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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, 2003.
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _________________ TO ________________.
COMMISSION FILE NUMBER 1-13925
CHAMPIONSHIP AUTO RACING TEAMS, INC.
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(Exact name of registrant as specified in its charter)
Delaware 38-3389456
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(State or other jurisdiction of (IRS Employer Identification No.)
Incorporation or organization)
5350 Lakeview Parkway Drive South, Indianapolis, IN 46268
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(Address of principal executive offices) (Zip Code)
(317) 715-4196
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(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to section 12(g) of the Act:
Common Stock, $.01 par value
(Title of class)
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 [ ] No [ X ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to Form
10-K [ X ].
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes [ ] No [ X ]
On June 30, 2004 the aggregate market value of the shares of voting stock of
Registrant held by non-affiliates was approximately $226,815 based on the last
sales price on the Pink Sheets Market of $0.02 per share.
At August 24, 2004, the Registrant had 14,718,134 shares of common stock
outstanding.
FORM 10-K TABLE OF CONTENTS
Part I
Item 1: BUSINESS........................................................................................1
Item 2: PROPERTIES......................................................................................8
Item 3: LEGAL PROCEEDINGS...............................................................................8
Item 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.............................................9
Part II
Item 5: MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS............................................................................10
Item 6: SELECTED CONSOLIDATED FINANCIAL DATA...........................................................12
Item 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS..........14
Item 7A: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.....................................29
Item 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA....................................................29
Item 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE...........30
Item 9A: CONTROLS AND PROCEDURES........................................................................30
Part III
Item 10: DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.............................................31
Item 11: EXECUTIVE COMPENSATION.........................................................................31
Item 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT................................34
Item 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.................................................36
Item 14: PRINCIPAL ACCOUNTING FEES AND SERVICES.........................................................41
Part IV
Item 15: EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K...............................42
SIGNATURES
CERTIFICATIONS
EXHIBITS
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PART I
This Annual Report on Form 10-K contains forward-looking statement within the
meaning of Section 21E of the Securities Exchange Act of 1934, as amended,
including statement that indicate what we "believe," "expect" and "anticipate"
or similar expressions. These statements involve known and unknown risks,
uncertainties and other factors which may cause actual results, performance or
our achievement to differ materially from those expressed or implied by such
forward-looking statement. Such factors include, among others, the information
contained under the captions Part I, Item 1, "Business," and Part II, Item 7
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Additional Factors that May Affect Future Results" in this
Annual Report. You are cautioned not to place undue reliance on these
forward-looking statements, which reflect management's analysis only as of the
date of this Annual Report. We undertake no obligation to publicly release the
results of any revisions of these forward-looking statements. You are strongly
urged to read the information set forth under the captions Part I, Item 1,
"Business," and Part II, Item 7 "Management's Discussion and Analysis of
Financial Condition and Results of Operations" for a more detailed description
of these significant risks and uncertainties.
ITEM 1: BUSINESS
INTRODUCTION
Championship Auto Racing Teams, Inc. (the Company), through CART, Inc. its
wholly-owned subsidiary, owned, operated and sanctioned the open-wheel
motorsports series known in 2003 as the Bridgestone Presents the Champ Car World
Series Powered By Ford. CART, Inc. was responsible for organizing, marketing and
staging each of the races in the Champ Car World Series.
In February 2004, we completed the sale of substantially all of our
operating assets to Open Wheel Racing Series, LLC. (Open Wheel), most of our
employees resigned and accepted employment with Open Wheel and we ceased
operations. We cannot list here all the risks and uncertainties that could cause
our actual future financial results to differ materially from our present
expectations or projections regarding the estimated distribution to
shareholders, but we can identify many of them. These are set forth in "Factors
That May Affect Future Results."
The following information is presented primarily for historical purposes
and should be read noting that the Company is no longer involved in an active
business. As you read the following you should also refer to the consolidated
financial statements and related notes contained in this report, as well as item
6, "Selected Consolidated Financial Data."
In 2003, in light of the significant near term financial challenges that
faced the Company, we retained the investment banking firm of Bear Stearns & Co.
Inc. to assist us in exploring financing and other strategic alternatives
available to us. On August 18, 2003, the Company announced it had received a
proposal from Open Wheel and was engaged in negotiations regarding a possible
transaction with Open Wheel. Subsequently, on September 10, 2003, the Company
and Open Wheel announced that they had signed a definitive merger agreement
providing for Open Wheel to acquire the Company for cash equivalent to $0.56 per
share, based on the number of shares of Company common stock then outstanding.
On December 15, 2003, we announced that the merger agreement was terminated, and
we subsequently entered into an agreement with Open Wheel to sell certain of the
assets of CART, Inc. to Open Wheel, and Open Wheel agreed to assume certain
contractual obligations in connection with the bankruptcy of CART, Inc., all as
described below.
In the past two years, our financial condition has deteriorated
significantly. CART, Inc., our wholly owned subsidiary that operated the Champ
Car World Series, experienced a
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significant reduction in revenue from all of its previous revenue sources,
including sanction fees, television programming and sponsorship fees. At the
same time, race promoters, who were critical partners in the Champ Car World
Series, also experienced a deterioration in their financial condition. This
deterioration was primarily attributable to a decrease in promotional and
advertising expenditures by corporations due to the general downturn in the
economy, decreased attendance at some race venues as a result of the split with
the Indy Racing League and competition from NASCAR, which experienced rapid
growth during this period. In addition, during this period, two of the three
engine manufacturers which supplied engines for the Champ Car World Series left
the series to participate in the Indy Racing League. Our teams, which were
supported to a significant degree by engine manufacturers and their suppliers,
were being encouraged to follow those manufacturers to the Indy Racing League.
The teams that elected to participate in the Champ Car World Series experienced
a dramatic loss of sponsorship revenue related to the departed engine
manufacturers as well as the adverse economic conditions that caused companies
to cut back promotion and advertising of their brands. In addition, the teams
experienced increased costs because they were required to pay for the lease of
engines as compared to receiving complimentary engine leases in the past. These
conditions required CART, Inc. to expend significant amounts of capital on entry
support programs and team participation payments to encourage teams to remain in
the Champ Car World Series with the anticipation that the economic climate for
the Champ Car World Series would improve in 2004.
Beginning in 2001, CART, Inc. lost several important race venues. Three of
CART, Inc.'s more profitable international races were lost due to, in the case
of Brazil, an adverse political climate, in the case of Germany, bankruptcy of
the promoter and, in the case of Japan, the decision by the race venue, which
was owned by Honda Motor Company, not to renew with CART, Inc. but rather to run
an Indy Racing League event in which participating teams were using Honda
engines. CART, Inc. was also forced to cancel another race due to safety
concerns. Promoters of CART, Inc.'s other events were also experiencing
weakening revenue streams and therefore began demanding lower sanction fees or
sanction fees that were based either in whole or in part on a revenue or net
income sharing model. CART, Inc. lost some promoters altogether. In order to
preserve important markets, CART, Inc. began self-promoting some of its series
races rather than utilizing third party promoters. In 2002, CART, Inc. promoted
two of its races and in 2003 it promoted six of its races. Unfortunately, due to
unfavorable trends in consumer and corporate spending, the overall economic
conditions affecting advertising in open-wheel motorsports and the entertainment
industry in general and the declining popularity of open-wheel motorsports in
the United States, the expenses of self-promoted races were significantly
greater than the revenues generated.
During 2001, CART, Inc. began negotiations for a new television agreement
to replace its existing fixed fee television agreement that was due to expire at
the end of the 2001 season. The existing agreement guaranteed that at least half
of the Champ Car World Series races would be shown on network television (ABC)
and the balance of the races would be shown on the ESPN cable network. That
agreement provided a guaranteed amount of income with no offsetting expenses.
Unfortunately, CART, Inc. was unable to negotiate an acceptable fixed fee
television agreement to replace the agreement that expired at the end of 2001.
Therefore, beginning in 2002, CART, Inc. began buying the air-time and bearing
the production costs for its television broadcasts in order to provide its race
sponsors, race promoters and team sponsors with adequate television coverage of
its races. CART, Inc.'s television revenue thus became dependent solely upon
advertising and international rights sales. In addition, the new television
agreements provided for fewer network broadcasts and a significant number of
races broadcast on a cable network with less exposure than ESPN. Due to the
adverse economic and industry developments described in the previous paragraph
and CART, Inc.'s limited experience with selling television advertising, the
revenue generated from sales of television advertising was significantly less
than the costs to produce and air the television broadcasts.
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Also in 2001 and 2002, difficult economic conditions and other factors
adversely affected CART, Inc.'s sponsorship revenues. Beginning in 1999, CART,
Inc. had outsourced its sponsorship sales function pursuant to a long-term
contract which guaranteed CART, Inc. a minimum amount of annual sponsorship
revenue plus escalations on an annual basis. At the beginning of 2001, however,
CART, Inc.'s sponsorship sales partner defaulted on its contract, ceased
operations and filed for bankruptcy protection. As a result, CART, Inc. was
required to build an internal sponsorship sales force. This sales force had to
operate under adverse economic conditions that caused corporate sponsors to
reduce their expenditures for both teams and the Champ Car World Series. The
decline in sponsorship revenue was also attributable to our weakened television
package, as sponsors value a sponsorship opportunity largely on the amount of
exposure they receive on television. In some cases, corporate sponsors left the
Champ Car World Series to align themselves with a rival series. In other cases,
corporate sponsors left motorsports altogether. Our title sponsor for the
previous four years decided not to renew its title sponsorship and withdrew from
the Champ Car World Series after the 2002 season.
Other factors also contributed to our declining financial condition during
this time period. During 2001, CART, Inc. was in negotiations to change the
engine specifications for the Champ Car World Series beginning with the 2003
race season. At the time, American Honda Motor Company, Toyota Motor Sales,
U.S.A., Inc. and Ford Motor Company supplied engines for the Champ Car World
Series. In some cases, these car manufacturers supplied free engines and
provided other financial support to certain teams. In addition, the
manufacturers were major sponsors for race promoters and also purchased large
quantities of television advertising. At the end of the 2002 season, however,
Honda and Toyota left the Champ Car World Series to participate in the Indy
Racing League. Several of the teams participating in the Champ Car World Series
followed Honda and Toyota to the rival series. Although CART, Inc. was able to
enter into a contract with a subsidiary of Ford to purchase and service engines
for the Champ Car World Series for the 2003 and 2004 seasons, the loss of Honda
and Toyota had an adverse effect on CART, Inc. and the Champ Car World Series
promoters and teams.
As a result of the foregoing, by the middle of 2002 it had become apparent
to CART, Inc. that it would need to find a way to retain its remaining teams and
attract new teams in order to have 18 to 20 race cars in the field for the 2003
season. Failure to field 18 to 20 race cars would, depending on the agreements,
have resulted in defaults under certain promoter and television agreements. In
light of the circumstances, CART, Inc. believed that the only way to retain
existing teams and attract new teams would be to provide participating teams
with additional financial support. CART, Inc. believed that this support would
result in increased team participation in 2003 and would give it the opportunity
to market its television and sponsorship rights on a profitable basis.
Therefore, in August 2002, CART, Inc. announced its entry support program and
increased its existing team participation payments in order to ensure adequate
team participation in the 2003 Champ Car World Series. The entry support program
and the team participation payments provided a total of $42,500 in cash payments
to teams, per race, for each car entered in the 2003 Champ Car World Series.
These payments amounted to a total of $14.5 million for the 2003 Champ Car World
Series. These payments were in addition to prize money and other non-monetary
benefits that accrued to participating teams. In October 2002, recognizing the
difficulties the teams were having in securing sponsorship, CART, Inc. announced
its commitment to spend an aggregate amount of $30 million in team assistance
payments, which would be in addition to the entry support program and team
participation payments. In exchange for the entry support, team participation
and team assistance payments, the teams agreed to participate in the Champ Car
World Series for the entire 2003 season and granted CART, Inc. the right to sell
certain advertising space on the teams' racecars. CART, Inc. planned to package
this advertising opportunity with its advertising inventory from television and
self-promoted races. CART, Inc. believed this would provide an integrated
marketing opportunity to sponsors whereby they could participate at the team,
race event and series levels. However, CART, Inc. was unsuccessful in selling
the integrated advertising packages.
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On October 29, 2002, the Company retained Bear Stearns to act as its
financial advisor in its consideration of strategic alternatives to increase
stockholder value.
At that time, management, at the direction of the board of directors,
began developing a four-year business plan incorporating the changing business
model discussed above, including financial forecasts for the four fiscal years
ending December 31, 2006. From October 2002 to April 2003, the Company's
management worked with an outside consultant to develop the business plan.
During the spring and summer of 2003, the overall economic, financial and
operating conditions affecting our business continued to deteriorate. These
developments were reflected in a series of deteriorating financial forecasts
provided to our board of directors and publicly disclosed on June 16, 2003, July
22, 2003 and August 11, 2003. Consequently, the expectations of management and
our board of directors as to our future performance diminished and it became
clear to management that we would not have sufficient resources to fund the
Champ Car World Series in 2004, even if the entry support, team participation
and team assistance payments were reduced.
On August 18, 2003, the Company publicly announced that it had received a
proposal from Open Wheel and that it was engaged in negotiations regarding a
possible transaction with Open Wheel.
On August 24, 2003, the Company publicly announced that its board of
directors had instructed management to continue negotiating with Open Wheel with
respect to all terms related to a possible acquisition of the Company. The
Company, Open Wheel and their respective advisors continued to engage in
negotiations regarding the terms of a possible transaction and related
definitive agreements.
On September 10, 2003, representatives of the Company, Open Wheel and Open
Wheel Acquisition Corp., a wholly-owned subsidiary of Open Wheel, executed and
delivered the merger agreement and other related agreements and issued a joint
press release announcing the proposed transaction.
On December 2, 2003, we announced that representatives of Open Wheel
informed the Company that Open Wheel believed that a number of conditions of the
pending merger between the parties would not be satisfied by the time of the
special meeting of stockholders that was scheduled for December 19, 2003. The
Company considered Open Wheel's position and believed that it was unlikely that
the condition requiring the absence of a material adverse effect would be
satisfied because it expected that there would be a net decrease in the number
of teams planning to participate in the series for the 2004 season from the
number that participated in the 2003 season. Open Wheel indicated it would not
waive any condition of the closing.
On December 15, 2003, we announced that we had entered into an Asset
Purchase Agreement ("the Agreement") with Open Wheel. The Agreement would allow
Open Wheel to purchase the assets of CART, Inc. needed to operate the Champ Car
World Series and the stock of Pro-Motion Agency, Inc., our subsidiary that
operates the Toyota Atlantics series. In addition, Open Wheel would assume from
us and CART, Inc. the rights and obligations under certain promoter, sponsor and
other contracts. Open Wheel indicated that it intended to continue to operate
the Champ Car World Series and the Toyota Atlantic series. The total
consideration that would be paid under the agreement was $3.0 million less $1.5
million in 2003 prize money to teams who were not affiliated with Open Wheel;
which was an obligation of CART, Inc. that would be assumed by Open Wheel.
The Agreement terminated the previously announced merger agreement that
had been entered into between Championship and Open Wheel on September 10, 2003.
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On December 16, 2003, CART, Inc. filed a voluntary petition for relief
under Chapter 11 of the United States Bankruptcy Code, 11 U.S.C. Section in the
United States Bankruptcy Court Southern District of Indiana (RE CART, Inc., Case
No. 03-23385-FJO-11).
An Amendment by Interlineation (the "Amendment") with respect to the
Agreement was entered into on January 15, 2004 to reflect the change in
consideration and the assumption of certain claims.
Pursuant to a January 28, 2004, court order, on February 13, 2004, the
assets of CART, Inc., the stock of Promotion Agency, LTD. and CART Licensed
Products, Inc., were sold to Open Wheel for total consideration of $3.3 million
in cash, the assumption by the buyer of $1.4 million in prize money owed to
teams not affiliated with the principles of Open Wheel for the 2003 race season,
forgiveness of $1.3 million in prize money due teams affiliated with the
principles of Open Wheel and the assumption of certain promoter, sponsor and
other contracts.
We currently intend to liquidate our remaining assets, pay off our
remaining liabilities, and complete the process of liquidation and winding up
the Company's affairs as soon as practicable. Our Board of Directors has not
adopted a plan of liquidation and dissolution at this time, but will consider
this option when the liquidation and bankruptcy of our subsidiary CART, Inc. is
complete and after approval by our shareholders. In the event that our Board of
Directors adopts a plan of liquidation and dissolution, we would expect to incur
liquidation expenses, in addition to payments of ongoing operating expenses and
settlement of existing or potential obligations. Liquidation expenses may
include, among others, employee salaries, severance and related costs, legal and
accounting fees, as well as payments to a liquidation trustee. While we cannot
currently make a precise estimate of the expenses, we believe that a significant
portion of our current cash may be required to pay the above expenditures.
Our 10-K is being filed late because of our inability to complete the
audit of our year end financial statements. Because of the complications
resulting from the bankruptcy of CART, Inc. we were unable to file timely the
10-K. In addition, we failed to file the Forms 10-Q for the quarters ended March
31, 2004 and June 30,2004. We anticipate that the Form 10-Q for the quarter
ended March 31, 2004 will be filed coincident with this filing. The information
being provided herein should be viewed primarily as historical information since
we are no longer actively engaged in any business. Our plan is to complete the
bankruptcy of CART, Inc. and thereafter to propose to our shareholders a plan of
liquidation and dissolution of the Company. This process involves numerous risks
and uncertainties. You should review "Factors That May Affect Future Results"
herein.
GLOSSARY
Sanction Fees. Sanction fees were received from the promoters of our races
(other than races we promoted). The fees were based on contracts between the
promoters and CART, INC.. Under certain agreements, we had the right to receive
a share of the net income from the event.
Sponsorship Revenue. We received corporate sponsorship revenue based on
negotiated contracts. For 2003, we had corporate sponsorship contracts with 12
major manufacturing and consumer products companies.
Beginning in 2003, we developed an Entrant Support Program as a part of an
enhanced incentive program we developed with our teams. Under the program, we
provided financial support to new and existing teams to run in the Champ Car
World Series and, in exchange, each team provided logo space on its cars for
Champ Car-designated sponsors to advertise.
Television Revenue. In 2002, we had contracts for domestic television
rights with Fox, Speed Channel and CBS. We had seven races broadcast on CBS, one
race broadcast on FOX and
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the balance of the races were broadcast on Speed Channel. We bought the air-time
and paid for production (See "Television Expenses") for the CBS and Fox races
and received the advertising inventory. We, along with our agents, were
responsible for selling the advertising time. Speed Channel produced and
provided the air time, at their cost, for races to be broadcast on their
network. In addition, Speed Channel aired Champ Car practice and qualifying, a
half-hour pre-race show and a weekly magazine show. Speed Channel retained the
advertising inventory and income for all shows aired on their network.
In 2002, International television rights were with Fittipaldi USA
(Brazil), Gold Coast Motor Events Co. (Australia), Molstar (Canada), Promotion
Entertainment of Mexico LLC (Mexico), Sports Television Incorporated (Japan),
and Octagon CSI.
A rights fee was paid to us by each international broadcast partner for
rights to air the CART race either live, time-delayed or as a highlight package,
in the country where they held our rights.
In 2003, we had contracts for our domestic television rights with CBS and
Speed Channel. We broadcasted six races on CBS and the balance on Speed Channel.
We bought the air-time and paid for production for the CBS races. Speed Channel
provided the air-time for the races aired on their network, including Champ Car
practice and qualifying and a half-hour pre-race show. We paid for production
for the races to be broadcast on their network. We received the advertising
inventory for all shows aired on both networks and we were responsible for
selling the advertising.
In 2003, International television rights were with Fittipaldi USA
(Brazil), Gold Coast Motor Events Co. (Australia), Molstar (Canada), Promotion
Entertainment of Mexico LLC (Mexico), and Octagon CSI (all others).
A rights fee was paid to us by each international broadcast partner for
rights to air the Champ Car race either live, time-delayed or as a highlight
package, in the country where they held our rights.
Race Promotion Revenue. In 2002, we promoted the races in Chicago,
Illinois and Miami, Florida. In 2003, we promoted six of our races. Race
promotion revenue included all the commercial rights associated with promoting a
Champ Car event, such as admissions, event sponsorship and hospitality sales.
Engine Leases. In 2003, we purchased the engines that were used for the
2003 Champ Car World Series race season. Each team was required to use these
engines in order to compete in the series. We leased the engines to the teams
for $100,000 per car per year.
Other Revenue. Other revenue included membership and entry fees,
contingency awards money, royalties, commissions and other miscellaneous revenue
items. Membership and entry fees were payable on an annual basis by Toyota
Atlantics Championship competitors. In addition, we charged fees to competitors
for credentials for all team participants and driver license fees for all
drivers competing in the series. We received royalty revenue for the use of the
CART service marks and trademarks on licensed merchandise that was sold both at
tracks and at off-track sites. We received commission income from the sale of
chassis and parts to our support series teams.
Race Distributions. We paid the racing teams for their on-track
performance. Race distributions included the following for each event:
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- event purse which was paid based on finishing position
- contingency award payments
- year-end point fund, which was paid on year end finishing position
(except during 2003)
- participation payments
- entrant support payments
- team assistance
We paid awards to the teams, based on their cumulative performance for the
season, out of the year-end point fund. Participation payments were made in 2003
to each of our entries on a per car, per race basis. In addition, entrant
support payments were made to participating teams as part of a financial
incentive plan to attract and retain teams to compete in our series. The
payments were made to teams in exchange for logo advertising space on their
cars. We had the opportunity to sell and retain the revenue from the
advertising. In 2003, we provided assistance to certain teams to ensure that
there were a sufficient number of race cars competing in our series. We spent
$31.8 million in team assistance, spread out over the race season, to make sure
there were a sufficient number of healthy competitors for the 2003 season. In
exchange for the team assistance we received certain sponsorship rights from the
team.
Race Expenses. We were responsible for officiating and administering all
of our events. Costs primarily included officiating fees, travel, per diem and
lodging expenses for the following officiating groups:
- medical services
- race administration
- race officiating and rules compliance
- registration
- safety
- technical inspection
- timing and scoring
Race Promotion Expenses. In 2002, we co-promoted two races. In 2003, we
promoted six of our own events. Race promotion expenses related to all costs
associated with staging a Champ Car event include track rental, personnel costs
and promotion of the event.
Television Expenses. In 2002, we bought the air time at approximately
$235,000 per hour and paid approximately $3.4 million for production for our CBS
and FOX races. We also incurred expenses for our international production of
$2.3 million. For domestic television rights with respect to the CBS and FOX
broadcasts, we received the advertising inventory which we and our agents sold,
to partially offset these expenses. We also received a guaranteed rights fee
from our international broadcast partners to partially offset these costs. (See
"Television Revenue")
In 2003, we bought the air time at approximately $240,000 per hour for our
CBS races. Speed Channel provided the air time for the races aired on their
network, including Champ Car practice and qualifying and a half-hour pre-race
show. We paid for production costs associated with the races to be broadcast on
their network. We also incurred expenses for our international production for
all of our races.
Administrative and Indirect Expenses. Administrative and indirect expenses
included all operating costs not directly incurred for a specific event:
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- administration
- marketing and advertising
- sponsorship sales and service
- public relations
EMPLOYEES
As of March 31, 2004, we had three employees and two employees as of July
31, 2004. In connection with our intention to dissolve the company in the
future, we have retained these employees for the purpose of executing the
dissolution process, including winding down the Company, CART, Inc. and
Raceworks, LLC.
ITEM 2: PROPERTIES
We have sublet our office space in Indianapolis, Indiana (approximately
64,000 square feet) to Open Wheel on terms that are substantially the same as
our current lease. Annual lease payments under the obligation are $308,965.
Similarly, annual charges to Open Wheel under the sublease are $308,965. We
remain liable on such lease, which has future lease payments as of March 31,
2004 of $2.1 million, and expires in October 31, 2010. We have retained office
space in this building, at no cost to us, for administrative purposes to execute
our plan to liquidate and dissolve our business.
ITEM 3: LEGAL PROCEEDINGS
On November 4, 2003, 88 Corp. filed suit against CART, Inc. in the United
States Federal District Court for the Central District of California. 88 Corp.,
the promoter of the CART Champ Car World Series race at the California Speedway
in Fontana, California, claimed that the race which was to be held on November
2, 2003 was canceled due to a "force majeure" and requested a judicial
determination as to whether or not the organizational and rights fee of $2.5
million, previously paid by 88 Corp. to CART, minus reasonable expenses incurred
by CART, should be refunded to 88 Corp. As a result of the bankruptcy of CART,
this litigation was suspended. 88 Corp. has filed a proof of claim against CART
in the bankruptcy court proceedings requesting repayment of the $2.5 million,
imposition of a constructive trust, and such other relief as the bankruptcy
court deems appropriate. CART has objected to the claim and has asserted against
88 Corp. a claim for wrongful termination of the sanction agreement as it
relates to the 2003 and 2004 races in the amount of $5.2 million. These claims
are currently pending in bankruptcy court and we are unable to make a
determination as to the likelihood of an unfavorable outcome or estimate the
amount or range of the recovery or loss.
On December 16, 2003, CART, Inc., the Company's wholly owned subsidiary,
filed for protection under Chapter 11 of the Bankruptcy Code in the United
States Bankruptcy Court, Southern District of Indiana, Indianapolis Division.
CART, Inc.'s Chapter 11 Plan has been filed with the Bankruptcy Court. Based
upon filings by creditors of CART, Inc. , there will be claims by creditors
against CART, Inc. which could result in litigation against CART, Inc. in
Bankruptcy Court. The Company is currently unable to determine the extent of
these asserted claims and whether or not they will ultimately result in
litigation involving CART, Inc.
On December 12, 2003, S. R. Holdings Co., filed an action against the
Company and Raceworks, LLC, its wholly owned limited liability company, for an
alleged breach of contract to provide concession services at the Champ Car World
Series race held in Miami, Florida in 2003 and in future years. The case was
filed in the Circuit Court of Miami, Dade County, Florida. The Company filed
answer denying all allegations. Raceworks filed an answer denying all
allegations and asserted a counterclaim for breach of the agreement by S.R.
Holdings for failure to make a minimum payment to Raceworks. The Company is
unable to make a
8
determination as to the likelihood of an unfavorable outcome or estimate of the
amount or range of possible loss.
On August 5, 2004 the Company was served with a complaint to avoid and
recover preferential transfers filed on behalf of WorldCom, Inc. and MCI, Inc.,
in the United States Bankruptcy Court for the Southern District of New York. The
action alleges that the Company received $1,500,000 in July of 2002 which was a
payment within 90 days of the date that WorldCom, Inc. and its subsidiaries
commenced their bankruptcy by filing under Chapter 11 of the Bankruptcy Code.
The Company has not filed an answer at this point in time and is unable to make
a determination as to the likelihood of an unfavorable outcome. The range of the
possible loss is up to $1,500,000.
We may become involved in other litigation not specifically identified
above.
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
9
PART II
ITEM 5: MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
Our common stock was traded on The New York Stock Exchange under the
trading symbol "MPH" until October 15, 2003. From October 16, 2003 to the
present, our common stock has been trading on the over-the-counter bulletin
board under the ticker symbol "CPNT.PK." As of July 31, 2004, we had 14,718,134
shares of common stock outstanding and approximately 574 record holders of our
common stock.
In the following table we have provided the high and low sales price for
our common stock, as reported by the NYSE for each calendar quarter of 2002 and
2003 (through October 15, 2003). From October 16, 2003 through the end of the
fourth quarter of 2003 and through June 30, 2004, the following table shows the
high and low sales prices of our common stock as reported on the
over-the-counter bulletin board.
Quarter Ended High Low
- ------------- ---- ---
2004
First Quarter $0.16 $0.095
Second Quarter 0.13 0.02
2003
First Quarter $4.13 $2.72
Second Quarter 3.95 2.40
Third Quarter 2.57 0.58
Fourth Quarter (through October 15, 2003) 0.62 0.53
Fourth Quarter (from October 16, 2003) 0.56 0.09
2002
First Quarter $17.00 $13.78
Second Quarter 14.50 8.05
Third Quarter 9.42 3.54
Fourth Quarter 5.10 3.49
We have not declared or paid any dividends on our common stock to date.
10
EQUITY COMPENSATION PLAN INFORMATION
The following table sets forth information regarding outstanding options,
warrants and rights and shares reserved for future issuance under our existing
equity compensation plans as of December 31, 2003. Descriptions of the plans are
included in footnote 13 of our consolidated financial statements. Each of these
plans have been previously approved by the Company's stockholders.
(A) (B) Number of securities
Number of Securities to Weighted-average remaining available for
be issued upon exercise exercise price of future issuance (excluding
of outstanding options, outstanding options, securities reflected in
Plan Category warrants, rights warrants, rights column (A))
------------- ----------------- ----------------- -----------
Equity compensation plans
approved by security holders:
(1) 1997 Employee and Director
Stock Option Plans 85,302 $20.77 none*
(2) 1997 Director Stock Option
Plan 90,000 $20.77 none*
(2) 2001 Long-Term Stock
Incentive Plan 1,029,300 $11.65 470,700
Equity compensation plans not
approved by security holders
none not applicable not applicable
---- -------------- --------------
Total 1,204,602 $12.98 470,700
========= ====== =======
- --------------------
* No further options will be granted under either the 1997 Stock Option Plan or
the 1997 Director Stock Option Plan.
11
ITEM 6: SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data, as of and for each of
the five years in the period ended December 31, 2003, are derived from our
audited consolidated financial statements. The selected consolidated financial
data below should be read in combination with our consolidated financial
statements and related notes contained elsewhere in this document and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
YEAR ENDED DECEMBER 31,
-----------------------
2003 2002 2001 2000 1999
---- ---- ---- ---- ----
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
STATEMENT OF OPERATIONS:
Revenues:
Sanction fees $ 24,720 $ 36,607 $ 47,226 $ 38,902 $ 35,689
Sponsorship revenue 7,777 10,150 12,314 21,063 19,150
Television revenue 1,889 4,538 5,228 5,501 5,018
Race promotion revenue 10,772 1,417 -- -- --
Engine leases, rebuilds and wheel sales 1,900 -- 1,286 2,122 2,054
Other revenue 2,638 4,533 4,209 7,460 6,865
--------- --------- --------- --------- ---------
Total revenues 49,696 57,245 70,263 75,048 68,776
Expenses:
Race distributions (1) 60,850 19,797 18,599 15,370 15,334
Race expenses 8,059 10,823 10,618 9,869 6,670
Race promotion expense 20,844 9,687 -- -- --
Costs of engine rebuilds and wheel sales -- -- 348 652 610
Television expense 14,941 10,975 -- -- --
Administrative and indirect expenses (2) 20,567 27,756 35,605 25,275 20,646
Merger charges 1,953 -- -- -- --
Bad debt-sponsorship partner (3) -- -- -- 6,320 --
Litigation expenses (4) 2,660 -- 3,547 -- --
Relocation Expense -- 1,422 -- -- --
Asset impairment and strategic charges (5) 9,580 -- 8,548 -- --
Depreciation and amortization 3,841 1,436 1,493 1,352 1,048
--------- --------- --------- --------- ---------
Total expenses (143,295) 81,896 78,758 58,838 44,308
--------- --------- --------- --------- ---------
Operating income (loss) (93,599) (24,651) (8,495) 16,210 24,468
Realized gain (loss) on sale of investments 400 26 -- -- --
Interest income 1,274 3,762 7,033 7,463 5,255
--------- --------- --------- --------- ---------
Income (loss) before income taxes (91,925) (20,863) (1,462) 23,673 29,723
Income tax expense (benefit) 427 (7,302) (512) 8,520 10,865
--------- --------- --------- --------- ---------
Income (loss) before effect of accounting change (92,352) (13,561) (950) 15,153 18,858
Cumulative effect of accounting change -- (956) -- -- --
--------- --------- --------- --------- ---------
Net income (loss) $ (92,352) $ (14,517) $ (950) $ 15,153 $ 18,858
========= ========= ========= ========= =========
Earnings (loss) per share before cumulative effect of
accounting change:
Basic $ (6.27) $ (0.92) $ (0.06) $ 0.97 $ 1.22
========= ========= ========= ========= =========
Diluted $ (6.27) $ (0.92) $ (0.06) $ 0.97 $ 1.22
========= ========= ========= ========= =========
Net earnings (loss) per share:
Basic $ (6.27) $ (0.99) $ (0.06) $ 0.97 $ 1.22
========= ========= ========= ========= =========
Diluted $ (6.27) $ (0.99) $ (0.06) $ 0.97 $ 1.19
========= ========= ========= ========= =========
Weighted average shares outstanding:
Basic 14,718 14,718 15,289 15,624 15,427
========= ========= ========= ========= =========
Diluted 14,718 14,738 15,289 15,657 15,908
========= ========= ========= ========= =========
12
AS OF DECEMBER 31,
------------------
2003 2002 2001 2000 1999
---- ---- ---- ---- ----
(In Thousands)
BALANCE SHEET DATA:
Cash and cash equivalents $ 3,211 $ 6,773 $ 27,765 $ 19,504 $ 7,216
Short-term investments 7,356 79,489 87,621 98,206 91,758
Working capital (deficit) 4,838 92,288 111,604 119,953 99,480
Total assets 20,045 114,451 132,941 144,101 124,887
Long-term debt (including
current portion) 1,750 -- -- -- --
Total stockholders' equity $ 10,121 $103,018 $117,936 $133,894 $114,330
(1) Distributions for the year ended December 31, 2003, include team
assistance, entry support and participation payments. Distributions for
the years ended December 31, 2002 and 2001 include reimbursement of
overseas travel expenses to race teams.
(2) Administrative and indirect expenses for the years ended December 31, 2001
and 2000 include severance payments to former employees of $4,329 and
$2,758, respectively.
(3) Bad debt expense relates to a charge associated with our sponsorship
agreement with ISL Marketing AG.
(4) Litigation expense for the year ended December 31, 2003, relates to the
settlements attributable to an arbitration settlement of $1.75 million
paid in August 2003, to Engine Developments Ltd. in a breach of contract
case over a contract to purchase engines, a settlement of $400 in a breach
of contract suit filed by two former team owners, DellaPenna Motorsports
and Precision Preparation, Inc., settlement of contract disputes with ESPN
television of $250 over the canceled Texas Motor Speedway race, an
arbitration award to Action Performance Companies, Inc. of $900 in a
breach of contract case in regard to a licensed merchandise contract, and
settlement of $500 for an early termination of a sanction agreement with
IMSA in regard to a race in Miami, Florida. The expenses were partially
offset by receipt of $1.0 million from proceeds received from a bankruptcy
settlement regarding claims filed against EuroSpeedway Lausitz for loss of
sanction fees and other damages that occurred when the 2002 event was
canceled as a result of the bankruptcy of the promoter. Litigation expense
for the year ended December 31, 2003 relates to a settlement with Texas
Motor Speedway ("TMS") for the postponement of a race at TMS during 2001.
(5) Asset impairment charges for the year ended December 31, 2003, relates to
the write down of certain long lived assets in connection with the "Asset
Purchase Agreement" entered into with Open Wheel in December of 2003 and
the write down of intangible assets and long lived assets in connection
with Raceworks, LLC our subsidiary that operated the race in Miami,
Florida. The asset impairment charges for the year ended December 31, 2001
relate to the discontinuance of operations of the Dayton Indy Lights
Championship effective at the conclusion of the 2001 race season.
13
ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Championship Auto Racing Teams, Inc. is engaged in the process of orderly
liquidation of its remaining assets, the winding up of its business, and the
dissolution of the Company.
Upon completion of the sale of substantially all of our operating assets
to Open Wheel in February 2004, most of our employees resigned and accepted
employment with Open Wheel and we ceased operations. The risks and uncertainties
that could cause our actual future financial results to differ materially from
our present expectations or projections regarding the estimated distribution to
shareholders are set forth in "Factors That May Affect Future Results."
The following information is presented primarily for historical purposes
and should be read noting that the Company is no longer involved in an active
business. As you read the following you should also refer to the consolidated
financial statements and related notes contained in this report, as well as item
6, "Selected Consolidated Financial Data."
DISCONTINUANCE OF INDY LIGHTS
The financial results below include the operations of American Racing
Series ("ARS") which operated the Dayton Indy Lights Championship series. At the
end of the 2001 season, we discontinued the operations of ARS and the Dayton
Indy Lights Championship series. (See Footnote 12 to our consolidated financial
statements included in Item 15 of this report.) All revenues and expenses
related to the Dayton Indy Lights Championship series ceased for 2002 and
beyond.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
USE OF ESTIMATES
The following discussion and analysis of our financial condition and
results of operations are based upon our consolidated financial statements,
which have been prepared in accordance with accounting principles generally
accepted in the United States. The preparation of these financial statements
requires us to make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting periods.
Significant accounting estimates include accounting for allowance for
doubtful accounts for accounts receivable, impairment of tangible and intangible
assets, income taxes and related valuation allowance and certain contingent
liabilities.
We believe that the estimates, assumptions and judgments involved in the
accounting policies described below did not have a material impact on our
financial statements for the year ended December 31, 2003. However, as we wind
down the Company, our financial position will be based on a number of estimates
which will have or may have a significant effect on the Company's financial
condition. These estimates are subject to the risks and uncertainties which we
describe in this report. Actual results, therefore, could differ from those
estimated.
We review the valuation of our accounts receivable on a monthly basis. The
allowance for doubtful accounts is estimated based on managements assessment of
conditions that might impact the collectibility of accounts.
We adopted FASB Statement of Financial Accounting Standards (SFAS) No.
142, "Goodwill and Intangible Assets," effective January 1, 2002. The statement
requires companies
14
to discontinue amortizing goodwill and certain intangible assets with an
indefinite useful life. The statement also requires that we test our goodwill
and intangible assets for impairment upon adoption of the statement and
periodically thereafter. Our goodwill was associated with our acquisitions of
Pro-Motion Agency, Inc., CART Licensed Products, LP, and Raceworks, LLC on April
10, 1998, January 1, 1999, and March 7, 2003, respectively. Upon adoption of the
statement, we recorded a one-time, non-cash charge of $1.5 million, or $956,000
net of tax benefit of $514,000, to write-off the value of the goodwill related
to the acquisition of Pro-Motion Agency, Inc. and CART Licensed Products, L. P.
An analysis of the goodwill associated with the acquisitions of Raceworks, LLC
was conducted subsequent to the race that was held in Miami, Florida in
September of 2003. The operating results and cash flows were significantly lower
than expected which was an indication of impairment. The Company recognized a
non-cash asset impairment of $1.3 million to write-off goodwill and other
intangible assets related to the acquisition. The write-off of goodwill results
from the use of discounted cash flows in assessment of fair value for each
reporting unit as required by SFAS No. 142. Under SFAS No. 142, goodwill
impairment is deemed to exist if the carrying value of a reporting unit exceeds
its estimated fair value. Our analysis are subjective and are based on
conditions existing at the time the assumptions are made. Actual results could
differ materially from those assumptions.
Our estimates of deferred tax assets and liabilities and their related
valuation allowances and the significant items giving rise to deferred tax
assets and liabilities reflect our assessment of actual future taxes to be paid
or tax refunds to be received. Actual income taxes could vary significantly from
these estimates due to adjustments resulting from final review of our tax
returns by taxing authorities.
Our determination of the treatment of contingent liabilities in the
financial statements is based on our view of the expected outcome of the
applicable contingency. In the ordinary course of business, we consult with
legal counsel on matters related to litigation. We are involved in litigation as
a part of our normal course of business (refer to Item 3: Legal Proceedings).
When a complaint is filed by or against the Company, we disclose the complaint
in our financial statements. When a claim against us is probable and estimable,
we record the expense. When we are the party filing the claim, we do not record
a gain contingency until a settlement for the claim for damages is received.
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 2003 COMPARED TO YEAR ENDED DECEMBER 31, 2002
Revenues. Total revenues for 2003 were $49.7 million, a decrease of $7.5
million, or 13%, from 2002. This was due to a decrease in sanction fee revenues,
sponsorship revenue, television revenue and other revenue, partially offset by
an increase in race promotion revenue and engine leases as described below.
Sanction fees for 2003 were $24.7 million, a decrease of $11.9 million, or
32%, from 2002. The decrease was partially due to a decrease in the number of
races for which we received a sanction fee. In 2002, we staged 19 races and
received a sanction fee from 17 of those races, compared to 2003 when we
received a sanction fee with respect to 13 races. In 2003, we promoted the races
in Kent, United Kingdom, Lausitz Germany, Portland, Oregon, Cleveland, Ohio,
Lexington, Ohio and Miami, Florida and did not receive sanction fees for these
events. The results for these events are reported in race promotion revenue and
race promotion expense. In 2002, we received sanction fees from races in Motegi,
Japan of $4.5 million, Rockingham, United Kingdom of $2.8 million, Portland,
Oregon of $1.4 million, Cleveland, Ohio of $900,000 and Lexington, Ohio of
$1.2 million. In 2003, we also entered into amended agreements with certain
promoters pursuant to which we reduced the originally contracted sanction fee.
15
Sponsorship revenue for 2003 was $7.8 million, a decrease of $2.4 million,
or 23%, from 2002. This decrease was primarily attributable to the loss of our
title sponsor in the amount of $5.0 million after the 2002 season, the decrease
was partially offset by an increase in 2003 sponsorship income from our two
presenting sponsors in the amount of $2.5 million.
Television revenue for 2003 was $1.9 million, a decrease of $2.6 million,
or 58%, from 2002. The decrease was due to a reduction in television advertising
revenues of $800,000, due to a decrease in the amount of available ads sold and
a reduction in ad prices due to a decline in television ratings of our shows. In
addition, international rights fees declined by $1.9 million, due to a decrease
in demand for our television show and inability to sell advertising for our show
in the Brazilian market which in past years had been one of our most profitable
markets internationally.
Race promotion revenue for 2003 was $10.8 million, an increase of $9.4
million or 660%, from 2002. The increase was due to staging six self-promoted
events in 2003 compared to two in 2002. In 2003, we promoted the races in Kent,
United Kingdom, Lausitz Germany, Portland, Oregon, Cleveland, Ohio, Lexington,
Ohio and Miami, Florida. In 2002 we promoted the races in Chicago, Illinois and
Miami, Florida. The corresponding expenses are reported in race promotion
expense below.
Engine leases for 2003, were $1.9 million with no corresponding revenue in
2002. In 2003, we purchased the engines that were used for the 2003 Champ Car
World Series race season. Each team was required to use these engines in order
to compete in the series. We leased the engines to the teams for $100,000 per
car per year.
Other revenue for 2003 was $2.6 million, a decrease of $1.9 million, or
42%, from 2002. Other revenue includes membership and entry fees, contingency
awards money, royalty income, commission on parts sales and other miscellaneous
revenue. The decrease was primarily due to the discontinuance of membership,
entry fees and pop-off valve leases for the Champ Car Series in 2003; a
reduction of $600,000, and fewer entries in our Toyota Atlantic series which
reduced entry fees and parts commissions by $500,000. In addition, there was a
reduction in non-recurring miscellaneous income. In 2002, we received an
insurance settlement reimbursement of $500,000 and a breach of contract
settlement for $500,000.
Expenses. Total expenses for 2003 were $143.3 million, an increase of
$61.4 million, or 75%, from 2002. This increase was due to higher race
distributions, race promotion expenses, television expenses, merger and
strategic charges, litigation expense, asset impairment and strategic charges
and depreciation and amortization, partially offset by a reduction in race
expenses, administrative and indirect expenses and relocation expense as
described below.
Race distributions for 2003 were $60.9 million, an increase of $41.1,
million or 207%, from 2002. The increase was primarily due to in 2003, we
provided assistance to certain teams to ensure that there were a sufficient
number of race cars competing in our series. We paid $31.8 million in team
assistance in 2003 compared to $2.0 million in 2002. The increase was also
partially due to an increase in participation payments that we made to all of
our teams, from $10,000 per car per race in 2002 to $20,000 per car per race in
2003. In addition, for the 2003 Champ Car World Series we began an entrant
support program where we made payments of $22,500 per car per race to each
participating team. In 2003, we paid $14.5 million in participation and entry
support payments compared to $3.5 million in 2002.
Race expenses for 2003 were $8.1 million, a decrease of $2.8 million, or
26%, from 2002. The decrease is partially due to a decrease in freight expenses
of $800,000, related to the race in Rockingham, England in 2002. The freight
expenses were related to transporting the cars and equipment for the two races
scheduled to be conducted in Europe. The German promoter filed for bankruptcy in
2002 and the race was canceled; in an amendment to the original agreement for
the Rockingham race, CART agreed to pay the German promoter's share of the
freight charges. The
16
decrease is also due to a reduction in salaries, fees, per diems and travel
expenses of $1.4 million, due to having fewer officials working the events and a
$600,000 decrease related to a reduction of our pace car program.
Race promotion expenses for 2003 were $20.8 million, an increase of $11.2
million, or 115%, from 2002. The increase is due to staging six self-promoted
events in 2003 compared to two in 2002. In 2003, we promoted the races in Kent,
United Kingdom, Lausitz Germany, Portland, Oregon, Cleveland, Ohio, Lexington,
Ohio and Miami, Florida. In 2002 we promoted the races in Chicago, Illinois and
Miami, Florida.
Television expense for 2003 was $14.9 million, an increase of $4.0 million
or 36% from 2002. The increase was due to a change in our television agreements
from the previous year. In 2002, Speed Channel paid for the production and
received the ad inventory for shows aired on their network. In 2003, we paid for
the production expenses and received the ad inventory for shows aired on their
network.
Administrative and indirect expenses for 2003 were $20.6 million, a
decrease of $7.2 million, or 26%, from 2002. This decrease was primarily
attributable to a decrease in, marketing and advertising of $3.4 million, sales
costs related to the loss of our tile sponsor of $2.2 million, professional fees
of $850,000 and salary and employee related expenses of $594,000, due to a
reduction in the workforce from 2002.
Merger charges for 2003 was $2.0 million with no corresponding expense in
the prior year. This expense was attributable to legal and consulting expenses
associated with the terminated merger and subsequent asset purchase agreement
entered into with Open Wheel Racing, LLC.
Litigation expense for 2003 was $2.7 million with no corresponding expense
in the prior year. This expense was partially attributable to an arbitration
settlement of $1.75 million paid in August 2003, to Engine Developments Ltd. in
a breach of contract case over a contract to purchase engines, a settlement of
$400,000, in a breach of contract suit filed by two former team owners,
DellaPenna Motorsports and Precision Preparation, Inc., settlement of contract
disputes with ESPN television over the canceled Texas Motor Speedway race of
$250,000, an arbitration award to Action Performance Companies, Inc. in a breach
of contract case in regard to a licensed merchandise contract of $931,000, and
settlement of early termination of a sanction agreement with IMSA of $500,000,
in regard to a race in Miami, Florida. The expenses were partially offset by
receipt of $1.0 million from a bankruptcy settlement regarding claims filed
against EuroSpeedway Lausitz for loss of sanction fees and other damages that
occurred when the 2002 event was canceled as a result of the bankruptcy of the
promoter.
Relocation expenses for 2002 were $1.4 million with no corresponding
expense in the current year. This expense relates to moving our headquarters
from Troy, Michigan to Indianapolis, Indiana.
Asset impairment charges for 2003 were $9.6 million with no corresponding
expense in the prior year. The charges partially relate to impairment of
long-lived assets associated with the bankruptcy of CART, Inc. and the court
approved "Asset Purchase Agreement" entered into with Open Wheel Racing Series,
LLC of $4.5 million. In addition, the impairment charges include the write-down
of goodwill and long lived assets of $5.1 million, associated with our
subsidiary Raceworks, LLC, which was the promoter of the race in Miami, Florida.
In December of 2003 it was determined that it was not feasible to continue
holding races in the Miami market; the impairment expense is the write-down to
fair value of the tangible and intangible assets related to this subsidiary.
Depreciation and amortization for 2003 was $3.8 million, compared to
depreciation and amortization of $1.4 million for 2002. The increase was
primarily attributable to the depreciation
17
related to the engines we purchased in 2003 that were leased to teams in the
2003 Champ Car Series.
Interest Income. Interest income for 2003 was $1.3 million, compared to
interest income (net) of $3.8 million for 2002. The decrease of $2.5 million was
primarily attributable to a decrease in interest rates and available cash
balances.
Income Tax Expense/Benefit. Income tax expense for 2003 was $427,000,
compared to an income tax benefit of $7.3 million in 2002. Due to the Company
winding up its business and dissolving, management does not believe that any
future tax benefit will be realized, therefore, the tax benefit for 2003 has
been completely reduced by a valuation allowance. The 2003 tax expense relates
to foreign taxes paid where no future foreign tax credit will be realized. The
effective tax rate for 2002 was 35%.
Cumulative Effect of Accounting Change. Cumulative effect of accounting
change for 2002 was $1.5 million, or $956,000 net of tax benefit of $514,000.
There was no corresponding amount in the same period in the current year. The
amount relates to our implementation of Statement of Financial Accounting
Standard No. 142 pursuant to which we wrote off our impaired goodwill.
YEAR ENDED DECEMBER 31, 2002 COMPARED TO YEAR ENDED DECEMBER 31, 2001
Revenues. Total revenues for 2002 were $57.2 million, a decrease of $13.0
million, or 18%, from 2001. This was due to a decrease in sanction fee revenues,
sponsorship revenue, television revenue and engine leases, rebuilds and wheel
sales, partially offset by race promotion revenue and other revenue as described
below.
Sanction fees for 2002 were $36.6 million, a decrease of $10.6 million, or
22%, from 2001. The decrease was partially due to a decrease in the number of
races for which we received a sanction fee, in 2001, we staged 20 races and
received a sanction fee from each, compared to 2002 when we received a sanction
fee with respect to 17 races. In 2002, we promoted the race in Chicago and the
race in Miami and did not receive sanction fees for these events; the results
for these events are reported in race promotion revenue and race promotion
expense. In 2001, we also received sanction fees from races in Nazareth, PA,
Brooklyn, MI, Detroit, MI, Houston, TX and Lausitz, Germany. We did not race at
those venues in 2002 and therefore did not receive sanction fees. This was
partially offset in 2002 with new races in Denver, CO, Montreal, Canada and
Mexico City, Mexico for which we received sanction fees. In 2002, we also
entered into amended agreements with certain promoters pursuant to which we
reduced the originally contracted sanction fee in exchange for a percentage of
profits from the event. The sanction fees and/or percentage of profits we
received were less than the sanction fees received in the previous year at the
races in Corby, England, Elkhart Lake, WI, Portland, OR and Cleveland, OH.
Sponsorship revenue for 2002 was $10.2 million, a decrease of $2.2
million, or 18%, from 2001. This decrease was primarily attributable to the loss
of sponsorship income from the Indy Lights series which we discontinued at the
end of the 2001 race season, as well as a reduction in sponsorship fees from one
of our sponsors, pursuant to a renegotiation clause in the applicable
sponsorship contract.
Television revenue for 2002 was $4.5 million, a decrease of $690,000, or
13%, from 2001. The decrease was due to a change in our television agreements
from the previous year. In 2001, we received a guaranteed rights fee for both
our domestic and international television rights. In 2002, we purchased the
air-time, and we received the advertising revenue for our races broadcast on
network television. We also received rights fees for the international
broadcasts of all of our races. The advertising revenue and rights fees received
in 2002 were less than the guaranteed rights fee received in 2001. The
corresponding expenses are reported in television expenses.
18
Race promotion revenue for 2002 was $1.4 million, with no corresponding
amount in 2001. The revenue was due to our promotion of the Chicago race which
was our first self-promoted race.
There were no engine leases, rebuilds and wheel sales for 2002, a decrease
of $1.3 million from the same period in the prior year. This decrease was due to
the discontinuance of the Indy Lights Championship.
Other revenue for 2002 was $4.5 million, an increase of $324,000, or 8%,
from 2001. Other revenue includes membership and entry fees, contingency awards
money, royalty income, commission on parts sales and other miscellaneous
revenue. The increase was primarily due to an insurance settlement reimbursement
of $500,000. The increase was partially offset by decreased membership and entry
fees, and a decrease in award banquet revenue.
Expenses. Total expenses for 2002 were $81.9 million, an increase of $3.1
million, or 4%, from 2001. This increase was due to higher race distributions,
race expenses, television expenses, race promotion expenses and relocation
expense, partially offset by a reduction in depreciation and amortization, cost
of engine rebuilds and wheel sales and administrative and indirect expenses,
litigation and asset impairment and strategic charges as described below.
Race distributions for 2002 were $19.8 million, an increase of $1.2,
million or 6%, from 2001. The increase was primarily due to a $10,000 per race
participation payment that we made to all of our teams beginning in 2002. In
addition, during 2002 we have provided $2.0 million in assistance to certain
teams in order to ensure their necessary participation in our series. The
increase was also due to an increase in the purse and year-end points fund for
the Toyota Atlantics Series. The increase was partially offset by travel
payments made to teams in 2001 for European travel that were not made in 2002
and a decrease in Champ Car and Indy Lights purse payments due to holding one
less Champ Car race in 2002 and discontinuing the Indy Lights Championship at
the conclusion of the 2001 race season.
Race expenses for 2002 were $10.8 million, an increase of $205,000, or 2%,
from 2001. This increase is primarily due to freight expenses related to the
race in Rockingham, England. In 2001, the freight expenses related to
transporting the cars and equipment to Europe were paid by the promoters. In an
amendment to the original agreement for the Rockingham race, CART, Inc. agreed
to pay these freight charges. The increase is also due to increased salaries,
fees and travel expenses in regards to the competition and safety departments.
The increase was partially offset by the discontinuance of the Indy Lights
Championship.
Race promotion expenses for 2002 were $9.7 million, with no corresponding
amount in 2001. The expense was due to our promotion of the Chicago and Miami
races.
There was no cost of engine rebuilds and wheel sales for 2002, a decrease
of $348,000 from the same period in the prior year. This decrease was due to the
discontinuance of the Indy Lights Championship.
Television expense for 2002 was $11.0 million with no corresponding
expense in the prior period. The increase was due to a change in our television
agreements from the previous year. In 2001, we received a guaranteed rights fee
for both our domestic and international television rights with no corresponding
expense. In 2002, we bought the air-time and paid for production expenses for
our network races. In addition, we incurred expenses to provide an international
feed for all of our races.
Administrative and indirect expenses for 2002 were $27.8 million, a
decrease of $7.8 million, or 22%, from 2001. This decrease was primarily
attributable to a decrease in severance expense, marketing and advertising,
professional fees for strategic planning, TV consulting and employee recruitment
and the discontinuance of the Indy Lights Championship, partially offset by
19
an increase in bad debt expense, legal fees, public relations and the advance
program. An advance program team visited selected race venues prior to the event
weekend and invited local media and corporate guests to participate in
activities at the track in order to generate excitement in the market prior to
the event.
Litigation expense for 2001 was $3.5 million. There was no corresponding
expense in 2002. The charge was a result of a settlement with the Texas Motor
Speedway for the cancellation of a race that was to be held in April 2001.
Relocation expenses for 2002 were $1.4 million with no corresponding
expense in the prior year. This expense relates to our headquarters moving from
Troy, Michigan to Indianapolis, Indiana.
Asset impairment and strategic charges for 2001 were $8.5 million. There
was no corresponding expense in the current year. These charges related to the
formal exit plan for the discontinuance of the Indy Lights series. The charges
related to the impairment of goodwill ($5.6 million) and property and equipment
($2.0 million) and $885,000 relating to provisions for doubtful accounts,
severance payments and other settlement charges.
Depreciation and amortization for 2002 was $1.4 million, compared to
depreciation and amortization of $1.5 million for 2001.
Operating Loss. Operating loss for 2002 was $24.7 million, compared to
operating loss of $8.5 million for 2001 due to the items discussed above.
Interest Income (Net). Interest income (net) for 2002 was $3.8 million,
compared to interest income (net) of $7.0 million for 2001. The decrease of $3.2
million was primarily attributable to a decrease in interest rates and available
cash balances.
Loss Before Income Taxes. Loss before income taxes for 2002 was $20.9
million, compared to a loss before income taxes of $1.5 million for 2001 due to
the items discussed above.
Income Tax Benefit. Income tax benefit for 2002 was $7.3 million, compared
to an income tax benefit of $512,000 in 2001. The effective tax rate for 2002 of
35% was comparable to that in 2001 of 35%.
Loss Before Cumulative Effect of Accounting Change. Loss before cumulative
effect of accounting change for 2002 was $13.6 million compared to loss before
cumulative effect of accounting change of $950,000 for the same period in the
prior year.
Cumulative Effect of Accounting Change. Cumulative effect of accounting
change for 2002 was $1.5 million, or $956,000 net of tax benefit of $514,000.
There was no corresponding amount in the same period in the prior year. The
amount relates to our implementation of Statement of Financial Accounting
Standard No. 142 pursuant to which we wrote off our impaired goodwill.
Net Loss. Net loss for 2002 was $14.5 million, compared to a net loss of
$950,000 in 2001 due to the items discussed above.
LIQUIDITY AND CAPITAL RESOURCES
Since our inception, we have funded our operations and capital
expenditures from the proceeds of our public offerings and our cash reserves
generated from operations. At December 31, 2003, we had $4.8 million in working
capital, and our primary source of liquidity was $3.2 million in cash and cash
equivalents. Our cash balance on December 31, 2003 was $3.2 million, a
20
net decrease of $3.6 million from December 31, 2002. This decrease was primarily
the result of net cash used in operating activities and financing activities of
$69.3 million and $1.0 million respectively partially by net cash proceeds from
investing activities of $66.7 million.
Our short term investment balance on December 31, 2003 was $7.4 million, a
net decrease of $72.1 million from December 31, 2002. This decrease was
primarily due to funding our operations during 2003.
In May 2003, the Company entered into an agreement with a third party
where we paid for the costs of capital improvements retained by the third party
necessary to stage an event where we were the promoter. We accepted an unsecured
note of $750,000 for said improvements. In November, of 2003 we terminated the
contract due to certain breaches of the contract. Pursuant to the terms of the
contract if future races are not held at the facility the note receivable is
terminated. Therefore, we wrote off the note in its entirety.
In June 2003, the Company entered into an amendment to a sanction
agreement with a promoter where we accepted a note in the amount of $400,000 as
payment for a portion of the sanction fee. This note is payable in 36 equal
monthly installments, bearing interest at 10% per annum, beginning January 1,
2004. The note is collateralized by all products and proceeds of all other
events staged by the promoter at the promoter's facility. We have not received
any payments on the note which were to begin on January 1, 2004. After an
assessment of the financial condition of the promoter and other considerations,
it was determined that the note should be been written-down to management's
estimate of its fair value of $150,000 and an impairment loss has been recorded
in regard to the note and trade account receivables for $320,139.
CONTRACTUAL OBLIGATIONS
In April 2002, we entered into a lease for our new corporate headquarters
in Indianapolis, Indiana. The lease commenced on May 1, 2002 and expires on
October 31, 2010. The total amount due through the life of the lease as of
December 31, 2003 is $2.1 million. We have sublet this office space to Open
Wheel, on substantially the same terms as our lease and retain office space for
our use, at no cost. However, we remain liable on the lease.
In March 2003, we entered into a lease for office space in Miami, Florida.
The lease commenced on June 1, 2003 and was to expire on May 31, 2008. The total
amount due through the life of the lease was $478,198. On December 12, 2003 we
cancelled and compromised the lease for a payment of $43,941 and the lessor
retained the security deposit of $16,058.
The following table summarizes our contractual obligations as of December
31, 2003, that remain outstanding obligations of the Company as of March 31,
2004. Certain contractual obligations of the Company as of December 31, 2003
were assumed or assigned to Open Wheel in the "Asset Purchase Agreement"
finalized in February 2004. The obligations that were assumed or assigned to
Open Wheel and are no longer an obligation of the Company are not included in
the table below.
Payments due by Period
----------------------
Less Than 1-3 4-5 After 5
Contractual Obligations Total 1 Year Years Years Years
- ----------------------- ----- ------ ----- ----- -----
Operating Leases* $2,111,261 $ 308,965 $ 926,895 $ 617,930 $ 257,471
Other Long-Term Obligations 1,781,000 1,245,000 536,000 -- --
---------- ---------- ---------- ---------- ----------
Total Contractual Cash Obligations $3,892,261 $1,553,965 $1,462,895 $ 617,930 $ 257,471
========== ========== ========== ========== ==========
*Sublet to Open Wheel Racing Series for the amounts of lease obligations.
21
In July 2002, we guaranteed a $1.8 million commercial term loan in
connection with our acquisition of Raceworks, LLC. The Company subsequently
assumed this loan in conjunction with the acquisition of Raceworks, LLC and has
recorded the loan in its long-term debt. The principal on the loan shall be paid
quarterly, starting October 31, 2003 and on the last day of each January, April,
July and October thereafter, in the amount of $50,000 per quarter. Payments of
principal and interest were paid for the October 2003 and January 2004
installments. The Company was in default of certain financial covenants of the
loan. These financial covenants require that total stockholders' equity of the
Company not be below $75 million. As a result, the entire amount of the note has
been classified as current. On May 10, 2004, the entire principal of the note
was paid according to an assignment and release entered into with the holder of
the note.
On March 7, 2003, we acquired 100% of the equity in Raceworks, LLC. The
purchase price was $1.2 million, including $473,000 of cash and a contingent
promissory note of $722,000, without interest, and assumption of liabilities of
$4.7 million. On December 8, 2003, the company entered into a release and
settlement agreement, with the sellers of Raceworks, that released both parties
from any future obligations under the acquisition agreement in exchange for
payment of $361,250 in cash to the sellers. In December of 2003, after the
merger agreement with OWRS was terminated, as discussed above, it was determined
that OWRS had no interest in the assets of Raceworks, LLC or continuing to race
in the city of Miami. The Company recognized an impairment charge of $5.1
million to write-off the goodwill and long lived assets of Raceworks, LLC.
Litigation and settlements expense was $2.7 million for the year ended
December 31, 2003. This expense was partially attributable to an arbitration
settlement of $1.75 million paid in August 2003, to Engine Developments Ltd. in
a breach of contract case over a contract to purchase engines, a settlement of a
breach of contract suit filed by two former team owners, DellaPenna Motorsports
and Precision Preparation, Inc., settlement of contract disputes with ESPN
television over the canceled Texas Motor Speedway race, an arbitration award to
Action Performance Companies, Inc. in a breach of contract case in regard to a
licensed merchandise contract, and settlement of an early termination of a
sanction agreement with IMSA in regard to a race in Miami, Florida. The expenses
were partially offset by receipt of $1.0 million from proceeds received from a
bankruptcy settlement regarding claims filed against EuroSpeedway Lausitz for
loss of sanction fees and other damages that occurred when the 2002 event was
canceled as a result of the bankruptcy of the promoter.
In addition, in August 2003 we paid $1.7 million to Joseph Heitzler, our
former CEO, in complete settlement of all actions brought by Mr. Heitzler in
claims related to his employment with the Company. The charge to expense related
to this settlement had been recorded in the year-ended December 31, 2001.
Capital spending for 2003 was approximately $2.2 million. Capital
expenditures included approximately $900,000 for race promotion equipment,
$693,000 for engines and related equipment, $306,000 for race car chassis and
improvements, $288,000 for trucks and trailers and $69,000 for computers and
office equipment. No capital spending will occur in 2004.
OFF-BALANCE SHEET ARRANGEMENTS
In October 2002, we provided a deposit of $550,000 and a letter of credit
in the amount of $1.7 million in regards to the production of conversion kits
for race car chassis for the 2003 season. The letter of credit guaranteed that
at least 20 of the kits would be purchased by our race teams. As the kits were
purchased, the letter of credit was reduced accordingly. If 20 kits were not
purchased by our teams, we would have been required to purchase the remaining
kits and continue to sell the kits to teams as they were needed. All 20 race
kits were purchased by our race teams; consequently, the deposit was refunded on
February 27, 2003 and the letter of credit was canceled.
22
RELATED PARTY TRANSACTIONS
We have historically entered into transactions with related parties,
because several of our directors and one of our significant shareholders are
team owners. We believed that it was necessary and appropriate to have team
owners involved as directors or significant shareholders of the Company because
of their unique knowledge of our business. We believed that all the transactions
which we have entered into with our directors or significant shareholders, were
comparable to the terms that we have in the past or could in the future enter
into with third parties with respect to each of these transactions. In order to
avoid conflicts of interest, any of our directors who were affiliated with an
entity that was entering into a transaction with us did not vote on any matters
related to such transactions and, in certain circumstances, refrained from
participating in any discussions related to such transactions.
Gerald R. Forsythe, a 22.9% stockholder of the Company, is one of the
three principal members, of Open Wheel Racing Series, LLC, the other members
being Mr. Gentilozzi and Mr. Kalkhoven, which purchased the operating assets of
CART, Inc. pursuant to the Asset Purchase Agreement, entered into in February
2004. The consideration paid to CART, Inc. for the purchase of such assets,
along with the stock of Pro-Motion Agency, Ltd. and CART Licensed Products, Inc.
was total consideration of $3.3 million in cash, the assumption by the buyer of
$1.4 million in prize money owed to teams not affiliated with the principals of
Open Wheel, forgiveness of $1.3 million in prize money due teams affiliated with
principals of Open Wheel, including Mr. Forsythe and Mr. Gentilozzi, and the
assumption of certain promoter, sponsorship, and other contracts. The agreement
was approved by order of the bankruptcy court at a hearing held on January 28,
2004.
The following related party transactions occurred during the three year
period ended December 31, 2003:
The related party transactions under "Purse Distributions, Entry Support
Program and Lease Arrangements" were all payments or transactions that were made
on the identical basis to all race teams, whether they were affiliated with
directors or significant shareholders or not affiliated. The payments payable to
related parties under the caption "Team Assistance Program" related to further
assistance that the Company provided to race teams to assure their participation
in the 2003 race season. The amounts payable to each race team varied, depending
upon the team's ability to raise third party sponsorship, the number of cars
that the team raced in 2003, their budget and other factors. The Company
determined that these payments were necessary in order to assure a proper field
for 2003 and believed that the amounts payable to each of the race teams
affiliated with a director was consistent with arrangements that the Company
could enter into with third parties. Both of these programs were developed to
insure the necessary participation in the series. Without this additional
funding, it was unlikely that there would have been 18 teams, which would have
resulted in defaults under certain of the Company's agreements with promoters
and television and could have resulted in severe financial consequences to the
Company.
Purse Distributions, Year-end Point Fund, Entry Support Program and Team
Assistance. We have entered into transactions with entities that were affiliated
with our directors and/or 5% stockholders who were owners of our race teams.
Race teams that participated in the Champ Car World Series received purse
distributions on a per race basis and from the year end point fund, which
amounts were paid based solely upon their performance in specific races. All of
these payments were made to our race teams regardless of the affiliation with
our directors or significant stockholders. Open Wheel Racing Series, LLC
released CART, Inc. from any obligation relating to amounts due them for the
year-end point fund and assumed the obligation to pay the year-end point fund to
the other participants of the 2003 season as part of the Asset Purchase
Agreement entered into with the Company as discussed previously (with the
exception
23
of the year-end point fund due Patrick Racing, Inc.) The following table
provides information with respect to payments made or accrued during 2003 by us
to race teams that were affiliated with directors and/or significant
stockholders of CART:
(paid) (accrued)
Race Team/Affiliated Person Purse Distributions Year-end Point Fund
- --------------------------- ------------------- -------------------
Newman/Haas Racing/Carl A. Haas $ 1,479,500 $ 700,000
Forsythe Racing, Inc./Gerald R. Forsythe 1,576,000 1,150,000
Patrick Racing, Inc./U.E. Patrick 454,250 130,000
Derrick Walker Racing, Inc./Derrick Walker 618,500 110,000
Rocketsports, Inc./Paul Gentilozzi 420,250 100,000
PK Racing LLC/Kevin Kalkhoven 332,250 -----
In 2003, we leased engines and provided financial assistance to every team
that participated in the Champ Car World Series, including teams affiliated with
our directors and/or 5% stockholders. The financial assistance payments related
to two programs instituted for the 2003 season, the Entry Support Program (ESP)
and the Team Assistance Program. ESP provided up to $42,500 in cash payments to
teams, per race, for each car entered into the series.
The Company entered into a sponsorship agreement with Ford Motor Company,
which provided in part, that Ford would lease to each of the teams Ford vehicles
for their use in 2003. For ease of administration, Ford leased these vehicles to
the Company and the Company subleased the vehicles to each team on a net basis.
There was no net cost or benefit to the Company related to this arrangement.
The Company purchased one hundred (100) race engines from Cosworth Racing,
Inc. for a total purchase price of $4.0 million and agreed to pay for track
support in the amount of $1.5 million. The Company in turn leased these engines
to each team on the basis of $100,000 per entrant per year.
The following table lists the amount of engine lease income we received
and Entry Support Payments we made to related parties for the 2003 race season.
Engine Lease Income ESP Payments
Race Team/Affiliated Person from Teams to Teams
- --------------------------- ---------- --------
Newman/Haas Racing/Carl A. Haas $ 200,000 $ 1,530,000
Forsythe Racing, Inc./Gerald R. Forsythe 200,000 1,530,000
Patrick Racing, Inc./U.E. Patrick 100,000 765,000
Derrick Walker Racing, Inc./Derrick Walker 200,000 1,530,000
PK Racing LLC/Kevin Kalkhoven 100,000 765,000
Rocketsports, Inc./Paul Gentilozzi 100,000 765,000
Team Assistance Program. The Team Assistance Program supplied an
additional $31.8 million in team assistance spread over the 2003 race season as
described above. The following table sets forth the Team Assistance Program
payments to teams affiliated with directors and/or 5% stockholders.
24
Race Team/Affiliated Person Team Assistance Payments
- --------------------------- ------------------------
Newman/Haas Racing/Carl A. Haas $ 2,000,000
Patrick Racing, Inc./U.E. Patrick 1,400,000
Derrick Walker Racing, Inc./Derrick Walker 5,925,000
Rocketsports, Inc./Paul Gentilozzi 2,000,000
PK Racing LLC/Kevin Kalkhoven 1,000,000
PROMOTER AGREEMENTS
Some of our directors or stockholders either controlled or were affiliated
with others who controlled racing venues which staged CART and other racing
events. We entered into the following agreements with entities associated with
directors or 5% stockholders:
Carl A. Haas, a former director of the Company and a race team owner, was
a principal owner of Carl Haas Racing Teams, Ltd. and Texaco Houston Grand Prix
L.L.C. ("HGP"), each of which entered into Promoter Agreements with respect to
Champ Car World Series races at the Wisconsin State Park Speedway in Milwaukee,
Wisconsin and at a temporary road course in Houston, Texas. In the second
quarter of 2002 the Promoter Agreement for the Milwaukee race was renewed for
the 2002 event with the promoter having the option to extend for the 2003 and
2004 years. The sanction fees payable to CART under this agreement is similar to
those paid by independent race promoters. Pursuant to the Promoter Agreement,
entities affiliated with Mr. Haas have paid sanction fees to CART of $1.4 and
$1.7 million in the years 2003 and 2002 respectively. On May 31, 2003, CART,
Inc., entered into an agreement with the Wisconsin State Fair Park to take over
as organizer/promoter of the event from Carl Haas Racing Teams, Ltd. In
addition, we have incurred a total of $100,000 in sales costs and $100,000 in
marketing expenses in relation to our race at Wisconsin State Park Speedway
during 2002. The promoter agreement in regards to the Houston, Texas event
provided for races to be held starting in 1998 through 2003. The Houston, Texas
race was not held in 2002 and 2003 due to construction on the temporary circuit
in downtown Houston. Therefore, the promoter agreement has been terminated by
mutual agreement. Carl Haas Racing Teams, Ltd. paid a $500,000 termination fee
to CART and CART has received an option to acquire certain assets of HGP, used
in operating the Houston event, for $750,000. This option was exercised and
payment was made in January 2003.
Gerald R. Forsythe, a race team owner and 22.9% stockholder, is a
principal owner of the entities which entered into Promoter Agreements with
respect to Champ Car World Series races in Monterrey, Mexico and Mexico City,
Mexico. These entities affiliated with Mr. Forsythe have paid sanction fees to
CART in the aggregate amount of $4.9 million and $6.1 million for 2003 and 2002
respectively.
In addition, we have paid a total of $200,000 in sales costs and $200,000
in marketing expenses to these entities during 2002.
In order to change the date of the Mexico City race as requested by Mr.
Forsythe's affiliated entity, we have paid another promoter $250,000. Mr.
Forsythe's affiliated entity reimbursed us for $125,000 of that expense.
Gerald R. Forsythe is also a principal owner of an entity which entered
into a Promoter Agreement with respect to Champ Car World Series races in
Rockingham, England. The agreement provided for a race to be held beginning in
2001 through 2006. Following the cancellation of the 2002 race scheduled to be
run in Germany, officials at Rockingham expressed concern regarding the
viability of running a single event in Europe. In order to assure that the
Rockingham event could move forward in 2002, we negotiated an amendment to the
Promoter
25
Agreement which reduced the sanction fee to $2.8 million and we assumed certain
costs, including freight and transportation, in the amount of $900,000. In
addition, the terms of the future years of the agreement, 2003-2006, were
subject to renegotiation. This renegotiation has subsequently resulted in the
cancellation of the remaining years of the agreement. In addition, we have paid
a total of $100,000 in sales costs and $400,000 in marketing expenses to this
entity during 2002.
Floyd R. Ganassi Jr., a former director of the Company and a race team
owner, is a principal owner of Chicago Motor Speedway, LLC and has entered into
a Promoter Agreement with respect to a Champ Car World Series race at Chicago
Motor Speedway in Cicero (Chicago), Illinois. Pursuant to the terms thereof, a
Championship race was to be held through 2003. The Chicago Motor Speedway, LLC
was to pay sanction fees to CART of $2.0 million for 2002 and $2.1 million for
2003. In 2002, the Chicago Motor Speedway, LLC announced the suspension of all
race events at Chicago Motor Speedway. We then entered into an agreement with
the Chicago Motor Speedway, LLC where we rented the track for $850,000 in 2002
and promoted the race ourselves.
OTHER TRANSACTIONS
In addition to the above, we have entered into the following transactions
with related parties:
Mr. Forsythe is also a principal owner of the entity that holds our
Mexican television rights through 2004. In return for these rights, we received
a minimum guarantee of $325,000 and $300,000 in 2003 and 2002 respectively. In
addition, we will receive 70% of the net profits, if any, until we reach
$500,000, $550,000 and $600,000 for each of the three years ending 2002, 2003
and 2004, respectively.
Mr. Ganassi is also principal owner of Target Chip Ganassi Racing, Inc.,
which entered into an agreement by which Target Chip Ganassi Racing Inc. ran a
third car for a portion of the 2002 season. Pursuant to the terms thereof, we
paid Target Chip Ganassi Racing, Inc. $1.7 million for running the third car,
and we received the right to sell certain sponsorship space on that car.
Ralph Sanchez, a director of the Company, is a principal owner of RAS
Development, Inc. which has entered into a five year lease agreement with the
Company for office space in Miami, Florida. Payments for this lease total
$80,292, $97,957, $99,081, $100,045, $101,008 and $16,861 for 2003, 2004, 2005,
2006, 2007 and 2008, respectively. The lease was terminated in December 2003, as
part of the wind-up of the operations in Miami for a payment of $43,941 and Mr.
Sanchez retained the deposit of $16,059.
PAYMENTS TO CART
In addition to the payments described above, CART received revenues from
its race teams, including those affiliated with CART directors and/or 5%
stockholders, for credential, FIA licenses, drivers fees and other payments
based solely on participation in CART events and CART's self-promoted event.
During 2003, race teams affiliated with CART directors and/or 5% stockholders
made such payments to CART as follows:
Forsythe Racing, Inc./Gerald R. Forsythe $ 42,200
Newman/Haas Racing/Carl A. Haas 11,300
Patrick Racing, Inc./U.E. Patrick 60,000
Derrick Walker Racing, Inc./Derrick Walker 32,950
Rocketsports, Inc./Paul Gentilozzi 10,750
PK Racing LLC/Kevin Kalkhoven 39,396
26
As part of the race in Miami, Florida, a special promotion was undertaken
whereby a rock music concert was cross-promoted in conjunction with the race
event. An agreement was entered into with Motorock, LLC, a rock concert
promoter, whose principals are Mr. Gentilozzi and Mr. Kalkhoven, who are also
principals in Open Wheel Racing Series, LLC., which purchased the assets of
CART, Inc. pursuant to the Asset Purchase Agreement as discussed above. The
Company received $141,000 from Motorock, LLC., in exchange for tickets,
hospitality and advertising rights at the race.
In 2004, the Company is sanctioning the races for Open Wheel Racing
Series, LLC., which Mr. Forsythe, a 22.9% owner of the Company, is a principal
owner. The Company receives $12,500 for each domestic race it sanctions and is
reimbursed for various expenses it incurs in sanctioning the events.
FACTORS THAT MAY AFFECT FUTURE RESULTS
WE CANNOT ASSURE YOU OF THE AMOUNT, IF ANY, OF ANY DISTRIBUTION TO OUR
STOCKHOLDERS UNDER A PLAN OF COMPLETE LIQUIDATION AND DISSOLUTION.
Liquidation and dissolution may not create value to our stockholders or
result in any remaining capital for distribution to our stockholders. We cannot
assure you of the precise nature and amount of any distribution to our
stockholders pursuant to a plan of distribution. Uncertainties as to the precise
net value of our non-cash assets and the ultimate amount of our liabilities make
it impracticable to predict the aggregate net value, if any, ultimately
distributable to our stockholders. The actual nature and amount of all
distributions will depend in part upon our ability to settle our liabilities or
potential liabilities. We may not be successful in doing so to return a
meaningful amount of cash to our stockholders.
WE MAY NOT BE ABLE TO SETTLE ALL OF OUR OBLIGATIONS TO CREDITORS.
We have current and future obligations to creditors. These include,
without limitation, long-term contractual obligations and litigation claims and
expenses. As part of the wind down process, we will attempt to settle our
obligations with our creditors. We may not, however, succeed in doing so. If we
cannot reach an agreement with a creditor concerning an obligation, that
creditors may choose to bring a lawsuit against us. Any litigation could delay
or even prevent us from completing the plan of dissolution. Moreover, amounts
required to settle our obligations to creditors will reduce the amount of
remaining capital available for distributions to stockholders.
WE WILL CONTINUE TO INCUR CLAIMS, LIABILITIES AND EXPENSES WHICH WILL REDUCE THE
AMOUNT AVAILABLE FOR DISTRIBUTION TO STOCKHOLDERS.
Claims, liabilities and expenses such as operating costs, salaries,
directors' and officers' insurance, payroll and local taxes, legal, accounting
and consulting fees and miscellaneous office expenses, will continue to be
incurred as we wind down operations. These expenses will reduce the amount of
assets available for ultimate distribution to stockholders, if any. If available
cash is not adequate to provide for our obligations, liabilities, expenses and
claims, we may not be able to distribute meaningful cash, or any cash at all, to
our stockholders.
27
DISTRIBUTION OF ASSETS, IF ANY, TO OUR STOCKHOLDERS COULD BE DELAYED.
Our Board of Directors has not established a firm timetable for proposing
to our stockholders a plan of liquidation, nor can we assure approval of such a
plan or the amount of any distributions to our stockholders. We are currently
unable to predict the precise timing of any distribution, if any, pursuant to
our wind down. The timing of distribution, if any, will depend on and could be
delayed by, among other things, the timing of claim settlements with creditors
and potential litigation. Additionally, a creditor could seek an injunction
against the making of distributions to our stockholders on the ground that the
amounts to be distributed were needed to provide for the payment of our
liabilities and expenses. Additionally, we could seek protection from creditors
under the federal bankruptcy code. Any action of this type could delay or
substantially diminish, or eliminate, the amount available for distribution to
our stockholders.
IF WE FAIL TO CREATE AN ADEQUATE CONTINGENCY RESERVE FOR PAYMENT OF OUR EXPENSES
AND LIABILITIES, OUR STOCKHOLDERS COULD BE HELD LIABLE FOR PAYMENT TO OUR
CREDITORS OF EACH SUCH STOCKHOLDER'S PRO RATA SHARE OF AMOUNTS OWED TO THE
CREDITORS IN EXCESS OF THE CONTINGENCY RESERVE, UP TO THE AMOUNT ACTUALLY
DISTRIBUTED TO SUCH STOCKHOLDER.
If a plan of dissolution is proposed to and ratified and approved by our
stockholders, we will file a Certificate of Dissolution with the State of
Delaware dissolving the Company. Pursuant to the Delaware General Corporation
Law, we will continue to exist for three years after the dissolution becomes
effective or for such longer period as the Delaware Court of Chancery shall
direct, for the purpose of prosecuting and defending suits against us and
enabling us gradually to close our business, to dispose of our property, to
discharge our liabilities and to distribute to our stockholders any remaining
assets. Under the Delaware General Corporation Law, in the event we fail to
create an adequate contingency reserve for payment of our expenses and
liabilities during this three-year period, each stockholder could be held liable
for payment to our creditors of such stockholder's pro rata share of amounts
owed to creditors in excess of the contingency reserve, up to the amount
actually distributed to such stockholder.
However, the liability of any stockholder would be limited to the amounts
previously received by such stockholder from us (and from any liquidating trust
or trusts) in the dissolution. Accordingly, in such event a stockholder could be
required to return all distributions previously made to such stockholder. In
such event, a stockholder could receive nothing from us under the plan of
dissolution. Moreover, in the event a stockholder has paid taxes on amounts
previously received, a repayment of all or a portion of such amount could result
in a stockholder incurring a net tax cost if the stockholder's repayment of an
amount previously distributed does not cause a commensurate reduction in taxes
payable. There can be no assurance that the contingency reserve established by
us will be adequate to cover any expenses and liabilities.
WE DO NOT EXPECT TO RECOGNIZE ANY MATERIAL REVENUE IN THE FUTURE
We do not expect to recognize much, if any, additional revenue.
Furthermore, it may be difficult to collect receivables now that we have
announced our intent to wind down.
WE WILL CONTINUE TO INCUR THE EXPENSES OF COMPLYING WITH PUBLIC COMPANY
REPORTING REQUIREMENTS.
We have an obligation to continue to comply with the applicable reporting
requirements of the Securities Exchange Act of 1934, as amended, referred to as
the "Exchange Act," even though compliance with such reporting requirements is
economically burdensome.
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RECENT ACCOUNTING PRONOUNCEMENTS
On July 30, 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities". The statement addresses financial
accounting and reporting for costs associated with exit or disposal activities
and nullifies Emerging Issues Task Force (EITF) Issue No. 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity (including Certain Costs Incurred in a Restructuring)." SFAS 146 is
effective for exit or disposal activities that are initiated after December 31,
2002. This statement did not have a material effect on the consolidated
financial statements.
In January 2003, the FASB issued FASB Interpretation No. 46 ("FIN 46")
"Consolidation of Variable Interest Entity". The term "variable interest" is
defined in FIN 46 as "contractual, ownership or other pecuniary interests in an
entity that change with changes in the entity's net asset value." Variable
interests are investments or other interests that will absorb a portion of an
entity's expected losses if they occur or receive portions of the entity's
expected residual returns if they occur. The Company does not expect the
recognition provisions of FIN 46 to have a material impact on the Company's
financial position or results of operations.
In April 2003, the FASB amended and clarified financial accounting and
reporting for derivative instruments, including certain derivative instruments
embedded in other contracts and hedging activities under SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities, "through the
issuance of SFAS No. 149, "Amendment of Statement 133 on Derivative Instruments
and Hedging Activities."SFAS No. 149 is effective for contracts entered into or
modified after June 30, 2003 and for hedging relationships designated after June
30, 2003. The Company's adoption of SFAS No. 149 in fiscal 2003 did not have a
material impact on its financial position or results of operations.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity."SFAS
No. 150 modifies the accounting for certain financial instruments that, under
previous guidance, issuers could account for as equity. SFAS No. 150 requires
that those instruments be classified as liabilities in statements of financial
position. The Company's adoption of SFAS No. 150 in fiscal 2003 did not have a
material impact on its financial position or results of operations.
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,
2003, our investments consisted of U.S. Agency issues, letters of credit, and
money market funds. The weighted average maturity of our portfolio is 152 days.
The weighted average maturity of the portfolio was 278 days at December 31,
2003. Because of the relatively short-term nature of our investments, our
interest rate risk is not considered significant.
ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Our consolidated financial statements and related notes are included in Item 15
of this document.
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ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
ITEM 9A: CONTROLS AND PROCEDURES
(a) We carried out an evaluation, under the supervision and with the
participation of our Chief Executive Officer and Chief Financial Officer, of the
effectiveness of the design and operation of our disclosure controls and
procedures pursuant to Exchange Act Rule 13a-14. Based upon that evaluation, our
Chief Executive Officer and Chief Financial Officer concluded that our
disclosure controls and procedures are effective in timely alerting them to
material information relating to us (including our consolidated subsidiaries)
required to be included in our periodic SEC filings.
(b) Upon completion of the sale of substantially all of our operating assets to
Open Wheel in February 2004, most of our employees resigned and accepted
employment with Open Wheel and we ceased operations. We are in the process of
winding up the affairs of the Company. We currently have two employees the Chief
Executive Officer and Chief Financial Officer and we also use temporary
accounting help in winding up the Companies affairs. Subsequently, we have had a
reduction in our accounting staff. We have reviewed and revised our internal
controls due to the reduction in staff and change in operations and believe we
have effective internal controls and proper approval and authorization processes
in place.
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PART III
ITEM 10: DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth certain information with respect to each
director and executive officer of the Company as of August 13, 2004:
Director
Name Principal Occupation During the Last Five Years Age Since
---- ----------------------------------------------- --- --------
Christopher R. Pook, Mr. Pook has served as President and CEO of the Company 63 January
President and Chief since December 2001. Prior to joining the Company, Mr. 2002
Executive Officer, Pook served as President of the Grand Prix Association
Director of Long Beach, Inc., a subsidiary of Dover Downs,
Entertainment, Inc. In 1973, Mr. Pook conceived the idea
of running a world-class automobile race through the
city streets of Long Beach, and his dream became a
reality when the initial event, a Formula 5000 event,
was staged in September 1975. Thereafter, the Long Beach
Grand Prix became a Formula One race and "The Toyota
Grand Prix of Long Beach" evolved into an annual event
on the World Championship Grand Prix circuit. Following
the 1983 event, Mr. Pook made a decision to change the
format of the Long Beach Grand Prix from Formula One to
CART Champ Cars. In 1996, the Grand Prix Association of
Long Beach, Inc., with Mr. Pook as President and Chief
Executive Officer, completed an initial public offering
of stock, and also acquired tracks in St. Louis and
Memphis. In 1998, this company was purchased by Dover
Downs Entertainment, Inc. (NYSE: DVD). Mr. Pook has
served as a member of the Board of Directors of Dover
Downs Entertainment, Inc. since 1998. Mr. Pook is a
Member of the Board of Directors of the Los Angeles
Organizing Committee for the 2012 Olympic Games; he is
Co-Chair of the Local Organizing Committee for the 2005
FINA World Swimming Champion