-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Cr3PmtCa5fChhzpaPVsyv/SyVqpsTMpFNcxyFWTaeJjLBiyYUYQ/vajlB/nLFpjf 0scVEFmjTF3xJiwmVIYn5A== 0000950152-99-002158.txt : 19990322 0000950152-99-002158.hdr.sgml : 19990322 ACCESSION NUMBER: 0000950152-99-002158 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990319 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CHAMPIONSHIP AUTO RACING TEAMS INC CENTRAL INDEX KEY: 0001051825 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-RACING, INCLUDING TRACK OPERATION [7948] IRS NUMBER: 383389456 STATE OF INCORPORATION: MI FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 001-13925 FILM NUMBER: 99569083 BUSINESS ADDRESS: STREET 1: 755 W BIG BEAVER RD STREET 2: SUITE 800 CITY: TROY STATE: MI ZIP: 48084 BUSINESS PHONE: 2483628800 MAIL ADDRESS: STREET 1: 755 W BIG BEAVER RD STREET 2: SUITE 800 CITY: TROY STATE: MI ZIP: 48084 10-K405 1 CHAMPIONSHIP AUTO RACING TEAMS, INC. FORM 10-K405 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K (Mark One) [ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998. OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM _________________ TO ________________. COMMISSION FILE NUMBER 1-13925 CHAMPIONSHIP AUTO RACING TEAMS, INC. (Exact name of registrant as specified in its charter) Delaware 38-3389456 (State or other jurisdiction of (IRS Employer Identification No.) Incorporation or organization) 755 West Big Beaver Rd., Suite 800, Troy, MI 48084 (Address of principal executive offices) (Zip Code) (248) 362-8800 (Registrant's telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act: Title of each class Name of each exchange on which registered Common Stock, $.01 par value New York Stock Exchange Securities registered pursuant to section 12(g) of the Act: None Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [ X ] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (ss. 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to Form 10-K. [ X ] On March 16, 1999, the aggregate market value of the shares of voting stock of Registrant held by non-affiliates was approximately $257,626,314 based on a closing sales price on the NYSE of $29.00 per share. At March 16, 1999, the Registrant had 15,171,666 shares of common stock outstanding. 2 DOCUMENTS INCORPORATED BY REFERENCE Portions of the Registrant's Proxy Statement for the 1999 Annual Meeting of Stockholders to be filed with the Securities and Exchange Commission, not later than 120 days after the close of its fiscal year, pursuant to Regulation 14A, are incorporated by reference into Items 10, 11, 12 and 13 of Part III of this annual report. 2 3
FORM 10-K TABLE OF CONTENTS PAGE PART I Item 1. Business....................................................................... 4 Item 2. Properties..................................................................... 21 Item 3. Legal Proceedings.............................................................. 21 Item 4. Submission of Matters to a Vote of Security Holders............................ 22 PART II Item 5. Market of the Registrant's Common Equity and Related Stockholder Matters 22 Item 6. Selected Consolidated Financial Data........................................... 23 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operation.................................................. 25 Item 7A. Quantitative and Qualitative Disclosures About Market Risk..................... 34 Item 8. Financial Statements and Supplementary Data.................................... 34 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.................................................. 34 PART III Item 10. Directors and Executive Officers of the Registrant............................. 34 Item 11. Executive Compensation......................................................... 34 Item 12. Security Ownership of Certain Beneficial Owners and Management................. 34 Item 13. Certain Relationships and Related Transactions................................. 35 PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K................ 35 SIGNATURES 37
3 4 PART I ITEM 1: BUSINESS THE REORGANIZATION Championship Auto Racing Teams, Inc. was formed in December 1997, as a Delaware corporation to serve as a holding company for CART, Inc., our racing entity, and its subsidiaries. In connection with a reorganization, we acquired all of the shares of CART, Inc. in exchange for our shares. The reorganization was completed in anticipation of, and to facilitate our initial public offering on March 10, 1998. INTRODUCTION We own, operate and sanction the premier open-wheel motorsports series in North America--the CART Championship. We are responsible for organizing, marketing and staging each of the races in the CART Championship. With speeds of up to 240 miles per hour, and an average margin of victory during the 1998 race season of less than three seconds, CART open-wheel racing is the fastest form of closed-circuit auto racing available to motorsports audiences, providing intense excitement and competition. We also own and sanction the Indy Lights Championship and the Atlantic Championship, both development series for the CART Championship. The drivers and racing teams participating in CART racing events are among the most recognized names in motorsports, with marquee drivers including: o Michael Andretti o Al Unser Jr. o Jimmy Vasser o Paul Tracy o Dario Franchitti o Adrian Fernandez o Bryan Herta o Greg Moore The excitement and competition of CART racing also attracts well-known racing legends, business leaders and sports and entertainment personalities as team owners including: o Chip Ganassi o Carl Haas o David Letterman o Bruce McCaw o Joe Montana o Paul Newman o U.E. "Pat" Patrick o Walter Payton o Roger Penske o Bobby Rahal Major sponsors of the CART Championship include: o Federal Express and PPG Industries as the co-series sponsors o MCI 4 5 o Budweiser o Mercedes-Benz o Honda o Craftsman o Motorola o Parke-Davis In addition, other Fortune 500 companies sponsor particular race teams and events. Open-wheel racing is the oldest continually scheduled motorsports competition in the world, tracing its history to 1904. The 1999 CART Championship will include 20 races staged in five countries: o United States o Canada o Australia o Brazil o Japan Two new races were added in 1998, one in Motegi, Japan and one in Houston, Texas. For the 1999 season, we added an additional series event in Chicago, Illinois and will sanction a non-series event in Oahu, Hawaii. We conduct our races on four different types of tracks, requiring teams and drivers competing for the CART Championship to employ a variety of skills to master different courses. Each race weekend in the CART Championship is an "event" offering spectators the opportunity to enjoy a CART race, as well as a full weekend of motorsports related entertainment. Most of our events include additional races, such as events in the Indy Lights Championship or the Atlantic Championship, practice and qualifying rounds for all racing events, and automotive and general entertainment demonstrations and displays. Race weekends provide corporate sponsors and other businesses the opportunity to entertain their customers and employees through hospitality areas and other activities. We derive our revenues from five primary sources: o sanction fees paid by track promoters o corporate sponsorship fees o television revenues o engine leases and rebuilds o licensing royalties Our revenues have increased during the last four years from $25.0 million in 1994 to $62.5 million in 1998. We were incorporated in Delaware in December 1997. Our principal executive office is located at 755 West Big Beaver Road, Suite 800, Troy, Michigan 48084, and our telephone number is (248) 362-8800. INDUSTRY OVERVIEW TYPES OF AUTO RACING. Auto racing consists of several distinct categories, each with its own organizing body and racing events. Internationally, the most recognized form of auto racing is open-wheel racing, utilizing an aerodynamically designed chassis and technologically advanced equipment. The most established open-wheel racing series are: 5 6 o Formula One o CART Championship o Indy Racing League o Formula 3000 o Indy Lights Championship o Atlantic Championship o FORMULA ONE. The Formula One World Championship was founded in 1950. The Federation Internationale de L'Automobile sanctions Formula One World Championship events consisting of open-wheel races on road courses in Europe, South America, Asia, Canada, and Australia. The 1999 season will include 16 races. The 1998 Formula One calendar included 15 events in 13 different countries. o CART. The CART Championship started in 1978 and is the premier open-wheel motorsports series in North America. The CART Championship is sanctioned by CART and will include 20 races this year. The 1998 season included 19 races. CART events are staged on four different types of tracks: - superspeedways - ovals - temporary street courses - permanent road courses Superspeedways are banked ovals of two miles or more in distance. Oval tracks are closed circuits, less than two miles in distance, which are often "banked" at varying angles. Temporary street courses are typically built on closed-off downtown streets of major cities, but can also be built on airport runways or similar facilities that have a primary purpose other than as a motorsports venue. Permanent road courses are raceways built solely for motorsports racing and are designed with varying turns, straight-aways and elevation changes to simulate driving on a road. Racing on different types of tracks requires teams and drivers to employ a variety of skills to master different courses to compete for the CART Championship. o IRL. The IRL was formed as a rival United States open-wheel racing series, competing with CART and began racing in 1996. The IRL sanctions its own events. The IRL's events are staged solely on oval courses and will include 11 races this year. The IRL's 1998 season consisted of 11 races, including the Indianapolis 500. o FORMULA 3000. The FIA sanctions the International Formula 3000 Championship. The championship season covers Europe between April and September in a twelve race series. Success in Formula 3000 has been the stepping stone for many drivers into Formula One. o INDY LIGHTS CHAMPIONSHIP. We sanction the Indy Lights Championship and have designated it as the "Official Development Series of the CART Championship." Similar to CART, the Indy Lights Championship is staged on four different types of tracks. The Indy Lights Championship consisted of 14 races during the 1998 season in the United States and Canada, with 13 events run in conjunction with CART events and one stand alone race. o ATLANTIC CHAMPIONSHIP. We also sanction the Atlantic Championship. The Atlantic Championship is also a stepping stone to a career in international motorsports competition. The 1998 Atlantic Championship consisted of 12 races in the United States 6 7 and Canada, with 10 events held in conjunction with CART events, one race with an Indy Lights race and another race as a support series to a Formula One race in Montreal, Canada. The largest auto racing category in the United States, in terms of attendance, media exposure and sponsorships, is stock car racing. Stock car racing utilizes equipment similar in appearance to standard passenger automobiles and races are typically staged on oval courses. The most prominent organizing body in stock car racing is NASCAR. Drag racing typically involves short sprint races on a straight-line drag strip. The National Hot Rod Association is the most prominent organizing body in drag racing. Other, less prominent, racing segments include various types of sports car racing and club racing. o NASCAR. Professional stock car racing developed in the Southeastern United States in the 1930s, and NASCAR has been influential in the growth and development of the sport. NASCAR is the most recognized sanctioning body of professional stock car racing in North America, supervising the Winston Cup and Busch Grand National stock car race series. The 1998 Winston Cup and Busch Grand National race series included 33 and 31 races, respectively; all of which were held in the United States, with two exhibition events in Japan. o OTHER SANCTIONING BODIES. Sports car races are held on road courses and temporary street circuits throughout the United States and are sanctioned by SCCA and PSCR. The NHRA sanctions drag races in the United States. ARCA sanctions stock car races that are less prominent than those sanctioned by NASCAR. Motorsports events are generally heavily promoted, with a number of supporting events surrounding the main race event. Examples of supporting events include: o qualifying trials o secondary racing events o driver autograph sessions o automobile and product expositions o catered parties These events are all designed to maximize the spectators' entertainment experience and enhance the value of the sponsorship experience. PARTICIPANTS. The primary participants in motorsports are: o spectators o corporate sponsors o track owners/race promoters o drivers o team owners o sanctioning bodies SPECTATORS. After soccer, motorsports is the most watched sport worldwide. Motorsports is among the fastest growing spectator sports in the United States. Total attendance at all motorsports events in the United States in 1998 exceeded 16.8 million people. During 1998, approximately 2.5 million people attended CART events. CART races were also televised in 195 countries in 1997, with aggregate television audiences approaching 1 billion viewers. CORPORATE SPONSORS. Corporate sponsors are drawn to motorsports by the large number of spectators and television viewers and their attractive demographics. Corporate sponsors are active 7 8 in all phases of the industry. We believe that the demographic profile of our growing spectator base has considerable appeal to sponsors, track owners, television networks and advertisers. The mean household income of our spectators is estimated to be $55,600, compared to $47,000 for an average United States household. We believe that the spectators are loyal to motorsports and to its corporate sponsors. In addition to sponsoring the various racing series, corporate sponsors support drivers and teams by funding certain costs of their operations, and race promoters and track owners by sponsoring and promoting specific events. In return, corporate sponsors receive advertising exposure on television and radio, through newspapers and in printed materials. Corporate sponsors also receive advertising, promotional and hospitality benefits at the track during the race weekend. Finally, corporate sponsors benefit from the attractive values of the high-speed, high technology competition that we provide. These values can be used to add new values and points of difference to each sponsor's brands. Companies negotiate sponsorship arrangements based on factors including a series' or event's audience size, spectator demographics and a team's racing success. TRACK OWNERS/RACE PROMOTERS. Race promoters, which include track owners, government organizations and other groups, pay a fee to have an event sanctioned at their race venue. Race promoters are responsible for the local marketing and promotion of the event. Their revenue sources generally include: o admissions o sponsorships o corporate hospitality (suites, chalets and tents for race viewing and other amenities) o advertising o concessions and souvenir sales DRIVERS. A majority of drivers contract independently with team owners, while select drivers own their own teams. Principally, drivers receive income from contracts with team owners, sponsorship fees and prize money. Successful drivers may also receive income from personal endorsement fees, sales of licensed merchandise and souvenir sales. The personality and success of a driver can be an important marketing advantage for the sanctioning body and team owners, because it can help attract audiences, corporate sponsorships and generate sales for licensed merchandise. TEAM OWNERS. In most instances, team owners underwrite the financial risk of placing their teams in competition. They contract with drivers, acquire racing vehicles and support equipment, employ pit crews and mechanics and syndicate sponsorship of their teams. Team owners generally receive income primarily from sponsorships and a percentage of prize money won. SANCTIONING BODIES. Sanctioning bodies such as us sanction events at various race venues in exchange for fees from race promoters. Sanctioning bodies are responsible for all aspects of race management necessary to "manufacture" the race event. They are responsible for presenting racing cars, drivers, and teams and providing race officials to ensure fair competition, as well as providing the race and series' purses and other prize payments. The Federation Internationale de l'Automobile (the "FIA"), based in Paris, France, is the worldwide governing body for auto racing, with "national sporting authority" members in more than 100 countries. The FIA's United States national sporting authority is the Automobile Competition Committee of the United States (ACCUS). It in turn is made up of seven member-sanctioning organizations: o CART o NASCAR o United States Auto Club ("USAC") o Professional Sports Car Racing ("PSCR") 8 9 o National Hot Rod Association ("NHRA") o Sports Car Club of America ("SCCA") o Indy Racing League ("IRL") GROWTH STRATEGY Our growth strategy is to increase revenues and net income by expanding the worldwide audience for CART racing. We intend to build brand awareness by capitalizing on the thrill and excitement of CART racing as well as our position as a premier open-wheel racing series. We believe that these factors will provide us with opportunities for increased overall: o sanction fees o corporate sponsorship fees o television revenues o royalties We intend to implement our growth strategy by: o INCREASING MARKET PENETRATION IN THE UNITED STATES. We will continue to develop our race schedule in key markets in the United States. As part of our plan, we will sanction a race in Chicago, Illinois during the 1999 season. Because our races are conducted on superspeedways, ovals, temporary street courses and permanent road courses, we believe we have great flexibility in selecting future race venues. o EXPAND INTERNATIONAL AUDIENCE. We believe that the world market for motorsports is predisposed to CART's style of exciting, competitive, open-wheel racing. The CART Championship spanned five countries in four continents in 1998, with events in the United States, Canada, Australia, Brazil and Japan. We typically receive higher sanction fees from the race promoters of international race events. Our management continues to explore additional opportunities to export our high-value, American racing product throughout the world and to include more international-based sponsors for the CART Championship and our race teams. o EXPAND MEDIA EXPOSURE. We plan to expand our overall television presence on a worldwide basis. The acquisition of Indylights and the Atlantics series, plus the addition of a new race in Chicago, results in our company being the rights owner for over 85 hours of high quality motorsports programming. We intend to build the worldwide distribution base for all three race series in the future. In the United States, we will focus on improving our television ratings on both network and cable and on developing race programming focused on new audiences for the sport. We will continue to expand press coverage for all three series - an area where we achieved substantial growth in 1998. We will re-launch our successful web site CART.com. During 1998, we added E-Commerce and a business section to CART.com, and in 1999, we will re-launch the entire site with a new look and presentation that will increase the immersive experience for visitors. o INCREASE LICENSING OPPORTUNITIES. We will continue to seek out opportunities to bring our brand to a broader market. We can provide "one stop shopping" for potential licensees for our servicemarks and trademarks, as well as for participating race teams, drivers and tracks. This integrated approach allows licensees and retailers to work with a 9 10 single licensing entity rather than negotiating with the fragmented licensing environment found in other sports. o ACQUIRE AND DEVELOP RELATED BUSINESSES AND PROPERTIES. We will selectively pursue opportunities to acquire and apply our brand name to other race-related businesses and properties. We expect to vertically integrate certain support-racing series to develop future racing talent in the United States. We are also seeking opportunities to acquire and develop race experience products which will provide potential and existing race fans with an affordable and accessible opportunity to experience the sport. These may include opportunities such as: - Simulation or virtual reality products - Indoor kart racing centers - Race schools As the first step in this strategy, in 1998 we acquired American Racing Series ("ARS"), which operates Indy Lights, and BP Automotive ("BP"), which provides certain equipment to the participants of Indy Lights, as well as Pro-Motion Agency which operates the Atlantic Championship series. THE CART ADVANTAGE The drivers, cars, venues and fans provide us with a world class product for audiences and sponsors. THE DRIVERS. The diversity of our drivers adds to our worldwide appeal. In 1998, 24 of the 34 drivers who competed in at least one of our race events were born outside of the United States. In total, these drivers represented 11 different countries. THE CARS. The cars are developed by a variety of different chassis manufacturers: o Reynard o Swift o Eagle o Lola o Penske These high-tech racecars are powered by state-of-the-art engines from: o Mercedes-Benz o Honda o Ford o Toyota The cars ride on tires provided by Firestone and Goodyear. THE VENUES. CART races are conducted on four different types of tracks: o superspeedways o ovals o temporary street courses o permanent road courses 10 11 The variety of tracks require different set-ups for chassis, engines and tires, requiring drivers and teams to adapt to the various courses. THE FANS. The primary means for a fan to interface with the CART Championship is through direct attendance at events or by television viewership. Our spectators are demographically attractive to sponsors and advertisers. They are generally young individuals with education and income levels above the U.S. national average. This makes sponsorship of CART, our teams and events an attractive advertising and promotional investment. Our television audience, while closer to the national average for household income, encompasses an above average proportion of males in the 25 to 54 age group. This is an attractive demographic for advertisers since this age group tends to watch less television than the average American. In the United States, CART's television ratings have declined in recent years and mirror the overall decline in television ratings for sports events in the United States. A positive factor going forward in 1999 is that CART will broadcast a record 13 of its 20 races via network television. The balance of the races can be viewed on ESPN. CART HISTORY CART-style, open-wheel racing stands as the longest continually scheduled major motorsports championship in the world, dating back to the early 1900s. The first American automobile race took place in 1895, and the American Automobile Association began sanctioning major races in 1904. The AAA sanctioned races through the 1955 season at which time USAC became the official sanctioning body. In the 1970s, race team owners became increasingly concerned about escalating costs, lack of promotional activities and concentration solely on the Indianapolis 500. As a result, in November 1978, a group of 18 of the 21 team owners left USAC to form CART and the CART Championship. The group included teams owners who desired greater participation in the rule-making and administrative processes concerning open-wheel racing in the United States. In its 1979 inaugural season, CART staged 13 races. PPG Industries became the title sponsor of our Championship late in that inaugural year, and we crowned Rick Mears as our first champion. Since Mears' victory in the inaugural season, CART has had many other memorable champions including: o Al Unser, Sr. o Johnny Rutherford o Mario Andretti o Danny Sullivan o Emerson Fittipaldi o Al Unser, Jr. o Michael Andretti o Bobby Rahal o Nigel Mansell o Jacques Villeneuve o Jimmy Vasser o Alex Zanardi Competitive, close racing is the hallmark of CART. In 1991, we had six different winners in the first six races. In 1993, we had six different race winners and 13 different podium finishers. The 1994 through 1998 race seasons were equally competitive. In 1998, we had seven different winners, including first-time victories in the CART Championship for Dario Franchitti and Bryan Herta. 11 12 Due to starting position reservations and changes to equipment specifications, CART teams have generally not competed in the Indianapolis 500 since 1995. Although the IRL removed starting position reservations after the 1997 Indianapolis 500, CART teams do not participate in the Indianapolis 500. We continue to evaluate opportunities for an accommodation with the Indianapolis Motor Speedway, but we can not assure you that a resolution will be reached or of the timing of any such resolution. We are unable to predict what effect, if any, the continued non-participation by CART teams at the Indianapolis 500 will have on our future results. Since 1995, we have added races in the United States in: o Homestead, Florida o Madison, Illinois o Fontana, California o Houston, Texas Internationally, we added a race in Rio de Janeiro, Brazil in 1996 and Motegi, Japan in 1998. We have scheduled a new race in Chicago, Illinois for 1999. In 1999, our races will serve the important United States markets of: o Miami o St. Louis o Los Angeles o Houston o Chicago In addition, a non-championship series event has been added to the 1999 schedule. The Hawaiian Super Prix will be held on the island of Oahu in November 1999. The Hawaiian Super Prix will feature the largest single-day payout in the history of motorsports, $10 million, with $5 million going to the winner. The top 12 finishers in the CART Championship, as well as four additional drivers to be selected by the promoter, will compete for this record payout. Showtime will provide television coverage on a pay-per-view basis in the United States. FRANCHISE SYSTEM AND RACE TEAMS We have operated CART as a "franchise system" since 1984. We offered franchises for each competing car, with owners limited to a maximum of two franchise memberships. The number of franchises we have awarded has varied, but we have never awarded more than 25 franchises. To become a CART franchise member, a race team must have competed in all CART events for the prior race year and be one of the 24 highest placed teams, based on points received from competition. The participation of race teams is critical to our ongoing success. Our franchise system is the only race governing system to offer teams direct input into race scheduling, rules and other racing activities. We believe that the franchise system is a significant factor in encouraging entities who are interested in auto racing to participate in our sanctioned events. Prior to our becoming a public company, CART, Inc. was managed by a board of directors composed of race team participants. We refer to this as the franchise board. Each franchise owner was entitled to designate a member to the franchise board. In addition, we paid certain benefits to franchise owners, including reimbursement of travel expenses on a per race basis, directors fees and other race-related expenses. The franchise and the stock were not transferable without the approval of the franchise board and were subject to redemption. 12 13 Following our initial public offering, we have continued the franchise system but without awarding any additional equity ownership in CART. Rather, the 24 race teams which have met participation requirements and have the highest total of points from the prior season are permitted to designate a member to the franchise board. The franchise board manages and oversees all racing-related activities and makes all decisions with respect to specifications for engines and chassis, race and venue participation, rules and related matters. INDY LIGHTS CHAMPIONSHIP On March 13, 1998, we acquired 100% of the outstanding common stock of ARS and certain assets of BP. ARS operates the Indy Lights Championship series and BP supplies certain equipment to the participants. CART racing team owner and founding member, U.E. "Pat" Patrick, formed the Indy Lights Championship in 1986 as a series in which team owners could discover and develop the next generation of CART talent. Mr. Patrick designed Indy Lights to emphasize driver and team talent, while reducing any advantage gained through large monetary expenditures for equipment and technology. By restricting competition to a single chassis design, powered by identical, sealed engines and running a single brand of tires, Indy Lights offers a series in which costs can be carefully controlled, creating a level playing field for drivers, team managers and engineers. We have designated the Indy Lights Championship the "Official Development Series of the CART Championship," and we sanction its race events. During the 1998 season, a record nine different drivers, representing seven different race teams and six different countries, won races, making 1998 one of the most competitive seasons in the series' history. During 1998, the series had a total of 32 drivers, representing 13 countries, competing in at least one race in the Indy Lights Championship. Graduates from the Indy Lights Championship who have competed in the CART Championship include drivers: o Paul Tracy o Bryan Herta o Greg Moore o Andre Ribeiro o Adrian Fernandez o Tony Kanaan o Helio Castro-Neves o Cristiano da Matta o Naoki Hattori o Shigeaki Hattori In 1998, four CART team owners, Steve Horne (Tasman Motorsports Group), Bruce McCaw (PacWest Racing), Barry Green (Team KOOL Green) and Bobby Rahal (Team Rahal), also had teams competing in the Indy Lights Championship. Similar to the CART Championship, we stage the Indy Lights Championship races on four different types of tracks. At certain venues we receive a sanction fee from the promoter for staging the Indy Lights event. We believe that the Indy Lights Championship can create significant revenue growth for us through: o packaged sponsorships with our other race series o extending our efforts to integrate category sponsorship o additional sanction fees for "stand alone" Indy Lights events, both in the United States and overseas 13 14 With the growth and popularity of the series, we believe that Indy Lights will play a significant role in our future revenue growth. ATLANTIC CHAMPIONSHIP On April 10, 1998, we acquired 100% of the outstanding common stock of Pro-Motion Agency. Pro-Motion Agency operates the Atlantic Championship open-wheel series, a support series to CART. The Atlantic Championship has a rich history of providing a stepping stone to a career in international motorsports competition. Graduates from the Atlantic Championship and its predecessors include drivers: o Bobby Rahal o Jimmy Vasser o Michael Andretti o Richie Hearn o Patrick Carpentier o Alex Barron In 1989, Toyota Motor Sales, USA joined the series as title sponsor, creating the Toyota Atlantic Championship. With the introduction of the race-tuned Toyota 4A-GE engine, Toyota along with their partner, TRD, USA, Inc. set the standard for Atlantic competition worldwide. The Yokohama Tire Corporation also joined the series in 1989 as an associate sponsor and tire supplier to the series. In 1997, KOOL entered the series as co-title sponsor with Toyota. SANCTION FEES For each race in the CART Championship, we enter into a multi-year sanction agreement with the promoter, which provides for payment of a sanction fee to CART. For the year ended December 31, 1997, promoters paid us sanction fees of approximately $24.2 million, averaging $1.4 million per event and representing approximately 59% of our total revenues. For the year ended December 31, 1998, promoters paid us sanction fees of approximately $30.4 million, an average of $1.6 million per event, representing approximately 49% of our revenues. International events typically have higher sanction fees than events in North America. So, as we have expanded internationally, our average sanction fee has increased. Additionally, as we grow our sport, the opportunity to grow our sanction fees may rise both by increases in sanction fees to reflect increased value and by the inclusion of new international and domestic race venues. We also believe that the popularity of the CART Championship will provide additional domestic and international race venues willing to pay sanction fees higher than our current average sanction fee. RACING EVENTS When staging a CART event, we provide all aspects of race management necessary to "manufacture" the race event, including the required expertise and personnel. We provide these race management services to track promoters in exchange for the sanction fee. As competition, support and interest in the CART Championship have increased, we have increased the number of events we stage each race season. The 1979 CART Championship was comprised of 13 race events. In 1998, we managed 19 races - 14 in the United States, two in Canada and one each in Australia, Brazil and Japan. These races included: 14 15 o two superspeedway races o six oval races o seven temporary street course races o four permanent road course races The 1999 CART Championship will be comprised of 20 races in five different countries. In 1999, we will stage a new race in Chicago, Illinois on a one-mile oval at the Chicago Motor Speedway. In 1998, the Indy Lights Championship was comprised of 14 races. Of the 14 races, 13 were held in conjunction with CART events, and one race was a "stand alone" event. In 1999, the Indy Lights Championship will include 12 races, all held in conjunction with CART events. In 1998, the Atlantic Championship was comprised of 13 races. Of the 13 races, 11 were held in conjunction with CART events and two were "stand alone" events. In 1999, the Atlantic Championship will consist of 12 races, two of which will be "stand alone" events. 15 16 In the following table, we have provided the locations and venues for the 1999 CART Championship, Indy Lights Championship and Atlantic Championship, as well as the event dates for the 1999 seasons and a description of the racing circuit:
CART INDY EVENT DATES LIGHTS ATLANTIC LOCATION 1999 RACE RACE TRACK DESCRIPTION -------- ---- ---- ---- ----------------- Homestead, Florida 3/21 Yes No 1.5 mile oval Metro-Dade Homestead Motorsports Complex Motegi, Japan 4/10 No No 1.5 mile oval Twin Ring Long Beach, California 4/18 Yes Yes 1.6 mile temporary street course Long Beach Nazareth, Pennsylvania 5/2 Yes Yes 1.0 mile tri-oval Nazareth Speedway Rio de Janeiro, Brazil 5/15 No No 1.8 mile oval Emerson Fittipaldi Speedway at Nelson Piquet International Raceway Madison, Illinois 5/29 No Yes 1.3 mile banked oval Gateway International Raceway West Allis, Wisconsin 6/6 Yes Yes 1.0 mile oval The Milwaukee Mile Portland, Oregon 6/20 Yes No 2.0 mile permanent road course Portland International Raceway Cleveland, Ohio 6/27 Yes No 2.4 mile temporary street course Burke Lakefront Airport Elkhart, Wisconsin 7/11 No Yes 4.0 mile permanent road course Road America Toronto, Ontario, Canada 7/18 Yes No 1.8 mile temporary street course Toronto Brooklyn, Michigan 7/25 Yes No 2.0 mile tri-oval superspeedway Michigan International Speedway Detroit, Michigan 8/8 Yes No 2.1 mile temporary street course The Raceway on Belle Isle Lexington, Ohio 8/15 No Yes 2.3 permanent road course Mid-Ohio Sports Car Course Chicago, Illinois (1) 8/22 Yes Yes 1.0 mile oval Chicago Motor Speedway Vancouver, British Columbia, Canada 9/5 No Yes 1.7 mile temporary street course Vancouver Monterey, California 9/12 Yes Yes 2.2 mile permanent road course Laguna Seca Raceway Houston, Texas 9/26 No Yes 1.7 mile temporary street course Houston Gold Coast, Queensland, Australia 10/17 No No 2.8 mile temporary street course Surfers Paradise, Queensland Fontana, California 10/31 Yes No 2.0 mile banked oval superspeedway California Speedway Montreal, Quebec, Canada (6/12) -- -- Yes 2.7 mile temporary street course Gilles-Villeneuve Circut Trois-Rivieres, Quebec, Canada (8/1) -- -- Yes 2.1 mile temporary street course Trois-Rivieres
(1) Added to race schedule for 1999. 16 17 A post-season invitational event will be held in Hawaii on November 13, 1999. The Hawaiian Super Prix is not part of the Championship series. The event is open to the top 12 finishers of the CART Championship, as well as 4 additional drivers to be selected by the promoter. The Hawaiian Super Prix will be held at Barbers Point Airport, outside of Honolulu, on the island of Oahu. DRIVERS During the 1998 season, 34 drivers competed in at least one of the CART race events, including past champions: o Michael Andretti o Bobby Rahal o Al Unser, Jr. o Jimmy Vasser o Alex Zanardi In the following table, we have provided information regarding each of the drivers who are expected to participate in the 1999 CART Championship:
DRIVER BIRTH PLACE 1999 RACE TEAM - ------ ----------- ---------------- MICHAEL ANDRETTI* Bethlehem, Pennsylvania Newman/Haas Racing Alex Barron San Diego, California All American Racers Mark Blundell Barnet, Hertforshire, England PacWest Racing Group Raul Roesel Curitiba, Brazil Team KOOL Green Patrick Carpentier Ville Lasalle, Quebec, Canada Player's Forsythe Racing Helio Castro-Neves Sao Paulo, Brazil Hogan Racing Cristiano da Matta Bela Harizonte, Brazil Arciero-Wells Racing Gil de Ferran Paris, France Walker Racing Adrian Fernandez Mexico City, Mexico Patrick Racing Christian Fittipaldi Sao Paulo, Brazil Newman/Haas Racing Dario Franchitti Edinburgh, Scotland Team KOOL Green Robby Gordon Cerritos, California Team Gordon Mauricio Gugelmin Joinville, Brazil PacWest Racing Group Naoki Hattori Mie Presecture, Japan Walker Racing Shigeaki Hattori Okayma, Japan Bettenhausen Motorsports Richie Hearn Glendale, California Della Penna Motorsports Bryan Herta Warren, Michigan Team Rahal PJ Jones Torrance, California Patrick Racing Michel Jourdain, Jr. Mexico City, Mexico Payton/Coyne Racing Tony Kanaan Salvador, Bahia, Brazil Forsythe Championship Racing Tarso Marques Curitiba, Brazil Payton/Coyne Racing Hidishi Matsuda Kochi-ken, Japan Della Penna Motorsports Juan Montoya Bogota, Columbia Target/Chip Ganassi Racing Greg Moore British Columbia, Canada Player's Forsythe Racing Max Papis Como, Italy Team Rahal Scott Pruett Sacramento, California Arciero-Wells Racing Andre Ribeiro Sao Paulo, Brazil Marlboro Team Penske Paul Tracy Scarborough, Ontario, Canada Team KOOL Green AL UNSER JR.* Albuquerque, New Mexico Marlboro Team Penske JIMMY VASSER* Canoga Park, California Target/Chip Ganassi Racing Dennis Vitolo Massapequa, New York Payton/Coyne Racing
* Indicates past champion of the CART Championship. 17 18 CORPORATE SPONSORS We receive sponsorship revenues pursuant to sponsorship contracts. In exchange for sponsorship revenues, we provide our sponsors the opportunity to receive brand and product exposure. For the year ended December 31, 1997, we received sponsorship revenues of approximately $7.2 million, representing approximately 17% of our total revenues. For the year ended December 31, 1998, we received sponsorship revenues of approximately $16.4 million, representing approximately 26% of our total revenues. We believe that as we expand the audience for our events, we will see a corresponding increase in sponsorship opportunities and sponsorship revenues. In addition, we have taken a different approach to selling sponsorship from other motorsports organizations by integrating the rights of the sanctioning body and the race tracks. This approach provides series-wide exclusivity and a centralized sponsorship program which increases the value and appeal of the sponsorship opportunity. MCI was the first such integrated sponsor, becoming the Official Communications Company in 1997. Federal Express also became an integrated sponsor as our official co-series sponsor in 1998. Beginning with the 1998 race season, Federal Express became the co-series sponsor of the CART Championship, which has been officially designated the "FedEx Championship Series." Under our agreement, Federal Express acquired a comprehensive range of marketing benefits, as well as opportunities to supply services to CART, our teams and our race promoters. A significant feature of this sponsorship arrangement is the combination of the marketing rights of both CART and our race promoters to provide an exclusive sponsorship involvement through the entire CART Championship. PPG Industries, our long-time title sponsor, continues to be involved as a co-series sponsor of the series and continues to be the name sponsor of the CART Championship winner's trophy--the "PPG Cup." PPG also continues with its successful pace car program at each race event. In June 1998, we entered into a nine-year agreement with ISL Worldwide. Under the agreement, we appointed ISL as our exclusive worldwide marketing agent for the sale of all sponsorships of our open wheel racing series, including: o the CART Championship o the Indy Lights Championship o the Atlantic Championship We have listed below some of our most significant sponsors for the 1999 CART Championship:
YEARS AS SPONSOR OFFICIAL DESIGNATION SPONSOR - ------- -------------------- --------- Federal Express Official Co-Series Sponsor 1 PPG Industries Official Co-Series Sponsor 19 MCI Telecommunications Official Communications Company 2 Budweiser Official Beer 4 Craftsman Tools Official Hand Tools 4 Featherlite Trailers and Vantare Coach Official Trailer and Coach 4 Ford SVO Technology Official Safety Technology Provider 2 Holmatro Official Rescue Tool Official Rescue Tool 7 Honda Motorcycles Official Motorcycle 3 Honda Power Equipment Official Power Equipment 3
18 19
K&K Insurance Official Insurance Provider 5 Mercedes-Benz Official Car 4 Racing Radios Official Two-Way Radio 9 Omega Official Watch and Timekeeper 2 Toyota Trucks Official Truck 3 The Valvoline Company Official Fuel and Oil 19
In addition to the sponsors listed above, we have entered into various sponsorship agreements with other companies which supply us with products and services. Official sponsors of the CART Championship pay money and provide products and services to us in return for being designated as an official sponsor. The payment obligations, as well as the amount of advertising exposure and other benefits, vary significantly among sponsors based on the negotiated terms of each sponsorship agreement. No sponsorship agreement provided more than 10% of our revenues during 1996, 1997 or 1998. ATTENDANCE, VIEWERSHIP AND BROADCAST RIGHTS ATTENDANCE. CART spectator attendance has grown dramatically in the 1990s, with more than a 40% increase from 1991 to 1998, based upon figures compiled by Goodyear Tire & Rubber Co. Race Reports. Average attendance per event declined in 1998 due in large part to the number of races effected by adverse weather conditions. In the following table, we have provided attendance information for CART events, based upon the Goodyear Race Reports. The figures do not include attendance at the Indianapolis 500, which was not a CART-sanctioned event.
1991 1992 1993 1994 1995 1996 1997 1998 ---- ---- ---- ---- ---- ---- ---- ---- Total Attendance at CART Events 1,803,601 1,890,327 1,964,180 2,015,417 2,259,751 2,366,440 2,491,050 2,529,995 Number of Race Events 16 15 15 15 16 16 17 19 Average Attendance per Event 112,725 126,022 130,945 134,361 141,234 147,902 146,532 133,158 Total Attendance Percentage Change 0.1% 4.8% 3.9% 2.6% 12.1% 4.7% 5.3% 1.6%
VIEWERSHIP. In addition to the spectators at our race events, millions of people around the world watch CART racing on television. According to the Nielsen Season Summary for 1998, an aggregate of 23.9 million gross United States households were delivered for the CART races, with gross United States viewership of approximately 31.5 million. Our races are televised in 195 countries and territories through terrestrial and satellite broadcasts, in 19 languages. Based upon an independent study conducted by Sponsorship Research International, the 1997 CART Championship had an average of 58 million viewers per race with cumulative worldwide viewership of 981.8 million. BROADCAST RIGHTS. In 1994, we entered into a long-term agreement with ESPN, which was amended in 1996 to extend through 2001. Under the agreement, ESPN provides broadcast coverage of each CART Championship race, with at least 50% of the races each year to be broadcast on one of the three major broadcast networks - ABC, CBS or NBC. In 1999, a record 13 races will be broadcast on network television. Our agreement with ESPN states that we receive 50% of the net profits received by ESPN for distribution of the race programs, with an escalating minimum guarantee provision. We retained the television rights for Brazil, Canada and Australia. We entered into exclusive agreements with: 19 20 o Fittipaldi U.S.A., Inc. to provide television broadcasts in Brazil of our race events through the 2002 race season o Molstar for the distribution of television broadcasts in Canada through the 2001 race season o Gold Coast Motor Events for the distribution of television broadcasts in Australia through the 2000 race season None of these three agreements represent a material amount of revenue for us. CART LICENSED PRODUCTS As a part of our initiative to increase CART's brand awareness and increase licensing opportunities, we formed CART Licensed Products, L.P. ("CLP") in 1996. CLP is a Georgia limited partnership. We own a 55% interest in CLP. The remaining 45% interest is owned by Top Gear, Inc., a company owned by Mr. Robert E. Hollander, who until January 1999 was president of CLP. We have a right to acquire Top Gear's ownership interest and are currently negotiating with Mr. Hollander to do so. CLP pays approximately 60% of the royalties it receives to the owners of the licensed property, including CART. The remaining 40% of revenues are used to fund the operations of CLP. CLP has executed licensing agreements with 36 companies including: o Action Performance o Microsoft o Sony o Sega o Antigua o Warner Brothers o VIA Marketing None of the licensing agreements are material to our financial results. COMPETITION Our racing events compete not only with other sports and recreational events scheduled on the same dates, but also with racing events sanctioned by various other racing bodies such as the: o Federation Internationale de L'Automobile o National Association for Stock Car Auto Racing o Indy Racing League o United States Auto Club o National Hot Rod Association o Sports Car Club of America o Professional Sports Car Racing o Automobile Racing Club of America Racing events sanctioned by other organizations are often held on the same dates as CART events, at separate tracks, and compete for corporate sponsorship, attendance as well as television viewership. In addition, we compete with other racing bodies to sanction racing events at various motorsports facilities. We believe that our events are distinguished from the racing events staged by other racing bodies by: 20 21 o the quality of the competition o caliber of the events o drivers and team owners participating in CART o speed of the cars We receive numerous requests to sanction racing events at venues throughout the world. However, we can not assure you that we will maintain or improve our position in light of such competition. EMPLOYEES As of December 31, 1998, we had 79 full-time employees and a roster of approximately 101 people who serve as race officials and 204 volunteers for CART events. None of our employees are represented by a labor union. We believe that we enjoy a good relationship with our employees. PATENTS AND TRADEMARKS We have various registered and common law trademark rights to "CART" and related logos. We have licenses from various drivers, teams, tracks and industry sponsors to use names and logos for merchandising programs and product sales. Our policy is to vigorously protect our intellectual property rights to maintain our proprietary value in merchandise and promotional sales. ITEM 2: PROPERTIES We lease our buildings in Troy, Michigan; Atlanta, Georgia; and Highland Park, Illinois. We do not own any real property. Our leases are through the following dates: o Michigan, May 31, 2002 o Georgia, December 31, 2002 o Illinois, May 31, 2000 Our lease payments have no material effect on our consolidated financial statements. We believe the leased space is adequate for our present needs. ITEM 3: LEGAL PROCEEDINGS Racing events can be dangerous to participants and spectators. During a CART race at the Michigan Speedway in July 1998, a racecar was involved in a racing incident that propelled tire and suspension parts into the grandstands. Three spectators were killed and six other people reported minor injuries. No claims have been made against CART, and we do not believe that we are liable for this incident. We require each promoter to indemnify us against any liability for personal injuries sustained at such promoter's racing event. In addition, we require each promoter to carry a minimum of $10.0 million ($20.0 million in 1999) in liability insurance, naming us as a named insured. We also maintain a $15.0 million umbrella policy. However, we cannot assure you that a claim will not be made against us or, if a claim is made, what the outcome of any such claim will be. We cannot assure you that the promoter will have liquid assets to satisfy any indemnification requirement. Any claims and associated expenses related to this incident (or future racing incidents), to the extent not covered by insurance or satisfied by indemnification from the promoter, could adversely affect our financial and business results. 21 22 ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None PART II ITEM 5: MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Our common stock is authorized for trading on the New York Stock Exchange under the trading symbol "MPH". As of March 1999, we had 15,171,666 shares of common stock outstanding and approximately 305 record holders of our common stock. In the following table we have provided the high and low closing sales price for our common stock, as reported by the NYSE for each calendar quarter of 1998.
1998 QUARTER ENDED HIGH LOW - ------------------------------------------------------------------------------------------------ First Quarter (from IPO on March 9 to March 31) $19.9375 $18.2500 Second Quarter (June 30) 21.3125 16.5625 Third Quarter (September 30) 24.4375 19.1875 Fourth Quarter (December 31) 29.6250 21.0000
We have not declared or paid any dividends on our common stock to date, and we do not intend to pay dividends in the foreseeable future. In March 1998, we completed our initial public offering of 5,038,000 shares of common stock. The principal underwriters for the initial public offering were Jefferies & Company, Inc. and A.G. Edwards & Sons, Inc. The initial public offering price was $16 per share. The total offering raised $80.6 million less $5.6 million in underwriting discounts. We used a portion of the net proceeds to acquire ARS and BP for $7.0 million. We acquired Pro-Motion Agency for $534,000. We paid $9.5 million in accrued point awards to franchise race teams for 1997. The remaining proceeds of $58 million are in short-term, interest-bearing investments that are being used for working capital and general corporate purposes, including expanding our business, through acquisition or development of race related businesses and properties. The effective date of our registration statement was March 9, 1998 and our registration number was 333-43141. 22 23 ITEM 6: SELECTED CONSOLIDATED FINANCIAL DATA The following selected consolidated financial data as of and for the three years ended December 31, 1998 are derived from our consolidated financial statements which have been audited by our independent auditors, Deloitte & Touche LLP. The financial statements for the two years ended December 31, 1995 are derived from our audited financial statements. The selected consolidated financial data below should be read in combination with our consolidated financial statements and related notes contained elsewhere in this document and "Management's Discussion and Analysis of Financial Condition and Results of Operations."
YEAR ENDED DECEMBER 31, 1994 1995 1996 1997 1998 ---- ---- ---- ---- ---- (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) STATEMENT OF OPERATIONS: Revenues: Sanction fees $16,299 $18,708 $21,078 $ 24,248 $30,444 U.S. 500(1) -- -- 7,054 -- -- Sponsorship revenue 4,104 4,780 5,501 7,221 16,388 Television revenue 2,343 3,177 4,373 5,604 5,148 Engine leases, rebuilds and wheel sales -- -- -- -- 2,214 Other revenue 2,229 3,077 3,118 4,372 8,336 ------- ------- ------- -------- ------- Total revenues 24,975 29,742 41,124 41,445 62,530 Expenses: Race and franchise fund payments(2) 18,305 18,446 17,198 28,939 15,183 U.S. 500(1) -- -- 8,246 -- -- Race expenses(2) 2,621 4,612 6,055 6,970 4,818 Costs of engine rebuilds and wheel sales -- -- -- -- 633 Administrative and indirect expenses(2)(3) 3,977 5,832 8,570 14,295 20,658 Compensation expense(4) -- -- 1,167 12,200 -- Depreciation and amortization 202 306 685 549 779 Minority interest -- -- -- (232) -- ------- ------- ------- -------- ------- Total expenses 25,105 29,196 41,921 62,721 42,071 ------- ------- ------- -------- ------- Operating income (loss) (130) 546 (797) (21,276) 20,459 Interest income (net) 212 235 280 329 3,198 ------- ------- ------- -------- ------- Income (loss) before income taxes 82 781 (517) (20,947) 23,657 Income tax benefit (expense) 344 204 179 3,423 (8,568) ------- ------- ------- -------- ------- Net income (loss) $ 426 $ 985 $ (338) $(17,524) $15,089 ======= ======= ======= ======== ======= Net Income (loss) per share: Basic $ .04 $ .10 $ (.04) $ (1.72) $ 1.06 ======= ======= ======= ======== ======= Diluted $ .04 $ .10 $ (.04) $ (1.72) $ 1.05 ======= ======= ======= ======== ======= Weighted average common shares outstanding: Basic 10,200 10,200 9,400 10,200 14,190 ======= ======= ======= ======== ======= Diluted 10,200 10,200 9,400 10,200 14,421 ======= ======= ======= ======== ======= BALANCE SHEET DATA: Cash and cash equivalents $ 1,393 $ 2,046 $ 630 $ 1,164 $15,080 Short-term investments -- -- -- -- 61,610 Working capital (deficit) (209) (1,182) (524) (5,325) 72,219 Total assets 2,974 5,613 6,600 12,348 97,186
23 24 Long-term debt (including current portion) -- -- 574 444 314 Total stockholders' equity (deficit) (1,875) (1,250) (151) (3,045) 86,219
(1) In 1996, we staged and acted as promoter of the inaugural U.S. 500. Revenues attributable to the U.S. 500 included sponsorship fees, television, admissions, program sales and other revenues associated with promoting the event. Expenses included, among others, the race purse, track rental, promotional and advertising costs and other expenses necessary to promote the event. We continue to sanction the event, but since 1996 we have not acted as the promoter. (2) Expenses for the years ended December 31, 1994, 1995, 1996 and 1997 include certain payments to franchise race teams, including reimbursement of travel expenses, director fees, purse awards and other race related payments. Effective January 1, 1998, we no longer reimburse the existing franchise race teams for travel expenses, directors fees and race-related payments. We do not intend to resume making such payments to franchise race teams unless we receive additional revenue that was not contracted for at the end of 1997. We do not believe that revenues will be materially impacted as a result of our potential inability to retain existing or new race teams due to the discontinuation of such payments. (3) Administrative and indirect expenses for 1997 include $4,817,000 in additional advertising, marketing and market research expenses incurred in connection with the implementation of our growth strategy. (4) Total expenses for the year ended December 31, 1996 and 1997 include compensation expense of $1,167,000 and $12,200,000 which relates to the issuance of Common Stock to franchise members below its fair value on the date the Common Stock became eligible for purchase. You should read "Management's Discussion and Analysis of Financial Condition and Results of Operations," for a discussion of this compensation expense. 24 25 ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS As you read the following, you should also refer to the consolidated financial statements and related notes as well as Item 6, "Selected Consolidated Financial Data." GENERAL In December 1997, as part of our reorganization, each stockholder of CART, Inc. exchanged their shares for stock of the Company. Prior to our reorganization, the franchise race teams received reimbursement of travel expenses, directors fees and franchise payments in an aggregate amount equal to $8.5 million and $19.4 million for the years ended December 31, 1996 and 1997, respectively. The franchise teams signed an agreement on December 19, 1997 to discontinue these payments after January 1, 1998. The agreement will expire in December 2000. This agreement is a related party transaction because each franchise team owns shares of our stock. We do not intend to resume making such payments to franchise race teams unless we receive additional revenue that was not contracted for at the end of 1997. Below are selected income and expense items for the years ended December 31, 1996, 1997 and 1998. The percentage calculations are based on total revenues.
YEAR ENDED DECEMBER 31, 1996 1997 1998 ---- ---- ---- (DOLLARS IN THOUSANDS) Revenues: Sanction fees $21,078 51.3% $ 24,248 58.5% $30,444 48.7% U.S. 500(1) 7,054 17.1 -- -- -- -- Sponsorship revenue 5,501 13.4 7,221 17.4 16,388 26.2 Television revenue 4,373 10.6 5,604 13.5 5,148 8.2 Engine leases, rebuilds, and wheel sales -- -- -- -- 2,214 3.6 Other revenue 3,118 7.6 4,372 10.6 8,336 13.3 ------- ----- -------- ----- ------- ----- Total revenues $41,124 100.0% $ 41,445 100.0% $62,530 100.0% ======= ===== ======== ===== ======= ===== Expenses: Race and franchise fund payments(2) $17,198 41.8% $ 28,939 69.8% $15,183 24.3% U.S. 500(1) 8,246 20.1 -- -- -- -- Race expenses(2) 6,055 14.7 6,970 16.8 4,818 7.7 Cost of engine rebuilds and wheel sales -- -- -- -- 633 1.0 Compensation expense 1,167 2.8 12,200 29.4 -- -- Administrative and other indirect expenses(2) 8,570 20.8 14,295 34.5 20,658 33.0 Depreciation and amortization 685 1.7 549 1.3 779 1.3 Minority interest in loss of subsidiaries -- -- (232) (0.5) -- -- ------- ----- -------- ----- ------- ----- Total expenses 41,921 101.9 62,721 151.3 42,071 67.3 ------- ----- -------- ----- ------- ----- Operating income (loss) (797) (1.9) (21,276) (51.3) 20,459 32.7 Interest income (net) 280 0.7 329 0.8 3,198 5.1 ------- ----- -------- ----- ------- ----- Income (loss) before income taxes (517) (1.2) (20,947) (50.5) 23,657 37.8 Income tax benefit (expense) 179 0.4 3,423 8.3 (8,568) (13.7) ------- ----- -------- ----- ------- ----- Net income (loss) $ (338) (0.8)% $(17,524) (42.2)% $15,089 24.1% ======= ===== ======== ===== ======= =====
(1) Our promotion of the U.S. 500 was a one-time event, and although we continue to sanction the event, we no longer act as the promoter. (2) Race expenses for 1996 and 1997 include our payments to franchise teams as explained above. 25 26 REVENUES Following is an explanation of our individual revenue items: SANCTION FEES. We receive sanction fees from the promoters of each of the races on the CART Championship schedule, as well as from selected races on the Indy Lights and Atlantics schedule. The fees are based on contracts between the promoters and CART. The contracts have terms which expire between 1999 and 2005. Currently contracted sanction fees range from $977,500 to $4.5 million per event. U.S. 500. In 1996, due to the reservation of starting positions at the Indianapolis 500 for IRL competitors, we promoted and sanctioned the inaugural U.S. 500 at Michigan International Speedway on May 26. Because we promoted the event, we did not receive sanction fee revenue from the event but did receive revenue from admissions, hospitality, television, sponsorship and licensing. Our promotion of the U.S. 500 was a one-time event, and though we continue to sanction the event, we do not anticipate acting as the promoter of the U.S. 500 in the future. SPONSORSHIP REVENUE. We receive corporate sponsorship revenue based on negotiated contracts. We currently have corporate sponsorship contracts with 15 major manufacturing and consumer products companies. The remaining terms of these contracts range from one to three years. An official corporate sponsor receives status and recognition rights, event rights and product category exclusivity. TELEVISION REVENUE. Our television revenue is derived from negotiated contracts with: o ESPN o ESPN International o Fittipaldi USA (Brazil) o Gold Coast Motor Events Co. (Australia) o Molstar (Canada) A guaranteed rights fee is paid to us by each broadcast partner. Based on our contract with ESPN/ESPN International, we receive 50% of the net profits received by ESPN for distribution of the race programs, with an escalating minimum guarantee provision. A provision of the ESPN contract requires that at least 50% of the CART Championship events be broadcast on a major broadcasting network in the United States. In 1996, 1997 and 1998, all CART Championship races were broadcast on either ABC or ESPN. In addition, CART Championship races are re-aired on ESPN and ESPN2. ESPN2 also broadcasts CART Championship qualifying sessions and pre-race shows. In addition, we receive advertising revenue from "Inside CART," our race magazine television show, and from video footage sales. ENGINE LEASES, REBUILDS AND WHEEL SALES. In March 1998, we purchased all of the stock of the American Racing Series, which operates the Indy Lights Series. ARS owns the engines that are used in the series and leases the engines to the competitors for the season. The teams pay us a fee to rebuild the engines. We also sell the wheels used on the race cars. Based on the rules of the series, all teams are required to use our engines and wheels. OTHER REVENUE. Other revenue includes membership and entry fees, contingency awards money, royalties, commissions and other miscellaneous revenue items. Membership and entry fees are payable on an annual basis by CART, Indy Lights and Atlantics Championship competitors. In addition, we charge fees to competitors for credentials for all team participants and driver license fees for all drivers competing in the series. We pay contingency awards money to competitors upon satisfaction of specific criteria. We receive royalty revenue for the use of the CART 26 27 servicemarks and trademarks on licensed merchandise that is sold both at tracks and at off-track sites. We receive commission income from the sale of chassis and parts to our support series teams. EXPENSES Following is an explanation of the expense line items. For an explanation of certain expenses discontinued in connection with our reorganization, you should read "Business--Franchise System and Race Teams." RACE AND FRANCHISE FUND PAYMENTS. We pay the racing teams for their on-track performance. Race and franchise fund payments include the following for each event: o fixed franchise fund payment to each franchise competitor o event purse which is paid based on finishing position o contingency award payments We also pay awards to the teams based on their cumulative performance for the season, out of the year-end point fund. After our reorganization, franchise fund payments were discontinued. We do not intend to resume making such payments to franchise race teams unless we receive additional revenue that was not contracted for at the end of 1997. U.S. 500. In addition to the race purse, expenses for the U.S. 500 in 1996 included: o sales costs related to the sale of sponsorships o track rental expenses o compensation expenses related to contract staff o promotional and advertising costs o administrative expenses incurred solely with respect to the U.S. 500 event RACE EXPENSES. We are responsible for officiating and administering all of our events. Costs primarily include officiating fees, travel, per diem and lodging expenses for the following officiating groups: o safety o technical inspection o race officiating and rules compliance o medical services o timing and scoring audit o registration o race administration Prior to our reorganization, each franchise race team was paid a travel fee to attend and participate in each event. These payments were discontinued after January 1, 1998. Overseas event organizers are responsible for costs related to cargo, air passenger travel and lodging for our staff and race participants. COST OF ENGINE REBUILDS AND WHEEL SALES. These costs are associated with rebuilding the engines and the cost of the wheels used in the Indy Lights series. ADMINISTRATIVE AND INDIRECT EXPENSES. All operating costs not directly incurred for a specific event, primarily wages, Board of Directors fees and other administrative expenses, are recorded as administrative and indirect expenses. 27 28 RESULTS OF OPERATIONS Year Ended December 31, 1998 Compared to Year Ended December 31, 1997 REVENUES. Total revenues for 1998 were $62.5 million, an increase of $21.1 million from 1997. This was due to increased sanction fees, sponsorship, engine leases, rebuilds and wheel sales and other revenue as described below, partially offset by a reduction in television revenue as described below. Sanction fees for 1998 were $30.4 million, an increase of $6.2 million, or 26%, from 1997. Of this increase, $5.0 million was attributable to the addition of new events in Motegi, Japan and Houston, Texas. The balance of the increase resulted from annual sanction fee escalation for certain other events of $1.2 million. Sponsorship revenue for 1998 was $16.4 million, an increase of $9.2 million, or 127%, from 1997. This increase was primarily attributable to a new sponsorship agreement entered into with Federal Express, an agreement with ISL Worldwide that guaranteed certain sponsorship income in 1998 and the additional sponsorship revenues attributable to the acquisition of ARS in March 1998 and Pro-Motion in April 1998. Television revenue for 1998 was $5.1 million, a decrease of $456,000, or 8%, from 1997. This decrease was due primarily to slightly lower revenues on the profit sharing portion on our contract with ESPN due to having two fewer network events in 1998. Engine leases, rebuilds and wheel sales for 1998 was $2.2 million. There was no corresponding revenue in the prior year as this revenue was earned by ARS, which was acquired in March 1998. Other revenue for 1998 was $8.3 million, an increase of $4.0 million, or 91%, from 1997. Of this increase, $2.0 million was attributable to an increase in membership and credential income, royalties and awards money. The balance of the increase was attributable to the acquisition of ARS in March 1998 and Pro-Motion in April 1998. EXPENSES. Total expenses for 1998 were $42.1 million, a decrease of $20.7 million, or 33%, from 1997. This decrease was due to lower race and franchise fund payments, race expenses and compensation expense as described below, partially offset by an increase in administrative and indirect expenses, and cost of engine rebuilds and wheel sales as described below. Race and franchise fund payments for 1998 were $15.2 million, a decrease of $13.8 million, or 48%, from 1997. This decrease was partially due to our reorganization that was effective January 1, 1998. In 1997, certain payments were made to franchise members that were discontinued for the 1998 season. The decrease was partially offset by two additional races being held in 1998 and by race distributions related to ARS and Pro-Motion that were not included in 1997 as these companies were acquired in 1998. Race expenses for 1998 were $4.8 million, a decrease of $2.2 million, or 31%, from 1997. This decrease is partially due to our reorganization that was effective January 1, 1998. In 1997, certain payments were made to franchise members that were discontinued for the 1998 season. The decrease was partially offset by two additional races being held in 1998 and by race expenses related to ARS and Pro-Motion that were not included in 1997 as these companies were acquired in 1998. Cost of engine rebuilds and wheel sales were $633,000. There was no corresponding expense in the prior year as this expense was related to ARS, which was acquired in 1998. 28 29 Administrative and indirect expenses for 1998 were $20.7 million, an increase of $6.4 million, or 45%, from 1997. This was primarily attributable to an increase in marketing and advertising, sales costs related to sponsor sales for Federal Express and MCI, development of a creative services department in 1998 and increased administrative expenses related to our expanded licensed products venture. In addition, ARS and Pro-Motion administrative expenses contributed to the increase, as there were no corresponding expenses in the prior period since these companies were acquired in 1998. Compensation expense was not incurred in 1998 compared to $12.2 million incurred in 1997. This non-cash compensation expense relates to the issuance of stock to race teams at below fair market value. OPERATING INCOME. Operating income for 1998 was $20.5 million, an increase of $41.7 million from 1997. INTEREST INCOME (NET). Interest income (net) for 1998 was $3.2 million compared to interest income (net) of $329,000 for 1997. The increase of $2.9 million was primarily attributable to interest earned on the invested proceeds from the initial public offering that occurred in March 1998. INCOME BEFORE INCOME TAXES. Income before income taxes for 1998 was $23.7 million, compared to a loss before income taxes of $21.0 million for 1997. INCOME TAX EXPENSE/BENEFIT. Income tax expense for 1998 was $8.6 million, compared to an income tax benefit of $3.4 million for 1997. NET INCOME/LOSS. Net income for 1998 was $15.1 million compared to a net loss of $17.5 million in 1997. Year Ended December 31, 1997 Compared to Year Ended December 31, 1996 REVENUES. Total revenues for 1997 were $41.4 million, an increase of $321,000 from 1996. This was due to increased sanction fees and sponsorship, television and other revenue as described below, partially offset by a reduction in revenue of $7.1 million due to the fact that we did not promote the U.S. 500 in 1997. Sanction fees for 1997 were $24.2 million, an increase of $3.2 million, or 15%, from 1996. Of this increase, $1.9 million was attributable to the addition of new events in Madison, Illinois near St. Louis and Fontana, California near Los Angeles. The balance of the increase resulted from annual sanction fee escalation for certain other events of $1.3 million. Sponsorship revenue for 1997 was $7.2 million, an increase of $1.7 million, or 31%, from 1996. This increase was primarily attributable to a new sponsorship agreement entered into with MCI. Television revenue for 1997 was $5.6 million, an increase of $1.2 million, or 28%, from 1996. This increase was due to the increase of approximately $500,000 in the ESPN rights fee, and an increase of $400,000 in rights fees from Fittipaldi USA, our Brazilian television partner. There was also an increase in the sale of commercial time for Inside CART and video footage sales of $379,000, partially offset by a reduction in Canadian rights fees of $44,000. 29 30 Other revenue for 1997 was $4.4 million, an increase of $1.3 million, or 40%, from 1996. This increase was primarily attributable to $934,000 of additional revenue from a CART-sanctioned support series. The balance was attributable to royalty income from licensed merchandise sales. EXPENSES. Total expenses for 1997 were $62.7 million, an increase of $20.7 million, or 50%, from 1996. This increase was due to higher race and franchise fund payments, race expenses, compensation expense and administrative and indirect expenses as described below, partially offset by a reduction in expenses of $8.2 million because we did not act as the promoter of the U.S. 500 in 1997. Race and franchise fund payments for 1997 were $28.9 million, an increase of $11.7 million, or 68%, from 1996. This increase was attributable to a one-time increase of $9.5 million in the year-end point fund in 1997, increases in purse distributions for the additional events in Madison, Illinois and Fontana, California of $1.8 million and additional payments related to team travel expenses of $266,000. Race expenses for 1997 were $7.0 million, an increase of $915,000, or 15%, from 1996. This increase was the result of the addition of the events in Madison, Illinois and Fontana, California. Administrative and indirect expenses for 1997 were $14.3 million, an increase of $5.7 million, or 67%, from 1996. Of this increase, $3.5 million was attributable to increases in advertising, marketing and market research incurred in connection with implementation of our growth strategy. An additional $1.3 million reflected costs associated with the implementation of the sponsorship agreement entered into with MCI, and $1.0 million related to the establishment of CART Licensed Products, L.P., a new partnership formed to enhance CART's licensed product sales. Compensation expense for 1997 was $12.2 million, an increase of $11.0 million, or 945%, from 1996. This non-cash compensation expense related to the issuance of stock to race teams at below fair market value. OPERATING LOSS. Operating loss for 1997 was $21.3 million, an increase of $20.5 million from 1996. INTEREST INCOME (NET). Interest income (net) for 1997 was $329,000 compared to interest income (net) of $280,000 for 1996. LOSS BEFORE INCOME TAXES. Loss before income taxes for 1997 was $20.9 million, compared to loss before income taxes of $517,000 for 1996 for the reasons cited above. INCOME TAX BENEFIT. Income tax benefit for 1997 was $3.4 million, compared to an income tax benefit of $179,000 for 1996 for the reasons cited above. NET LOSS. Net loss for 1997 was $17.5 million compared to a net loss of $338,000 in 1996 for the reasons cited above. 30 31 SEASONALITY AND QUARTERLY RESULTS A substantial portion of our total revenues during the race season is expected to remain seasonal, based on our race schedule. Our quarterly results vary based on the number of races held during the quarter. In addition, the mix between the type of race (street course, superspeedway, etc.) and the sanction fees attributed to those races will affect quarterly results. We have provided unaudited quarterly financial data for each of the four quarters of 1997 and 1998 in the following table. The information for each of these quarters is prepared on the same basis as our consolidated financial statements and related notes included elsewhere in this document and include, in the opinion of management, all adjustments (consisting of normal recurring adjustments) necessary to fairly present the data for such periods. You should read this table with "Selected Consolidated Financial Data", and the consolidated financial statements and the related notes included elsewhere in this document.
QUARTER ENDED MARCH 31 JUNE 30 SEPT. 30 DEC. 31 -------- ------- --------- ------- (DOLLARS IN THOUSANDS) Total revenues 1997 5,363 18,704 15,507 1,871 1998 10,031 20,034 20,010 12,455 Income (loss) before taxes 1997 1,272 (1,695) (17,659) (2,865) 1998 4,481 7,800 6,277 5,099 Number of races 1997 1 8 8 0 1998 2 7 7 3 1999 1 8 9 2
The revenues we receive for any race in the CART Championship can significantly affect our quarterly results. Consequently, changes in race schedules from year to year, with races held in different quarters, will result in fluctuations in our quarterly results and affect comparability. LIQUIDITY AND CAPITAL RESOURCES We have relied on the proceeds from our initial public offering and cash flow from operations, supplemented by bank borrowings, to finance working capital, investments and capital expenditures during the past year. Our bank borrowing with a commercial bank consists of a fixed rate installment note incurred in connection with the acquisition of a mobile medical unit that we transport to each North American race. The note bears interest at the rate of 8.25% per annum and matures on May 1, 2001. The note is secured by our mobile medical unit. Interest is payable monthly. As of December 31, 1998, the current portion of this note was $130,000, and the long-term portion was $184,000. We also have a $1.5 million revolving line of credit with a commercial bank. As of December 31, 1998, there was no outstanding balance under the line of credit. The line of credit contains no significant covenants or restrictions. Advances on the line of credit are payable on 31 32 demand and bear interest at the bank's prime rate. The line is secured by our deposits with the bank. In March 1998, we completed our initial public offering of 5,038,000 shares of stock. The initial offering price was $16.00 per share with proceeds to us of $75.0 million, net of underwriting discount. In December 1997, we sold 1,399,998 shares of our stock for aggregate proceeds of $1.8 million of which 1,200,000 shares were sold to three race teams for $1.13 per share and 199,998 shares were sold to three race teams for $2.25 per share. In January and February 1997, we sold 1,200,000 shares of our stock for aggregate proceeds of $840,000 ($0.70 per share). In March 1998 we rescinded the sale of 66,666 shares of stock we issued in December 1997 for an aggregate price of $151,000. In January 1997, we redeemed 400,000 shares of stock for $210,000 ($0.53 per share). Our cash balance on December 31, 1998 was $15.1 million, a net increase of $13.9 million from December 31, 1997. This increase was primarily the result of net cash provided by operations of $15.1 million and net financing activities of $73.7 million, which was offset by net cash used in investing activities of $74.9 million. Our cash balance on December 31, 1997 was $1.2 million compared to $630,000 at December 31, 1996, a net increase of $534,000. The increase was primarily the result of net cash provided by operations of $1.5 million and net financing activities of $125,000, offset by net cash used in investing activities of $1.1 million. We anticipate capital expenditures of approximately $1.5 million during 1999. We believe that existing cash, cash flow from operations and available bank borrowings will be sufficient for capital expenditures and other cash needs. The economic crisis in Brazil provides some uncertainty in terms of collectability of future sanction fees and payments of the note receivable from our Brazilian promoter. The note receivable is to be repaid in five equal installments over the life of the sanction agreement with a stated 5% per annum interest rate. Letters of credit to be issued annually by the City of Rio De Janeiro substantially cover the sanction fees and the note receivable. In addition, in February 1999, ISL Worldwide signed an agreement with the Brazil promoter where the two entities will be equal partners in promoting the Brazil event for the next four years beginning in 1999. We received the initial sanction fee payment for 1999 and the letter of credit for the 1999 event has been issued. YEAR 2000 COMPLIANCE GENERAL. The Year 2000 compliance issue is primarily the result of computer programs using a two-digit format, as opposed to four digits, to indicate the year. Such computer systems will be unable to interpret dates beyond the year 1999, which could cause a system failure or other computer errors, leading to a disruption in the operation of such systems. PROJECT. Our Y2K project covers both traditional computer systems and infrastructure and computer-based hardware, such as fax machines, postage machines and phone systems. The Y2K project has six phases: o Awareness o Assessment o Detailed Analysis and Planning for Upgrades and Testing o System Upgrades and Testing 32 33 o Implementation o Post Implementation Phases I, II and III have been completed. Phases IV and V are currently in process and are approximately 50% complete. The Post Implementation Phase includes our contingency plan where users will have developed fall back procedures, and be ready to implement manual procedures for conducting company business, record keeping, follow-up data entry and system recovery in the event of system failure. The entire Y2K project is scheduled to be complete by June 30, 1999. RISKS. Based on our assessment of our major information technology systems, we expect that all necessary modifications and/or replacements will be completed in a timely manner to ensure that all systems are Y2K compliant. However, if we fail to be in compliance, we do not currently anticipate any material disruption in our operations. We believe that the worse case scenario would be for our financial operations to maintain its current level of performance and customer service. Additional administrative expense could be incurred if automated functions would need to be performed manually. We do not believe race operations would be subject to material adverse effects from the Y2K problem. Our race season does not start until approximately two months after the 1999 year-end, and we anticipate that any unforeseen Y2K problems that are encountered would be resolved during this period. In addition, manual back-up systems for timing and scoring and other important race operation functions are already in place as part of our normal contingency planning. INTERFACES WITH THIRD PARTIES. Our Y2K project also considers the readiness of significant vendors and suppliers. We do not have any suppliers or vendors that are material to our operations as a whole. We are in the process of contacting our vendors and suppliers concerning their Y2K compliance. COSTS. Our total costs relating to Y2K compliance is expected to be approximately $35,000 to $50,000 and will be funded through our normal operating budget. Such cost estimates are based upon presently available information and may change as we continue with our Y2K project. Currently, we have incurred approximately $20,000 in expenses related to the Y2K project. RECENT ACCOUNTING PRONOUNCEMENTS In June 1998, SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities" was issued by the FASB. SFAS No. 133 establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. We have not determined the impact on our consolidated financial statement disclosure. SFAS No. 133 is effective for fiscal years beginning after June 15, 1999. CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS With the exception of historical information contained in this Form 10-K, certain matters discussed are forward-looking statements. These forward-looking statements involve risks that could cause the actual results and plans for the future to differ from these forward-looking 33 34 statements. The following factors, and other factors not mentioned, could cause the forward-looking statements to differ from actual results and plans: o competition in the sports and entertainment industry o participation by race teams o continued industry sponsorship o regulation of tobacco and alcohol advertising and sponsorship o competition by the Indy Racing League o liability for personal injuries o Y2K compliance ITEM 7A: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK INTEREST RATE RISK. Our investment policy was designed to maximize safety and liquidity while maximizing yield within those constraints. At December 31, 1998, our investments consisted of commercial paper, corporate bonds, U.S. Agency issues and repurchase agreements. The weighted average maturity of our portfolio is 192 days. Because of the relatively short-term nature of our investments, our interest rate risk is immaterial. ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Our consolidated financial statements and related notes are included in Item 14 of this document. ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None PART III ITEM 10: DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Information required by this Item will be contained in our definitive Proxy Statement for our 1999 Annual Meeting of Stockholders to be filed on or before April 30, 1999, and such information is incorporated herein by reference. ITEM 11: EXECUTIVE COMPENSATION Information required by this Item will be contained in our definitive Proxy Statement for our 1999 Annual Meeting of Stockholders to be filed on or before April 30, 1999, and such information is incorporated herein by reference. ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Information required by this Item will be contained in our definitive Proxy Statement for our 1999 Annual Meeting of Stockholders to be filed on or before April 30, 1999, and such information is incorporated herein by reference. ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 34 35 Information required by this Item will be contained in our definitive Proxy Statement for our 1999 Annual Meeting of Stockholders to be filed on or before April 30, 1999, and such information is incorporated herein by reference. PART IV ITEM 14: EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) List of Documents Filed as Part of this Report: (1) Consolidated Financial Statements start on page F-1 (2) Financial Statement Schedule Schedule II Valuation and Qualifying Accounts is on page S-1 (3) Exhibits 3.1 Certificate of Incorporation of the Company filed December 8, 1997* 3.2 Bylaws of the Company* 10.1 1997 Stock Option Plan* (Exhibit 10.1) 10.2 Director Stock Option Plan* (Exhibit 10.2) 10.3 Employment Agreement with Andrew Craig dated December 22, 1997* (Exhibit 10.3) 10.4 Employment Agreement with Randy K. Dzierzawski dated December 22, 1997* (Exhibit 10.4) 10.5 Form of Promoter Agreement* 10.6 Promoter Agreement with Wisconsin State Park Speedway related to West Allis, Wisconsin dated June 5, 1996* 10.7 Promoter Agreement with Texaco Houston Grand Prix L.L.C. related to Houston, Texas dated July 28, 1997* 10.9 Loan Agreement with Comerica Bank dated April 30, 1997* 10.10 Loan Agreement with Comerica Bank dated May 1,1996* 10.11 Form of Sponsorship Agreement* 10.15 Promoter Agreement with Ganassi Group, L.L.C. related to Chicago, Illinois dated April 7, 1998** 10.16 Marketing Representation Agreement with ISL Marketing AG dated June 24, 1998*** 10.17 Final Agreements for ARS Stock Purchase and BP Asset Purchase dated March 13, 1998 27.1 Financial Data Schedule (b) Reports on Form 8-K We were not required to file a Form 8-K during the three months ended December 31, 1998. * Incorporated by reference to exhibit filed as part of our Registration Statement on Form S-1 (Registration No. 333-43141) 35 36 ** Incorporated by reference to exhibit filed with our Quarterly Report on Form 10-Q for the quarter ended March 31, 1998. *** Incorporated by reference to exhibit to the Current Report on Form 8-K filed June 29, 1998. 36 37 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. DATED: March 19, 1999 CHAMPIONSHIP AUTO RACING TEAMS, INC. ------------------ ------------------------------------ Registrant By: /s/ Andrew Craig ------------------------------- Andrew Craig Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated: /s/ Andrew Craig Chief Executive Officer March 19, 1999 - -------------------------------- and Director Andrew Craig /s/ Randy K. Dzierzawski Chief Financial and March 19, 1999 - -------------------------------- Accounting Officer Randy K. Dzierzawski /s/ Gerald Forsythe Director March 19, 1999 - -------------------------------- Gerald Forsythe /s/ Floyd R.Ganassi, Jr. Director March 19, 1999 - -------------------------------- Floyd R.Ganassi, Jr. /s/ Carl A. Haas Director March 19, 1999 - -------------------------------- Carl A. Haas /s/ James F. Hardymon Director March 19, 1999 - -------------------------------- James F. Hardymon /s/ Bruce R. McCaw Director March 19, 1999 - -------------------------------- Bruce R. McCaw /s/ Don Ohlmeyer Director March 19, 1999 - -------------------------------- Don Ohlmeyer /s/ Robert W. Rahal Director March 19, 1999 - -------------------------------- Robert W. Rahal /s/ Derrick Walker Director March 19, 1999 - -------------------------------- Derrick Walker 37 38 CHAMPIONSHIP AUTO RACING TEAMS, INC. CONSOLIDATED FINANCIAL STATEMENTS
PAGE CHAMPIONSHIP AUTO RACING TEAMS, INC. Independent Auditors' Report................................................. F-2 Consolidated Balance Sheets as of December 31, 1997 and 1998................. F-3 Consolidated Statements of Operations for the Years Ended December 31, 1996, 1997 and 1998.................................... F-4 Consolidated Statements of Stockholders' Deficit for the Years Ended December 31, 1996, 1997 and 1998.......................... F-5 Consolidated Statements of Cash Flows for the Years Ended December 31, 1996, 1997 and 1998.................................... F-6 Notes to Consolidated Financial Statements................................... F-8
F-1 39 INDEPENDENT AUDITORS' REPORT To the Board of Directors and Stockholders of Championship Auto Racing Teams, Inc.: We have audited the accompanying consolidated balance sheets of Championship Auto Racing Teams, Inc. (the "Company") at December 31, 1997 and 1998, and the related consolidated statements of operations, stockholders' equity (deficit), and cash flows for each of the three years in the period ended December 31, 1998. Our audits also included the financial statement schedule listed in the index at Item 14. These consolidated financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the consolidated financial position of the Company at December 31, 1997 and 1998, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1998, in conformity with generally accepted accounting principles. Also, in our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly in all material respects the information set forth therein. /s/ Deloitte & Touche LLP - ------------------------- Deloitte & Touche LLP Detroit, Michigan February 5, 1999 F-2 40 CHAMPIONSHIP AUTO RACING TEAMS, INC. CONSOLIDATED BALANCE SHEETS (DOLLARS IN THOUSANDS)
DECEMBER 31, 1997 1998 ---- ---- ASSETS CURRENT ASSETS: Cash and cash equivalents $ 1,164 $15,080 Short-term investments -- 61,610 Accounts receivable (net of allowance for doubtful accounts of $306 in 1998. No allowance for doubtful accounts deemed necessary in 1997) 3,156 4,708 Current portion of notes receivable -- 824 Inventory -- 71 Prepaid expenses 751 331 Deferred income taxes 4,683 119 -------- ------- Total current assets 9,754 82,743 NOTES RECEIVABLE 49 3,350 PROPERTY AND EQUIPMENT- Net 2,236 5,026 GOODWILL (net of accumulated amortization of $105 in 1998) -- 5,883 OTHER ASSETS (net of accumulated amortization of $24 and $41 in 1997 and 1998, respectively) 309 184 -------- ------- TOTAL ASSETS $ 12,348 $97,186 ======== ======= LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable $ 1,890 $ 1,946 Accrued liabilities: Race expenses and point awards 9,500 -- Royalties 264 1,026 Payroll 431 482 Taxes 491 1,733 Other 21 934 Unearned revenue 2,352 4,273 Current portion of long-term debt 130 130 -------- ------- Total current liabilities 15,079 10,524 LONG-TERM DEBT 314 184 DEFERRED INCOME TAXES -- 259 COMMITMENTS AND CONTINGENCIES (Note 10) -- -- MINORITY INTEREST -- -- STOCKHOLDERS' EQUITY (DEFICIT): Preferred Stock, $.01 par value; 5,000,000 shares authorized, none issued and outstanding at December 31, 1997 and 1998 -- -- Common stock, $.01 par value; 50,000,000 shares authorized, 10,199,998 and 15,171,666 shares issued and outstanding at December 31, 1997 and 1998, respectively 102 151 Additional paid-in capital 15,975 89,771 Accumulated deficit (19,122) (4,033) Unrealized gain on investments -- 330 -------- ------- Total stockholders' equity (deficit) (3,045) 86,219 -------- ------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) $ 12,348 $97,186 ======== ======= The accompanying notes are an integral part of the consolidated financial statements.
F-3 41 CHAMPIONSHIP AUTO RACING TEAMS, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT EARNINGS PER SHARE)
YEAR ENDED DECEMBER 31, 1996 1997 1998 ---- ---- ---- REVENUES: Sanction fees $21,078 $ 24,248 $30,444 U.S. 500 7,054 -- -- Sponsorship revenue 5,501 7,221 16,388 Television revenue 4,373 5,604 5,148 Engine leases, rebuilds and wheel sales -- -- 2,214 Other revenue 3,118 4,372 8,336 ------- -------- ------- Total revenues 41,124 41,445 62,530 EXPENSES: Race and franchise fund payments 17,198 28,939 15,183 U.S. 500 8,246 -- -- Race expenses 6,055 6,970 4,818 Cost of engine rebuilds and wheel sales -- -- 633 Administrative and indirect expenses 8,570 14,295 20,658 Compensation expense 1,167 12,200 -- Depreciation and amortization 685 549 779 Minority interest in loss of subsidiaries -- (232) -- ------- -------- ------- Total expenses 41,921 62,721 42,071 ------- -------- ------- OPERATING INCOME (LOSS) (797) (21,276) 20,459 Interest income (net) 280 329 3,198 ------- -------- ------- INCOME (LOSS) BEFORE INCOME TAXES (517) (20,947) 23,657 INCOME TAX BENEFIT (EXPENSE) 179 3,423 (8,568) ------- -------- ------- NET INCOME (LOSS) $ (338) $(17,524) $15,089 ======= ======== ======= EARNINGS (LOSS) PER SHARE: BASIC $ (.04) $ (1.72) $ 1.06 ======= ======== ======= DILUTED $ (.04) $ (1.72) $ 1.05 ======= ======== ======= WEIGHTED AVERAGE SHARES OUTSTANDING: BASIC 9,400 10,200 14,190 ======= ======== ======= DILUTED 9,400 10,200 14,421 ======= ======== =======
The accompanying notes are an integral part of the consolidated financial statements. F-4 42
CHAMPIONSHIP AUTO RACING TEAMS, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) (IN THOUSANDS) ADDITIONAL UNREALIZED COMMON STOCK PAID-IN ACCUMULATED GAIN ON STOCKHOLDERS' COMPREHENSIVE SHARES AMOUNT CAPITAL DEFICIT INVESTMENTS EQUITY(DEFICIT) INCOME BALANCES, JANUARY 1, 1996 8,800 $ 88 $ (78) $ (1,260) -- $ (1,250) Net loss and comprehensive loss -- -- -- (338) -- (338) $ (338) ======== Compensation expense -- -- 1,167 -- -- 1,167 Stock redemption and repayment of note (2,000) (20) (340) -- -- (360) receivable Stock issuance 1,200 12 618 -- -- 630 ------ ---- ------- -------- ---- -------- BALANCES, DECEMBER 31, 1996 8,000 80 1,367 (1,598) -- (151) Net loss and comprehensive loss -- -- -- (17,524) -- (17,524) $(17,524) ======== Compensation expense -- -- 12,200 -- -- 12,200 Stock redemption (400) (4) (206) -- -- (210) Stock issuance 2,600 26 2,614 -- -- 2,640 ------ ---- ------- -------- ---- -------- BALANCES, DECEMBER 31, 1997 10,200 102 15,975 (19,122) -- (3,045) Net income -- -- -- 15,089 -- 15,089 $ 15,089 Unrealized gain on investments -- -- -- -- $330 330 330 ======== Comprehensive income $ 15,419 ======== Stock redemption (67) (1) (150) -- -- (151) Stock issuance 5,038 50 73,372 -- -- 73,422 Issuance of options -- -- 574 -- -- 574 ------ ---- ------- -------- ---- -------- BALANCES, DECEMBER 31, 1998 15,171 $151 $89,771 $ (4,033) $330 $ 86,219 ====== ==== ======= ======== ==== ========
The accompanying notes are an integral part of the consolidated financial statements. F-5 43
CHAMPIONSHIP AUTO RACING TEAMS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (DOLLARS IN THOUSANDS) YEAR ENDED DECEMBER 31, 1996 1997 1998 ---- ---- ---- CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) $ (338) $(17,524) $ 15,089 Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation and amortization 685 549 779 Compensation expense 1,167 12,200 -- Net loss (gain) from sale of property and equipment (133) 160 92 Write-off of trademark 88 -- -- Deferred income taxes (226) (3,629) 4,823 Minority interest in loss of subsidiaries -- (232) -- Changes in assets and liabilities that provided (used) cash: Accounts receivable (1,481) (854) (1,552) Prepaid expenses (302) (328) 420 Inventory 37 16 (71) Other assets (70) (23) 24 Accounts payable 134 959 56 Accrued liabilities 65 10,192 (6,532) Unearned revenue (253) 21 1,921 ------- -------- -------- Net cash provided by (used in) operating activities (627) 1,507 15,049 ------- -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Acquisitions of subsidiaries -- -- (5,881) Investments -- -- (61,280) Notes receivable -- (49) (4,125) Acquisition of property and equipment (1,094) (999) (3,602) Proceeds from sale of property and equipment 194 13 62 Acquisition of trademark (101) (63) (22) ------- -------- -------- Net cash used in investing activities (1,001) (1,098) (74,848) CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from long-term debt 650 -- -- Payments on long-term debt (76) (130) (130) Redemption of common stock (360) (210) (151) Issuance of common stock (net of underwriting discount and offering costs) 630 2,640 73,996 Proceeds from membership deposit 360 360 -- Payments on membership deposits -- (1,320) -- Payments on franchise fund liability (600) (1,440) -- Capital contributions to subsidiaries by minority stockholder -- 225 -- Payments on line of credit (392) -- -- ------- -------- -------- Net cash provided by financing activities 212 125 73,715 ------- -------- -------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (1,416) 534 13,916 CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 2,046 630 1,164 ------- -------- -------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 630 $ 1,164 $ 15,080 ======= ======== ======== SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid during the period for: Income taxes $ 23 $ 15 $ 2,350 ======= ======== ======== Interest $ 50 $ 43 $ 31 ======= ======== ========
F-6 44 SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCING ACTIVITIES--During 1996, 1997 and 1998, the Company received property and equipment worth approximately $75,000, $79,000 and $69000, respectively, in exchange for sponsorship privileges to the providers. In 1996, the Company redeemed 800,000 shares of common stock for $600,000 (including $240,000 representing a refund of membership deposits or franchise fund liability), which was used to offset a note receivable from a stockholder. During 1998, the acquisition price of ARS included 100,000 options granted to the sellers. The value of these options on the date of grant was $574,000. The amount to be received by the Company for the options will be approximately $504,000 (see Note 2). During 1998, the Company recorded $496,000 as goodwill related to the additional purchase price of ARS (see Note 2). The accompanying notes are an integral part of the consolidated financial statements. F-7 45 CHAMPIONSHIP AUTO RACING TEAMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES ORGANIZATION. CART, Inc., ("CART") (a Michigan Corporation) was organized as a not-for-profit corporation in 1978, with its main purpose being to promote the sport of automobile racing, primarily open-wheel type racing cars. As of January 1, 1992, the entity became a profit corporation and continued to use the CART name. In December 1997, Championship Auto Racing Teams, Inc., a Delaware corporation was formed to serve as a holding company for CART and its subsidiaries (the "Reorganization"). Each outstanding share of common stock of CART was acquired in exchange for 400,000 shares of common stock of the Company. References to the "Company" mean Championship Auto Racing Teams, Inc. and its subsidiaries. PRINCIPLES OF CONSOLIDATION. The 1997 and 1998 consolidated financial statements include the financial statements of the Company, CART and its wholly-owned subsidiary corporations CART Properties, Inc. and CART Licensed Products, Inc. In addition, the 1997 and 1998 consolidated financial statements include the financial statements of CART Licensed Products, L.P., a 55% owned subsidiary. As of March 13, 1998 and April 1, 1998, the consolidated financial statements also include the financial statements of American Racing Series, Inc. ("ARS") and Pro-Motion Agency Ltd. ("Pro-Motion"), respectively, wholly-owned subsidiaries of the Company(see Note 2). All significant intercompany balances have been eliminated in consolidation. OPERATIONS. The Company is the sanctioning body responsible for organizing, marketing and staging each of the racing events for the open-wheeled motorsports series -- the CART Championship. The Company stages events at four different types of tracks, including superspeedways, ovals, temporary road courses and permanent road courses, each of which require different skills and disciplines from the drivers and teams. Substantially all of the Company's revenue is derived from sanction fees, sponsorship revenues, television revenues and licensing royalties, each of which is dependent upon continued fan support and interest in CART race events. Sanction fee revenues are fees paid to the Company by track promoters to sanction a CART event at the race venue, and to provide the necessary race management. The Company receives sponsorship revenues from companies who desire to receive brand and product exposure in connection with CART races. Pursuant to broadcast agreements, the Company generates revenues for the right to broadcast the races, with revenues based upon viewership with a minimum guarantee. The Company receives revenue from engine leases and rebuilds and wheel sales from teams racing in the PPG-Dayton Indy Lights Championship ("Indy Lights"). The Company also receives revenues from royalty fees paid for licenses to use servicemarks of the Company, various drivers, teams, tracks and industry sponsors for merchandising programs and product sales. F-8 46 INVENTORY. Inventory consists of wheels, parts, and merchandise, which are stated at the lower of cost or market on a first-in, first-out basis. PROPERTY AND EQUIPMENT. Property and equipment are stated at cost and are depreciated using the straight-line and accelerated methods over their estimated useful lives which range from 3 to 20 years. Leasehold improvements are amortized over the life of the related leases. REVENUE RECOGNITION. Recognition of revenue from race sanction agreements is deferred until the event occurs. Sponsorship revenue and engine lease revenue are recognized on a monthly basis. Television revenue is recognized ratably over the race schedule. Engine rebuilds and wheel sales are recognized as earned. Other revenues include membership and entry fees, contingency awards money and royalty income and are recognized ratably over the race schedule. CASH AND CASH EQUIVALENTS. Cash and cash equivalents include investments with original maturities of three months or less at the date of original acquisition. SHORT-TERM INVESTMENTS. The Company's short-term investments are categorized as available-for-sale, as defined by Statement of Financial Accounting Standards ("SFAS") No. 115, "Accounting for Certain Investments in Debt and Equity Securities". Unrealized holding gains and losses are reflected as a net amount in a separate component of stockholders' equity until realized. For the purpose of computing realized gains and losses, cost is identified on a specific identification basis. GOODWILL. Goodwill represents the excess of the purchase price of ARS and B.P. Automotive, Ltd. ("BP") and Pro-Motion (see Note 2) over the fair value of the net tangible and identifiable intangible assets of these acquisitions. Goodwill is stated at cost and is amortized on a straight-line basis over 40 years. MANAGEMENT ESTIMATES. The preparation of the consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at December 31, 1997 and 1998, and the reported amounts of revenues and expenses during the periods presented. The actual outcome of the estimates could differ from the estimates made in the preparation of the consolidated financial statements. ACCOUNTING PRONOUNCEMENTS. In 1998, the Company adopted SFAS No. 130, "Reporting Comprehensive Income." Unrealized gains on investments is the Company's only component of other comprehensive income. In June 1998, SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities" was issued by the FASB. SFAS No. 133 establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. The Company has not determined the impact on its consolidated financial statement disclosure. SFAS No. 133 is effective for fiscal years beginning after June 15, 1999. RECLASSIFICATIONS. Certain reclassifications have been made to the 1996 and 1997 consolidated financial statements in order for them to conform to the 1998 presentation. F-9 47 2. INITIAL PUBLIC OFFERING AND ACQUISITIONS INITIAL PUBLIC OFFERING. In March 1998, the Company completed its initial public offering ("IPO") of 5,038,000 shares of common stock. The IPO provided proceeds of $75.0 million, net of underwriting discounts, to the Company. A portion of the net proceeds from the IPO were used to acquire ARS and BP for $10 million (see "Acquisition of ARS and BP"); and to pay accrued point awards to franchise race teams aggregating $9.5 million. The remaining net proceeds will be used for working capital and general corporate purposes, including the expansion of the Company's business through the acquisition or development of race related businesses and properties. ACQUISITION OF ARS AND BP. On March 13, 1998, the Company acquired 100% of the outstanding common stock of ARS and certain assets of BP, an entity previously owned by a director, race team owner and stockholder. ARS operates Indy Lights, a support series to CART. BP supplies certain equipment to Indy Lights competitors and earns commission income on the sale of chassis and spare parts to the teams. At closing of the acquisition, the Company paid $7 million in cash and issued options to the sellers to purchase 100,000 shares of the Company's common stock at an exercise price of $16.00 per share which vests one year from closing if certain performance criteria are met for 1998. In the event that ARS did not meet their performance criteria for 1998, they had the option to make up the shortfall to receive the options and elected to do so. The fair value of the options at the date of grant was approximately $574,000. The sellers are expected to pay the shortfall amount of approximately $504,000 to receive the options. In addition, the Company will pay an additional purchase price of up to $3 million, in three equal payments, upon satisfaction by ARS of certain performance criteria during 1998-2000. In the event that ARS does not meet its performance criteria in a given year, the additional payment will be reduced one dollar for every dollar that ARS is short of the performance criteria. However, if ARS exceeds its performance in a following year, it can make up the shortfall from the prior year. Based on 1998 performance criteria, CART owes the former shareholders of ARS a total of approximately $496,000 for 1998. The excess of the initial purchase price of $7 million, plus any additional purchase price payments, over the net book value of the net assets acquired has been allocated to the tangible and intangible assets based on the Company's estimate of the fair market value of the net assets acquired. The operating results of ARS and BP have been included in the Company's consolidated financial statements since the date of acquisition. ACQUISITION OF PRO-MOTION. On April 10, 1998, the Company acquired 100% of the outstanding common stock of Pro-Motion, an entity previously owned by a director, race team owner and stockholder, for $534,000 in cash. Pro-Motion operates the KOOL/Toyota Atlantic Championship open-wheel series, a support series to CART. The excess of the initial purchase price over the net book value of the net assets acquired has been allocated to the tangible and intangible assets based on the Company's estimate of the fair market value of the net assets acquired. The operating results of Pro-Motion have been included in the Company's consolidated financial statements since the date of acquisition. F-10 48 PRO FORMA RESULTS. The following unaudited pro forma summary for the year ended December 31, 1997 and 1998 assume the acquisitions of ARS, BP and Pro-Motion occurred as of January 1, 1997 and 1998.
YEAR ENDED DECEMBER 31, 1997 1998 (IN THOUSANDS, EXCEPT EARNINGS PER SHARE) - -------------------------------------------------------------------------- Revenues $49,628 $63,863 Net income (loss) (3,999) 15,196 Earnings per share: Basic $ (.38) $ 1.06 ======= ======= Diluted $ (.38) $ 1.05 ======= =======
Pro forma adjustments of $19.4 million ($12.6 million net of tax) for 1997 have also been made to reduce certain benefits paid to franchise members, including the reimbursement of travel expenses for $2.2 million, director's fees for $214,000 and other race related payments for $17 million in connection with the Company's reorganization, effective January 1, 1998 (see Note 14). 3. SHORT-TERM INVESTMENTS The following is a summary of the estimated fair value of available for sale short-term investments by balance sheet classification:
DECEMBER 31, 1998 GROSS UNREALIZED (IN THOUSANDS) COST FAIR VALUE GAIN LOSS - ---------------------------------------------------------------------------------------------- Commercial paper $ 33,168 $ 33,487 $ 319 $ - U.S. agencies securities 20,034 20,047 13 - Corporate bonds 8,078 8,076 - 2 -------- -------- -------- -------- Total short-term investments $ 61,280 $ 61,610 $ 332 $ 2 ======== ======== ======== ========
Contractual maturities range from less than one year to two years. The weighted average maturity of the portfolio does not exceed one year. 4. NOTE RECEIVABLE In May 1998, the Company entered into an agreement with a promoter whereby the Company provided financing for certain expenses associated with a CART sanctioned event in Brazil. The original amount of the note receivable of $4.1 million related to costs incurred by the Company during the 1998 event and will be repaid in five equal annual installments of $824,000 over the life of the sanction agreement through the year 2003. The receivable has a stated 5% per annum interest rate and approximately $1.0 million of the receivable and the annual sanction fee will be substantially secured each year by a separate letter of credit issued annually by the City of Rio de Janeiro, Brazil. The letter of credit relating to the 1999 event has been issued. Based on estimated market discount rates, the carrying value of this receivable approximates its fair value. F-11 49 5. PROPERTY AND EQUIPMENT Property and equipment consists of the following at December 31:
(IN THOUSANDS) 1997 1998 ---------- ---------- Engines $ - $ 2,296 Equipment 1,570 2,381 Furniture and fixtures 329 359 Vehicles 1,616 1,959 Other 228 121 ---------- ---------- Total 3,743 7,116 Less accumulated depreciation (1,507) (2,090) ---------- ---------- Property and equipment (net) $ 2,236 $ 5,026 ========== ==========
During 1997 and 1998, the Company received vehicles worth approximately $79,000 and $69,000, respectively, in exchange for sponsorship privileges to the providers. 6. OPERATING LEASES The Company has entered into various non-cancelable operating leases for office space and equipment which expire through 2003. Total rent expense was approximately $194,000, $345,000 and $421,000 for 1996, 1997 and 1998, respectively. Approximate future minimum lease payments under noncancelable operating leases are as follows:
(IN THOUSANDS) Year ending December 31: 1999 $ 443 2000 440 2001 352 2002 118 2003 2 -------- Total $1,355
7. INCOME TAXES Deferred income tax assets and liabilities are computed annually for differences between the financial statement and tax basis of assets and liabilities that will result in taxable or deductible amounts in the future based on enacted tax laws and rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. F-12 50 Realization of the Company's deferred tax assets is dependent on generating sufficient taxable income. Although realization is not assured, management believes it is more likely than not that all of the deferred tax assets will be realized. The tax effects of temporary differences giving rise to deferred tax assets and liabilities at December 31 are as follows:
1997 1998 ---- ---- (IN THOUSANDS) Deferred tax assets: Allowance for doubtful accounts $ -- $ 114 Accrued race expense and points award 3,446 -- Net operating loss carryforwards 1,186 -- Alternative minimum tax credit carryforwards 44 -- Pension liability 8 -- State taxes (22) 5 Other 21 -- ------- ------- Total 4,683 119 Current portion 4,683 119 ------- ------- Non-current portion $ -- $ -- ======= ======= Deferred tax liabilities: Basis difference in fixed assets $ -- $ (195) Amortization of goodwill -- (64) ------- ------- Total -- (259) Current portion -- -- ------- ------- Non-current portion $ -- $ (259) ======= =======
F-13 51 The provision (credit) for income taxes consists of the following at December 31:
1996 1997 1998 ---- ---- ---- (IN THOUSANDS) Current $ 25 $ 158 $3,745 Deferred (Credit) (204) (3,581) 4,823 ----- ------- ------ Total $(179) $(3,423) $8,568 ===== ======= ======
The reconciliation of income tax expense (benefit) computed at the U.S. federal statutory tax rate to the Company's effective income tax rate is as follows:
1996 1997 1998 ---- ---- ---- Tax at U.S. federal statutory rate (34.0)% (34.0)% 34.0% State income tax -- -- 1.9 Meals and entertainment 6.5 0.1 0.3 Compensation expense -- 17.3 -- Other (7.1) 0.2 -- ----- ----- ---- Total (34.6)% (16.4)% 36.2% ===== ===== ====
Additional compensation expense recorded for consolidated financial statement purposes in connection with common stock issued to race teams in December 1997, exceeded the Company's deductible amount for federal income tax purposes. 8. EMPLOYEE BENEFIT PLANS During 1991, the Company indicated its intent to terminate its defined benefit pension plan. The plan assets were frozen and remained in trust until September 30, 1998, at which time the assets were distributed to the participants of the plan. There was no liability at December 31, 1998. The Company incurred no additional expense as a result of the termination. In addition, the Company began a 401(k) savings plan (the "plan") in 1991. Contributions to the 401(k) are in the form of employee salary deferral, subject to discretionary employer matching contributions. The Company's contributions to the plan were approximately $25,000, $50,000 and $81,000 in 1996, 1997 and 1998, respectively. 9. DEBT At December 31, 1997 and 1998, the Company had an unused bank line of credit of $1.5 million. There were no amounts outstanding at December 31, 1997 and 1998. Advances on the line of credit are payable on demand, with interest at the bank's prime rate. The line of credit is secured by the Company's deposits with the bank. F-14 52 At December 31, 1998, the Company has a five-year note payable to a bank with an original face value of $650,000, with interest at 8.25%; payable in monthly installments of $11,000, plus interest through May 2001. The note payable is secured by the Company's mobile medical unit. The carrying amount of the note payable approximates its fair value. Future payments under the above agreement are as follows:
(IN THOUSANDS) 1999 $ 130 2000 130 2001 54 ----- Total 314 Less current portion 130 ----- Long-term portion $ 184 =====
10. COMMITMENTS AND CONTINGENCIES REVENUE AGREEMENTS. The Company has entered into promoter, sponsorship and television agreements that extend through various dates, with the longest date expiring in the 2007 racing season. Under the promoter agreements, the Company is obligated to sanction CART Championship racing events and provide related race management functions. Under the sponsorship agreements, the Company grants certain corporations official sponsorship status, in return the corporations receive recognition and status rights, event rights and product category exclusivity rights. Television agreements with various broadcast companies include production, sales and worldwide distribution of the Company's events. INSURANCE. The Company is self-insured for the deductible amount ($50,000) on an insurance policy which provides accident medical expense benefits for participants of CART sanctioned races. Losses above the deductible amount are covered by the insurance policy. EMPLOYMENT AGREEMENTS. The Company has employment agreements with several of its officers. The employment agreements expire at various dates through December 2001. Certain of the employment agreements provide for a multiple of the individual's base salary in the event there is a termination of their employment as a result of a change in control in the Company. LITIGATION. In January 1996, a lawsuit was filed against the Company by one of its shareholders and a related company. The lawsuit alleged antitrust and anti-competitive violations as well as damage of reputation. In December 1996, the Company settled the lawsuit and other related litigation. Included in the settlement amount was the redemption of common stock and related Franchise Fund Liability. Expenses incurred in 1996 and included in administrative and indirect expenses include approximately $1,734,000 related to litigation expense and the settlement of lawsuits. During a CART race at the Michigan Speedway in July 1998, a race car was involved in a racing incident that propelled a tire and suspension parts into the grandstands. Three spectators were killed and six other people reported minor injuries. No claims have been made against the Company, and the Company does not believe that it is liable for this incident. The Company requires each promoter to indemnify the Company against any liability for personal injuries sustained at such promoter's racing F-15 53 event. In addition, the Company requires each promoter to carry a minimum of $10.0 million ($20.0 million in 1999) in liability insurance, naming the Company as a named insured. The Company also maintains a $15.0 million umbrella policy. 11. STOCK OPTION PLAN In December 1997, the Board of Directors of the Company (the "Board") authorized, and the stockholders of the Company approved, a stock incentive plan for executive and key management employees of the Company and its subsidiaries, including a limited number of outside consultants and advisors, effective as of the completion of the initial public offering ("IPO") (the "Stock Option Plan"). Under the Stock Option Plan, key employees, outside consultants and advisors (the "Participants") of the Company and its subsidiaries (as defined in the Stock Option Plan) may receive awards of stock options (both Nonqualified Options and Incentive Options, as defined in the Stock Option Plan). A maximum of 2,000,000 shares of common stock are subject to the Stock Option Plan. Options granted vest pro-rata over a three-year period. No stock option is exercisable after ten years from the date of the grant, subject to certain conditions and limitations. The purpose of the Stock Option Plan is to provide the Participants (including officers and directors who are also key employees) of the Company and its subsidiaries with an increased incentive to make significant contributions to the long-term performance and growth of the Company and its subsidiaries. Concurrent with the IPO, an aggregate 1,088,100 options to acquire common stock were granted under the Stock Option Plan at the initial offering price of $16.00 per share. In March 1999, 100,250 options to acquire common stock were granted to employees under the Stock Option Plan at an exercise price of $27.50 per share. In addition, in December 1997, the Board and the stockholders of the Company approved a Director Option Plan permitting the granting of non-qualified stock options ("Director NQSOs") for up to 100,000 shares of common stock to directors of the Company who are neither employees of the Company nor affiliates of a race team which participates in CART race events (an "Independent Director"). Each person who is first elected or appointed to serve as an Independent Director of the Company is automatically granted an option to purchase 10,000 shares of Company common stock. In addition, each individual who is re-elected as an Independent Director is automatically granted an option to purchase 5,000 shares of Company common stock each year on the date of the annual meeting of stockholders. Each of the options automatically granted upon election, appointment or re-election as an Independent Director are exercisable at a price equal to the fair market value of the common stock on the date of grant. In addition, each Independent Director may elect to receive stock options in lieu of any director's fees payable to such individuals. All Director NQSOs are immediately exercisable upon grant. The exercise price for all options may be paid in cash, shares of common stock of the Company or other property. If an Independent Director dies or becomes ineligible to participate in the Director Option Plan due to disability, his Director NQSOs expire on the first anniversary of such event. If an Independent Director retires with the consent of the Company, his Director NQSOs expire 90 days after his retirement. In no event may a Director NQSO be exercised more than ten years from the date of grant. As of December 31, 1998, there were 10,000 Director NQSOs issued and outstanding. In January 1999, an additional 10,000 Director NQSOs were issued and outstanding. In addition to the plans described above, 100,000 stock options were issued in connection with the acquisition of ARS and BP (see Note 2). F-16 54 The following table summarizes information about stock options outstanding at December 31, 1998:
WEIGHTED AVERAGE NUMBER OF REMAINING WEIGHTED AVERAGE SHARES LIFE EXERCISE PRICE ---------------- ----------------- ------------------- Options outstanding December 31, 1997 -- -- $ -- Granted 1,198,100 4.2 16.02 Exercised -- -- -- Forfeited 600 -- 16.02 ---------- --- ------- Options outstanding December 31, 1998 1,197,500 4.2 $ 16.02 ========== === ======= (10,000 are exercisable)
The weighted average per share fair value of options granted at market value was $5.74 in 1998. At December 31, 1998, an additional 1,002,500 shares were reserved for issuance under all Company plans. SFAS No. 123 "Accounting for Stock Based Compensation" requires the recognition of compensation expense for equity investments that are issued for consideration other than employee services based upon the fair value of the common stock issued. The fair value of the Company's Common Stock has been measured on the date new Franchise Members become eligible to acquire such stock. Compensation expense of $1.2 million and $12.2 million has been recorded for the years ended 1996 and 1997 respectively, related to certain shares that became eligible for purchase based upon eligibility requirements met during 1996 and 1997. As permitted by SFAS No. 123, the Company has chosen to follow Accounting Principles Board Opinion No. 25, "Accounting for Stock issued to Employees" ("APB No. 25") in accounting for its stock options granted to employees and directors. Under APB No. 25, the Company does not recognize compensation expense on the issuance of its stock options because the option terms are fixed and the exercise price equals the market price of the underlying stock on the grant date. However, as required by SFAS No. 123, the Company has calculated pro forma information as if it had determined compensation cost based on the fair value at the grant date for its stock options granted to employees and directors. In accordance with SFAS No.123, the fair value of option grants is estimated on the date of grant using the Black-Scholes option-pricing model for pro forma purposes with the following assumptions used for all grants: expected volatility 30%, expected dividend yield of 0%, risk free interest rate of 5%, and an expected life of 5 years. Had the Company determined compensation cost based on the fair value at the grant date for its stock under SFAS No.123, net earnings and earnings per share would have been reduced to the pro forma amounts indicated below:
(IN THOUSANDS, EXCEPT EARNINGS PER SHARE) NET EARNINGS 1998 ---------------- As reported $15,089 ======= Pro forma $14,054 ======= DILUTED EARNINGS PER SHARE As reported $ 1.05 ====== Pro forma $ .97 ======
F-17 55 12. COMMON STOCK During 1996, the Company redeemed 2,000,000 shares of common stock for $1.4 million (including $480,000 representing a refund of Membership Deposits or Franchise Fund Liability), and sold 1,200,000 shares of common stock for $990,000 (including $360,000 representing Membership Deposits). A total of 800,000 of the shares of common stock were redeemed for $600,000 (including $240,000 representing a refund of Membership Deposits or Franchise Fund Liability), which was used to offset a note receivable from a stockholder as of December 31, 1995. In January 1997, CART redeemed 400,000 shares of common stock for $330,000 (including $120,000 representing a refund of Membership Deposits or Franchise Fund Liability). In January and February 1997, the Company issued 1,200,000 shares of common stock for $1.2 million (including $360,000 representing Membership Deposits). In December 1997, the Company issued 1,400,000 shares for $1.8 million. In March 1998, at the request of a race team owner, the Company rescinded the sale of an aggregate of 66,666 shares of common stock it issued in December 1997 at a total price of $151,000. 13. SEGMENT REPORTING The company has one reportable segment, racing operations. This reportable segment encompasses all the business operations of organizing, marketing and staging all of our open-wheel racing events. The accounting policies of the segments are the same as those described in the summary of significant accounting policies. The Company's long lived assets are substantially used in the racing operations segment in the United States. The Company evaluates performances based on income before income taxes.
YEAR ENDED DECEMBER 31, ----------------------------------------------- ($ in thousands) RACING OPERATIONS OTHER* TOTALS - ---------------- ----------------- ------ ------ 1996 Revenues $ 41,124 $ -- $ 41,124 Interest income (net) 280 -- 280 Depreciation and amortization 685 -- 685 Segment loss before income taxes (517) -- (517) 1997 Revenues 40,867 578 41,445 Interest income (expense) (net) 331 (2) 329 Depreciation and amortization 531 18 549 Segment loss before income taxes (20,432) (515) (20,947) 1998 Revenues 61,056 62,530 1,474 Interest income (expense) (net) 3,234 (36) 3,198 Depreciation and amortization 750 29 779 Segment income before income taxes 23,657 -- 23,657
F-18 56 *Segment is below the quantitative thresholds for determining reportable segments and commenced operations on January 1, 1997. This segment is related to the Company's licensing royalties. Reconciliations to consolidated financial statement totals are as follows:
YEAR ENDED DECEMBER 31, ------------ -- ----------- 1997 1998 ------------ ----------- Total assets for reportable segment $11,599 $95,851 Other assets 749 1,335 ------------ ----------- Total consolidated assets $12,348 $97,186 ============ =========== Total liabilities for reportable segment $14,996 $9,617 Other liabilities 397 1,350 ------------ ----------- Total consolidated liabilities $15,393 $10,967 ============ ===========
Domestic and foreign revenues, which are allocated to each country based on sanction fees, sponsorship revenues and television revenues, for each of the three years ended December 31 were as follows:
1996 1997 1998 ----------- ------------ ----------- United States $30,355 $28,888 $42,105 Canada 4,499 5,336 7,828 Other foreign countries 6,270 7,221 12,597 ----------- ------------ ----------- Total $41,124 $41,445 $62,530 =========== ============ ===========
14. EARNINGS (LOSS) PER SHARE Basic earnings per share ("EPS") excludes dilution and is computed by dividing earnings available to common shareholders by the weighted average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution of securities that could share in the earnings. Shares contingently issuable relate to shares that would have been outstanding under certain stock option plans (see Note 11) upon the assumed exercise of dilutive stock options.
YEAR ENDED DECEMBER 31, ----------------------------------------------- 1996 1997 1998 ----------------------------------------------- (IN THOUSANDS, EXCEPT EARNINGS PER SHARE) Net income (loss) $ (338) $(17,524) $ 15,089 ============ ============== ============ Basic EPS: Weighted average common shares outstanding 9,400 10,200 14,190 ============ ============== ============ Net earnings (loss) per common share, basic $ (.04) $ (1.72) $ 1.06 ============ ============== ============ Diluted EPS: Weighted average common shares outstanding 9,400 10,200 14,190 Shares contingently issuable -- -- 231 ------------ -------------- ------------ Shares applicable to diluted earnings 9,400 10,200 14,421 ============ ============== ============ Net earnings (loss) per common share, diluted $ (.04) $ (1.72) $ 1.05 ============ ============== ============
F-19 57 15. RELATED PARTY TRANSACTIONS The Company receives sanction fees from seven related parties. Total sanction fee revenue related to these entities for 1996, 1997 and 1998 was approximately $3.9 million, $5.2 million and $8.1 million, respectively. No sanction fees from a single related entity provided more than 10% of the Company's revenues in 1996, 1997 and 1998. The Company rented track facilities from a related party. Total track rental expense related to this entity for 1996, 1997 and 1998 was approximately $1.2 million, $0 and $62,000, respectively. At December 31, 1997 and 1998, the Company has accounts receivable of approximately $190,000 and $1.7 million, respectively, due from related parties. The Company receives entry fees and other race-related income to participate in the CART Championship from certain related parties. Such fees received from certain franchise members amounted to $80,000, $150,000 and $1.3 million in 1996, 1997 and 1998, respectively. The Company disburses purse winnings and awards to nine related parties. Total purse winnings related to these entities for 1996, 1997, and 1998 were $10.8 million, $9.0 million and $10.8 million, respectively. The Company paid for at-track rights to six related parties in order to satisfy contractual obligations with certain sponsors. Total at-track rights related to these entities for 1996, 1997 and 1998 were $0, $500,000 and $1.2 million, respectively. The Company paid royalties to nine related parties. Total royalties paid to these entities for 1996, 1997 and 1998 were $0, $173,000 and $495,000, respectively. At December 31, 1997 and 1998, the Company has accounts payable and royalties payable of approximately $6.6 million and $306,000, respectively, due to related parties. An officer of the Company is a principal in a law firm which received fees for legal services provided to the Company. Such fees amounted to approximately $129,000, $133,000 and $127,000 in 1996, 1997 and 1998, respectively. In connection with the Reorganization, effective January 1, 1998, the Company and the existing franchise race teams entered into an agreement on December 19, 1997 whereby reimbursements for travel expenses, directors fees and race-related payments were discontinued. These payments approximated $8.5 million and $19.4 million for the years 1996 and 1997, respectively. Such agreement expires in December 2000. Because each franchise member is also a stockholder of the Company, the agreement constitutes a related party transaction. F-20 58 16. SUBSEQUENT EVENTS (UNAUDITED) Effective December 31, 1998, the president of CART Licensed Products, L.P. resigned from his position. The Company is negotiating to purchase his 45 percent interest in CART Licensed Products, L.P. F-21 59 SCHEDULE II CHAMPIONSHIP AUTO RACING TEAMS, INC. VALUATION AND QUALIFYING ACCOUNTS YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996. (IN THOUSANDS)
CHARGED BALANCE BEGINNING TO COSTS DEDUCTIONS AT END OF DESCRIPTION OF PERIOD AND EXPENSES (1) OF PERIOD - ------------------------------------------- ------------ ------------ ----------- ----------- Allowance for doubtful accounts (deducted from accounts receivable): Year Ended December 31, 1998... $ -- $ 436 $ 130 $ 306 Year Ended December 31, 1997... -- -- -- -- Year Ended December 31, 1996... -- -- -- -- (1) Accounts deemed to be uncollectible.
S-1 EX-10.17 2 EXHIBIT 10.17 1 EXHIBIT 10.17 STOCK PURCHASE AGREEMENT This STOCK PURCHASE AGREEMENT ("AGREEMENT") is dated the ___ day of March, 1998, between CHAMPIONSHIP AUTO RACING TEAMS, INC., a Delaware corporation ("CART" or the "PURCHASER"), and the shareholders of AMERICAN RACING SERIES, INC., a Michigan Corporation ("ARS"), U.E. PATRICK, STEVEN E. PATRICK, MARK A. PATRICK, RICK L. PATRICK, SHERRY PATRICK-BURKE AND ROGER BAILEY (individually and collectively, the "SELLERS"). WITNESSETH: CART has filed a Registration Statement with the Securities and Exchange Commission for the purpose of having an initial public offering of its common stock ("IPO"); and in conjunction therewith, CART desires to purchase all (but not less than all) of the outstanding stock of ARS ("SHARES") from the Sellers, upon the terms and subject to the conditions hereinafter set forth; NOW, THEREFORE, in consideration of the premises and the mutual covenants, representations and agreements and warranties contained, the parties agree as follows: 1. SALE OF SHARES; PURCHASE PRICE. 1.1. SALE OF SHARES. The Sellers agree to sell the Shares to the Purchaser, and the Purchaser agrees to purchase and acquire the Shares from the Sellers, free and clear of all liens, claims, encumbrances and rights of others. Such Shares shall be evidenced by share certificates of ARS's Stock which shall be duly endorsed or accompanied by appropriate stock transfer powers duly executed. 1.2. PURCHASE PRICE. In consideration of the sale of the Shares, the Purchaser shall pay to the Sellers a purchase price, (the "PURCHASE PRICE") for all the shares for an amount equal to the following: 1.2.1. CASH PURCHASE PRICE. $5,500,000 which shall be paid at Closing; plus 1.2.2. EARN OUT PURCHASE PRICE. An aggregate of $2,700,000 in three (3) equal 1 2 annual payments each year for the three (3) years on the anniversary of the closing, if and only if ARS shall achieve revenues equal to or exceeding $3,943,800 in 1998 and in 1999, and $573,800 in 2000 from the following: 1.2.2.1. Sponsorship agreements that are not currently contracted for $522,500 each year for 1998, 1999, and 2000. It is understood and agreed that "sponsorship agreements that are not currently contracted" means any annual revenues from sponsorships that are in excess of $2,175,000 for 1998, $2,140,000 for 1999, and $1,100,000 for 2000 (which are the sponsorship revenues to be provided under current contracts). The Sellers will be entitled to continue to solicit sponsors in all categories until September 1, 1998. After September 1, 1998, the Sellers agree to discontinue any sales efforts 1.2.2.2. $200,000.00 each to Promoter fees for Nazareth Speedway, Homestead Speedway, Michigan Speedway and California Speedway for the 1998 and 1999 seasons. 1.2.2.3. Engine leases of $1,380,000 and engine rebuilds of $1,440,000 for a total of $2,820,000 each for 1998 and 1999. ARS will use reasonable efforts to increase the engine lease payments and engine rebuilds for the year 1999. 1.2.2.4. Wheel sales (net of cost of goods sold) of $51,300.00 each year for 1998, 1999 and 2000. 1.2.2.5. Parts and chassis commissions of $350,000.00 each year for 1998 and 1999. 1.2.2.6. Anything herein to the contrary notwithstanding, ARS shall only be required to meet the TOTAL annual dollar volume per year as set forth in Subsections 1.2.2.1 through 1.2.2.5 (the "REVENUES") and not any specific amount for any of the above-described categories. Further, any of the Revenues produced by BP Automotive, Ltd, a Michigan corporation ("BP"), and an affiliate of ARS, shall be deemed to have been produced by ARS. 1.2.3. SHORTFALL AND MAKE UP. In the event that there is a shortfall in 1998 and/or 1999 in the ARS revenues, the annual payments by CART will be reduced dollar for dollar (to not less than $0) by the shortfall for that year, provided, however, if such shortfall is subsequently made up in 1999 or 2000, the payment not made to the Sellers the prior year shall be paid to them in the subsequent year on a dollar for dollar basis to the extent made up. 1.2.4. CART LONG TERM STOCK OPTION. The Sellers shall be granted options to purchase 97,883 shares of the common stock of CART at a per share price equal to the price offered to the public in the IPO if, and only if, ARS's 1998 Revenues exceed $3,943,800. 2 3 Any shortfall for 1998 may be made up by the Sellers rendering a cash contribution to CART for the amount of the shortfall within 30 days after written determination of such shortfall has been delivered to the Sellers. Upon rendering such payment, the Sellers shall be qualified for the said stock options. These options shall vest one year after the closing of the IPO and may be exercised at any time within five (5) years after they vest. Shares issuable upon exercise of the option will not be registered under the Securities Act of 1933 or any state securities laws and will constitute restricted securities within the meaning of Rule 144 under the Securities Act. 1.2.5. CART STOCK PURCHASE. The Sellers shall be granted the right to subscribe for up to $960,000 of CART's common stock at a per share price equal to the price offered to the public in the IPO (rounded to the nearest whole shares). The stock shall be fully registered and listed in connection with CART's IPO at the closing. Each Seller who elects to purchase such shares shall pay for such stock, in cash, at the closing, on the Closing Date, and shall acknowledge that he or she has received a copy of the current final prospectus for the IPO. None of those who elect to purchase have made or will make any commitment to purchase such shares until such time as the registration statement for the CART IPO has become effective. 2. WARRANTIES AND REPRESENTATIONS OF THE SELLERS. The Sellers warrant and represent to the Purchaser as follows: 2.1. AUTHORITY AND CAPACITY. The Sellers have, and on the Closing Date will have, all requisite power, authority and capacity to enter into this Agreement and to perform the obligations required of them hereunder. This Agreement is a valid and binding obligation of the Sellers, enforceable against Sellers in accordance with its terms, subject, however, to the effect of applicable bankruptcy, insolvency, reorganization, moratorium and similar laws as now or hereafter are in effect or as to the application of equitable principles in any proceeding, legal or equitable. 2.2. TITLE TO THE SHARES. The Sellers presently are the owner of record and the beneficial owner of all of the issued and outstanding shares of ARS's Stock (as set forth on Exhibit A). On the Closing Date the Sellers will be the owner of record and the beneficial owner of all of the issued and outstanding shares of ARS, and the transfer, assignment and delivery of the Shares by the Sellers and each of them pursuant to the provisions of this Agreement will transfer to the Purchaser legal and valid record and beneficial title thereto, free and clear of all claims, liens, charges and encumbrances of any kind. 2.3. ORGANIZATION, GOOD STANDING AND POWER. ARS is a corporation duly organized and validly existing as a corporation in good standing under the laws of the State of Michigan and has the corporate power and authority to own its properties and to carry on its business as the same is now being conducted. Complete and correct copies of ARS's Articles of Incorporation (together with all amendments thereto) and the Bylaws in effect on the date of this Agreement have been delivered to the Purchaser. ARS is not required to qualify as a foreign corporation under the laws of any jurisdiction. 3 4 2.4. CAPITALIZATION; ABSENCE OF OPTIONS AND WARRANTS. The authorized capital stock of ARS consists of 10,000 shares of common stock with a par value of $5.00 per share, of which 300 shares of common stock are outstanding. All of such outstanding shares have been duly and validly issued, and are fully paid and nonassessable. There are no existing options, calls, agreements or commitments of any character relating to any of the authorized or issued shares of ARS's Stock. 2.5. NO SUBSIDIARIES. Other than its ownership of Patrick Group, LLC (the "LLC"), and Melbourne Properties, a general partnership, ARS does not directly or indirectly own any interest in or control any other corporation, partnership, limited partnership, limited liability company or other entity. 2.6. EFFECTIVE AGREEMENT. The execution and performance of this Agreement by the Sellers and compliance with the provisions hereof do not and will not (i) violate, with or without the giving of notice and/or the passage of time, any provision of law applicable to the Sellers or ARS, which such violation could have a Material Adverse Effect on the operations or financial condition of ARS, or (ii) conflict with, or result in a breach or termination of, or constitute a default under, or result in the creation of any lien, charge or encumbrance upon any of ARS's properties pursuant to any corporate charter, by-law, or any other agreement or instrument to which the Sellers or ARS is a party or by which they or any of their properties may be bound, the result of which could have a Material Adverse Effect. As used in this Agreement, "Material Adverse Effect" means any change, effect or circumstance that, individually or when taken together with all other like changes, effects or circumstances that have occurred prior to the date of determination of the occurrence of a Material Adverse Effect, is or is reasonably likely to be materially adverse to the revenues of ARS, or the ability of ARS to continue to operate its business and affairs in the manner heretofore operated. 2.7. ABSENCE OF DEFAULTS. ARS is not in default under any contract, agreement, lease or document to which it or any of its properties is bound (the "Contracts"), and no event exists with respect thereto which, with or without the giving of notice and/or the passage of time, would constitute a default or would reasonably be expected to have a Material Adverse Effect. Except as set forth on in the Disclosure Schedule, each of the Contracts is a valid and binding agreement of ARS, enforceable against ARS in accordance with its terms except as such enforceability may be limited by bankruptcy, insolvency, reorganization or similar laws affecting creditors' rights generally, and by principles of equity (whether considered in a proceeding at law or in equity) and Sellers have no knowledge that any Contract is not a valid and binding agreement of the other parties thereto. ARS has fulfilled all material obligations required under each Contract to have been performed by it prior to the date hereof, and Sellers have no reason to believe that ARS will not be able to fulfill, when due, all of its obligations under the Contracts which remain to be performed after the Closing Date. Except as set forth on the Disclosure Schedule, the continuation, validity and effectiveness of each Contract would not be affected by the consummation of the transactions contemplated by this Agreement. 2.8. FINANCIAL STATEMENTS. The Sellers have delivered to the Purchaser copies of the audited balance sheet of ARS as at December 31, 1997 (the "AUDITED BALANCE SHEET") and the related statement of operations and retained earnings of ARS for the year then ended (the "AUDITED 4 5 INCOME STATEMENT"), including in each case the related notes and schedules thereto, if any. The Audited Balance Sheet and Audited Income Statement fairly present ARS's financial position at December 31, 1997 and results of operations for period indicated, and have been prepared in accordance with generally accepted accounting principles consistently applied and contain all adjustments which are necessary to a fair statement of the results for the period covered. Except as set forth on the Disclosure Schedule, since December 31, 1997 there has been no change (not including world events or general economic conditions) which has had a Material Adverse Effect. Sellers have no knowledge of any existing or threatened occurrence, event or development which it believes will have a Material Adverse Effect. 2.9. ABSENCE OF UNDISCLOSED LIABILITIES. Except to the extent shown or provided for in the Audited Balance Sheet, at December 31, 1997, or disclosed in the Disclosure Schedule (attached hereto as Exhibit B), ARS had no material obligations or liabilities of any kind, fixed, accrued or contingent, except obligations to perform after December 31, 1997 under open sales contracts, supply contracts, purchase orders and other commitments incurred in the ordinary course of business. 2.10. ABSENCE OF CERTAIN CHANGES. 2.10.1 Except as otherwise disclosed in the Disclosure Schedule, since December 31, 1997, ARS has not: 2.10.1.1 incurred any obligation or liability, fixed, accrued or contingent, except normal payroll obligations, and trade obligations incurred in the ordinary course of business; 2.10.1.2 discharged or satisfied any lien or encumbrance or paid any obligation or liability, fixed, accrued or contingent, except current liabilities reflected in its Audited Balance Sheet, and current liabilities incurred in the ordinary course of business subsequent to the date of the Audited Balance Sheet; 2.10.1.3. mortgaged, pledged or subjected to lien, charge, security interest or to any other encumbrance any of its assets or properties; 2.10.1.4. transferred or leased any of its assets or properties except in the ordinary course of business; 2.10.1.5. canceled or compromised any debt or claim, and other than adjustments made with respect to contracts for the purchase of supplies, the sale of products or the rendering of services in the ordinary course of business which adjustments would not have a Material Adverse Effect; 2.10.1.6. waived or released any rights; 2.10.1.7 transferred or granted any rights under any material concessions, leases, licenses, agreements, patents, inventions, trademarks, trade names, copyrights, or with 5 6 respect to know-how; 2.10.1.8. made or entered into any employment contract with any officer or employee or paid any bonus or increased the compensation of any officer or employee; 2.10.1.9. entered into any transaction other than in the ordinary course of business; 2.10.1.10. suffered any material casualty loss; 2.10.1.11. entered into any contract or commitment to make any material capital expenditure; 2.10.1.12. declared any dividend or made any distribution to its shareholders; or 2.10.1.13. issued or sold any shares of ARS's stock or any other securities of ARS, or granted any options, warrants or rights for the purchase of any shares of ARS's stock or other securities of ARS. 2.10.2 Since December 31, 1997, there has not occurred any event which could reasonably be expected to cause or result in a Material Adverse Effect. 2.11. TITLE TO PROPERTIES. Except to the extent shown in the Audited Balance Sheet, ARS has, and except for those assets and properties described in Section 7.6, on the Closing Date will have, good title to all of its properties and assets reflected in the Audited Balance Sheet or acquired thereafter (except those disposed of hereafter in the ordinary course of business), in each case free and clear of all claims, liens, charges and encumbrances of any kind. All of such properties and assets not distributed in accordance with Section 7.6 will be in good condition and repair on the Closing Date, reasonable wear and tear excepted, and suitable for the uses for which intended. 2.12. INVENTORIES. The inventories reflected on the Audited Balance Sheet were, and the inventories on hand at the Closing Date will be, as the case may be, acquired in the ordinary course of business at not more than market prices prevailing at the times of purchase and are usable in the normal operation of ARS' business. 2.13. COMPLIANCE WITH LAWS. ARS is not in violation of any applicable law, ordinance, regulation, order or requirement relating to its operations or its properties which would have a material adverse effect upon its operations or financial condition. 2.14. DOCUMENT LIST. The Disclosure Schedule includes a list of all material contracts, licenses, permits, approvals, and other agreements, to which ARS is a party (the "DOCUMENTS"). Complete copies of all such Documents have been delivered or made available to the Purchaser. Except only as to such Documents, ARS is not a party to or bound by any: 2.14.1. written or oral contract not made in the ordinary course of business; 6 7 2.14.2. contract which is not terminable by it without cost or liability to it or to its successors upon 30 days notice or less; 2.14.3. collective bargaining agreement; 2.14.4. bonus, deferred compensation, profit sharing, pension, retirement, stock option, stock purchase, hospitalization, insurance or other plan or arrangement providing for employee benefits; 2.14.5. lease with respect to any property, real or personal, whether as lessor or lessee; 2.14.6. dealers', manufacturers', representatives' or distributors' agreement which is not terminable by it without cost or liability to it or its successors on thirty (30) days' notice or less; 2.14.7. contract requiring material capital expenditures; 2.14.8. material contract for the sale of goods or the rendering of services continuing for a period of more than thirty (30) days from the date of this Agreement; 2.14.9. contract for the purchase of supplies, materials or services for delivery over a period of more than thirty (30) days from the date of this Agreement; 2.14.10. contract or agreement of any kind continuing for a period of more than 3 months from the date of this Agreement; 2.14.11. material governmental licenses, permits, approvals or orders; or 2.14.12. loan agreements, indentures, mortgages or security agreements. 2.15. EMPLOYEES. The Disclosure Schedule contains a list setting forth the names of all employees of ARS, the current duties of such employees, the total compensation paid to such employees during 1997, the current salary paid to such employee and a description of existing compensation programs for various categories of employees. 2.16. OBLIGATIONS TO EMPLOYEES. All obligations of ARS, whether arising by operation of law or by contract for payment to trusts or other funds or to any governmental agency, or to any individual employee or agent (or his heirs, legatees or legal representatives) with respect to unemployment compensation benefits, profit sharing, pension or retirement benefits, social security benefits, or similar obligations have been paid, or shall have been paid on or before the Closing Date, by ARS, except current amounts accrued but not yet due. All obligations of ARS, whether arising by operation of law, by contract or by past practice, for vacation and holiday pay, bonuses and other 7 8 forms of compensation which are payable to employees or agents of ARS, have been paid, or shall have been paid, by ARS, on or before the Closing Date, except current amounts shown on the Disclosure Schedule which are accrued but not yet due. 2.17. INSURANCE LIST. The Disclosure Schedule contains a list and brief description of all policies of fire, extended coverage, business interruption, public and product liability and all other kinds of insurance held by ARS (the "INSURANCE LIST"). A copy of each such policy has been delivered or made available to the Purchaser. All such insurance policies are in full force and effect with all premiums due thereon paid in full (except those premiums which are paid on an installment basis and indicated as such on the Disclosure Statement). ARS has not received any notice or other communication from any issuer of the policies listed on the Insurance List canceling or materially amending any of such policy, materially increasing any deductibles or retained amounts thereunder or rejecting any claim under any policy and, to the knowledge of Sellers, no such cancellation, amendment or increase of deductibles is threatened. 2.18. REAL PROPERTY; LEASES OF REAL PROPERTY. The Disclosure Schedule contains a list and brief description of the location and approximate size of each tract of real property owned or leased by ARS (the "PROPERTY LIST"). With respect to the real property disclosed on the Property List, except as to mortgages, liens and encumbrances reflected in the Audited Balance Sheet, or existing utility easements which do not materially interfere with the present use of the real properties or materially affect their value, all of the real properties which are reflected as being owned by ARS in the Audited Balance Sheet are owned in fee simple, free and clear of all claims, liens, charges and encumbrances of any kind. Each of ARS's leases of real property is a valid and binding lease obligation, in full force and effect, enforceable in accordance with its terms and does not require the consent of any person to the transactions contemplated by this Agreement (except for consents which have been obtained in writing and delivered by Sellers to Purchaser). 2.19. LEASES OF PERSONAL PROPERTY. The Disclosure Schedule contains a list and brief description of each lease with respect to personal property leased by ARS (the "PERSONAL PROPERTY LIST"). Each of ARS's leases of personal property is a valid and binding lease obligation, in full force and effect, enforceable in accordance with its terms and does not require the consent of any person to the transactions contemplated by this Agreement (except for consents which have been obtained in writing and delivered by Sellers to Purchaser). 2.20. BOOKS AND RECORDS. The books and records of ARS are in all material respects complete and correct and have been maintained in accordance with sound business practices and the requirements of applicable law. 8 9 2.21. LITIGATION. There is no litigation, proceeding or investigation pending or, to the best knowledge of any Seller, threatened by or against ARS or its properties or business or the transactions contemplated by this Agreement, nor is any Seller aware of any fact or circumstance which they reasonably believe would be the basis for any such litigation, proceeding or investigation. Neither ARS nor Sellers are in violation of or in default with respect to any judgment, order, award, writ, injunction, decree or rule of any court, governmental authority or any regulation of any administrative agency or governmental authority, where such violation or default would have a Material Adverse Effect or would adversely affect the consummation of the transactions contemplated hereby. 2.22. TAX RETURNS. ARS has prepared and filed with the appropriate federal, state and local governmental agencies all tax returns required to be filed, and has paid all assessments shown to be due and claims to be due thereon. No claim for the assessment or collection of taxes has been asserted against ARS by any federal, state or local governmental authority. To the knowledge of the Sellers, the federal income tax returns of ARS are not being audited by the Internal Revenue Service, and ARS has not received notice of any such audit. The Sellers know of (i) no tax returns or reports which are required to be filed by ARS which have not been so filed and (ii) no unpaid assessments for any additional taxes of any fiscal period. 2.23. BENEFIT PLANS. ARS maintains a Simplified Employee Pension ("SEP"), an employee benefit plan subject to the Employee Retirement Income Security Act of 1974. ARS makes annual contributions to the SEP, and it is current with respect to all such contributions. 2.24. DISCLOSURE. No representation or warranty by Sellers in this Agreement or in any Exhibit or Schedule hereto, or in any certificate delivered or to be delivered pursuant to this Agreement, contains or will contain any untrue statement of a material fact or omits or will omit any material fact necessary in order to make the statements contained therein not misleading. 3. WARRANTIES AND REPRESENTATIONS OF PURCHASER. The Purchaser warrants and represents to the Sellers as follows: 3.1. AUTHORITY AND CAPACITY. The Purchaser has, and on the Closing Date will have, all requisite corporate power, authority and capacity to enter into this Agreement and to perform the obligations required of it hereunder, including, specifically, the delivery of the stock options and stock pursuant to Sections 1.2.4 and 1.2.5. This Agreement is a valid and binding obligation of the Purchaser, enforceable against Purchaser in accordance with its terms, subject, however, to the effect of applicable bankruptcy, insolvency, reorganization, moratorium and similar laws as now or hereafter are in effect or as to the application of equitable principles in any proceeding, legal or equitable. 3.2. ORGANIZATION, GOOD STANDING, POWER, ETC. The Purchaser is a corporation duly organized, validly existing and in good standing under the laws of Delaware and has the corporate power and authority to own its properties and to carry on its business as the same is now being conducted. 9 10 3.3. EFFECTIVE AGREEMENT. The execution and performance of this Agreement by the Purchaser and compliance with the provisions hereof do not and will not (i) violate, with or without the giving of notice and/or the passage of time, any provision of law applicable to the Purchaser, which violation could have a material adverse effect on the operations or financial condition of the Purchaser, or (ii) conflict with, or result in a material breach or termination of, or constitute a default under, or result in the creation of any material lien, charge or encumbrance upon any of the Purchaser's properties pursuant to any corporate charter, by-law, or any other material agreement or instrument to which the Purchaser is a party or by which it or any of its properties may be bound. 3.4. INVESTMENT REPRESENTATION. The Purchaser understands and acknowledges that the Shares have not been, and on the Closing Date will not have been, registered under the Securities Act of 1933, as amended (the "SECURITIES ACT"), or under any applicable state securities law, and that this transaction has not been reviewed by, passed on or submitted to any federal or state agency or commission. The Purchaser will be acquiring the Shares for its own account, for investment, and not with a view to, or for resale in connection with, a distribution thereof, in whole or in part. The Purchaser has made and will make such investigations of the financial statements, books, records and other documents and information concerning ARS as is deemed by the Purchaser to be necessary and appropriate in order to protect the Purchaser in connection with the transactions contemplated by this Agreement, it being understood, however, that no such investigation shall release the Sellers from any of their representations and warranties contained herein. 3.5. GOOD FAITH ASSISTANCE. Purchaser will cause its officers, employees and agents to utilize reasonable efforts to assist ARS to secure the Revenues, including but not limited to, the additional sponsorship revenues through the period ending September 1, 1998; and, in furtherance thereof, will provide Sellers complete access to all books and records of ARS. Further, the Purchaser shall elect as the Board of Directors of ARS for the years 1998, 1999, and 2000, not more than five nor less than two directors, two of whom shall be Sellers U.E. Patrick and Roger Bailey. If either U.E. Patrick or Roger Bailey are unable to serve as a director, then a successor or successors shall be selected by the Sellers. If Purchaser wishes to elect three additional directors, these directors shall be the then acting Chairman of the Board of CART, plus a CART team owner and a person who is neither an employee, agent or advisor of CART. Failure of Purchaser to so utilize its reasonable efforts to assist ARS or to elect the nominees of Sellers to ARS Board shall relieve the Sellers from having to achieve any of the Revenues in order for the annual payment of the balance of the purchase price to be paid as set forth in Section 1.2.2 to the extent that the failure to achieve such revenues is attributable to Purchaser's failure to use such reasonable efforts. 4. COVENANTS OF THE SELLERS. The Sellers covenant and agree that: 4.1. CONDUCT OF ARS'S BUSINESS. 4.1.1. Subject to the provision of 7.6, from and after the date of this Agreement until the Closing Date, the Sellers will cause ARS to: A. carry on its business in the normal and ordinary course and consistent 10 11 with the manner in which the same was heretofore being conducted; B. maintain and keep its properties in good condition and repair, reasonable wear and tear and damage due to casualty excepted; C. keep in force and effect insurance comparable in amount, scope and coverage to that which it presently maintains; D. perform in all material respects all of its obligations and commitments; and E. keep all of its material leases of real and personal property in force and effect. 4.1.2. From and after the date of this Agreement until the Closing Date, the Sellers will prohibit ARS from: A. redeeming or repurchasing any outstanding shares of ARS's Stock; B. issuing or agreeing to issue any additional shares of ARS's Stock or granting options or issuing warrants to acquire such shares; C. making any commitments or contracts of any kind or nature, or incurring any obligations or liabilities, exceeding $25,000.00 in the aggregate, except in the ordinary course of business; D. increasing any salaries being paid to any employees in excess of salaries being paid to them at the date hereof; E. making any loans to any officers or directors; or F. discharging or satisfying any lien or encumbrance or paid any obligation or liability, fixed, accrued or contingent, except current liabilities reflected in its Audited Balance Sheet, and current liabilities incurred in the ordinary course of business subsequent to the date of the Audited Balance Sheet; G. mortgaging, pledging or subjecting to lien, charge, security interest or to any other encumbrance any of its assets or properties; H. transferring or leasing any of its assets or properties except in the ordinary course of business which adjustments would not have a Material Adverse Effect; I. canceling or compromising any debt or claim, and other than 11 12 adjustments made with respect to contracts for the purchase of supplies, the sale of products or the rendering of services in the ordinary course of business which adjustments would not have a Material Adverse Effect; J. waiving or releasing any rights; K. transferring or granting any rights under any material concessions, leases, licenses, agreements, patents, inventions, trademarks, trade names, copyrights, or with respect to know-how; L. entering into any transaction other than in the ordinary course of business; M. suffering any material casualty loss; N. declaring any dividend or making any distribution to its shareholders; or O. entering into any transaction which would cause any of the Sellers' warranties and representations contained in this Agreement not to be true and correct in all material respects on and as of the Closing Date. 4.2. ACCESS TO DOCUMENTS. From the date of this Agreement until the Closing Date, the Sellers will permit the Purchaser and its attorneys, accountants, appraisers and other representatives access at all reasonable times to the properties, files, books and records of ARS, as well as to all information relating to its operations, financial condition, properties, taxes, contracts and commitments. 4.3. FURTHER ACTIONS. At the closing, the Sellers will, at the request of the Purchaser, execute and deliver to the Purchaser all such further assignments, endorsements and such other documents as the Purchaser may reasonably request in order to perfect the transfer, assignment and delivery to the Purchaser of the Shares owned by it. 4.4. EXCLUSIVITY. Sellers grant to Purchaser the exclusive right to acquire the shares until June 30, 1998. Sellers shall not (i) solicit, initiate or encourage the submission of any proposal or offer from any person relating to the acquisition of any capital stock or other voting securities, or any substantial portion of the assets of, ARS (including any acquisition structured as a merger, consolidation or share exchange) or (ii) participate in any discussions or negotiations regarding, furnishing any information with respect to, assist or participate in, or facilitate in any other manner any effort or attempt by any person to do or seek any of the foregoing. Sellers will notify Purchaser immediately if any person makes any proposal, offer, inquiry or contact with respect to any of the foregoing. 5. COVENANTS OF THE PURCHASER. The Purchaser covenants and agrees that: 12 13 5.1. CONDUCT OF BUSINESS. The Purchaser will not take any action which would cause any of the Purchaser's warranties and representations contained in this Agreement not to be true and correct in all material respects on and as of the Closing Date. 5.2. FURTHER ACTIONS. The Purchaser will, at the request of the Sellers, execute and deliver to the Sellers at the closing, all such further assignments, endorsements and such other documents as the Sellers may reasonably request in order to consummate the transactions contemplated by this Agreement. 6. CONDITIONS PRECEDENT TO OBLIGATIONS OF THE PURCHASER. The obligations of the Purchaser to consummate the transactions contemplated by this Agreement are subject, at the Purchaser's option, to the satisfaction at or prior to the Closing Date of each of the following conditions: 6.1. CORRECTNESS OF WARRANTIES AND REPRESENTATIONS. The warranties and representations of the Sellers contained in Section 2 of this Agreement shall be true and correct in all material respects on and as at the Closing Date, with the same force and effect as though the same had been made on and as of the Closing Date, and the Sellers shall have delivered to the Purchaser a certificate to such effect, signed by each of the Sellers, dated the Closing Date. 6.2. COMPLIANCE WITH CONDITIONS. All of the terms, covenants and conditions of this Agreement required to be complied with and performed by the Sellers at or prior to the Closing Date shall have been duly complied with and performed in all material respects. 6.3. OPINION OF COUNSEL FOR THE SELLERS. The Purchaser shall have received an opinion of Cox, Hodgman & Giarmarco, P.C., counsel for the Sellers, dated the Closing Date, in the form and to the effect set forth in Exhibit C annexed hereto. 6.4. ABSENCE OF LEGAL PROCEEDINGS. No action or proceeding shall have been instituted or affirmatively threatened before a court or any other governmental body, or by any public authority or agency, seeking to restrict or prohibit the sale by the Sellers to the Purchaser of the Shares or the operation by the Purchaser of the business presently conducted by ARS. 6.5. ABSENCE OF MATERIAL DAMAGE TO PROPERTY. Between the date of this Agreement and the Closing Date there shall not have occurred, (i) any casualty (irrespective of any insurance relating thereto) to any of ARS's properties or assets as a result of which the monetary amount of damage or destruction caused thereby aggregates twenty-five percent (25%) or more of the aggregate book value shown on ARS's books for all of its fixed assets. 6.6. DELIVERY OF FINANCIAL STATEMENTS. The Purchaser shall have received from the Sellers, as and when prepared by ARS, the unaudited balance sheets of ARS as at each month end after December 31, 1997 and the related unaudited statements of operations and retained earnings of ARS for each such period then ended, including, in each case, the related notes and schedules 13 14 thereto, which financial statements shall fairly present (and delivery of which shall constitute Sellers' representation that they do fairly present) ARS's financial position as at each such month end and its results of operations for each such period then ended, shall have been prepared in accordance with generally accepted accounting principles consistently applied, shall contain all adjustments which are necessary to a fair statement of the results for the interim periods presented. 6.7. COVENANT NOT TO COMPETE. Sellers U.E. Patrick and Roger Bailey each shall have entered into a Covenant Not to Compete (the "COVENANT") with ARS, substantially in the form attached hereto as Exhibit D. 6.8. DELIVERY OF RESIGNATIONS, MINUTE BOOKS, STOCK BOOKS. The Purchaser shall have received (i) the written resignation of the officers and directors (other than U.E. Patrick and Roger Bailey as Directors and Roger Bailey as President and Gary Donahoe as Vice President --as set forth in Sections 3.5 and 7.8) of ARS whose names are set forth in Exhibit E annexed hereto; (ii) all of ARS's corporate minute books, stock books, stock transfer ledgers and corporate seals; and (iii) such other items and documents of or relating to ARS as the Purchaser may reasonably request as are consistent with the purposes of this Agreement. 6.9. CERTIFIED ResolUTIONS. The Purchaser shall have received from the Sellers certified copies of all resolutions adopted by the Board of Directors of the ARS necessary in order to authorize the purchase of the Shares pursuant to this Agreement. 6.10. SECTION 338(H)(10) ELECTION. The parties agree that in connection with the sale of the Shares contemplated hereby, the parties shall cause an express election pursuant to Section 338(h)(10) of the Internal Revenue Code (a SECTION 338 "ELECTION") to be made, and shall comply with the rules and regulations applicable to such Section 338 Election. 14 15 6.10.1 For purposes of executing a Section 338 Election, on or prior to the Closing Date, the Sellers and the Purchasers (and/or ARS as necessary) jointly shall execute four (4) copies (three [3] for the Purchaser and one [1] for the Sellers) of Internal Revenue Service Form 8023 (or any successor form) and all attachments required to be filed therewith pursuant to applicable Treasury regulations. The forms relating to the Section 338 Election for federal, state and local tax purposes hereinafter shall be referred to as the "FORMS". The Purchaser and the Sellers agree that the Forms shall be filed with the appropriate tax authorities not earlier than sixty (60) days before the latest date for the filing thereof. At least one hundred twenty (120) days prior to the latest date for the filing of such Form, the Sellers shall prepare and submit to the Purchaser any necessary corrections, amendments or supplements to such Form and the attachments thereto, as executed the Sellers and the Purchaser (and/or ARS as necessary) on or before the Closing Date. The Sellers shall not file any Form or the attachments thereto as corrected, amended or supplemented unless they shall have obtained the Purchaser's consent thereto, which consent shall not be unreasonably withheld. On or prior to the thirtieth (30th) day after the Purchaser's receipt of such corrections, amendments or supplements from the Sellers, the Purchaser shall deliver to the Sellers either (A) its consent to such filing or (B) a written notice specifying in reasonable detail all disputed items and the basis therefor. If, within thirty (30) days after Sellers' receipt of the written notice described in clause (B) above, the Sellers and the Purchaser have been unable to resolve their differences, any remaining disputed issues shall be submitted to a nationally recognized independent public accounting firm in the United States (other than a firm which then serves, has been selected to serve in the future, or has served within the past three [3] years as, the independent auditor for the Sellers or any of their affiliates) selected by the Sellers, and reasonably acceptable to the Purchaser, to resolve the disputed issues in a final, binding manner after hearing the views of both parties. In that event, the Sellers and the Purchaser shall execute and consent to the filing of the corrected, amended or supplemented Form in the manner determined by such accounting firm. In no event, however, shall the Forms be filed later than fifteen (15) days before they are due. The fees and expenses of the accounting firm shall be shared equally. 6.10.2 For purposes of making a Section 338 Election, Exhibit F shall set forth an allocation of the Purchaser's "ADJUSTED GROSSED-UP BASIS" in the Shares (within the meaning of the Treasury Regulations under Section 338 of the Internal Revenue Code) to the tangible and intangible assets of ARS as of the Closing Date (the "ALLOCATION"). The Allocation shall be binding upon the Purchaser and the Sellers for purposes of allocating the "DEEMED SELLING PRICE" (within the meaning of the Treasury Regulations) among the assets of ARS. Neither party shall file any tax return, or take a position with a tax authority, that is inconsistent with the Allocation. 6.11 NO CHANGE. Since December 31, 1997, no change in the business, assets or financial condition of ARS shall have occurred which has or will have a Material Adverse Effect. 15 16 7. CONDITIONS PRECEDENT TO OBLIGATIONS OF THE SELLERS. The obligations of the Sellers to consummate the transactions contemplated by this Agreement are subject, at Sellers' option, to the satisfaction at or prior to the Closing Date of each of the following conditions: 7.1. CORRECTNESS OF WARRANTIES AND REPRESENTATIONS. The warranties and representations of the Purchaser contained in Section 3 of this Agreement shall be true and correct in all material respects on and as at the Closing Date, with the same force and effect as though the same had been made on and as of the Closing Date, and the Purchaser shall have delivered to the Sellers a certificate to such effect, signed by an authorized officer of the Purchaser, dated the Closing Date. 7.2. COMPLIANCE WITH CONDITIONS. All of the terms, conditions and covenants of this Agreement required to be complied with and performed by the Purchaser on or prior to the Closing Date shall have been duly complied with and performed in all material respects. 7.3. OPINION OF COUNSEL FOR THE PURCHASER. Sellers shall have received an opinion of Butzel Long, counsel for the Purchaser, dated the Closing Date, in the form and to the effect set forth in Exhibit G annexed hereto. 7.4. ABSENCE OF LEGAL PROCEEDINGS. No action or proceeding shall have been instituted or affirmatively threatened before a court or any other governmental body, or by any public authority or agency, seeking to restrict or prohibit the sale by Sellers to the Purchaser of the Shares or the operation by the Purchaser of the business presently conducted by ARS. 7.5. CERTIFIED RESOLUTIONS. The Sellers shall have received from the Purchaser certified copies of all resolutions adopted by the Board of Directors of the Purchaser necessary in order to authorize the purchase of the Shares pursuant to this Agreement. 7.6. DISTRIBUTIONS PRIOR TO CLOSING. Anything to the contrary notwithstanding, the parties agree that, prior to the Closing, ARS shall distribute to its shareholders on February 28, 1998, by way of dividends or otherwise, all cash, accounts receivable (subject to all accounts payable), its entire interest in the LLC, and the partnership interests with respect to the real estate located in Melbourne, Florida. The cash distributed shall be adjusted to reflect any obligations that ARS may have with respect to engine deposits, unearned income related to 1998 and beyond, or other matters recorded on ARS's financial statements which reflect future obligations of ARS, all of which shall be accounted for in accordance with past practices. In the event that the distribution of cash is less than or greater than the amount as finally determined by ARS's accountants, ARS or the Sellers, as the case may be, shall correct such error by ARS distributing to Sellers or Sellers returning to ARS in cash the amount so determined within thirty (30) days after the Closing. In addition to the distributions described in this Section 7.6, in the event that the Savannah Racetrack of Savannah, Georgia, or the trustee in bankruptcy for said Track makes a distribution for unpaid sanction fees for the 1997 race to CART and ARS, then fifty percent (50%) of such distribution shall be paid immediately to the Sellers and shall be accounted for as if such amount were an Account Receivable as set forth herein and distributed on February 28, 1998. 16 17 7.7 ACCOUNTS RECEIVABLE. With respect to the Accounts Receivable being distributed to Sellers as referred to in Section 7.6 (the "Assigned Accounts"), all receipts from each of said accounts, however obtained, including but not limited to the withholding of monies due such accounts by ARS, shall be deemed to be a payment on the Assigned Account until all such accounts have been paid in full, regardless of the intent of the obligor for such account. Such amounts so collected shall be immediately paid to Sellers. 7.8. EMPLOYMENT CONTRACT. Purchaser shall have entered into an Amendment to the Employment Contract of Roger Bailey in the form attached hereto as Exhibit H. 8. SIMULTANEOUS CLOSING. Purchaser has entered into an agreement to purchase the assets of BP immediately after the Closing contemplated by this Agreement. In the event that for any reason whatsoever Purchaser does not purchase the assets of BP contemporaneous with the Closing of this transaction pursuant to the terms of the Asset Purchase Agreement attached hereto as Exhibit K, then this transaction shall be null and void and of no force or effect and all of the transfers and other actions taken pursuant to this Agreement shall be rescinded and the parties shall be returned to their same status as existed immediately prior to the Closing pursuant to this Agreement and the transactions contemplated to sell and purchase as evidenced hereunder shall be cancelled and of no further force or effect. 9. THE CLOSING 9.1. CLOSING AND CLOSING DATE. The closing hereunder (herein referred to as the "CLOSING") shall take place at a mutually convenient location and at a mutually convenient time simultaneously with the closing of the initial public offering of CART's common stock, provided that all conditions to the obligations of the Purchaser and of the Sellers set forth, respectively, in Sections 6 and 7 hereof shall have been satisfied or waived. The date of the Closing is referred to in this Agreement as the "CLOSING DATE". Notwithstanding any other provision of this Agreement, if the Closing fails to occur by June 30, 1998, then, in such event, Purchaser or Sellers, in addition to any other rights they may have, shall have the right, exercisable by written notice, to terminate this Agreement, such termination to be effective upon the date set forth in such notice; provided, however, that nothing contained in this Section 9.1 shall affect or impair any rights or obligations arising prior to or at the time of termination of this Agreement, or that may arise by an event causing the termination of this Agreement. 9.2. PROCEEDINGS AT CLOSING. 9.2.1. All proceedings taken and all documents to be executed and delivered by the parties at the Closing shall be deemed to have been taken and executed simultaneously, and no proceedings shall be deemed taken nor documents executed or delivered until all have been taken, executed and delivered. 9.2.2. At the Closing, the Sellers shall deliver or cause to be delivered to the 17 18 Purchaser the following: A. Share certificates evidencing the Shares, duly endorsed or accompanied by appropriate stock transfer powers duly executed; B. The certificate referred to in Section 6.1 hereof; C. The opinion of counsel for the Sellers referred to in Section 6.3 hereof; D. The list of Sellers with the number of options for each Seller and the purchase price for the shares which any Seller has elected to purchase pursuant to Sections 1.2.4 and 1.2.5, respectively; E. A duly executed Option Agreement from each Seller to whom options are to be granted as referred to in Section 1.2.4; F. The Covenant Not to Compete duly executed by U.E. Patrick as referred to in Section 6.7; G. The Covenant Not to Compete duly executed by Roger Bailey as referred to in Section 6.7; and H. The executed Amendment to Employment Agreement of Roger Bailey. 9.2.3. At the Closing, the Purchaser shall deliver or cause to be delivered to the Sellers the following: A. The Purchase Price, in the form of the Purchaser's certified checks in the amounts and to the respective Sellers as set forth on Exhibit A. B. The certificate referred to in Section 7.1 hereof; C. The opinion of counsel for the Purchaser referred to in Section 7.3; D. The certified resolutions referred to in Section 7.5 hereof; E. A duly executed Option Agreement to each Seller to whom options are to be granted as referred to in Section 1.2.4 hereof and the stock to be purchased as referred to in Section 1.2.5 hereof; and F. The executed Amendment to the Employment Contract with Roger Bailey. 18 19 10. INDEMNIFICATION. 10.1 INDEMNIFICATION OF PURCHASER BY SELLERS. The Sellers covenant and agree that they will indemnify and hold the Purchaser and its officers, directors, employees and agents harmless from and against any and all losses, damages, liabilities, obligations, and reasonable costs and expenses incurred or sustained by the Purchaser by reason or arising out of any material breach of any warranty, representation, covenant, agreement or obligation of the Sellers contained in this Agreement, including, but not limited to, any claim by any taxing authority with respect to taxes (including penalties and interest) due through the close of business the day prior to the Closing Date for which adequate provisions for such taxes referred to in Sections 2.8 and 2.22 had not been made. 10.2 INDEMNIFICATION OF SELLERS BY PURCHASER. The Purchaser covenants and agrees that it will indemnify and hold the Sellers harmless from and against any and all losses, damages, liabilities, obligations, and reasonable costs and expenses incurred or sustained by the Sellers by reason or arising out of any material breach of any warranty, representation, covenant, agreement or obligation of the Purchaser contained in this Agreement. 10.3 CLAIMS FOR INDEMNITY. Promptly upon notice of any claim, suit or demand which any person entitled to indemnity hereunder (the "INDEMNITEE") believes will give rise to indemnity by the Sellers or the Purchaser, as the case may be (the "INDEMNITOR"), under Sections 10.1 or 10.2, the Indemnitee shall give the Indemnitor written notice thereof, and the Indemnitor shall defend against any such claim, suit or demand, in its name or in the name of the Indemnitee, as the case may be, at the Indemnitor's expense and with counsel of its own choice at its own expense. The Indemnitor shall have no obligation or liability to indemnify with respect to, or in connection with, any claim, suit or demand which shall be paid, settled or compromised by the Indemnitee without the prior written consent of the Indemnitor. No right or remedy conferred in this Section 10.3 is intended to be exclusive of any other right or remedy available, now or hereafter, at law or in equity or otherwise, to the parties hereto. 10.4 RIGHT TO OFFSET. To the extent that the Purchaser has suffered any loss or losses, damages, liabilities or obligations by reason of any breach of any warranty, representation, covenant, agreement or obligation of the Sellers contained in this Agreement, the Purchaser shall have the right to offset any such amounts against any amounts due and owing Sellers. 19 20 11. ARBITRATION. In the event of any dispute among CART, ARS and Sellers under this Agreement which they are unable to resolve, including but not limited to whether the criteria as set forth in Section 1.2.2. has been met, or whether the requirements as set forth in Section 3.5 have been met, the dispute shall be submitted to arbitration at the request of any party. The party requesting arbitration shall so notify the other party(ies) in writing and shall specify the question or questions to be arbitrated. Within ten (10) days after receipt of such notification, CART or ARS shall select one arbitrator and Sellers shall select one arbitrator and each shall give the name and address thereof to the other party. The two arbitrators shall select a third disinterested arbitrator to complete a panel consisting of three arbitrators. In the event one party fails to select an arbitrator within the required time period, the arbitrator who has been selected may select one disinterested arbitrator and the two arbitrators may proceed to resolve the dispute. Within ten (10) days of the selection of the second arbitrator, or third arbitrator, as the case may be, the panel of arbitrators shall schedule a hearing on the disputed issues to be held within thirty (30) days after the selection of the final arbitrators. The arbitrators shall render their written decision within thirty (30) days of the last day of the hearing. The decision of a majority of the arbitrators shall be final and conclusive on all parties. Such decision shall be entered as a final judgement in a court of competent jurisdiction and shall be a final, nonappealable order. The arbitration shall be conducted in accordance with the commercial arbitration rules of the American Arbitration Association except as specified herein. The arbitration shall take place in Troy, Michigan or such other location as the parties may agree. The arbitrator shall substantially comply with the Michigan rules of evidence; shall grant essential but limited discovery; shall provide for the exchange of witness lists and exhibit copies; and shall conduct a pretrial conference and consider dispositive motions. Each party shall have the right to request the arbitrator to make findings of specific factual issues. The arbitrator shall decide all issues and disputes in conformity with applicable law and shall have no authority to alter the terms of this Agreement. Each party shall cooperate with the arbitrator to comply with procedural time requirements and the failure of either to do so shall entitle the arbitrator to extend the arbitration proceedings accordingly and to impose sanctions on the party responsible for the delay, payable to the other party. If the arbitrator determines that a party has failed to act in good faith or with a reasonable basis in connection with the dispute, the arbitrator shall be entitled to award, against the party so acting, the fees and expenses of the arbitration and the costs and expenses incurred by the other party in connection with the arbitration, included but not limited to reasonable attorneys' fees. In the absence of such a finding, the fees and expenses of the arbitration shall be borne equally by Purchaser and Sellers (except that each party shall be solely responsible for the fees and expenses of its counsel and other professionals and experts retained by it). 12. MISCELLANEOUS. 12.1. ANNOUNCEMENTS. All announcements relating to the transactions contemplated hereby shall be mutually approved by, and shall not be released except with the mutual consent of the parties thereto, except where immediate disclosure, in the opinion of counsel for the party concerned, is required by law. 12.2. BROKERAGE. The Sellers warrant and represent to the Purchaser that they have not incurred any obligation or liability, contingent or otherwise, for brokerage or finder's fees or agent's 20 21 commissions or other like payment in connection with this Agreement or the transactions contemplated hereby. The Sellers covenant and agree to indemnify and hold the Purchaser harmless from and against any such obligation or liability (and any reasonable expense or expenses incurred in investigating or defending the same, including counsel fees) based in any way on any agreements, arrangements or understandings claimed to have been made by the Sellers with any third party. The Purchaser warrants and represents to the Sellers that it has not incurred any obligation or liability, contingent or otherwise, for brokerage or finder's fees or agent's commissions or other like payment in connection with this Agreement or the transactions contemplated hereby. The Purchaser covenants and agrees to indemnify and hold the Sellers harmless from and against any such obligation or liability (and any reasonable expense or expenses incurred in investigating or defending the same, including counsel fees) based in any way on any agreements, arrangements or understandings claimed to have been made by the Purchaser with any third party. 12.3. SURVIVAL OF WARRANTIES AND REPRESENTATIONS. Each party hereto covenants and agrees that its warranties and representations contained in this Agreement and in any document delivered or to be delivered pursuant hereto shall survive the Closing Date hereunder until December 31, 2000. 12.4. EXPENSES. Whether or not the transactions contemplated by this Agreement are consummated, each of the parties hereto shall pay the fees and expenses of its counsel, accountants, other experts and all other expenses incurred by such party incident to the negotiation, preparation and execution of this Agreement. 12.5. NOTICES. All notices, requests, demands and other communications which are required or permitted to be given under this Agreement shall be in writing and shall be deemed to have been duly given upon the delivery or mailing thereof, as the case may be, if delivered personally or sent by registered or certified mail, return receipt requested, postage prepaid: (a) If to the Seller, to: U.E. Patrick Patrick Exploration Company 301 W. Michigan Ave. P.O. Box 747 Jackson, MI 49204-0747 with a copy to: Basil M. Briggs, Esq. Cox, Hodgman & Giarmarco, P.C. - Suite 500 201 West Big Beaver Road Troy, MI 48084-4160 (b) If to the Purchaser, to: Championship Auto Racing Teams, Inc. 755 W. Big Beaver Road, Suite 800 Troy, MI 48084-4160 with a copy to: Jack Bjerke, Esq. 21 22 Capital Square, Suite 1800 65 East State Street Columbus, OH 43215-4294 with a copy to: Justin. G. Klimko, Esquire Butzel Long 150 W. Jefferson, Ste. 900 Detroit, MI 48226-4430 or to such other address as either the Sellers or the Purchaser shall have specified by notice in writing to the other. 12.6. WAIVERS. Either the Sellers or the Purchaser may, by written notice to the other, (a) extend the time for the performance of any of the obligations or other actions of the other; (b) waive any inaccuracies in this Agreement or in any document delivered pursuant hereto by the other; (c) waive compliance with any of the terms, conditions or covenants required to be complied with by the other hereunder; and (d) waive or modify performance of any of the obligations of the other hereunder. The waiver by any party hereto of a breach of any provision of this Agreement shall not operate or be construed as a waiver of any other or subsequent breach. 12.7. ENTIRE AGREEMENT. This Agreement constitutes the entire agreement between the parties with respect to the subject matter hereof. 12.8. BINDING EFFECT; BENEFITS. This Agreement shall inure to the benefit of and be binding upon the parties hereto and their respective successors and assigns. Nothing in this Agreement, expressed or implied, is intended to confer on any person other than the parties hereto, or their respective successors and assigns, any rights, remedies, obligations or liabilities. 12.9. FULFILLMENT OF CONDITIONS. The parties hereby covenant and agree to use their reasonable efforts to fulfill all of the terms and conditions contained in this Agreement, and to take such action as may be reasonably required to obtain all necessary consents, permits, authorizations and approvals of third parties which are conditions of this Agreement. 12.10. LAW GOVERNING. This Agreement shall be governed by and construed in accordance with the laws of the State of Michigan, without regard to choice of law provisions which would require the application of the laws of any other jurisdiction. 12.11. HEADINGS. Headings on the Articles and Sections in this Agreement are for reference purposes only and shall not be deemed to have any substantive effect. 12.12. COUNTERPARTS. This Agreement may be executed in any number of counterparts, each of which shall be deemed an original but all of which together shall be deemed to be one and the same instrument. 22 23 IN WITNESS WHEREOF, the Sellers have caused this Agreement to be duly executed in each of their names, and the Purchaser has caused this Agreement to be duly executed in its corporate name by one of its duly authorized officers, all as of the date first above written. Witnesses: /s/ BASIL M. BRIGGS - -------------------------------- /s/ U.E. PATRICK ------------------------------ /s/ JUSTIN G. KLIMKO U.E. PATRICK - -------------------------------- /s/ BASIL M. BRIGGS - -------------------------------- /s/ STEVEN E. PATRICK ------------------------------ /s/ JUSTIN G. KLIMKO STEVEN E. PATRICK - -------------------------------- /s/ BASIL M. BRIGGS - -------------------------------- /s/ MARK A. PATRICK ------------------------------ /s/ JUSTIN G. KLIMKO MARK A. PATRICK - -------------------------------- /s/ BASIL M. BRIGGS - -------------------------------- /s/ RICK L. PATRICK ------------------------------ /s/ JUSTIN G. KLIMKO RICK L. PATRICK - -------------------------------- /s/ BASIL M. BRIGGS - -------------------------------- /s/ SHERRY PATRICK-BURKE ------------------------------ /s/ JUSTIN G. KLIMKO SHERRY PATRICK-BURKE - -------------------------------- /s/ BASIL M. BRIGGS - -------------------------------- /s/ ROGER BAILEY ------------------------------ /s/ JUSTIN G. KLIMKO ROGER BAILEY - -------------------------------- "SELLERS" CHAMPIONSHIP AUTO RACING 23 24 TEAMS, INC., a Delaware corporation - ------------------------------- /s/ Andrew Craig By: ----------------------------- Chairman and CEO Its: ---------------------------- - ------------------------------- "PURCHASER" 24 25 EXHIBITS: A - List showing owners of record (Sellers) of ARS Stock B - Disclosure Schedule - Documents C - Opinion of counsel to Sellers - Cox, Hodgman & Giarmarco, P.C. D - Covenant not to Compete - U.E. Patrick and Roger Bailey E - List of Officers and Directors of the Corporation F - Section 338 Allocation G - Opinion of counsel to Purchaser - Butzel Long H - Amendment of Employment Contract with Roger Bailey I - Asset Purchase Agreement - CART / BP 25 26 ASSET PURCHASE AGREEMENT This ASSET PURCHASE AGREEMENT ("Agreement") is made this ___ day of March, 1998, between CHAMPIONSHIP AUTO RACING TEAMS, INC., a Delaware corporation ("CART" or the "PURCHASER"), and BP AUTOMOTIVE, LTD., a Michigan corporation ("SELLER"). WITNESSETH: Seller is in the business of selling racing wheels and related products (the "Business"); CART has filed a Registration Statement with the Securities and Exchange Commission for the purpose of having an initial public offering of its common stock ("IPO"); and in conjunction therewith, CART desires to purchase the Business and certain assets from Seller upon the terms and subject to the conditions hereinafter set forth; NOW, THEREFORE, in consideration of the premises and the mutual covenants, representations and agreements and warranties contained, the parties agree as follows: 1 PURCHASE AND SALE OF ACQUIRED ASSETS 1.1 Purchase and Sale. Upon the terms and subject to the conditions of this Agreement, Seller agrees to sell, assign, transfer, convey and deliver, or cause to be sold, assigned, transferred, conveyed and delivered, to Purchaser and Purchaser agrees to purchase at the Closing, all the acquired assets free and clear of all liens, liabilities or obligations. 1.2 Acquired Assets. The term "ACQUIRED ASSETS" means all the assets, properties, goodwill and rights owned by Seller on the Closing Date and used or usable in connection with the operation of the Business, of whatever kind and nature, real or personal, tangible or intangible, other than the Excluded Assets (as defined in Section 1.4), including, but not limited to the following: (a) all machinery, equipment, tools, dies, jigs, 1 27 patterns, trade fixtures, molds, spare parts, vehicles, furniture, designs, drawings and supplies; (b) all rights in, to and under all leases of tools, furniture, machinery, supplies, vehicles, equipment and other items of personal property listed on Exhibit A attached hereto; (c) all of Seller's right, title and interest in and to the Agreement between Lola Cars and American Racing Series, Inc., a Michigan corporation ("ARS"), attached hereto as Exhibit B; (d) all real property, leasehold and other interests in real property of Seller, in each case together with all buildings, improvements, fixtures and all appurtenances thereto; (e) all right, title and interest of Seller in, to and under the following, which shall be referred to herein collectively as the "INTELLECTUAL PROPERTY RIGHTS"; (i) all inventions (whether patentable or unpatentable and whether or not reduced to practice), all improvements thereto, and all patents, patent applications, and patent disclosures, together with all reissuances, continuations, continuations-in-part, revisions, extensions, and reexaminations thereof; (ii) all trademarks, service marks, trade dress, logos, trade names, together with all translations, adaptations, derivations, and combinations thereof and including all goodwill associated therewith, and all applications, registrations, and renewals in connection therewith; (iii) all copyrightable works, all copyrights, all mask works, and all applications, registrations, and renewals in connection therewith; 2 28 (iv) all trade secrets and confidential business information (including ideas, research and development, technology, know-how, formulas, compositions, manufacturing and production processes and techniques, technical data, designs, drawings, specifications, customer and supplier lists, pricing and cost information, and business and marketing plans and proposals); and (v) all other proprietary rights, all copies and tangible embodiments of any of the foregoing (in whatever form or medium), and all license agreements (as licensee or licensor) relating to any of the foregoing; (f) to the extent legally assignable, all right, title and interest of Seller in, to and under all franchises, licenses, permits, orders, certificates, approvals and other governmental authorizations which are necessary to own or lease and operate the Acquired Assets and to conduct the Business as it has been conducted by Seller ("PERMITS"); (g) all right, title and interest of Seller in, to and under all contracts, agreements, including but not limited to purchase orders, customer orders and work orders (the "Contracts"); (h) all computer programs, including but not limited to the Peer-to-Peer Network, and a copy of the source code and object code of all such programs, together with all additions, modifications, updates, and enhancements thereto; all design specifications including, but not limited to, program descriptions, system flow charts, file layouts, report layouts, screen layouts, and all other computer program documentation; and all user's manuals, training manuals, sales literature, and other system and operations documentation relating to such computer programs; (i) all rights, claims, causes of action and chooses in action against third parties (including, but not limited to, rights against suppliers under warranties covering any inventory, machinery or equipment) existing on the Closing Date, the benefits of which have been assumed by or assigned 3 29 to Purchaser pursuant to this Agreement; (j) all books and records relating to the Business, including, but not limited to, financial, accounting and personnel records, property records, production records, engineering records, environmental compliance records, files, invoices, customer lists and records, supplier lists and records and other data owned or used by Seller relating to the Acquired Assets described in subparagraphs (a) through (j) of this Section 1.2; and (k) all other tangible and intangible assets of Seller relating to the Business, whether or not carried at value or listed on the books and records of Seller, and whether or not in the possession of Seller or others. 1.3 Transfer of Title to Acquired Assets. The sale, assignment, conveyance, transfer and delivery by Seller of the Acquired Assets shall be made at the Closing by such bills of sale, assignments, licenses, endorsements and other appropriate instruments of transfer as shall be necessary to vest in Purchaser, as of the Closing Date, good and marketable title to the Acquired Assets, free and clear of all liens. 1.4 Excluded Assets. The term "EXCLUDED ASSETS" means: (a) minute books, stock records, tax returns, financial statements and similar corporate records of Seller; (b) the rights of Seller to any of Seller's claims for any federal, state, local or foreign tax refunds; and (c) cash, cash equivalents and accounts receivable of Seller; (d) Note Receivable from Ted Wayman to Seller; (e) other Notes Receivable (if any) of Seller; (f) Accounts Payable (if any); and (g) the corporate name, "BP Automotive Ltd.". 1.5 ACCOUNTS RECEIVABLE. With respect to the Accounts Receivable being Excluded Assets and retained by Seller as referred 4 30 to in Section 1.4(c), (the "Assigned Accounts"), all receipts from each of said accounts, however obtained, including but not limited to the withholding of monies due such accounts by Seller, shall be deemed to be a payment on the Assigned Account until all such accounts have been paid in full, regardless of the intent of the obligor for such account. Such amounts so collected shall be immediately paid to Seller. Notwithstanding the foregoing, Buyer shall have no obligation to collect or pursue the collection of Accounts Receivable retained by Seller. 1.6 CERTAIN LIABILITIES ASSUMED. Upon the terms and subject to the conditions of this Agreement, Purchaser shall assume and agree to pay, perform and discharge all obligations and liabilities of Seller under the contracts and agreements which are to be acquired by Purchaser pursuant to the provisions of this Agreement, and with respect to which Purchaser succeeds to the rights of Seller thereunder, to the extent that such obligations and liabilities accrue from and after the Closing Date (the "Assumed Liabilities"). 1.7 LIABILITIES NOT ASSUMED. Purchaser shall not assume and shall not be responsible to pay, perform or discharge any other obligations, liabilities, contracts or commitments of Seller of any kind or nature whatsoever. 1.8 PURCHASE PRICE. Purchaser shall pay to Seller at Closing a purchase price, (the "PURCHASE PRICE") for all the Acquired Assets an amount equal to the following: 1.8.1 CASH PURCHASE PRICE. $1,500,000 which shall be paid at Closing; plus 1.8.2 EARN OUT PURCHASE PRICE. An aggregate of $300,000 in three (3) equal annual payments each year for three (3) years on the anniversary of the Closing, if and only if Purchaser shall achieve revenues equal to or exceeding $401,300.00 (the "REVENUES") in 1998 and 1999, from wheel sales and parts and chassis commissions, and $51,300.00 for year 2000 from wheel sales, (net of cost of goods sold). Included in the revenues from wheel sales shall be the revenues (net of cost of goods sold) from the sales of the 1993-20 Lola wheels. Further, the earn out shall require total Revenues as set forth in Sections 1.2.2.1. through 1.2.2.5. of the Stock Purchase Agreement (Exhibit G) produced by both Seller and ARS of $3,943,800 for the years 1998-1999 and $573,800 in the year 2000. 5 31 1.8.3 SHORTFALL AND MAKE UP. In the event that there is a shortfall in 1998 and/or 1999 in the Revenues, the annual payments by CART will be reduced dollar for dollar (to not less than $0) by the shortfall for that year, provided, however, if such shortfall is subsequently made up in 1999 or 2000, the payment not made to the Seller the prior year shall be paid to it in the subsequent year on a dollar-for-dollar basis to the extent made up. 1.8.4 CART LONG TERM STOCK OPTION. James McGee ("MCGEE"), a Shareholder of Seller, shall be granted options to purchase 2,117 shares of the common stock of CART at a per-share price equal to the price offered to the public in the IPO if, and only if, 1998 Revenues equal or exceed the amounts specified in Section 1.8.2. Any shortfall for 1998 may be made up by the Seller and/or McGee rendering a cash contribution to CART for the amount of the shortfall within 30 days after written determination of such shortfall has been delivered to the Seller. Upon rendering such payment, the McGee shall be qualified for the said stock options. These options shall vest one year after the closing of the IPO and they may be exercised at any time within five (5) years after they vest. Shares issuable upon exercise of the option will not be registered under the Securities Act of 1933 or any state securities laws and will constitute restricted securities within the meaning of Rule 144 under the Securities Act. 1.8.5 CART STOCK PURCHASE. McGee shall subscribe for 2500 shares of CART's common stock at a per-share price equal to the price offered to the public in the IPO. The stock shall be fully registered and listed in connection with CART's IPO at the Closing. McGee shall pay for such stock, in cash, at the Closing, on the Closing Date and shall acknowledge that he has received a copy of the current final prospectus for the IPO. McGee has not made, and will not make, any commitment to purchase such shares until such time as the registration statement for the CART IPO has become effective. 1.8.6 ALLOCATION. The Purchase Price shall be allocated among the Acquired Assets as set forth on Exhibit C. The Purchase Price shall be allocated to the Assets (other than Goodwill) in an amount equal to their net book value as carried on Seller's balance sheet and the balance of the Purchase Price shall be allocated to Goodwill. Seller and Purchaser each hereby covenant and agree that it will not take a position on any income tax return, before any governmental agency charged with the 6 32 collection of any income tax, or in any judicial proceeding that is in any way inconsistent with the terms of this Section 1.8.6. 2 WARRANTIES AND REPRESENTATIONS OF THE SELLER. Seller warrants and represents to Purchaser as follows: 2.1 Authority and Capacity. Seller has, and on the Closing Date will have, all requisite power, authority and capacity to enter into this Agreement and to perform the obligations required of it hereunder. This Agreement is a valid and binding obligation of Seller, enforceable against Seller in accordance with its terms, subject, however, to the effect of applicable bankruptcy, insolvency, reorganization, moratorium and similar laws as now or hereafter are in effect or as to the application of equitable principles in any proceeding, legal or equitable. 2.2 Authorization. The execution and delivery of this Agreement and all other agreements, documents and instruments provided for herein by Seller, and the consummation of all transactions contemplated hereby and thereby, has been duly authorized by all requisite corporate action of Seller (including approval by Seller's shareholders in accordance with applicable law and the provisions of Seller's Articles of Incorporation and Bylaws). 2.3 Title to the Acquired Assets. Seller has good and marketable title to all of the Acquired Assets free and clear of all Liens of any nature whatsoever, except as set forth on the Disclosure Schedule attached hereto as Exhibit D. The Acquired Assets include all the assets and properties which are necessary to conduct the Business as presently conducted, and to perform all of the contracts, leases, agreements, commitments, purchase orders, work orders, customer orders, and other arrangements of Seller. The tools, machinery and equipment included in the assets of Seller are in good operating condition and are sufficient to enable Buyer to operate the Business as presently conducted. 2.4 Organization, Good Standing and Power. Seller is a corporation duly organized and validly existing as a corporation in good standing under the laws of the State of Michigan and has the corporate power and authority to own its properties, to carry on its business as the same is now being conducted and to execute and deliver this Agreement and perform its obligations hereunder. Seller is not required to qualify as a foreign corporation under 7 33 the laws of any jurisdiction. 2.5 No Subsidiaries. Seller does not directly or indirectly own any interest in or control any other corporation, partnership, limited partnership, limited liability company, joint venture or other entity. 2.6 Effective Agreement. The execution and performance of this Agreement by the Seller and compliance with the provisions hereof do not and will not (i) violate, with or without the giving of notice and/or the passage of time, any provision of law applicable to the Seller, which such violation could have a Material Adverse Effect on the Business or the operations or financial condition of Seller, or (ii) conflict with, or result in a breach or termination of, or constitute a default under, or result in the creation of any lien, charge or encumbrance upon any Acquired Assets pursuant to any corporate charter, by-law, or any other agreement or instrument to which the Seller is a party or by which it or any of its properties may be bound, the result of which could have a Material Adverse Effect. As used in this Agreement, "Material Adverse Effect" means any change, effect or circumstance that, individually or when taken together with all other like changes, effects or circumstances that have occurred prior to the date of determination of the occurrence of a Material Adverse Effect, is or is reasonably likely to be materially adverse to the Acquired Assets, business, financial condition or results of operations of Seller, or the ability of Seller to perform its obligations under this Agreement, or the ability of Buyer to operate the acquired assets and the business in the manner heretofore operated by Seller. 2.7 Absence of Defaults. Seller is not in default under any of the contracts or any other contract, agreement, lease or document to which it or any of its properties is bound, and no event exists with respect thereto which, with or without the giving of notice and/or the passage of time, would constitute a default or would reasonably be expected to have a Material Adverse Effect. Except as set forth on in the Disclosure Schedule, each of the Contracts is a valid and binding agreement of Seller, enforceable against Seller in accordance with its terms except as such enforceability may be limited by bankruptcy, insolvency, reorganization or similar laws affecting creditors' rights generally, and by principles of equity (whether considered in a proceeding at law or in equity) and Seller has no knowledge that 8 34 any Contract is not a valid and binding agreement of the other parties thereto. Seller has fulfilled all material obligations required under each Contract to have been performed by it prior to the date hereof, and Seller has no reason to believe that Purchaser will not be able to fulfill, when due, all of its obligations under the Contracts which remain to be performed after the Closing Date. Except as set forth on the Disclosure Schedule, the continuation, validity and effectiveness of each Contract would not be affected by the transfer thereof to Purchaser under this Agreement and all such Contracts are assignable to Purchaser without the consent of any other party. 2.8 Financial Statements. The Seller has delivered to the Purchaser copies of its audited balance sheet as at December 31, 1997 (the "AUDITED BALANCE SHEET") and its related statement of operations and retained earnings for the year then ended (the "AUDITED INCOME STATEMENT"), including in each case the related notes and schedules thereto, if any. The Audited Balance Sheet and Audited Income Statement fairly present Seller's financial position at December 31, 1997 and results of operations for period indicated, and have been prepared in accordance with generally accepted accounting principles consistently applied and contain all adjustments which are necessary to a fair statement of the results for the period covered. Except as set forth on the Disclosure Schedule, since December 31, 1997, there has been no change (not including world events or general economic conditions) which has had a Material Adverse Effect. Seller has no knowledge of any existing or threatened occurrence, event or development which it believes will have a Material Adverse Effect. 2.9 Absence of Undisclosed Liabilities. Except to the extent shown or provided for in the Audited Balance Sheet at December 31, 1997, or disclosed in the Disclosure Schedule, Seller had no material obligations or liabilities of any kind, fixed, accrued or contingent, except obligations to perform after December 31, 1997 under open sales contracts, supply contracts, purchase orders and other commitments incurred in the ordinary course of business. 2.10 Absence of Certain Changes. (a) Except as otherwise disclosed in the Disclosure Schedule, since December 31, 1997, Seller has not: 9 35 (i) incurred any obligation or liability, fixed, accrued or contingent, except normal payroll obligations, and trade obligations incurred in the ordinary course of business; (ii) discharged or satisfied any lien or encumbrance or paid any obligation or liability, fixed, accrued or contingent, except current liabilities reflected in its Audited Balance Sheet, and current liabilities incurred in the ordinary course of business subsequent to the date of the Audited Balance Sheet; (iii) mortgaged, pledged or subjected to lien, charge, security interest or to any other encumbrance any of its assets or properties; (iv) transferred or leased any of its assets or properties except in the ordinary course of business; (v) canceled or compromised any debt or claim, other than adjustments made with respect to contracts for the purchase of supplies, the sale of products or the rendering of services in the ordinary course of business which adjustments would not have a Material Adverse Effect; (vi) waived or released any rights; (vii) transferred or granted any rights under any material concessions, leases, licenses, agreements, patents, inventions, trademarks, trade names, copyrights, or with respect to know-how; (viii) made or entered into any employment contract with any officer or employee or paid any bonus or increased the compensation of any officer or employee; (ix) entered into any transaction other than in the ordinary course of business; (x) suffered any material casualty loss; or (xi) entered into any contract or commitment to make any material capital expenditure. (b) Since December 31, 1997, there has not occurred any event 10 36 which could reasonably be expected to cause or result in a Material Adverse Effect. 2.11 Inventories. The inventories reflected on the Audited Balance Sheet were, and the inventories will be, on hand at the Closing Date and will be, as the case may be, acquired in the ordinary course of business at not more than market prices prevailing at the times of purchase and are usable in the normal operation of the business (except for the 1993-20 Lola Wheels). 2.12 Products Liability and Warranty Claims. Except as set forth in the Disclosure Schedule: (a) Seller has not made any oral or written warranties with respect to the quality or absence of defects of its products or services which are in force as of the date of this Agreement; (b) there are no liabilities of or claims against Seller and, to the knowledge of Seller, no liabilities or claims are threatened against Seller, with respect to any product liability (or similar claim) of Seller or product warranty (or similar claim) of Seller that relates to any product manufactured or sold by Seller; (c) Seller has no knowledge of any facts or circumstances which might reasonably give rise to such liabilities or claims. 2.13 Compliance with Laws. Seller is not in violation of any applicable law, ordinance, regulation, order or requirement relating to its operations or its properties which would have a material adverse effect upon its assets, operations or financial condition. 2.14 Document List. The Disclosure Schedule includes a list of all material contracts, licenses, permits, approvals, and other agreements, to which Seller is a party (the "DOCUMENTS"). Complete copies of all such Documents have been delivered or made available to the Purchaser. Except only as to such Documents, Seller is not a party to or bound by any: (a) written or oral contract not made in the ordinary course of business; 11 37 (b) contract which is not terminable by it without cost or liability to it or to its successors upon 30 days notice or less; (c) collective bargaining agreement; (d) bonus, deferred compensation, profit sharing, pension, retirement, stock option, stock purchase, hospitalization, insurance or other plan or arrangement providing for employee benefits; (e) lease with respect to any property, real or personal, whether as lessor or lessee; (f) dealers, manufacturers, representatives or distributors agreement which is not terminable by it without cost or liability to it or its successors on thirty (30) days notice or less; (g) contract requiring material capital expenditures; (h) material contract for the sale of goods or the rendering of services continuing for a period of more than 30 days from the date of this Agreement; (i) contract for the purchase of supplies, materials or services for delivery over a period of more than 30 days from the date of this Agreement; (j) contract or agreement of any kind continuing for a period of more than 3 months from the date of this Agreement; (k) material governmental licenses, permits, approvals or orders; or (l) loan agreements, indentures, mortgages or security agreements 2.15 Employees. The Disclosure Schedule contains a list setting forth the names of all employees of Seller, the current duties of such employees, the total compensation paid to such employees during 1997, the current salary paid to such employee and a description of existing compensation programs for various categories of employees. 12 38 2.16 Obligations to Employees. All obligations of Seller, whether arising by operation of law or by contract for payment to trusts or other funds or to any governmental agency, or to any individual employee or agent (or his heirs, legatees or legal representatives) with respect to unemployment compensation benefits, profit sharing, pension or retirement benefits, social security benefits, or similar obligations have been paid, or shall have been paid on or before the Closing Date, by Seller, except current amounts accrued but not yet due. All obligations of Seller, whether arising by operation of law, by contract or by past practice, for vacation and holiday pay, bonuses and other forms of compensation which are payable to employees or agents of Seller, have been paid, or shall have been paid, by Seller, on or before the Closing Date, except current amounts shown on the Disclosure Schedule which are accrued but not yet due. 2.17 Insurance List. The Disclosure Schedule contains a list and brief description of all policies of fire, extended coverage, business interruption, public and product liability and all other kinds of insurance held by Seller (the "INSURANCE LIST"). A copy of each such policy has been delivered or made available to the Purchaser. All such insurance policies are in full force and effect with all premiums due thereon paid in full (except those premiums which are paid on an installment basis and indicated as such on the Disclosure Statement). Seller has not received any notice or other communication from any issuer of the policies listed on the Insurance List canceling or materially amending any of such policy, materially increasing any deductibles or retained amounts thereunder or rejecting any claim under any policy and, to the knowledge of Seller, no such cancellation, amendment or increase of deductibles is threatened. 2.18 Real Property; Leases of Real Property. There is no real property owned or leased by Seller. 2.19 Leases of Personal Property. There are no leases of personal property. 2.20 Books and Records. The books and records of Seller are in all material respects complete and correct and have been maintained in accordance with sound business practices and the requirements of applicable law. 13 39 2.21 Litigation. There is no litigation, proceeding or investigation pending or, to the best knowledge of Seller, threatened by or against Seller or its properties or business or the transactions contemplated by this Agreement, nor is Seller aware of any fact or circumstance which they reasonably believe would be the basis for any such litigation, proceeding or investigation. Seller is not in violation of or in default with respect to any judgment, order, award, writ, injunction, decree or rule of any court, governmental authority or any regulation of any administrative agency or governmental authority, where such violation or default would have a Material Adverse Effect or would adversely affect the consummation of the transactions contemplated hereby. 2.22 Tax Returns. Seller has prepared and filed with the appropriate federal, state and local governmental agencies all tax returns required to be filed, and has paid all assessments shown to be due and claims to be due thereon. No claim for the assessment or collection of taxes has been asserted against Seller by any federal, state or local governmental authority. To the knowledge of Seller, the federal income tax returns of Seller are not being audited by the Internal Revenue Service, and Seller has not received notice of any such audit. The Seller knows of (i) no tax returns or reports which are required to be filed by Seller which have not been so filed and (ii) no unpaid assessments for any additional taxes of any fiscal period. 2.23 Benefit Plans. Seller does not maintain an employee benefit plan subject to the Employee Retirement Income Security Act of 1974. 2.24 Disclosure. No representation or warranty by Seller in this Agreement or in any Exhibit or Schedule hereto, or in any certificate delivered or to be delivered pursuant to this Agreement, contains or will contain any untrue statement of a material fact or omits or will omit any material fact necessary in order to make the statements contained therein not misleading. 3 WARRANTIES AND REPRESENTATIONS OF PURCHASER. The Purchaser warrants and represents to the Seller as follows: 3.1 Authority and Capacity. The Purchaser has, and on the Closing Date will have, all requisite corporate power, authority and capacity to enter into this Agreement and to perform the 14 40 obligations required of it hereunder, including, specifically, the delivery of the stock options and stock pursuant to Sections 1.8.4 and 1.8.5. This Agreement is a valid and binding obligation of the Purchaser, enforceable against Purchaser in accordance with its terms, subject, however, to the effect of applicable bankruptcy, insolvency, reorganization, moratorium and similar laws as now or hereafter are in effect or as to the application of equitable principles in any proceeding, legal or equitable. 3.2 Organization, Good Standing, Power, Etc. The Purchaser is a corporation duly organized, validly existing and in good standing under the laws of Delaware and has the corporate power and authority to own its properties and to carry on its business as the same is now being conducted. 3.3 Effective Agreement. The execution and performance of this Agreement by the Purchaser and compliance with the provisions hereof do not and will not (i) violate, with or without the giving of notice and/or the passage of time, any provision of law applicable to the Purchaser, which such violation could have a material adverse effect on the operations or financial condition of the Purchaser, or (ii) conflict with, or result in a material breach or termination of, or constitute a default under, or result in the creation of any material lien, charge or encumbrance upon any of the Purchaser's properties pursuant to any corporate charter, by-law, or any other material agreement or instrument to which the Purchaser is a party or by which it or any of its properties may be bound. 3.4 Good Faith Assistance. Purchaser will cause its officers, employees and agents to utilize reasonable efforts to assist Seller to secure the Revenues, including but not limited to, the wheel sales and chassis commission revenues through the period ending December 31, 2000. In furtherance thereof, Seller, or its attorneys and/or representatives, shall be permitted access to the documents described in Section 4.2 through the period ending December 31, 2000. Failure of Purchaser to so utilize reasonable efforts to assist Seller shall relieve Seller from having to achieve any of the Revenues in order for the annual payment of the balance of the purchase price to be paid as set forth in Section 1.8.2 to the extent that the failure to achieve such revenues is attributable to Purchaser's failure to use such reasonable efforts. 4 COVENANTS OF THE SELLER. The Seller covenants and agrees 15 41 that: 4.1 Conduct of Business. 4.1.1 From and after the date of this Agreement until the Closing Date, the Seller will: (a) carry on its business in the normal and ordinary course and consistent with the manner in which the same was heretofore being conducted; (b) maintain and keep its properties in good condition and repair, reasonable wear and tear and damage due to casualty excepted; (c) keep in force and effect insurance comparable in amount, scope and coverage to that which it presently maintains; (d) perform in all material respects all of its obligations and commitments; and (e) keep all of its material leases of real and personal property in force and effect. 4.1.2 From and after the date of this Agreement until the Closing Date, the Seller will not: (a) incur any liability or obligation, fixed contingent, accrued or otherwise, other than liabilities incurred in the ordinary course of business consistent with past practice, or discharge or satisfy any Lien or pay any liabilities, other than in the ordinary course of business consistent with past practice, or fail to pay or discharge when due any material liabilities (individually or in the aggregate), or fail to perform any material obligations (individually or in the aggregate); (b) mortgage, pledge or subject any of its assets to any mortgage, lien, pledge, security interest, conditional sales contract or other encumbrance of any nature whatsoever; (c) make or suffer any amendment or termination of any material agreement, contract, commitment, lease or 16 42 plan, or cancel, modify or waive any material debts or claims held by it or waive any rights material to the Business; (d) sell or in any way transfer or otherwise dispose of any of its assets or property except for sales of inventory and other transfers and dispositions in the ordinary course of business; (e) suffer any casualty, damage, destruction or loss, or any material interruption in use, of any material assets or properties, whether or not covered by insurance, or suffer any repeated, recurring or prolonged shortage, cessation or interruption of supplies or utility or other services required to conduct its business and operations; (f) institute, settle, or agree to settle any litigation, action, proceeding, or arbitration related to the Acquired Assets or the Business; (g) make any commitments or contracts of any kind or nature, or incur any obligations or liabilities exceeding $25,000.00 in the aggregate, except in the ordinary course of business; (h) increase any salaries being paid to any employees in excess of salaries being paid to them at the date hereof; (i) make any loans to any officers or directors; or (j) cancel or compromise any debt or claim, other than adjustments made with respect to contracts for the purchase of supplies, the sale of products or the rendering of services in the ordinary course of business which adjustments would not have a Material Adverse Effect; (k) transfer or grant any rights under any material concessions, leases, licenses, agreements, patents, inventions, trademarks, trade names, copyrights, or with respect to know-how; 17 43 (l) enter into any transaction which would cause any of the Seller's warranties and representations contained in this Agreement not to be true and correct in all material respects on and as of the Closing Date. 4.2 Access to Documents. From the date of this Agreement until the Closing Date, the Seller will permit the Purchaser and its attorneys, accountants, appraisers and other representatives access at all reasonable times to the properties, files, books and records of Seller, as well as to all information relating to its operations, financial condition, properties, taxes, contracts and commitments. 4.3 Bulk Sales Act. Purchaser waives compliance with the bulk sale provisions of the Michigan Uniform Commercial Code, MCLA 440.1101 et seq (the "Bulk Sales Law"). Seller agrees to pay when due all claims of creditors which could be asserted by reason of noncompliance with the Bulk Sales Law, and to the extent Purchaser may be held liable for any claims of Seller's creditors by reason of noncompliance with the Bulk Sales Law, Purchaser shall be indemnified against any such loss in accordance with Section 10. 4.4 Further Actions. At the closing, the Seller will, at the request of the Purchaser, execute and deliver to the Purchaser all such further assignments, endorsements and such other documents as the Purchaser may reasonably request in order to perfect the transfer, assignment and delivery to the Purchaser of the Acquired Assets being sold hereunder. 4.5 EXCLUSIVITY. Seller grants to Purchaser the exclusive right to acquire the Business and the Acquired Assets until June 30, 1998. Seller shall not (i) solicit, initiate or encourage the submission of any proposal or offer from any person relating to the acquisition of any capital stock or other voting securities, or any substantial portion of the assets of, Seller (including any acquisition structured as a merger, consolidation or share exchange) or (ii) participate in any discussions or negotiations regarding, furnishing any information with respect to, assist or participate in, or facilitate in any other manner any effort or attempt by any person to do or seek any of the foregoing. Seller will notify Purchaser immediately if any person makes any proposal, offer, inquiry or contact with respect to any of the foregoing. 18 44 COVENANTS OF THE PURCHASER. the Purchaser covenants and agrees that: 5.1 Conduct of Business. The Purchaser will not take any action which would cause any of the Purchaser's warranties and representations contained in this Agreement not to be true and correct in all material respects on and as of the Closing Date. 5.2 Further Actions. The Purchaser will, at the request of the Seller, execute and deliver to the Seller at the closing, all such further assignments, endorsements and such other documents as the Seller may reasonably request in order to consummate the transactions contemplated by this Agreement. 6 CONDITIONS PRECEDENT TO OBLIGATIONS OF THE PURCHASER. The obligations of the Purchaser to consummate the transactions contemplated by this Agreement are subject, at the Purchaser's option, to the satisfaction at or prior to the Closing Date of each of the following conditions: 6.1 Correctness of Warranties and Representations. The warranties and representations of the Seller contained in Section 2 of this Agreement shall be true and correct in all material respects on and as at the Closing Date, with the same force and effect as though the same had been made on and as of the Closing Date, and the Seller shall have delivered to the Purchaser a certificate to such effect, signed by an officer of the Seller, dated the Closing Date. 6.2 Compliance with Conditions. All of the terms, covenants and conditions of this Agreement required to be complied with and performed by the Seller at or prior to the Closing Date shall have been duly complied with and performed in all material respects. 6.3 Opinion of Counsel for the Seller. The Purchaser shall have received an opinion of Cox, Hodgman & Giarmarco, P.C., counsel for the Seller, dated the Closing Date, in the form and to the effect set forth in Exhibit E annexed hereto. 6.4 Absence of Legal Proceedings. No action or proceeding shall have been instituted or affirmatively threatened before a court or any other governmental body, or by any public authority or agency, seeking to restrict or prohibit the sale by the Seller to the Purchaser of the Acquired Assets or the operation by the 19 45 Purchaser of the business presently conducted by Seller. 6.5 Absence of Material Damage to Property. Between the date of this Agreement and the Closing Date there shall not have occurred, (i) any casualty (irrespective of any insurance relating thereto) to any of Seller's properties or assets as a result of which the monetary amount of damage or destruction caused thereby aggregates twenty-five percent (25%) or more of the aggregate book value shown on Seller's books for all of its fixed assets. 6.6 Delivery of Financial Statements. The Purchaser shall have received from the Seller, as and when prepared by Seller, the unaudited balance sheets of Seller as at each month end after December 31, 1997 and the related unaudited statements of operations and retained earnings of Seller for each such period then ended, including, in each case, the related notes and schedules thereto, which financial statements shall fairly present (and delivery of which shall constitute Seller's representation that they do fairly present) Seller's financial position as at each such month end and its results of operations for each such period then ended, shall have been prepared in accordance with generally accepted accounting principles consistently applied, shall contain all adjustments which are necessary to a fair statement of the results for the interim periods presented. 6.7 No Change. Since December 31, 1997, no change in the Business or the financial condition of the Business shall have occurred which has or will have a Material Adverse Effect. 6.8 Certified Resolutions. The Purchaser shall have received from the Seller certified copies of all resolutions adopted by the Board of Directors of the Seller necessary in order to authorize the purchase of the Acquired Assets pursuant to this Agreement. 7 CONDITIONS PRECEDENT TO OBLIGATIONS OF THE SELLER. The obligations of the Seller to consummate the transactions contemplated by this Agreement are subject, at Seller's option, to the satisfaction at or prior to the Closing Date of each of the following conditions: 7.1 Correctness of Warranties and Representations. The warranties and representations of the Purchaser contained in Section 3 of this Agreement shall be true and correct in all material respects on and as at the Closing Date, with the same force and effect as though the same had been made on and as of the 20 46 Closing Date, and the Purchaser shall have delivered to the Seller a certificate to such effect, signed by an authorized officer of the Purchaser, dated the Closing Date. 7.2 Compliance With Conditions. All of the terms, conditions and covenants of this Agreement required to be complied with and performed by the Purchaser on or prior to the Closing Date shall have been duly complied with and performed in all material respects. 7.3 Opinion of Counsel for the Purchaser. Seller shall have received an opinion of Butzel Long, counsel for the Purchaser, dated the Closing Date, in the form and to the effect set forth in Exhibit F annexed hereto. 7.4 Absence of Legal Proceedings. No action or proceeding shall have been instituted or affirmatively threatened before a court or any other governmental body, or by any public authority or agency, seeking to restrict or prohibit the sale by Seller to the Purchaser of the Acquired Assets or the operation by the Purchaser of the business presently conducted by Seller. 7.5 Certified Resolutions. The Seller shall have received from the Purchaser certified copies of all resolutions adopted by the Board of Directors of the Purchaser necessary in order to authorize the purchase of the Acquired Assets pursuant to this Agreement. 8 SIMULTANEOUS CLOSING. Purchaser has entered into an agreement to purchase all outstanding shares of stock of ARS (the "Shares") immediately prior to the Closing contemplated by this Agreement. In the event that for any reason whatsoever Purchaser does not purchase the Shares contemporaneous with the Closing of this transaction pursuant to the terms of the Stock Purchase Agreement attached hereto as Exhibit G, then this transaction shall be null and void and of no force or effect and all of the transfers and other actions taken pursuant to this Agreement shall be rescinded and the parties shall be returned to their same status as existed immediately prior to the Closing pursuant to this Agreement and the transactions contemplated to sell and purchase as evidenced hereunder shall be cancelled and of no further force or effect. 9 THE CLOSING. 21 47 9.1 Closing and Closing Date. The closing hereunder (herein referred to as the "CLOSING") shall take place at a mutually convenient location and at a mutually convenient time simultaneously with the closing of the initial public offering of CART's common stock, provided that all conditions to the obligations of the Purchaser and of the Seller set forth, respectively, in Sections 6 and 7 hereof shall have been satisfied or waived. The date of the Closing is referred to in this Agreement as the "CLOSING DATE". Notwithstanding any other provision of this Agreement, if the Closing fails to occur by June 30, 1998, then, in such event, Purchaser or Seller, in addition to any other rights it may have, shall have the right, exercisable by written notice to the other, to terminate this Agreement, such termination to be effective upon the date set forth in such notice; provided, however, that nothing contained in this Section 9.1 shall affect or impair any rights or obligations arising prior to or at the time of termination of this Agreement, or that may arise by an event causing the termination of this Agreement. 9.2 Proceedings at Closing. 9.2.1 All proceedings taken and all documents to be executed and delivered by the parties at the Closing shall be deemed to have been taken and executed simultaneously, and no proceedings shall be deemed taken nor documents executed or delivered until all have been taken, executed and delivered. 9.2.2 At the Closing, the Seller shall deliver or cause to be delivered to the Purchaser the following: (a) an appropriately executed general assignment and bill of sale in the form attached hereto as Exhibit H ("Bill of Sale") and such deeds, assignments and other instruments of transfer relating to the Acquired Assets in form and substance reasonably satisfactory to Purchaser and its counsel; (b) such other documents as Purchaser or its counsel may reasonably request to demonstrate satisfaction of the conditions and compliance with the agreements set forth in this Agreement; (c) The certificate referred to in Section 6.1 hereof; 22 48 (d) The opinion of counsel for the Seller referred to in Section 6.3 hereof; (e) McGee shall deliver payment for any shares purchased pursuant to Section 1.8.5; (f) McGee shall execute and deliver the Option Agreement as referred to in Section 1.8.4 hereof. 9.2.3 At the Closing, the Purchaser shall deliver or cause to be delivered to the Seller the following: (a) The Purchase Price, in the form of the Purchaser's certified check in the amount as set forth in Section 1.8.1; (b) The certificate referred to in Section 7.1 hereof; (c) The opinion of counsel for the Purchaser referred to in Section 7.3 hereof; (d) The certified resolutions referred to in Section 7.5 hereof; (e) To McGee certificates for any shares of stock which McGee has elected to purchase pursuant to Section 1.8.5 hereof; and (f) To McGee a duly executed Option Agreement as referred to in Section 1.8.4 hereof. 10 INDEMNIFICATION. 10.1 Indemnification of Purchaser by Seller. The Seller covenants and agrees that it will indemnify and hold the Purchaser and its officers, directors, employees and agents harmless from and against any and all losses, damages, liabilities, obligations, and reasonable costs and expenses incurred or sustained by the Purchaser by reason or arising out of any material breach of any warranty, representation, covenant, agreement or obligation of the Seller contained in this Agreement, including, but not limited to, liabilities and debts related to the Business (other than the Assumed Liabilities), failure to comply with applicable bulk sales 23 49 or similar laws, and any other liability (other than an Assumed Liability) respecting the Business or any of the Acquired Assets which is attributable to any period prior to the Closing Date. 10.2 Indemnification of Seller by Purchaser. The Purchaser covenants and agrees that it will indemnify and hold the Seller harmless from and against any and all losses, damages, liabilities, obligations, and reasonable costs and expenses incurred or sustained by the Seller by reason or arising out of any material breach of any warranty, representation, covenant, agreement or obligation of the Purchaser contained in this Agreement. 10.3 Claims for Indemnity. Promptly upon notice of any claim, suit or demand which any person entitled to indemnity hereunder (the "INDEMNITEE") believes will give rise to indemnity by the Seller or the Purchaser, as the case may be (the "INDEMNITOR"), under Sections 10.1 or 10.2, the Indemnitee shall give the Indemnitor written notice thereof, and the Indemnitor shall defend against any such claim, suit or demand, in its name or in the name of the Indemnitee, as the case may be, at the Indemnitor's expense and with counsel of its own choice at its own expense. The Indemnitor shall have no obligation or liability to indemnify with respect to, or in connection with, any claim, suit or demand which shall be paid, settled or compromised by the Indemnitee without the prior written consent of the Indemnitor. No right or remedy conferred in this Section 10.3 is intended to be exclusive of any other right or remedy available, now or hereafter, at law or in equity or otherwise, to the parties hereto. 10.4 Right to Offset. To the extent that the Purchaser has suffered any loss or losses, damages, liabilities or obligations by reason of any breach of any warranty, representation, covenant, agreement or obligation of the Seller contained in this Agreement, the Purchaser shall have the right to offset any such amounts against any amounts due and owing Seller. 11 ARBITRATION. In the event of any dispute among CART and Seller under this Agreement which they are unable to resolve, including but not limited to whether the criteria as set forth in Section 1.8.2 has been met, or whether the requirements as set forth in Section 3.4 have been met, the dispute shall be submitted to arbitration at the request of any party. The party requesting arbitration shall so notify the other party(ies) in writing and shall specify the question or questions to be arbitrated. Within 24 50 ten (10) days after receipt of such notification, CART shall select one arbitrator and Seller shall select one arbitrator and each shall give the name and address thereof to the other party. The two arbitrators shall select a third disinterested arbitrator to complete a panel consisting of three arbitrators. In the event one party fails to select an arbitrator within the required time period, the arbitrator who has been selected may select one disinterested arbitrator and the two arbitrators may proceed to resolve the dispute. Within ten (10) days of the selection of the second arbitrator, or third arbitrator, as the case may be, the panel of arbitrators shall schedule a hearing on the disputed issues to be held within thirty (30) days after the selection of the final arbitrators. The arbitrators shall render their written decision within thirty (30) days of the last day of the hearing. The decision of a majority of the arbitrators shall be final and conclusive on all parties. Such decision shall be entered as a final judgment in a court of competent jurisdiction and shall be a final non-appealable order. The arbitration shall be conducted in accordance with the commercial arbitration rules of the American Arbitration Association except as specified herein. The arbitration shall take place in Troy, Michigan or such other location as the parties may agree. The arbitrator shall substantially comply with the Michigan rules of evidence; shall grant essential but limited discovery; shall provide for the exchange of witness lists and exhibit copies; and shall conduct a pretrial conference and consider dispositive motions. Each party shall have the right to request the arbitrator to make findings of specific factual issues. The arbitrator shall decide all issues and disputes in conformity with applicable law and shall have no authority to alter the terms of this Agreement. Each party shall cooperate with the arbitrator to comply with procedural time requirements and the failures of either to do so shall entitle the arbitrator to extend the arbitration proceedings accordingly and to impose sanctions on the party responsible for the delay, payable to the other party. If the arbitrator determines that a party has failed to act in good faith or with a reasonable basis in connection with the dispute, the arbitrator shall be entitled to award, against the party so acting, the fees and expenses of the arbitration and the costs and expenses incurred by the other party in connection with the arbitration, included but not limited to reasonable attorneys' fees. In the absence of such a finding, the fees and expenses of the arbitration shall be borne equally by Purchaser and Seller (except that each party shall be solely responsible for the fees and expenses of its counsel and other 25 51 professionals and experts retained by it). 12 MISCELLANEOUS. 12.1 Announcements. All announcements relating to the transactions contemplated hereby shall be mutually approved by, and shall not be released except with the mutual consent of the parties thereto, except where immediate disclosure, in the opinion of counsel for the party concerned, is required by law. 12.2 Brokerage. The Seller warrants and represents to the Purchaser that it has not incurred any obligation or liability, contingent or otherwise, for brokerage or finder's fees or agent's commissions or other like payment in connection with this Agreement or the transactions contemplated hereby. The Seller covenants and agrees to indemnify and hold the Purchaser harmless from and against any such obligation or liability (and any reasonable expense or expenses incurred in investigating or defending the same, including counsel fees) based in any way on any agreements, arrangements or understandings claimed to have been made by the Seller with any third party. The Purchaser warrants and represents to the Seller that it has not incurred any obligation or liability, contingent or otherwise, for brokerage or finder's fees or agent's commissions or other like payment in connection with this Agreement or the transactions contemplated hereby. The Purchaser covenants and agrees to indemnify and hold the Seller harmless from and against any such obligation or liability (and any reasonable expense or expenses incurred in investigating or defending the same, including counsel fees) based in any way on any agreements, arrangements or understandings claimed to have been made by the Purchaser with any third party. 12.3 Survival of Warranties and Representations. Each party hereto covenants and agrees that its warranties and representations contained in this Agreement and in any document delivered or to be delivered pursuant hereto shall survive the Closing Date hereunder until December 31, 2000. 12.4 Expenses. Whether or not the transactions contemplated by this Agreement are consummated, each of the parties hereto shall pay the fees and expenses of its counsel, accountants, other experts and all other expenses incurred by such party incident to the negotiation, preparation and execution of this Agreement. 26 52 12.5 Notices. All notices, requests, demands and other communications which are required or permitted to be given under this Agreement shall be in writing and shall be deemed to have been duly given upon the delivery or mailing thereof, as the case may be, if delivered personally or sent by registered or certified mail, return receipt requested, postage prepaid: (a) If to the Seller, to: BP Automotive, Ltd. 1395 Wheaton Avenue Suite 700 Troy, MI 48083-1967 with a copy to: Basil M. Briggs, Esq. Cox, Hodgman & Giarmarco, P.C. - Suite 500 201 West Big Beaver Road Troy, MI 48084-4160 (b) If to the Purchaser, to: Championship Auto Racing Teams, Inc. 755 W. Big Beaver Road, Suite 800 Troy, MI 48084-4160 with a copy to: Jack Bjerke, Esq. Capital Square, Suite 1800 65 East State Street Columbus, OH 43215-4294 with a copy to: Justin G.Klimko, Esquire Butzel Long 150 W. Jefferson, Suite 900 Detroit, M 48226-4430 or to such other address as either the Seller or the Purchaser shall have specified by notice in writing to the other. 12.6 Waivers. Either Seller or the Purchaser may, by written notice to the other, (a) extend the time for the performance of any of the obligations or other actions of the other; (b) waive any inaccuracies in this Agreement or in any document delivered pursuant hereto by the other; (c) waive compliance with any of the terms, conditions or covenants required to be complied with by the other hereunder; and (d) waive or modify performance of any of the 27 53 obligations of the other hereunder. The waiver by any party hereto of a breach of any provision of this Agreement shall not operate or be construed as a waiver of any other or subsequent breach. 12.7 Entire Agreement. This Agreement constitutes the entire agreement between the parties with respect to the subject matter hereof. 12.8 Binding Effect; Benefits. This Agreement shall inure to the benefit of and be binding upon the parties hereto and their respective successors and assigns. Nothing in this Agreement, expressed or implied, is intended to confer on any person other than the parties hereto, or their respective successors and assigns, any rights, remedies, obligations or liabilities. 12.9 Fulfillment of Conditions. The parties hereby covenant and agree to use their reasonable efforts to fulfill all of the terms and conditions contained in this Agreement, and to take such action as may be reasonably required to obtain all necessary consents, permits, authorizations and approvals of third parties which are conditions of this Agreement. 12.10 Law Governing. This Agreement shall be governed by and construed in accordance with the laws of the State of Michigan, without regard to choice of law principles which would require the application of the laws of any other jurisdiction. 12.11 Headings. Headings on the Articles and Sections in this Agreement are for reference purposes only and shall not be deemed to have any substantive effect. 12.12 Counterparts. This Agreement may be executed in any number of counterparts, each of which shall be deemed an original but all of which together shall be deemed to be one and the same instrument. 28 54 IN WITNESS WHEREOF, the Seller has caused this Agreement to be duly executed in its corporate name by one of its duly authorized officers, and the Purchaser has caused this Agreement to be duly executed in its corporate name by one of its duly authorized officers, all as of the date first above written. CHAMPIONSHIP AUTO RACING TEAMS, INC., a Delaware corporation - ------------------------------------------------------------------------------- By: /s/ ANDREW CRAIG /s/ BASIL M. BRIGGS ----------------------------- - ------------------------- /s/ JUSTIN G. KLIMKO Its: Chairman - ----------------------------------------------------------------- -------- & CEO - ------------------------------------------------------------------------------- BP AUTOMOTIVE, LTD., a Michigan corporation - ------------------------------------------------------------------------------ By: /s/ ROGER BAILEY ----------------------------- - ------------------------- Its: President - ---------------------------------------------------------------- --------- - ------------------------------------------------------------------------------- Exhibits: A: Personal Property B: Lola Cars/ARS Agreement C: Allocation of Purchase Price D: Disclosure Schedule E: Cox, Hodgman & Giarmarco, P.C. Opinion F: Butzel Long's Opinion G: ARS/CART Stock Purchase Agreement H: Bill of Sale of Assets 29 EX-27 3 EXHIBIT 27
5 1,000 US DOLLARS YEAR DEC-31-1998 JAN-01-1998 DEC-31-1998 1 15,080 61,610 9,188 306 71 82,743 7,116 2,090 97,186 10,524 0 151 0 0 86,068 97,186 0 62,530 0 0 41,685 355 31 23,657 8,568 15,089 0 0 0 15,089 1.06 1.05
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