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1. DESCRIPTION OF BUSINESS
Basis of Presentation – The consolidated financial statements include the accounts of Speedway Motorsports, Inc. and all of its wholly-owned and operated subsidiaries: Atlanta Motor Speedway LLC (AMS), Bristol Motor Speedway LLC (BMS), Charlotte Motor Speedway LLC (CMS), Kentucky Raceway LLC d/b/a Kentucky Speedway (KyS), Nevada Speedway LLC d/b/a Las Vegas Motor Speedway (LVMS), Speedway Sonoma LLC (Sonoma Raceway or SR), New Hampshire Motor Speedway, Inc. (NHMS), North Wilkesboro Speedway, Inc. (NWS), Texas Motor Speedway, Inc. (TMS), SMISC Holdings, Inc. d/b/a SMI Properties (SMI Properties), US Legend Cars International, Inc. (Legend Cars), Oil-Chem Research Corporation (Oil-Chem), SMI Trackside LLC (SMI Trackside), Speedway Funding LLC, Speedway Motorsports International Limited (BVI) and consolidated foreign entity (SMIL), Speedway Properties Company LLC a/k/a Performance Racing Network (PRN), Speedway Media LLC a/k/a Racing Country USA (RCU), and TSI Management Company LLC d/b/a The Source International LLC (TSI) (collectively, the Company, SMI, we, our or us). Hereafter, references to “the Company’s” or “eight” speedways exclude NWS, which presently has no significant operations and assets consist primarily of real estate which has no significant fair value. See Notes 1 and 2 to the Consolidated Financial Statements in the Company’s 2013 Annual Report on Form 10-K (2013 Annual Report) for further description of its business operations, properties and scheduled events.
Racing Events – In 2014, we plan to hold 24 major annual racing events sanctioned by the National Association for Stock Car Auto Racing, Inc. (NASCAR), including 13 Sprint Cup and 11 Nationwide Series racing events. We also plan to hold seven NASCAR Camping World Truck Series, three NASCAR K&N Pro Series, four NASCAR Whelen Modified Tour, two IndyCar Series, six major National Hot Rod Association (NHRA), one Automobile Racing Club of America (ARCA) and three World of Outlaws (WOO) racing events. In 2013, we held 24 major annual racing events sanctioned by NASCAR, including 13 Sprint Cup and 11 Nationwide Series racing events. We also held six NASCAR Camping World Truck Series, three NASCAR K&N Pro Series, four NASCAR Whelen Modified Tour, two IndyCar Series, six major NHRA, one ARCA and three WOO racing events.
Discontinued Oil and Gas Activities (Note 11) – In 2008, we discontinued our oil and gas operations primarily because of ongoing challenges and business risks in conducting these activities in foreign countries. Management believes associated activities for 2013, to-date in 2014 and future periods, if any, are not significant for continued presentation as discontinued operations. We had no continuing involvement or ownership interest in these discontinued operations, and there were no assets, liabilities or outstanding standby letters of credit associated with discontinued operations for any period presented herein. Remaining activities are now included in other income or expense in the Consolidated Statement of Operations, and all note disclosures pertain to continuing operations unless otherwise indicated. During the three months ended March 31, 2014 and 2013, the Company incurred legal fees and other costs of $40,000 and $35,000 associated with efforts to recover previously reserved receivables, representing all activities during these periods (see Note 8 for information on legal proceedings associated with oil and gas activities). While the Company plans to continue litigation of the matter to maximize potential recovery value, future legal costs are expected to be insignificant.
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2. SIGNIFICANT ACCOUNTING POLICIES AND OTHER DISCLOSURES
These unaudited consolidated financial statements should be read in conjunction with the Company's consolidated financial statements included in its 2013 Annual Report. In management's opinion, these unaudited consolidated financial statements contain all adjustments necessary for their fair presentation at interim periods in accordance with accounting principles generally accepted in the United States. All such adjustments are of a normal recurring nature unless otherwise noted. The results of operations for interim periods are not necessarily indicative of operating results that may be expected for the entire year due to the seasonal nature of the Company's motorsports business. See Note 2 to the Consolidated Financial Statements in our 2013 Annual Report for further discussion of significant accounting policies.
Quarterly Reporting – The Company recognizes revenues and operating expenses for all events in the calendar quarter in which conducted. Changes in race schedules at the Company's speedways from time to time, including speedway acquisitions, can lessen the comparability of operating results between quarterly financial statements of successive years and increase or decrease the seasonal nature of its motorsports business. The more significant racing schedule changes for the three months ended March 31, 2014 as compared to 2013 include:
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LVMS held one major NHRA racing event in the first quarter 2014 that was held in the second quarter 2013 |
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Poor weather resulted in delays in starting and completing one NASCAR Sprint Cup race held at BMS in the first quarter 2014 |
Consolidated Statements of Cash Flows – Cash flows from operations in the three months ended March 31, 2014 compared to 2013 reflect decreases in net deferred race event income, including advance payment of NASCAR event management (purse and sanction) fees before April 1, 2014 for second quarter 2014 TMS events that were not paid as of March 31, 2013 for similar upcoming second quarter 2013 TMS events, and accrued interest from changes in interest payment due dates associated with 2013 debt refinancing transactions.
NASCAR Event Management Fees – Beginning in 2014, NASCAR renamed “purse and sanction” fees as “event management” fees in our annual race event sanctioning and renewal agreements. The change had no other impact on our consolidated financial statements or disclosures.
Joint Venture Equity Investment – Before February 2014, the Company and International Speedway Corporation equally owned a joint venture (50% non-controlling interest) operating independently under the name Motorsports Authentics (MA). MA’s operations consist principally of trackside and, to a lesser extent, wholesale and retail, event souvenir merchandising as licensed and regulated under NASCAR Teams Licensing Trust agreements. The NASCAR Trust significantly influences MA’s operations and results. On January 31, 2014, the Company abandoned its interest and rights in MA to focus management resources in areas that may be profitable and more productive. As further described below, and in Notes 2 and 8 to the Consolidated Financial Statements in our 2013 Annual Report, the Company recognized an anticipated material tax benefit related to abandonment as of December 31, 2013. There was no other impact on the Company’s December 31, 2013 or first quarter 2014 Consolidated Financial Statements. The carrying value of the Company’s equity investment in MA was reduced to $0 as of December 31, 2009. Under equity method accounting, the Company no longer recorded its 50% share of MA operating losses, if any, unless and until this carrying value was increased to the extent of future MA operating profits, if any. As such, the Company’s first quarter 2014 and 2013 results were not impacted by MA’s operations under the equity method.
Income Taxes – The Company provides for income taxes at the end of each interim period based on management’s best estimate of the annual estimated effective income tax rate. Cumulative adjustments to the Company’s annual estimated effective income tax rate are recorded in the interim period in which a change in the annual estimated effective income tax rate is determined. See Notes 2 and 8 to the Consolidated Financial Statements in our 2013 Annual Report for additional information on our accounting for income taxes.
The effective income tax rate for the three months ended March 31, 2014 and 2013 was 37.1% and 37.5%, respectively. The Company paid cash of $3,000 and $0 for income taxes in the three months ended March 31, 2014 and 2013. Income tax liabilities for unrecognized tax benefits approximate $1,004,000 as of March 31, 2014 and December 31, 2013, and are included in other noncurrent liabilities, all of which would favorably impact the Company’s effective tax rate if recognized. As of March 31, 2014, management was not aware of any significant tax positions where it appeared reasonably possible that unrecognized tax benefits might significantly increase within the next twelve months. There was no change or activity for unrecognized tax benefits during the three months ended March 31, 2014 or 2013. Interest and penalties recognized on uncertain tax positions amounted to $0 and $18,000 for the three months ended March 31, 2014 and 2013. As of March 31, 2014 and December 31, 2013, the Company had $844,000 accrued for the payment of interest and penalties on uncertain tax positions, which is included in other noncurrent liabilities. The tax years that remain open to examination include 2006 through 2013 by the California Franchise Tax Board, and 2009 through 2013 by all other taxing jurisdictions to which the Company is subject. The Kentucky Department of Revenue is currently examining the Company’s 2009, 2010, 2011 and 2012 state tax returns. The Company does not anticipate material adjustments resulting from examination.
Anticipated Income Tax Benefit From Equity Interest Abandonment – On January 31, 2014, the Company abandoned its interest and rights in MA as previously described above. The Company’s carrying value of the investment was reduced to $0 through sizable impairment charges prior to 2010 and MA’s historical operating results. The Company recognized no concurrent tax benefits as valuation allowances were provided against associated deferred tax assets. As a result of abandonment, the Company intends to recognize tax losses that will be reported on its 2014 income tax returns. Management believes there is or will be sufficient taxable income in carryback or carryforward periods under tax law to fully utilize these tax losses. As such, the Company recognized a material income tax benefit of $49.3 million at December 31, 2013 for the reversal of previously recorded valuation allowances under applicable accounting guidance.
The Company believes it is more likely than not that its filing position would be sustained based on its technical merits upon examination with taxing authorities that have full knowledge of all relevant information. The Company reached this conclusion based on the use of legal counsel and other tax consultants and the potential to utilize tax losses. Under applicable accounting guidance, tax positions are measured at the largest amount of benefit that is greater than 50 percent likely (or more-likely-than not) of being ultimately realized. As such, the full anticipated tax benefit was recognized because the Company believes that partial sustaining of its tax position by taxing authorities would be an unlikely outcome given the nature of the position. The Company believes it will fully utilize the associated tax losses. Should the Company’s tax position not be fully sustained if examined, a valuation allowance would be required to reduce or eliminate the associated deferred tax assets. Any differences between the final tax outcome and amounts recorded would affect the Company’s income tax provision in the period in which such determination was made.
Taxes Collected from Customers – The Company reports sales, admission and other taxes collected from customers on both a gross and net basis in operations. Such taxes reported on a gross basis for the three months ended March 31, 2014 and 2013 amounted to $965,000 and $1,002,000.
Advertising Expenses – Event specific advertising costs are expensed when an associated event is held and included principally in direct expense of events. Non-event related advertising costs are expensed as incurred and included principally in other direct operating expense. Advertising expense amounted to $2,440,000 and $2,599,000 in the three months ended March 31, 2014 and 2013. There were no deferred direct-response advertising costs at March 31, 2014 or December 31, 2013.
Fair Value of Financial Instruments – The Company follows applicable authoritative guidance which requires that financial and non-financial assets and liabilities measured and reported on a fair value basis be classified, disclosed and categorized as further described below. Fair value estimates are based on relevant market information and single broker quoted market prices where available at a specific point in time, and changes in assumptions or market conditions could significantly affect estimates. The carrying values of cash and cash equivalents, accounts and notes receivable, certain other assets and accounts payable approximate fair value because of the short maturity of these financial instruments. Cash surrender values are carried at fair value based on binding broker quoted market prices. Notes and other receivables and bank revolving credit facility and term loan borrowings are variable interest rate financial instruments and, therefore, carrying values approximate fair value. The fixed rate senior notes payable are publicly traded and estimated fair values are based on single broker quoted market prices. Other long-term debt is non-interest bearing and discounted based on estimated current cost of borrowings and, therefore, carrying values approximate market value. There have been no changes or transfers between category levels or classes.
The following table presents estimated fair values and categorization levels of the Company’s financial instruments as of March 31, 2014 and December 31, 2013 (in thousands):
March 31, 2014 |
December 31, 2013 |
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Level |
Class |
Carrying Value |
Fair Value |
Carrying Value |
Fair Value |
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Assets |
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Cash and cash equivalents |
1 |
R |
$ | 77,098 | $ | 77,098 | $ | 97,343 | $ | 97,343 | |||||||||||
Floating rate notes receivable |
2 |
NR |
1,710 | 1,710 | 2,005 | 2,005 | |||||||||||||||
Cash surrender values |
2 |
NR |
5,012 | 5,012 | 4,937 | 4,937 | |||||||||||||||
Liabilities |
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Floating rate revolving Credit Facility, including Term Loan |
2 |
NR |
200,000 | 200,000 | 210,000 | 210,000 | |||||||||||||||
6 ¾% Senior Notes Payable due 2019 |
1 |
NR |
253,991 | 265,625 | 254,197 | 265,000 | |||||||||||||||
Other long-term debt |
2 |
NR |
2,464 | 2,464 | 2,792 | 2,792 |
Level 1: |
Quoted market prices in active markets for identical assets or liabilities. |
Level 2: |
Observable market-based inputs or unobservable inputs that are corroborated by market data. |
Level 3: |
Unobservable inputs that are not corroborated by market data. |
Class R: |
Measured at fair value on recurring basis, subsequent to initial recognition. |
Class NR: |
Measured at fair value on nonrecurring basis, subsequent to initial recognition. |
Deferred Income – TMS, in conjunction with the Fort Worth Sports Authority, has an oil and gas mineral rights lease agreement which, among other things, provides the lessee various defined property access and right-of-ways, exclusive exploration and extraction rights, and non-interference by TMS should extraction infrastructure construction and operations commence. TMS is required to coordinate directly with the lessee on roadway and pipeline logistics to prevent interference of TMS or lessee activities, and monitor regulatory and other contract compliance. An upfront cash payment received in December 2011 has been accreted into other operating revenue over an associated two-year agreement term on a straight-line basis, with $802,000 recognized in the three months ended March 31, 2013 ($0 in the three months ended March 31, 2014). As of March 31, 2014 and December 31, 2013, associated deferred income was $0. This two-year agreement is part of a long-term arrangement under which the lessee initiated drilling activities prior to expiration, resulting in the lease remaining enforceable as long as drilling or extraction related activities continue. Through a combination of this lease and other agreements, including a joint exploration agreement, with the Fort Worth Sports Authority, if and when oil and gas extraction commences or upon meeting certain price levels, this lease agreement can be extended and TMS entitled to stipulated stand-alone and shared royalties. At this time, although extraction is expected to commence in 2014, management is unable to determine possible volumes of production if any or if stipulated price levels will be met.
In late 2013, BMS announced plans to host a collegiate football game in September 2016. As of March 31, 2014 and December 31, 2013, advance revenues and associated direct expenses were not significant. Under the similar accounting policy for event revenues and expenses described above, the Company plans to continue to defer advance revenues and direct expenses pertaining to this event until held.
Other Contingencies – CMS’s property includes areas used as solid waste landfills for many years. Landfilling of general categories of municipal solid waste on the CMS property ceased in 1992, but CMS currently allows certain property to be used for land clearing and inert debris landfilling. Landfilling for construction and demolition debris has ceased on the CMS property. Management believes the Company’s operations, including the landfills on its property, comply with all applicable federal, state and local environmental laws and regulations. Management is not aware of any situation related to landfill operations which would have a material adverse effect on the Company’s financial position, future results of operations or cash flows.
Recently Issued Accounting Standards – The FASB issued Accounting Standards Update No. 2013-11 “Income Taxes (Topic 740): Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists” whereby an unrecognized tax benefit, or a portion of an unrecognized tax benefit, should be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward, except as follows. To the extent those three items are not available at the reporting date under tax law of applicable jurisdictions to settle additional income taxes that would result from the disallowance of a tax position or such tax law does not require the entity to use, and the entity does not intend to use, the deferred tax asset for such purpose, the unrecognized tax benefit should be presented in the financial statements as a liability and not combined with deferred tax assets. The assessment of whether deferred tax assets are available is based on unrecognized tax benefits and deferred tax assets existing at the reporting date, and should be made presuming disallowance of associated tax positions at that date. The guidance is effective for fiscal years and interim periods beginning after December 15, 2013, applies prospectively to all unrecognized tax benefits existing at the effective date, and does not require new recurring disclosures. The Company’s adoption had no impact on its financial statements or disclosures, and the Company will apply this guidance where applicable in the future.
The FASB issued Accounting Standards Update No. 2014-08 “Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity: Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360)” which improves the definition of discontinued operations, changes the requirements for reporting discontinued operations and includes several new disclosures. Some of the new required disclosures include: (i) presentation of assets and liabilities of disposal groups that include a discontinued operation separately in assets and liabilities within the statement of financial position or reconciliation to total amounts presented; (ii) statement of cash flow presentation or note disclosure of total operating and investing cash flows for discontinued operations, or depreciation, amortization, capital expenditures, and significant operating and investing noncash items related to discontinued operations; and (iii) major classes of line items constituting pretax profit or loss of discontinued operations for periods in which results of discontinued operations are presented where net income is reported. Other disclosures are required when entities retain significant continuing involvement with a discontinued operation after disposal, including cash flows to and from a discontinued operation, and for disposals of individually significant entity components not qualifying for discontinued operations presentation, including noncontrolling interests and retained equity method investments after disposal transactions. For disposals of individually significant components that do not qualify as discontinued operations, entities must disclose pre-tax earnings of the disposed component. Disposals of an entity component or group of entity components are required to be reported in discontinued operations if disposal represents a strategic shift that has or will have a major effect on an entity’s operations and financial results when certain defined activities occur, including disposals by sale, abandonments and distributions. The guidance is effective for disposals (or classifications as held for sale) of entity components, and activities upon acquisition classified as held for sale, that occur within annual periods beginning on or after December 15, 2014, and interim periods within those years. Entities should not apply this guidance to entity components or business activities classified as held for sale before the effective date even if components or activities are disposed after the effective date. Early adoption is permitted only for disposals (or classifications as held for sale) that have not been reported in previously issued financial statements. At this time, the Company believes adoption will have no impact on its financial statements or disclosures, and the Company will apply such guidance where applicable in the future.
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3. INVENTORIES
Inventories, net consist of the following components (in thousands):
March 31, |
December 31, |
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2014 |
2013 |
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Finished race cars, parts and accessories |
$ | 5,319 | $ | 5,372 | ||||
Souvenirs and apparel |
3,437 | 2,409 | ||||||
Micro-lubricant® and other |
713 | 824 | ||||||
Total |
$ | 9,469 | $ | 8,605 |
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4. GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill and Other Intangible Assets represent the excess of business acquisition costs over the fair value of net assets acquired, and are all associated with the Company’s motorsports related activities and reporting units. Intangible assets consist predominately of goodwill and nonamortizable intangible assets for race event sanctioning and renewal agreements and, to a lesser extent, goodwill associated with event related motorsports merchandising. Acquired intangible assets are valued using the direct value method. The Company’s race event sanctioning and renewal agreements for each NASCAR-sanctioned racing event are awarded annually. The Company has evaluated each of its intangible assets for these agreements and determined that each will extend into the foreseeable future. The Company has never been unable to renew these race date agreements for any subsequent year and no such agreement has ever been cancelled. Based on these and other factors, such race date agreements are expected to be awarded to the Company in perpetuity. As such, these nonamortizable intangible assets for race event sanctioning and renewal agreements are considered to have indefinite useful lives because their renewal and cash flow generation are expected to continue indefinitely.
We evaluate goodwill and other intangible assets for possible impairment annually in the second quarter, or when events or circumstances indicate possible impairment may have occurred. See Notes 2 and 5 to the Consolidated Financial Statements in our 2013 Annual Report for additional information on the Company’s goodwill and other intangible assets and assessment methodology and evaluation. Management’s latest annual impairment assessment was performed in the second quarter 2013, and management believes that no events or circumstances have since occurred which indicate interim assessment for possible impairment is required as of March 31, 2014. Management's 2013
annual impairment assessment indicated the estimated fair value of each reporting unit and each indefinite-lived intangible asset substantially exceeded its associated carrying value except for two reporting units. As further described in Note 5 to the Consolidated Financial Statements in our 2013 Annual Report, a sizable goodwill impairment charge was reflected in the second quarter 2013 related to those two reporting units. Among other factors, the latest assessment assumes economic and industry condition improvements, and projected cash flow and profitability recovery, to pre-recession levels through modest annual growth rates for periods of approximately eight years depending on the associated projected revenue stream, and strategic amounts of planned capital expenditures. Management also assumed that increases in contracted NASCAR television broadcasting rights revenues after 2014 would approximate those reflected in the recently negotiated multi-year contracts
beginning in 2015. Different economic or industry conditions or assumptions, and changes in projected cash flows or profitability, if significantly negative or unfavorable, could have a material adverse effect on the impairment evaluation and the Company’s future financial condition or results of operations. The evaluations are subjective and based on conditions, trends and assumptions existing at the time of evaluation.
There were no changes in the gross carrying value of goodwill or other intangible assets during the three months ended March 31, 2014. As of March 31, 2014 and December 31, 2013, gross carrying values and accumulated amortization by class of intangible asset are as follows (dollars in thousands):
March 31, 2014 |
December 31, 2013 |
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Gross Carrying Value |
Accumulated Amortization |
Net |
Gross Carrying Value |
Accumulated Amortization |
Net |
Estimated Amortization Period (Years) |
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Nonamortizable race event sanctioning and renewal agreements |
$ | 394,913 | — | $ | 394,913 | $ | 394,913 | — | $ | 394,913 | — | |||||||||||||||||
Amortizable race event sanctioning and renewal agreements |
100 | $ | (58 |
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42 | 100 | $ | (58 |
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42 | 5-6 | |||||||||||||||||
Total |
$ | 395,013 | $ | (58 |
) |
$ | 394,955 | $ | 395,013 | $ | (58 |
) |
$ | 394,955 |
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5. LONG-TERM DEBT
2013 Bank Credit Facility – The Company’s Credit Facility, as amended in February 2013, (the 2013 Credit Facility or Credit Facility) among other things: (i) provides for a five-year $100,000,000 senior secured revolving credit facility, with separate sub-limits of $50,000,000 for standby letters of credit and $10,000,000 for swing line loans; (ii) provides for a five-year $250,000,000 senior secured term loan (the Term Loan); (iii) matures in February 2018; (iv) allows the Company to increase revolving commitments or establish a term loan (or a combination of the two) up to an aggregate additional $100,000,000 with certain lender commitment conditions; (v) allows for annual aggregate payments of dividends and repurchases of SMI securities of up to $50,000,000, increasing up to $75,000,000 subject to maintaining certain financial covenants; and (vi) limits annual capital expenditures to $75,000,000. The Term Loan requires minimum quarterly principal payments of at least 5% of the initial amount drawn on an annualized basis (or $12,500,000 in a twelve month period based on an initial draw of $250,000,000).
During the three months ended March 31, 2014, the Company repaid $10,000,000 of Term Loan borrowings. At March 31, 2014 and December 31, 2013, outstanding borrowings under the Credit Facility were $200,000,000 and $210,000,000 (all Term Loan borrowings). At March 31, 2014 and December 31, 2013, outstanding letters of credit amounted to $882,000 and $887,000. Interest is based, at the Company’s option, upon LIBOR plus 1.25% to 2.00% or Bank of America’s base rate plus 0.25% to 1.00%. The 2013 Credit Facility also contains a commitment fee ranging from 0.25% to 0.40% of unused amounts available for borrowing. The interest rate margins on borrowings and the commitment fee are adjustable periodically based upon certain consolidated total leverage ratios. The 2013 Credit Facility requires that the Company maintain certain ratios of funded debt to earnings before interest, taxes, depreciation and amortization (EBITDA) and earnings before interest and taxes (EBIT) to interest expense, contains other affirmative and negative financial covenants and restrictions, and is secured by a pledge of all capital stock and limited liability company interests of the Guarantors.
2019 Senior Notes –The Company’s 6¾% senior notes consist of aggregate principal of $150,000,000 issued at par in 2011 and $100,000,000 issued at 105% of par in an add-on offering in 2013, with interest payments due semi-annually on February 1 and August 1, maturing in February 2019, and governed by the same indenture (the 2019 Senior Notes). All notes were initially issued in private placement offerings and subsequently exchanged for substantially identical notes registered under the Securities Act. As of March 31, 2014 and December 31, 2013, the 2019 Senior Notes carrying value of $253,991,000 and $254,197,000 includes unamortized issuance premium of $3,991,000 and $4,197,000, respectively.
Other Notes Payable – Long-term debt includes a non-interest bearing debt obligation, payable in 60 monthly installments of $125,000, associated with the Company's acquisition of KyS. As of March 31, 2014 and December 31, 2013, their combined carrying values of $2,464,000 and $2,792,000 reflect discounts of $161,000 and $208,000, respectively, based on an effective interest rate of 7%.
Other Terms and Conditions– The 2013 Credit Facility and 2019 Senior Notes contain specific requirements and restrictive financial covenants and limits or prohibits various financial and transactional activities. The 2013 Credit Facility and 2019 Senior Notes Indenture also contain cross-default provisions. The Company was in compliance with all applicable covenants under these debt agreements as of March 31, 2014. See Note 6 to the Consolidated Financial Statements included in the Company’s 2013 Annual Report for additional information on these debt agreements, including dividend, redemption, right of payment provisions, and financial and restrictive covenants.
Subsidiary Guarantees – Amounts outstanding under the 2013 Credit Facility and 2019 Senior Notes are guaranteed by all of SMI’s material operative subsidiaries except for Oil-Chem and its subsidiaries (which are presently non-material). These guarantees are full and unconditional and joint and several, with the 2019 Senior Notes on a senior unsecured basis. The parent company has no independent assets or operations. There are no restrictions on the subsidiaries’ ability to pay dividends or advance funds to the parent company.
Interest Expense, Net—Interest expense, interest income and capitalized interest costs are summarized as follows (in thousands):
Three Months Ended |
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March 31: |
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2014 |
2013 |
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Gross interest costs |
$ | 5,731 | $ | 11,092 | ||||
Less: capitalized interest costs |
(85 |
) |
(36 |
) |
||||
Interest expense |
5,646 | 11,056 | ||||||
Interest income |
(45 |
) |
(146 |
) |
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Interest expense, net |
$ | 5,601 | $ | 10,910 | ||||
Weighted-average interest rate on Credit Facility borrowings |
2.2 |
% |
2.7 |
% |
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7. RELATED PARTY TRANSACTIONS
Before July 30, 2002, the Company made loans to, and paid certain expenses on behalf of, Sonic Financial Corporation (Sonic Financial), a Company affiliate through common ownership by the Company’s Chairman and Chief Executive Officer, for various corporate purposes. Also, the Company and Sonic Financial currently share various expenses in the ordinary course of business. Notes and other receivables from affiliates at March 31, 2014 and December 31, 2013 include $2,992,000 and $3,294,000 due from Sonic Financial. The amount due bears interest at 1% over prime, is payable on demand, and because the Company does not anticipate or require repayment before March 31, 2015, is classified as a noncurrent asset in the accompanying consolidated balance sheet. Changes in the amount due from December 31, 2013 primarily reflect increases for accrued interest on outstanding balances and decreases from shared expenses and repayments. The amounts due were reduced from shared expenses and repayments (in 2014), net of accrued interest, by $302,000 and $95,000 in the three months ended March 31, 2014 and 2013. Any increases pertain to note receivable arrangements in place before July 30, 2002.
Amounts payable to affiliate at March 31, 2014 and December 31, 2013 consist of $2,594,000 for acquisition and other expenses paid on behalf of AMS by Sonic Financial prior to 1996. Of this amount, approximately $1,800,000 bears interest at 3.83% and the remainder at prime plus 1%. The entire amount is classified as long-term because payment is not required before March 31, 2015.
Certain SMI subsidiaries lease office and warehouse facilities from companies affiliated through common ownership by the Company’s Chairman and Chief Executive Officer, under annually renewable lease agreements. Rent expense amounted to $166,000 in the three months ended March 31, 2014 and 2013. At March 31, 2014 and December 31, 2013, amounts owed to these affiliated companies were not significant.
Various SMI subsidiaries purchased new and used vehicles for operations and employee use from certain subsidiary dealerships of Sonic Automotive, Inc. (SAI), an entity in which the Company's Chairman and Chief Executive Officer is a controlling stockholder, for an aggregate of $32,000 and $11,000 in the three months ended March 31, 2014 and 2013. There were no vehicles sold to SAI in the three months ended March 31, 2014 or 2013. SMI Properties sold merchandise to SAI totaling $146,000 and $170,000 in the three months ended March 31, 2014 and 2013. Amounts due from SAI at March 31, 2014 and December 31, 2013 were not significant.
Oil-Chem sold zMAX micro-lubricant® product to certain dealerships of SAI for resale to service customers of the dealerships in the ordinary course of business. Total purchases from Oil-Chem by SAI dealerships approximated $476,000 and $572,000 for the three months ended March 31, 2014 and 2013. At March 31, 2014 and December 31, 2013, approximately $187,000 and $154,000 was due from SAI and is reflected in current assets.
SMI Properties and, to a lesser extent, other SMI subsidiaries purchased and sold motorsports merchandise, and received commissions from MA for merchandise sold during Company events. As further described in Note 2, the Company abandoned its interest in MA on January 31, 2014, after which MA is no longer a related party. During the one month ended January 31, 2014 and three months ended March 31, 2013, merchandise purchases approximated $234,000 and $414,000, and merchandise sales and event related commissions approximated $60,000 and $573,000, respectively. At December 31, 2013, net amounts due to or from MA were not significant.
The foregoing related party balances as of March 31, 2014 and December 31, 2013, and transactions for the three months ended March 31, 2014 and 2013, are summarized below (in thousands):
2014 |
2013 |
|||||||
Notes and other receivables |
$ | 3,268 | $ | 3,552 | ||||
Amounts payable to affiliates |
2,594 | 2,594 | ||||||
Merchandise and vehicle purchases |
266 | 425 | ||||||
Merchandise and vehicle sales and event related commissions, and reimbursed shared expenses |
978 | 1,410 | ||||||
Rent expense |
166 | 166 | ||||||
Interest income |
19 | 25 | ||||||
Interest expense |
25 | 25 |
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8. LEGAL PROCEEDINGS AND CONTINGENCIES
The Company is involved in various lawsuits in the normal course of business, some of which involve material claims.
On April 22, 2008, SMIL filed a complaint in the Superior Court of North Carolina sitting in Mecklenburg County (the Complaint) against Bronwen Energy Trading, Ltd. (Bronwen), Bronwen Energy Trading UK, Ltd. (Bronwen UK), Dr. Patrick Denyefa Ndiomu (Dr. Ndiomu), BNP Paribas (Suisse) SA (BNP Suisse), BNP Paribas S.A. (BNP France), Swift Aviation Group, Inc. (SAG), Swift Air, LLC (SA), and Swift Aviation Group, LLC (Swift Aviation). On May 29, 2008, SMIL filed an amended complaint (the Amended Complaint) adding Swift Transportation Company, Inc. (Swift Transportation). SAG, SA, Swift Aviation and Swift Transportation are collectively referred to as the “Swift Defendants”. SMIL is seeking recovery of $12,000,000 it alleges was wrongfully drawn from its bank account by BNP Suisse and BNP France in connection with obligations SMIL contends are owed by Bronwen, Bronwen UK, Dr. Ndiomu, and the Swift Defendants for petroleum product purchases utilizing credit extended by BNP France. SMIL is also seeking to recover contractual amounts it alleges are owed by Bronwen, Bronwen UK, Dr. Ndiomu, and the Swift Defendants under the terms of various contracts regarding the petroleum product purchases. Additionally, SMIL is seeking treble damages, attorneys’ fees and costs. In the litigation, SMIL has asserted claims for breach of contract, wrongful honor on a guarantee demand, conversion, fraud, negligent misrepresentation, equitable subrogation, alter ego, unfair and deceptive trade practices, and has sought an accounting. On July 23, 2008, SMIL obtained an entry of default against Bronwen due to its failure to timely file a responsive pleading. On September 12, 2008, SMIL obtained entries of default against Bronwen UK and Dr. Ndiomu due to their failure to timely file a responsive pleading. On December 15, 2010, SMIL reached a negotiated settlement with the Swift Defendants, as a result of which SMIL dismissed its claims against only the Swift Defendants on December 29, 2010. The settlement did not have a material impact on the Company’s financial position, results of operations or cash flows. On August 18, 2008, BNP France filed a motion to dismiss the claims against it alleging: 1) the North Carolina court does not possess personal jurisdiction over BNP France; 2) that Geneva, Switzerland is the appropriate forum for disputes about the guarantees; and 3) that SMIL is unable to state claims for relief against BNP France. On September 30, 2008, BNP France filed a revised motion to dismiss, withdrawing its challenge to personal jurisdiction, but maintaining allegations that Geneva, Switzerland is the appropriate forum for disputes about the guarantees and that SMIL is unable to state claims for relief against BNP France. On January 21, 2009, the trial court denied BNP France’s motion to dismiss based upon its contention that SMIL’s claims against it should be heard in Geneva, Switzerland, and further denied its motion to dismiss for failure to state a claim for relief as to all of SMIL’s claims, except for SMIL’s breach of contract claim against BNP France. On February 10, 2009, BNP France served notice it was appealing the trial court’s ruling with respect to its contention that SMIL’s claims against it should be heard in Geneva, Switzerland. On February 15, 2011, the North Carolina Court of Appeals filed its opinion affirming the trial court’s ruling denying BNP France’s motion to dismiss. On March 22, 2011, BNP France filed a Petition for Discretionary Review with the North Carolina Supreme Court seeking to have the Supreme Court review the decision of the North Carolina Court of Appeals that affirmed the trial court’s ruling denying BNP France’s motion to dismiss. SMIL filed its response to the petition on April 4, 2011. The North Carolina Supreme Court denied BNP France’s Petition for Discretionary Review on January 26, 2012. On August 4, 2008, BNP Suisse filed a motion to dismiss the claims against it alleging the North Carolina court does not possess personal jurisdiction over BNP Suisse, which motion was denied by the trial court on July 14, 2009. On August 11, 2009, BNP Suisse served notice it was appealing the trial court’s ruling. On February 15, 2011, the North Carolina Court of Appeals filed its opinion which reversed the trial court, holding that BNP Suisse was not subject to personal jurisdiction in North Carolina. On March 22, 2011, SMIL filed a Petition for Discretionary Review with the North Carolina Supreme Court seeking to have the Supreme Court review the decision of the North Carolina Court of Appeals which reversed the trial court, holding that BNP Suisse was not subject to personal jurisdiction in North Carolina. BNP Suisse filed its response to the petition on April 4, 2011. The North Carolina Supreme Court denied SMIL’s Petition for Discretionary Review on January 26, 2012. SMIL intends to continue pursuit of its claims against BNP France in the North Carolina Business Court. On July 27, 2012, BNP France filed a motion for judgment on the pleadings. The Court conducted oral argument on October 17, 2012, and denied the motion by order dated February 26, 2014. Discovery and motions practice are ongoing in this matter.
On May 17, 2013, Gary Gaylor filed a lawsuit against AMS and SMI. The lawsuit was filed in the United States District Court for the Northern District of Georgia and alleges violations under Title III of the Americans with Disabilities Act. The Plaintiff alleges that he attended events at AMS on April 5 and 26, 2013. The Plaintiff alleges serious difficulty in accessing goods and utilizing services at AMS due to various alleged physical barriers. The Plaintiff seeks remediation of the alleged barriers. AMS and SMI filed a responsive pleading in this matter June 14, 2013, denying the material allegations of the complaint, and further stating that SMI is not a proper party to the lawsuit. This matter is in the early stages of litigation and discovery is ongoing. The Plaintiff submitted his expert’s report on December 31, 2013, and AMS and SMI are in the process of preparing a rebuttal to that report. The Company is currently unable to predict the effect the outcome of this litigation will have on its future financial position, results of operations or cash flows. The Company intends to vigorously defend this matter.
|
9. STOCK COMPENSATION PLANS
2013 Stock Incentive Plan – In February 2013, the Company’s Board of Directors adopted the 2013 Stock Incentive Plan (the 2013 Plan) which was approved by stockholders at the 2013 Annual Meeting. The 2013 Plan allows the Company, among other things, to continue to provide equity-based incentives to, and continue to attract and retain, key employees, directors and other individuals providing services to the Company. Awards under the 2013 Plan may be in the form of incentive stock options, nonqualified stock options, stock appreciation rights (SARs), restricted stock, restricted stock units or stock awards. Approval of the 2013 Plan did not amend or modify the 2004 Plan described below.
Under the 2013 Plan, 3,500,000 shares of SMI’s common stock are reserved for issuance, subject to various restrictions and adjustments including the following: (i) if shares subject to award under the 2013 Plan are forfeited, or the award otherwise terminates or is canceled for any reason without the issuance of such shares, those shares will be available for future awards; (ii) no individual may be granted options or SARs aggregating more than 300,000 shares of common stock during any calendar year; (iii) in the case of awards other than options or SARs that are intended to be “performance-based compensation”, no individual may be granted an aggregate of more than 100,000 shares of common stock during any calendar year; and (iv) with respect to any cash-based stock award that is intended to be a performance award, the maximum cash payment that may be paid during any one calendar year to an individual is $10,000,000.
2004 Stock Incentive Plan, Amended and Restated as of February 10, 2009—The 2004 Stock Incentive Plan (the 2004 Plan) terminated in February 2014 and no awards were granted under this plan in the three months ended March 31, 2014. Previously granted awards under the 2004 Plan consisted of incentive stock options, non-statutory stock options, restricted stock units or restricted stock. All stock options granted under the 2004 Plan had an exercise price equal to the market value of the underlying common stock at grant date, expire ten years from grant date and vested immediately or in equal installments over three years, and restricted stock and restricted stock units vest three years from grant date or in equal installments over three years. Once applicable restrictions lapse or have been satisfied, restricted stock units may be payable in cash, shares of common stock or a combination, as specified in the award agreement.
Under the Company’s performance-based Incentive Compensation Plan, the Compensation Committee of the Company’s Board of Directors approved grants of restricted stock to the Company’s Vice Chairman and Chief Financial Officer and restricted stock units to the Company’s President and Chief Operating Officer in each of the three months ended March 31, 2014 and 2013. The 2014 grants were awarded under the 2013 Plan and the 2013 grants were awarded under the 2004 Plan which is now terminated. All grants under both plans are to be settled in shares of common stock, vest in equal installments over three years and are subject to reaching certain defined full year earnings targets established at the beginning of each year by the Compensation Committee. Forfeitures in any given year result from differences between the Company’s actual results for the previous year as compared to the defined full year earnings target. The following is a summary of restricted stock and restricted stock units granted, vested and forfeited under the Incentive Compensation Plan during the three months ended March 31, 2014 and 2013 (shares in thousands):
Three Months Ended March 31: |
||||||||||||||||
2014 |
2013 |
|||||||||||||||
|
Restricted Stock |
Restricted Stock Units |
Restricted Stock |
Restricted Stock Units |
||||||||||||
Outstanding, beginning of period |
59 | 59 | 60 | 60 | ||||||||||||
Granted |
35 | 35 | 35 | 35 | ||||||||||||
Vested |
(27 | ) | (27 | ) | (24 | ) | (24 | ) | ||||||||
Forfeited |
(3 | ) | (3 | ) | (12 | ) | (12 | ) | ||||||||
Outstanding, end of period |
64 | 64 | 59 | 59 |
In the three months ended March 31, 2014 and 2013, the Company repurchased 27,000 and 25,000 shares of common stock for $523,000 and $418,000 from executive management employees to settle income taxes on 54,000 and 48,000 shares that vested during the period, respectively.
2008 Formula Restricted Stock Plan, Amended and Restated as of April 17, 2012 – The 2008 Formula Restricted Stock Plan (the 2008 Formula Plan) is for the benefit of the Company’s outside directors, and is scheduled to terminate in February 2018. On the first business day following each annual meeting, each non-employee director who is then a member of the Board receives a grant of restricted stock consisting of the number of shares equaling $75,000 divided by the average closing sale price for the twenty days immediately preceding the grant date, rounded up to the nearest whole share. Grants of restricted stock fully vest on the earlier of (i) the first grant date anniversary or (ii) the day before the Company’s next annual meeting following the grant date. Vesting is subject to continued service as a director through scheduled vesting dates. The Company awarded 4,028 shares of restricted stock to each of the Company’s four non-employee directors on April 16, 2014. An aggregate of 16,668 shares granted to non-employee directors on April 17, 2013 vested on April 14, 2014, and 17,200 shares granted in 2012 vested on April 15, 2013. All restricted stock awards were granted and vested in accordance with plan provisions.
Employee Stock Purchase Plan – No shares were granted to employees under the Employee Stock Purchase Plan for calendar years 2014 or 2013.
Share-Based Payments – The Company generally records share-based compensation cost for stock option, restricted stock and restricted stock unit awards on either the accelerated method using a graded vesting schedule or the straight-line method over the requisite service period, depending on the vesting schedule of the awards. The Company’s practice has been to issue new shares upon option exercise; however, repurchases of shares in the open market are permitted. There were no significant changes in the characteristics of restricted stock or restricted stock units granted in 2014 or 2013 as compared to prior grants and no modifications of the terms of any share-based payment arrangements. There were no significant changes in estimates, assumptions or valuation methods used to estimate the fair value of share-based payment awards. No stock options were granted under any of the Company’s stock compensation plans during the three months ended March 31, 2014 or 2013. A total of 3,000 stock options previously granted under the 2004 Plan were exercised in the three months ended March 31, 2014 at an exercise price of $15.83. No stock options were exercised in the three months ended March 31, 2013.
Share-based compensation cost for the three months ended March 31, 2014 and 2013 totaled $639,000 and $525,000, before income taxes of $237,000 and $197,000, respectively, and is included in general and administrative expense. There were no capitalized share-based compensation costs at March 31, 2014 or December 31, 2013. As of March 31, 2014, there was approximately $3,177,000 of total unrecognized compensation cost related to non-vested restricted stock and restricted stock units granted under the 2013 Plan, the 2004 Plan and the 2008 Formula Plan that is expected to be recognized over a weighted average period of 1.0 year. As of March 31, 2014, all stock options were vested and there was no unrecognized compensation cost related to stock options granted under any of the Company’s stock compensation plans.
See Note 11 to the Consolidated Financial Statements in our 2013 Annual Report for additional information and terms of the Company’s stock compensation plans.
|
10. SEGMENT DISCLOSURES
The Company’s operations are predominately comprised of promoting, marketing and sponsoring motorsports racing events, merchandising and other related activities conducted at its various major speedway facilities located in the United States. The Company’s business activities, including those of its subsidiaries and joint venture equity investee, are further described in Notes 1 and 2 to the Consolidated Financial Statements in our 2013 Annual Report. The Company’s “motorsports event related” segment consists of revenues and expenses associated with all admissions, event related, NASCAR broadcasting and event motorsports merchandising activities. The segment includes motorsports related events and operations for all Company speedways, NASCAR broadcasting and ancillary media rights, PRN and RCU motorsports radio programming, and SMI Properties and SMI Trackside motorsports merchandising at Company and non-Company speedways. These operating segments have been aggregated into the motorsports related reporting segment as each share similar types and classes of customers, similar methods for providing or distributing motorsports related services, souvenirs and other merchandise, and other similar economic characteristics. The Company’s “all other” operations consist of SMIP subsidiary non-event motorsports and non-motorsports merchandising, Legend Cars non-event merchandising and sanctioning body activities, Oil-Chem micro-lubricant activities, and office rentals at certain Company speedways. All segment information below pertains to continuing operations and excludes discontinued oil and gas operations for all periods presented.
Segment information as presented below comports with information the Company’s chief operating decision maker and management use and focus on when assessing segment performance and allocating resources. Segment operating income excludes interest, taxes, other income or expense and specified non-recurring items, if any, and corporate general and administrative and depreciation costs are allocated to operating segments based on their respective revenues relative to consolidated revenues. Segment information for the three months ended March 31, 2014 and 2013, and as of March 31, 2014 and December 31, 2013 is as follows (in thousands):
Three Months Ended March 31: |
||||||||||||||||||||||||
2014 |
2013 |
|||||||||||||||||||||||
Motorsports Event Related |
All Other |
Consolidated |
Motorsports Event Related |
All Other |
Consolidated |
|||||||||||||||||||
Revenues |
$ | 80,104 | $ | 4,438 | $ | 84,542 | $ | 79,024 | $ | 5,198 | $ | 84,222 | ||||||||||||
Depreciation and amortization |
13,502 | 50 | 13,552 | 13,680 | 61 | 13,741 | ||||||||||||||||||
Segment operating income |
7,015 | 293 | 7,308 | 8,123 | 765 | 8,888 | ||||||||||||||||||
Capital expenditures |
7,396 | 7 | 7,403 | 2,635 | 13 | 2,648 |
March 31, 2014 |
December 31, 2013 |
|||||||||||||||||||||||
Other intangibles |
$ | 394,955 |
– |
$ | 394,955 | $ | 394,955 |
– |
$ | 394,955 | ||||||||||||||
Goodwill intangibles |
49,680 |
– |
49,680 | 49,680 |
– |
49,680 | ||||||||||||||||||
Total assets |
1,770,893 | $ | 24,865 | 1,795,758 | 1,761,698 | $ | 24,562 | 1,786,260 |
The following table reconciles segment operating income above to consolidated income or loss before income taxes (both from continuing operations) for the three months ended March 31, 2014 and 2013 (in thousands):
Three Months Ended |
||||||||
March 31: |
||||||||
2014 |
2013 |
|||||||
Total segment operating income |
$ | 7,308 | $ | 8,888 | ||||
Adjusted for: |
||||||||
Interest expense, net |
(5,601 |
) |
(10,910 |
) |
||||
Other (expense) income, net |
1,261 | (145 |
) |
|||||
Consolidated income (loss) before income taxes |
$ | 2,968 | $ | (2,167 |
) |
|
Quarterly Reporting – The Company recognizes revenues and operating expenses for all events in the calendar quarter in which conducted. Changes in race schedules at the Company's speedways from time to time, including speedway acquisitions, can lessen the comparability of operating results between quarterly financial statements of successive years and increase or decrease the seasonal nature of its motorsports business. The more significant racing schedule changes for the three months ended March 31, 2014 as compared to 2013 include:
|
• |
LVMS held one major NHRA racing event in the first quarter 2014 that was held in the second quarter 2013 |
|
• |
Poor weather resulted in delays in starting and completing one NASCAR Sprint Cup race held at BMS in the first quarter 2014 |
Joint Venture Equity Investment – Before February 2014, the Company and International Speedway Corporation equally owned a joint venture (50% non-controlling interest) operating independently under the name Motorsports Authentics (MA). MA’s operations consist principally of trackside and, to a lesser extent, wholesale and retail, event souvenir merchandising as licensed and regulated under NASCAR Teams Licensing Trust agreements. The NASCAR Trust significantly influences MA’s operations and results. On January 31, 2014, the Company abandoned its interest and rights in MA to focus management resources in areas that may be profitable and more productive. As further described below, and in Notes 2 and 8 to the Consolidated Financial Statements in our 2013 Annual Report, the Company recognized an anticipated material tax benefit related to abandonment as of December 31, 2013. There was no other impact on the Company’s December 31, 2013 or first quarter 2014 Consolidated Financial Statements. The carrying value of the Company’s equity investment in MA was reduced to $0 as of December 31, 2009. Under equity method accounting, the Company no longer recorded its 50% share of MA operating losses, if any, unless and until this carrying value was increased to the extent of future MA operating profits, if any. As such, the Company’s first quarter 2014 and 2013 results were not impacted by MA’s operations under the equity method.
Income Taxes – The Company provides for income taxes at the end of each interim period based on management’s best estimate of the annual estimated effective income tax rate. Cumulative adjustments to the Company’s annual estimated effective income tax rate are recorded in the interim period in which a change in the annual estimated effective income tax rate is determined. See Notes 2 and 8 to the Consolidated Financial Statements in our 2013 Annual Report for additional information on our accounting for income taxes.
The effective income tax rate for the three months ended March 31, 2014 and 2013 was 37.1% and 37.5%, respectively. The Company paid cash of $3,000 and $0 for income taxes in the three months ended March 31, 2014 and 2013. Income tax liabilities for unrecognized tax benefits approximate $1,004,000 as of March 31, 2014 and December 31, 2013, and are included in other noncurrent liabilities, all of which would favorably impact the Company’s effective tax rate if recognized. As of March 31, 2014, management was not aware of any significant tax positions where it appeared reasonably possible that unrecognized tax benefits might significantly increase within the next twelve months. There was no change or activity for unrecognized tax benefits during the three months ended March 31, 2014 or 2013. Interest and penalties recognized on uncertain tax positions amounted to $0 and $18,000 for the three months ended March 31, 2014 and 2013. As of March 31, 2014 and December 31, 2013, the Company had $844,000 accrued for the payment of interest and penalties on uncertain tax positions, which is included in other noncurrent liabilities. The tax years that remain open to examination include 2006 through 2013 by the California Franchise Tax Board, and 2009 through 2013 by all other taxing jurisdictions to which the Company is subject. The Kentucky Department of Revenue is currently examining the Company’s 2009, 2010, 2011 and 2012 state tax returns. The Company does not anticipate material adjustments resulting from examination.
Anticipated Income Tax Benefit From Equity Interest Abandonment – On January 31, 2014, the Company abandoned its interest and rights in MA as previously described above. The Company’s carrying value of the investment was reduced to $0 through sizable impairment charges prior to 2010 and MA’s historical operating results. The Company recognized no concurrent tax benefits as valuation allowances were provided against associated deferred tax assets. As a result of abandonment, the Company intends to recognize tax losses that will be reported on its 2014 income tax returns. Management believes there is or will be sufficient taxable income in carryback or carryforward periods under tax law to fully utilize these tax losses. As such, the Company recognized a material income tax benefit of $49.3 million at December 31, 2013 for the reversal of previously recorded valuation allowances under applicable accounting guidance.
The Company believes it is more likely than not that its filing position would be sustained based on its technical merits upon examination with taxing authorities that have full knowledge of all relevant information. The Company reached this conclusion based on the use of legal counsel and other tax consultants and the potential to utilize tax losses. Under applicable accounting guidance, tax positions are measured at the largest amount of benefit that is greater than 50 percent likely (or more-likely-than not) of being ultimately realized. As such, the full anticipated tax benefit was recognized because the Company believes that partial sustaining of its tax position by taxing authorities would be an unlikely outcome given the nature of the position. The Company believes it will fully utilize the associated tax losses. Should the Company’s tax position not be fully sustained if examined, a valuation allowance would be required to reduce or eliminate the associated deferred tax assets. Any differences between the final tax outcome and amounts recorded would affect the Company’s income tax provision in the period in which such determination was made.
Taxes Collected from Customers – The Company reports sales, admission and other taxes collected from customers on both a gross and net basis in operations. Such taxes reported on a gross basis for the three months ended March 31, 2014 and 2013 amounted to $965,000 and $1,002,000.
Advertising Expenses – Event specific advertising costs are expensed when an associated event is held and included principally in direct expense of events. Non-event related advertising costs are expensed as incurred and included principally in other direct operating expense. Advertising expense amounted to $2,440,000 and $2,599,000 in the three months ended March 31, 2014 and 2013. There were no deferred direct-response advertising costs at March 31, 2014 or December 31, 2013.
Fair Value of Financial Instruments – The Company follows applicable authoritative guidance which requires that financial and non-financial assets and liabilities measured and reported on a fair value basis be classified, disclosed and categorized as further described below. Fair value estimates are based on relevant market information and single broker quoted market prices where available at a specific point in time, and changes in assumptions or market conditions could significantly affect estimates. The carrying values of cash and cash equivalents, accounts and notes receivable, certain other assets and accounts payable approximate fair value because of the short maturity of these financial instruments. Cash surrender values are carried at fair value based on binding broker quoted market prices. Notes and other receivables and bank revolving credit facility and term loan borrowings are variable interest rate financial instruments and, therefore, carrying values approximate fair value. The fixed rate senior notes payable are publicly traded and estimated fair values are based on single broker quoted market prices. Other long-term debt is non-interest bearing and discounted based on estimated current cost of borrowings and, therefore, carrying values approximate market value. There have been no changes or transfers between category levels or classes.
The following table presents estimated fair values and categorization levels of the Company’s financial instruments as of March 31, 2014 and December 31, 2013 (in thousands):
March 31, 2014 |
December 31, 2013 |
||||||||||||||||||||
Level |
Class |
Carrying Value |
Fair Value |
Carrying Value |
Fair Value |
||||||||||||||||
Assets |
|||||||||||||||||||||
Cash and cash equivalents |
1 |
R |
$ | 77,098 | $ | 77,098 | $ | 97,343 | $ | 97,343 | |||||||||||
Floating rate notes receivable |
2 |
NR |
1,710 | 1,710 | 2,005 | 2,005 | |||||||||||||||
Cash surrender values |
2 |
NR |
5,012 | 5,012 | 4,937 | 4,937 | |||||||||||||||
Liabilities |
|||||||||||||||||||||
Floating rate revolving Credit Facility, including Term Loan |
2 |
NR |
200,000 | 200,000 | 210,000 | 210,000 | |||||||||||||||
6 ¾% Senior Notes Payable due 2019 |
1 |
NR |
253,991 | 265,625 | 254,197 | 265,000 | |||||||||||||||
Other long-term debt |
2 |
NR |
2,464 | 2,464 | 2,792 | 2,792 |
Level 1: |
Quoted market prices in active markets for identical assets or liabilities. |
Level 2: |
Observable market-based inputs or unobservable inputs that are corroborated by market data. |
Level 3: |
Unobservable inputs that are not corroborated by market data. |
Class R: |
Measured at fair value on recurring basis, subsequent to initial recognition. |
Class NR: |
Measured at fair value on nonrecurring basis, subsequent to initial recognition. |
Deferred Income – TMS, in conjunction with the Fort Worth Sports Authority, has an oil and gas mineral rights lease agreement which, among other things, provides the lessee various defined property access and right-of-ways, exclusive exploration and extraction rights, and non-interference by TMS should extraction infrastructure construction and operations commence. TMS is required to coordinate directly with the lessee on roadway and pipeline logistics to prevent interference of TMS or lessee activities, and monitor regulatory and other contract compliance. An upfront cash payment received in December 2011 has been accreted into other operating revenue over an associated two-year agreement term on a straight-line basis, with $802,000 recognized in the three months ended March 31, 2013 ($0 in the three months ended March 31, 2014). As of March 31, 2014 and December 31, 2013, associated deferred income was $0. This two-year agreement is part of a long-term arrangement under which the lessee initiated drilling activities prior to expiration, resulting in the lease remaining enforceable as long as drilling or extraction related activities continue. Through a combination of this lease and other agreements, including a joint exploration agreement, with the Fort Worth Sports Authority, if and when oil and gas extraction commences or upon meeting certain price levels, this lease agreement can be extended and TMS entitled to stipulated stand-alone and shared royalties. At this time, although extraction is expected to commence in 2014, management is unable to determine possible volumes of production if any or if stipulated price levels will be met.
In late 2013, BMS announced plans to host a collegiate football game in September 2016. As of March 31, 2014 and December 31, 2013, advance revenues and associated direct expenses were not significant. Under the similar accounting policy for event revenues and expenses described above, the Company plans to continue to defer advance revenues and direct expenses pertaining to this event until held.
Other Contingencies – CMS’s property includes areas used as solid waste landfills for many years. Landfilling of general categories of municipal solid waste on the CMS property ceased in 1992, but CMS currently allows certain property to be used for land clearing and inert debris landfilling. Landfilling for construction and demolition debris has ceased on the CMS property. Management believes the Company’s operations, including the landfills on its property, comply with all applicable federal, state and local environmental laws and regulations. Management is not aware of any situation related to landfill operations which would have a material adverse effect on the Company’s financial position, future results of operations or cash flows.
Recently Issued Accounting Standards – The FASB issued Accounting Standards Update No. 2013-11 “Income Taxes (Topic 740): Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists” whereby an unrecognized tax benefit, or a portion of an unrecognized tax benefit, should be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward, except as follows. To the extent those three items are not available at the reporting date under tax law of applicable jurisdictions to settle additional income taxes that would result from the disallowance of a tax position or such tax law does not require the entity to use, and the entity does not intend to use, the deferred tax asset for such purpose, the unrecognized tax benefit should be presented in the financial statements as a liability and not combined with deferred tax assets. The assessment of whether deferred tax assets are available is based on unrecognized tax benefits and deferred tax assets existing at the reporting date, and should be made presuming disallowance of associated tax positions at that date. The guidance is effective for fiscal years and interim periods beginning after December 15, 2013, applies prospectively to all unrecognized tax benefits existing at the effective date, and does not require new recurring disclosures. The Company’s adoption had no impact on its financial statements or disclosures, and the Company will apply this guidance where applicable in the future.
The FASB issued Accounting Standards Update No. 2014-08 “Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity: Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360)” which improves the definition of discontinued operations, changes the requirements for reporting discontinued operations and includes several new disclosures. Some of the new required disclosures include: (i) presentation of assets and liabilities of disposal groups that include a discontinued operation separately in assets and liabilities within the statement of financial position or reconciliation to total amounts presented; (ii) statement of cash flow presentation or note disclosure of total operating and investing cash flows for discontinued operations, or depreciation, amortization, capital expenditures, and significant operating and investing noncash items related to discontinued operations; and (iii) major classes of line items constituting pretax profit or loss of discontinued operations for periods in which results of discontinued operations are presented where net income is reported. Other disclosures are required when entities retain significant continuing involvement with a discontinued operation after disposal, including cash flows to and from a discontinued operation, and for disposals of individually significant entity components not qualifying for discontinued operations presentation, including noncontrolling interests and retained equity method investments after disposal transactions. For disposals of individually significant components that do not qualify as discontinued operations, entities must disclose pre-tax earnings of the disposed component. Disposals of an entity component or group of entity components are required to be reported in discontinued operations if disposal represents a strategic shift that has or will have a major effect on an entity’s operations and financial results when certain defined activities occur, including disposals by sale, abandonments and distributions. The guidance is effective for disposals (or classifications as held for sale) of entity components, and activities upon acquisition classified as held for sale, that occur within annual periods beginning on or after December 15, 2014, and interim periods within those years. Entities should not apply this guidance to entity components or business activities classified as held for sale before the effective date even if components or activities are disposed after the effective date. Early adoption is permitted only for disposals (or classifications as held for sale) that have not been reported in previously issued financial statements. At this time, the Company believes adoption will have no impact on its financial statements or disclosures, and the Company will apply such guidance where applicable in the future.
|
March 31, 2014 |
December 31, 2013 |
||||||||||||||||||||
Level |
Class |
Carrying Value |
Fair Value |
Carrying Value |
Fair Value |
||||||||||||||||
Assets |
|||||||||||||||||||||
Cash and cash equivalents |
1 |
R |
$ | 77,098 | $ | 77,098 | $ | 97,343 | $ | 97,343 | |||||||||||
Floating rate notes receivable |
2 |
NR |
1,710 | 1,710 | 2,005 | 2,005 | |||||||||||||||
Cash surrender values |
2 |
NR |
5,012 | 5,012 | 4,937 | 4,937 | |||||||||||||||
Liabilities |
|||||||||||||||||||||
Floating rate revolving Credit Facility, including Term Loan |
2 |
NR |
200,000 | 200,000 | 210,000 | 210,000 | |||||||||||||||
6 ¾% Senior Notes Payable due 2019 |
1 |
NR |
253,991 | 265,625 | 254,197 | 265,000 | |||||||||||||||
Other long-term debt |
2 |
NR |
2,464 | 2,464 | 2,792 | 2,792 |
|
March 31, |
December 31, |
|||||||
2014 |
2013 |
|||||||
Finished race cars, parts and accessories |
$ | 5,319 | $ | 5,372 | ||||
Souvenirs and apparel |
3,437 | 2,409 | ||||||
Micro-lubricant® and other |
713 | 824 | ||||||
Total |
$ | 9,469 | $ | 8,605 |
|
March 31, 2014 |
December 31, 2013 |
|||||||||||||||||||||||||||
Gross Carrying Value |
Accumulated Amortization |
Net |
Gross Carrying Value |
Accumulated Amortization |
Net |
Estimated Amortization Period (Years) |
||||||||||||||||||||||
Nonamortizable race event sanctioning and renewal agreements |
$ | 394,913 | — | $ | 394,913 | $ | 394,913 | — | $ | 394,913 | — | |||||||||||||||||
Amortizable race event sanctioning and renewal agreements |
100 | $ | (58 |
) |
42 | 100 | $ | (58 |
) |
42 | 5-6 | |||||||||||||||||
Total |
$ | 395,013 | $ | (58 |
) |
$ | 394,955 | $ | 395,013 | $ | (58 |
) |
$ | 394,955 |
|
Three Months Ended |
||||||||
March 31: |
||||||||
2014 |
2013 |
|||||||
Gross interest costs |
$ | 5,731 | $ | 11,092 | ||||
Less: capitalized interest costs |
(85 |
) |
(36 |
) |
||||
Interest expense |
5,646 | 11,056 | ||||||
Interest income |
(45 |
) |
(146 |
) |
||||
Interest expense, net |
$ | 5,601 | $ | 10,910 | ||||
Weighted-average interest rate on Credit Facility borrowings |
2.2 |
% |
2.7 |
% |
|
2014 |
2013 |
|||||||
Notes and other receivables |
$ | 3,268 | $ | 3,552 | ||||
Amounts payable to affiliates |
2,594 | 2,594 | ||||||
Merchandise and vehicle purchases |
266 | 425 | ||||||
Merchandise and vehicle sales and event related commissions, and reimbursed shared expenses |
978 | 1,410 | ||||||
Rent expense |
166 | 166 | ||||||
Interest income |
19 | 25 | ||||||
Interest expense |
25 | 25 |
|
Three Months Ended March 31: |
||||||||||||||||
2014 |
2013 |
|||||||||||||||
|
Restricted Stock |
Restricted Stock Units |
Restricted Stock |
Restricted Stock Units |
||||||||||||
Outstanding, beginning of period |
59 | 59 | 60 | 60 | ||||||||||||
Granted |
35 | 35 | 35 | 35 | ||||||||||||
Vested |
(27 | ) | (27 | ) | (24 | ) | (24 | ) | ||||||||
Forfeited |
(3 | ) | (3 | ) | (12 | ) | (12 | ) | ||||||||
Outstanding, end of period |
64 | 64 | 59 | 59 |
|
Three Months Ended March 31: |
||||||||||||||||||||||||
2014 |
2013 |
|||||||||||||||||||||||
Motorsports Event Related |
All Other |
Consolidated |
Motorsports Event Related |
All Other |
Consolidated |
|||||||||||||||||||
Revenues |
$ | 80,104 | $ | 4,438 | $ | 84,542 | $ | 79,024 | $ | 5,198 | $ | 84,222 | ||||||||||||
Depreciation and amortization |
13,502 | 50 | 13,552 | 13,680 | 61 | 13,741 | ||||||||||||||||||
Segment operating income |
7,015 | 293 | 7,308 | 8,123 | 765 | 8,888 | ||||||||||||||||||
Capital expenditures |
7,396 | 7 | 7,403 | 2,635 | 13 | 2,648 |
March 31, 2014 |
December 31, 2013 |
|||||||||||||||||||||||
Other intangibles |
$ | 394,955 |
– |
$ | 394,955 | $ | 394,955 |
– |
$ | 394,955 | ||||||||||||||
Goodwill intangibles |
49,680 |
– |
49,680 | 49,680 |
– |
49,680 | ||||||||||||||||||
Total assets |
1,770,893 | $ | 24,865 | 1,795,758 | 1,761,698 | $ | 24,562 | 1,786,260 |
Three Months Ended |
||||||||
March 31: |
||||||||
2014 |
2013 |
|||||||
Total segment operating income |
$ | 7,308 | $ | 8,888 | ||||
Adjusted for: |
||||||||
Interest expense, net |
(5,601 |
) |
(10,910 |
) |
||||
Other (expense) income, net |
1,261 | (145 |
) |
|||||
Consolidated income (loss) before income taxes |
$ | 2,968 | $ | (2,167 |
) |
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