercised -- -- -- --
Forfeited (600) -- 16.00 --
--------- ---- ------ ------
Options outstanding December 31, 1998 1,202,500 4.2 16.03 --
(15,000 are exercisable)
Granted 122,750 5.1 27.90 10.99
Exercised (142,427) -- 16.00 --
Forfeited (16,535) -- 22.26 --
--------- ---- ------ ------
Options outstanding December 31, 1999 1,166,288 3.4 $17.20 --
(357,559 are exercisable) ========= ==== ====== ======
</TABLE>
At December 31, 1999 and 1998, an additional 891,285 and 1,002,500,
respectively, 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 $12.2 million has been recorded for the year
ended 1997 related to certain shares that became eligible for purchase based
upon eligibility requirements met during 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 diluted earnings per share would have been reduced to the pro forma
amounts indicated below:
<TABLE>
<CAPTION>
(IN THOUSANDS,
EXCEPT EARNINGS PER SHARE)
NET EARNINGS 1999 1998
------------ ------- -------
<S> <C> <C>
As reported $18,858 $15,089
======= =======
Pro forma $17,142 $14,054
======= =======
DILUTED EARNINGS PER SHARE
As reported $ 1.19 $ 1.05
======= =======
Pro forma $ 1.08 $ .97
======= =======
</TABLE>
F-17
<PAGE> 58
12. 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>
1999
- ----
Revenues $ 67,195 $1,581 $ 68,776
Interest income (expense) (net) 5,289 (34) 5,255
Depreciation and amortization 960 88 1,048
Segment income before income taxes 29,544 179 29,723
1998
- ----
Revenues $ 61,056 $1,474 $ 62,530
Interest income (expense) (net) 3,234 (36) 3,198
Depreciation and amortization 750 29 779
Segment income before income taxes 23,657 -- 23,657
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)
</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 at December
31 are as follows:
<TABLE>
<CAPTION>
(In Thousands)
--------------
1999 1998
-------- -------
<S> <C> <C>
Total assets for reportable segment $122,700 $95,851
Other assets 2,187 1,335
-------- -------
Total consolidated assets $124,887 $97,186
======== =======
Total liabilities for reportable segment $ 9,374 $ 9,617
Other liabilities 1,183 1,350
-------- -------
Total consolidated liabilities $ 10,557 $10,967
======== =======
</TABLE>
F-18
<PAGE> 59
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>
(In Thousands)
------------
1999 1998 1997
------- ------- -------
<S> <C> <C> <C>
United States $48,518 $42,105 $28,888
Canada 7,037 7,828 5,336
Other foreign countries 13,221 12,597 7,221
------- ------- -------
Total $68,776 $62,530 $41,445
======= ======= =======
</TABLE>
13. 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,
1999 1998 1997
---- ---- ----
(IN THOUSANDS, EXCEPT EARNINGS PER SHARE)
<S> <C> <C> <C>
Net income (loss) $18,858 $15,089 $(17,524)
======= ======= ========
Basic EPS:
Weighted average common shares outstanding 15,427 14,190 10,200
======= ======= ========
Net earnings (loss) per common share, basic $ 1.22 $ 1.06 $ (1.72)
======= ======= ========
Diluted EPS:
Weighted average common shares outstanding 15,427 14,190 10,200
Shares contingently issuable 481 231 --
------- ------- --------
Shares applicable to diluted earnings 15,908 14,421 10,200
======= ======= ========
Net earnings (loss) per common share, diluted $ 1.19 $ 1.05 $ (1.72)
======= ======= ========
</TABLE>
14. RELATED PARTY TRANSACTIONS
The Company receives sanction fees from promoters affiliated with
certain of its directors. Total sanction fee revenue related to these entities
for 1999, 1998 and 1997 was approximately $5.6 million, $8.1 million and $5.2
million, respectively. No sanction fees from a single related entity provided
more than 10% of the Company's revenues in 1999, 1998 and 1997.
The Company rented track facilities from a related party. Total track
rental expense related to this entity for 1999, 1998 and 1997 was approximately
$20,000, $62,000 and $0, respectively.
At December 31, 1999 and 1998, the Company has accounts receivable of
approximately $324,000 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 $1.2 million, $1.3 million
and $150,000 in 1999, 1998 and 1997, respectively.
F-19
<PAGE> 60
The Company disburses purse winnings and awards to teams affiliated
with certain of its directors. Total purse winnings and awards related to these
entities for 1999, 1998 and 1997 were $9.8 million, $10.8 million and $9.0
million, respectively.
The Company paid for at-track rights to promoters affiliated with
certain of its directors in order to satisfy contractual obligations with
certain sponsors. Total at-track rights related to these entities for 1999, 1998
and 1997 were $800,000, $1.2 million and $500,000, respectively.
The Company records royalty expense for teams and promoters affiliated
with certain of its directors. Total royalties for these entities for 1999, 1998
and 1997 were $378,000, $552,000 and $173,000, respectively.
At December 31, 1999 and 1998, the Company has accounts payable and
royalties payable of approximately $569,000 and $537,000, 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 $126,000, $127,000 and $133,000 in 1999, 1998 and 1997,
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 $19.4
million for 1997. 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> 61
<TABLE>
SCHEDULE II
CHAMPIONSHIP AUTO RACING TEAMS, INC.
VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997.
(IN THOUSANDS)
<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, 1999... $306 $ 90 $146 $250
Year Ended December 31, 1998... -- 436 130 306
Year Ended December 31, 1997... -- -- -- --
</TABLE>
(1) Accounts deemed to be uncollectible.
S-1
<PAGE> 1
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statement No.
333-74889 of Championship Auto Racing Teams, Inc. on Form S-8 of our report
dated January 28, 2000, appearing in this Annual Report on Form 10-K of
Championship Auto Racing Teams, Inc. for the year ended December 31, 1999.
/s/ Deloitte & Touche LLP
Detroit, Michigan
March 20, 2000
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 7,216
<SECURITIES> 91,758
<RECEIVABLES> 9,030
<ALLOWANCES> 250
<INVENTORY> 311
<CURRENT-ASSETS> 109,260
<PP&E> 8,150
<DEPRECIATION> 2,922
<TOTAL-ASSETS> 124,887
<CURRENT-LIABILITIES> 9,780
<BONDS> 0
0
0
<COMMON> 156
<OTHER-SE> 114,174
<TOTAL-LIABILITY-AND-EQUITY> 124,887
<SALES> 0
<TOTAL-REVENUES> 68,776
<CGS> 0
<TOTAL-COSTS> 43,260
<OTHER-EXPENSES> 1,048
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 24
<INCOME-PRETAX> 29,723
<INCOME-TAX> 10,865
<INCOME-CONTINUING> 18,858
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 18,858
<EPS-BASIC> 1.22
<EPS-DILUTED> 1.19
</TABLE>
