SPEEDWAY MOTORSPORTS INC, 10-K filed on 3/8/2012
Annual Report
Document and Entity Information (USD $)
12 Months Ended
Dec. 31, 2011
Mar. 1, 2012
Jun. 30, 2011
Document Type
10-K 
 
 
Amendment Flag
false 
 
 
Document Period End Date
Dec. 31, 2011 
 
 
Document Fiscal Year Focus
2011 
 
 
Document Fiscal Period Focus
FY 
 
 
Trading Symbol
TRK 
 
 
Entity Registrant Name
SPEEDWAY MOTORSPORTS INC 
 
 
Entity Central Index Key
0000934648 
 
 
Current Fiscal Year End Date
--12-31 
 
 
Entity Well-known Seasoned Issuer
No 
 
 
Entity Current Reporting Status
Yes 
 
 
Entity Voluntary Filers
No 
 
 
Entity Filer Category
Accelerated Filer 
 
 
Entity Common Stock, Shares Outstanding
 
41,430,484 
 
Entity Public Float
 
 
$ 176,084,603 
CONSOLIDATED BALANCE SHEETS (USD $)
In Thousands, unless otherwise specified
Dec. 31, 2011
Dec. 31, 2010
Current Assets:
 
 
Cash and cash equivalents
$ 87,368 
$ 92,200 
Short-term investments
 
975 
Accounts and notes receivable, net
39,415 
42,509 
Prepaid income taxes
12,975 
11,431 
Inventories, net
8,630 
9,382 
Prepaid expenses
3,583 
4,317 
Deferred income taxes
5,924 
291 
Current assets of discontinued operation
 
2,150 
Total Current Assets
157,895 
163,255 
Notes and Other Receivables:
 
 
Affiliates
4,055 
4,412 
Other
2,057 
4,623 
Other Assets
29,805 
27,655 
Property and Equipment, Net
1,177,154 
1,169,281 
Other Intangible Assets, Net
394,960 
394,972 
Goodwill
138,717 
187,326 
Total
1,904,643 
1,951,524 
Current Liabilities:
 
 
Current maturities of long-term debt
17,540 
2,381 
Accounts payable
13,705 
14,182 
Deferred race event and other income, net
62,658 
67,084 
Accrued interest
6,260 
3,865 
Accrued expenses and other current liabilities
21,480 
19,619 
Total Current Liabilities
121,643 
107,131 
Long-term Debt
555,017 
626,316 
Payable to Affiliate
2,594 
2,594 
Deferred Income, Net
12,713 
6,587 
Deferred Income Taxes
366,898 
333,947 
Other Liabilities
4,598 
8,712 
Total Liabilities
1,063,463 
1,085,287 
Commitments and Contingencies (Notes 2, 6, 8, 10, 11 and 14)
   
   
Stockholders' Equity:
 
 
Preferred Stock, $.10 par value, shares authorized - 3,000,000, no shares issued
   
   
Common Stock, $.01 par value, shares authorized - 200,000,000, issued and outstanding - 41,452,000 in 2011 and 41,621,000 in 2010
451 
450 
Additional Paid-in Capital
244,946 
243,132 
Retained Earnings
679,491 
702,558 
Accumulated Other Comprehensive Loss (Note 2)
 
(72)
Treasury stock at cost, shares - 3,673,000 in 2011 and 3,398,000 in 2010
(83,708)
(79,831)
Total Stockholders' Equity
841,180 
866,237 
Total
$ 1,904,643 
$ 1,951,524 
CONSOLIDATED BALANCE SHEETS (Parenthetical) (USD $)
Dec. 31, 2011
Dec. 31, 2010
Preferred Stock, par value
$ 0.10 
$ 0.10 
Preferred Stock, shares authorized
3,000,000 
3,000,000 
Preferred Stock, shares issued
   
   
Common Stock, par value
$ 0.01 
$ 0.01 
Common Stock, shares authorized
200,000,000 
200,000,000 
Common Stock, issued
41,452,000 
41,621,000 
Common Stock, outstanding
41,452,000 
41,621,000 
Treasury stock at cost, shares
3,673,000 
3,398,000 
CONSOLIDATED STATEMENTS OF OPERATIONS (USD $)
In Thousands, except Per Share data, unless otherwise specified
12 Months Ended
Dec. 31, 2011
Dec. 31, 2010
Dec. 31, 2009
Revenues:
 
 
 
Admissions
$ 130,239 
$ 139,125 
$ 163,087 
Event related revenue
163,621 
156,691 
178,805 
NASCAR broadcasting revenue
185,394 
178,722 
173,803 
Other operating revenue
26,591 
27,705 
34,827 
Total Revenues
505,845 
502,243 
550,522 
Expenses and Other:
 
 
 
Direct expense of events
106,204 
100,843 
100,922 
NASCAR purse and sanction fees
120,146 
120,273 
123,078 
Other direct operating expense
20,352 
21,846 
26,208 
General and administrative
89,384 
85,717 
84,250 
Depreciation and amortization
54,004 
52,762 
52,654 
Interest expense, net (Note 6)
42,112 
52,095 
45,081 
Impairment of goodwill and other intangible assets
48,609 
 
7,273 
Loss on early debt redemption and refinancing
7,456 
 
 
Equity investee losses
 
 
76,657 
Other (income) expense, net
(342)
(2,378)
337 
Total Expenses and Other
487,925 
431,158 
516,460 
Income from Continuing Operations Before Income Taxes
17,920 
71,085 
34,062 
Provision For Income Taxes
(23,481)
(25,822)
(40,220)
(Loss) Income from Continuing Operations
(5,561)
45,263 
(6,158)
Loss from Discontinued Operation, Net of Taxes
(883)
(782)
(4,145)
Net (Loss) Income
$ (6,444)
$ 44,481 
$ (10,303)
Basic (Loss) Earnings Per Share:
 
 
 
Continuing Operations
$ (0.14)
$ 1.08 
$ (0.14)
Discontinued Operation
$ (0.02)
$ (0.02)
$ (0.10)
Net (Loss) Income
$ (0.16)
$ 1.06 
$ (0.24)
Weighted Average Shares Outstanding
41,524 
41,927 
42,657 
Diluted (Loss) Earnings Per Share:
 
 
 
Continuing Operations
$ (0.14)
$ 1.08 
$ (0.14)
Discontinued Operation
$ (0.02)
$ (0.02)
$ (0.10)
Net (Loss) Income
$ (0.16)
$ 1.06 
$ (0.24)
Weighted Average Shares Outstanding
41,524 
41,928 
42,657 
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (USD $)
In Thousands
Total
Outstanding Common Stock
Additional Paid-In Capital
Retained Earnings
Accumulated Other Comprehensive Loss
Treasury Stock
Beginning Balance at Dec. 31, 2008
$ 885,362 
$ 449 
$ 240,089 
$ 700,506 
$ (72)
$ (55,610)
Beginning Balance (in shares) at Dec. 31, 2008
 
43,128 
 
 
 
 
Net (loss) income
(10,303)
 
 
(10,303)
 
 
Change in net unrealized gain on marketable equity securities, net of tax
 
 
 
 
Comprehensive (loss) income
(10,295)
 
 
 
 
 
Share-based compensation (in shares)
 
35 
 
 
 
 
Share-based compensation
1,290 
 
1,290 
 
 
 
Cash dividends of $0.40 in 2011, $0.40 in 2010 and $0.36 in 2009 per share of common stock
(15,352)
 
 
(15,352)
 
 
Repurchases of common stock at cost (in shares)
 
(897)
 
 
 
 
Repurchases of common stock at cost
(12,792)
 
 
 
 
(12,792)
Ending Balance at Dec. 31, 2009
848,213 
449 
241,379 
674,851 
(64)
(68,402)
Ending Balance (in shares) at Dec. 31, 2009
 
42,266 
 
 
 
 
Net (loss) income
44,481 
 
 
44,481 
 
 
Change in net unrealized gain on marketable equity securities, net of tax
(8)
 
 
 
(8)
 
Comprehensive (loss) income
44,473 
 
 
 
 
 
Share-based compensation (in shares)
 
98 
 
 
 
 
Share-based compensation
1,754 
1,753 
 
 
 
Cash dividends of $0.40 in 2011, $0.40 in 2010 and $0.36 in 2009 per share of common stock
(16,774)
 
 
(16,774)
 
 
Repurchases of common stock at cost (in shares)
 
(743)
 
 
 
 
Repurchases of common stock at cost
(11,429)
 
 
 
 
(11,429)
Ending Balance at Dec. 31, 2010
866,237 
450 
243,132 
702,558 
(72)
(79,831)
Ending Balance (in shares) at Dec. 31, 2010
 
41,621 
 
 
 
 
Net (loss) income
(6,444)
 
 
(6,444)
 
 
Reduction for loss realization on marketable equity securities, net of tax
72 
 
 
 
72 
 
Comprehensive (loss) income
(6,372)
 
 
 
 
 
Share-based compensation (in shares)
 
106 
 
 
 
 
Share-based compensation
1,815 
1,814 
 
 
 
Cash dividends of $0.40 in 2011, $0.40 in 2010 and $0.36 in 2009 per share of common stock
(16,623)
 
 
(16,623)
 
 
Repurchases of common stock at cost (in shares)
 
(275)
 
 
 
 
Repurchases of common stock at cost
(3,877)
 
 
 
 
(3,877)
Ending Balance at Dec. 31, 2011
$ 841,180 
$ 451 
$ 244,946 
$ 679,491 
 
$ (83,708)
Ending Balance (in shares) at Dec. 31, 2011
 
41,452 
 
 
 
 
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (Parenthetical)
12 Months Ended
Dec. 31, 2011
Dec. 31, 2010
Dec. 31, 2009
Cash dividends, per share of common stock
$ 0.40 
$ 0.40 
$ 0.36 
CONSOLIDATED STATEMENTS OF CASH FLOWS (USD $)
In Thousands, unless otherwise specified
12 Months Ended
Dec. 31, 2011
Dec. 31, 2010
Dec. 31, 2009
Cash Flows from Operating Activities:
 
 
 
Net (loss) income
$ (6,444)
$ 44,481 
$ (10,303)
Loss from discontinued operation, net of tax
883 
782 
4,145 
Cash provided (used) by operating activities of discontinued operation
1,267 
(3,845)
(1,513)
Adjustments to reconcile income or loss from continuing operations to net cash provided by operating activities:
 
 
 
Impairment of goodwill and other intangible assets
48,609 
 
7,273 
Loss on early debt redemption and refinancing, non-cash
2,816 
 
 
Loss (gain) loss on disposals of property and equipment and other assets
155 
(2,304)
131 
Deferred loan cost amortization
2,499 
3,584 
3,101 
Interest expense accretion of debt discount
1,860 
1,527 
1,120 
Depreciation and amortization
54,004 
52,762 
52,654 
Amortization of deferred income
(2,692)
(1,534)
(1,680)
Deferred income tax provision
27,248 
24,168 
29,826 
Equity investee losses
 
 
76,657 
Share-based compensation
1,885 
1,979 
1,585 
Changes in operating assets and liabilities:
 
 
 
Accounts and notes receivable
1,802 
(1,770)
2,174 
Prepaid and accrued income taxes
(1,544)
3,902 
1,968 
Inventories
752 
1,842 
2,737 
Prepaid expenses
331 
(356)
(91)
Accounts payable
2,413 
(1,789)
(1,733)
Deferred race event and other income
(5,618)
(11,482)
(26,826)
Accrued interest
2,395 
(71)
1,576 
Accrued expenses and other liabilities
1,771 
(1,716)
(2,059)
Deferred income
4,113 
389 
312 
Other assets and liabilities
(4,223)
(3,935)
(3,251)
Net Cash Provided By Operating Activities
134,282 
106,614 
137,803 
Cash Flows from Financing Activities:
 
 
 
Borrowings under long-term debt
330,000 
 
296,271 
Principal payments on long-term debt
(388,000)
(51,505)
(311,509)
Payments of debt issuance and loan amendment costs
(6,707)
(88)
(11,007)
Dividend payments on common stock
(16,623)
(16,774)
(15,352)
Repurchases of common stock
(3,877)
(11,429)
(12,792)
Net Cash Used By Financing Activities
(85,207)
(79,796)
(54,389)
Cash Flows from Investing Activities:
 
 
 
Capital expenditures
(59,321)
(37,218)
(42,551)
Proceeds from (payment for) other non-current assets
 
1,500 
(1,570)
Proceeds from:
 
 
 
Sales of property and equipment
1,336 
2,755 
98 
Distributions of short-term investments
975 
 
4,503 
Repayment of notes and other receivables
3,103 
694 
1,079 
Net Cash Used By Investing Activities
(53,907)
(32,269)
(38,441)
Net (Decrease) Increase In Cash and Cash Equivalents
(4,832)
(5,451)
44,973 
Cash and Cash Equivalents at Beginning of Year
92,200 
97,651 
52,678 
Cash and Cash Equivalents at End of Year
87,368 
92,200 
97,651 
Supplemental Cash Flow Information:
 
 
 
Cash paid for interest, net of amounts capitalized
40,019 
52,584 
45,239 
Cash paid for income taxes
2,475 
1,616 
11,856 
Supplemental Non-cash Investing and Financing Activities Information:
 
 
 
Increase (decrease) in accounts payable for capital expenditures
(2,890)
4,443 
(6,145)
Increase in deferred income for exchange of property and equipment
5,960 
 
 
Net liabilities assumed for Kentucky Speedway acquisition
 
$ 6,313 
 
BASIS OF PRESENTATION AND DESCRIPTION OF BUSINESS
BASIS OF PRESENTATION AND DESCRIPTION OF BUSINESS

1. BASIS OF PRESENTATION AND 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 a/k/a Infineon Raceway (IR), 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. (US Legend Cars), Oil-Chem Research Corporation (Oil-Chem), SMI Trackside LLC (SMI Trackside), Speedway Funding LLC, Speedway Motorsports International Limited (BVI) and consolidated foreign entities (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. The Company discontinued its oil and gas operations in 2008. Those operations are presented herein as discontinued operations and all note disclosures pertain to continuing operations unless otherwise indicated.

Description of Business – The Company is a promoter, marketer and sponsor of motorsports activities in the United States. As of December 31, 2011, as further described below, the Company principally owns and operates the following motorsports facilities: Atlanta Motor Speedway, Bristol Motor Speedway, Charlotte Motor Speedway, Infineon Raceway, Kentucky Speedway, Las Vegas Motor Speedway, New Hampshire Motor Speedway and Texas Motor Speedway. The Company provides souvenir merchandising services, and food, beverage and hospitality catering services through its SMI Properties subsidiaries; provides syndicated radio programming, production and distribution through its Performance Racing Network subsidiary; develops electronic media promotional programming and distributes wholesale and retail racing and other sports related souvenir merchandise and apparel through its TSI subsidiary; manufactures and distributes smaller-scale, modified racing cars and parts through its US Legend Cars subsidiary; and produces and sells an environmentally-friendly micro-lubricant® through its Oil-Chem subsidiary. The Company also provides souvenir merchandising services through its Motorsports Authentics joint venture.

AMS owns and operates a 1.54-mile lighted, banked, asphalt quad-oval superspeedway, and a 2.47-mile road course. AMS currently hosts one NASCAR Sprint Cup Series event annually, and one NASCAR Nationwide Series race and one NASCAR Camping World Truck Series race, each preceding the Sprint Cup event. As further discussed in Note 2, the Company realigned one annual NASCAR Sprint Cup racing event from AMS to KyS beginning in 2011. AMS also hosts motorsports related events such as auto, truck and motorcycle shows, as well as rents the racetrack throughout the year for driving schools, automobile testing, holiday season festivities and other activities. AMS has constructed 46 condominiums overlooking its speedway.

BMS owns and operates a 0.533-mile lighted, high-banked concrete oval speedway, and a one-quarter mile modern, lighted dragway. BMS currently hosts two Sprint Cup Series events annually, and two Nationwide Series races, one Camping World Truck Series race and one NASCAR-sanctioned K&N Pro Series East event, each preceding a Sprint Cup event. BMS also currently hosts an annual NHRA-sanctioned Nationals and other bracket racing events, as well as various holiday season festivities.

CMS owns and operates a 1.5-mile lighted, banked, asphalt quad-oval superspeedway, a 4/10-mile, modern, lighted dirt track, a 2.25-mile road course, and several other on-site race tracks. CMS currently hosts three Sprint Cup Series events annually, and two Nationwide Series and one Camping World Truck Series race, each preceding a Sprint Cup event. CMS owns and operates a 1/4-mile, four-lane, all concrete, modern, lighted dragway where it hosts two annual NHRA-sanctioned Nationals along with other drag racing events. CMS also hosts two WOO events, Sports Car Club of America (SCCA) events, rents its racetrack facilities for driving schools, automobile testing and car clubs, and conducts other motorsports events and activities throughout the year, including holiday season festivities. CMS also owns and operates an entertainment and office complex overlooking the main speedway, d/b/a The Speedway Club, which generates rental, membership, catering and dining revenues. CMS has constructed 52 condominiums overlooking its speedway.

 

IR owns and operates a modern 2.52-mile, twelve-turn asphalt road course, a one-quarter mile modern, lighted dragway, and a modern expansive industrial park. IR currently hosts one Sprint Cup Series event annually. IR also hosts one Indy Car Series racing event, and annually hosts a NASCAR-sanctioned K&N Pro Series West event, a NHRA-sanctioned Nationals, as well as AMA Series, and SCCA racing events. Also, the racetrack is rented throughout the year for driving school and karting use by various organizations, including the SCCA, major automobile manufacturers, and other car clubs.

KyS owns and operates a 1.5-mile lighted, tri-oval asphalt superspeedway located in Sparta, Kentucky. KyS currently hosts one NASCAR Sprint Cup Series event annually. As further discussed in Note 2, one annual NASCAR Sprint Cup racing event was realigned from AMS to KyS beginning in 2011. KyS also currently hosts two NASCAR Nationwide Series (one is new for 2012) and two NASCAR Camping World Truck Series racing events (with one Nationwide and one Camping World Truck race preceding the Sprint Cup event). The racetrack is also rented for various motorsports related activities and conducts other racing events during the year.

LVMS owns and operates a 1.5-mile lighted, asphalt quad-oval superspeedway, a one-quarter mile modern, lighted dragway, a 1/2-mile, modern, lighted dirt track, and several other on-site race tracks. LVMS currently hosts one Sprint Cup Series, one Nationwide Series and one Camping World Truck Series racing event annually. LVMS also currently hosts two annual NHRA-sanctioned Nationals racing events, as well as other NHRA and bracket drag racing events, along with one NASCAR-sanctioned K&N Pro Series West event, one WOO event, and various other motorsports events at its on-site paved and dirt tracks. The racetrack is also rented throughout the year for motorsports related activities such as driving schools and automobile testing. LVMS also rents its facilities for concerts, holiday season and other festivities, and other non-motorsports events.

NHMS owns and operates a multi-use complex located in Loudon, New Hampshire, featuring a 1.058-mile oval superspeedway and a 1.6-mile road course. NHMS currently hosts two Sprint Cup Series races annually, and one Nationwide Series and one NASCAR-sanctioned K&N Pro Series East event, each preceding a Sprint Cup event. NHMS also hosts SCCA and other racing events and is rented throughout the year for motorsports activities such as driving schools, car clubs and holiday season festivities.

TMS operates a 1.5-mile lighted, banked, asphalt quad-oval superspeedway, a 4/10-mile, modern, lighted dirt track, and a 2.48-mile road course. TMS currently hosts two Sprint Cup events annually, each preceded by a Nationwide Series race. TMS also promotes two Camping World Truck Series racing events, as well as one IndyCar Series, SCCA and other racing events. The racetrack is also rented throughout the year for motorsports related activities such as driving schools, automobile testing, car clubs and holiday season festivities. TMS also owns and operates an entertainment and office complex overlooking the main speedway, d/b/a The Speedway Club at TMS, which generates rental, membership, catering and dining revenues. TMS has constructed 76 condominiums overlooking its speedway.

SMI Properties provides event souvenir merchandising services, and receives commissions for food, beverage and hospitality catering services provided by the Levy Premium Foodservice Limited Partnership, wholly-owned by Compass Group USA, Inc. (Levy), at the Company’s speedways and other third party sports-oriented venues (see “Long-Term Management Contract” below). SMI Properties also provides screenprinting and embroidery services, and is a distributor of wholesale and retail racing and other sports related souvenir merchandise and apparel.

Oil-Chem produces an environmentally-friendly, micro-lubricant® that is promoted and distributed by mass-marketing retailers, auto parts stores and other wholesale and retail customers.

PRN is the Company’s proprietary radio Performance Racing Network. PRN is syndicated nationwide and broadcasts most of the Company’s NASCAR Sprint Cup and Nationwide Series racing events, as well as many other events, and produces daily and weekly racing-oriented programs throughout the NASCAR season.

SMIL, a wholly-owned subsidiary of Oil-Chem, prior to discontinuing operations, engaged in oil and gas exploration and production activities, and the purchase and sale of bulk petroleum products, in certain foreign countries. As further described in Note 14, the Company discontinued those oil and gas operations in 2008.

RCU is a nationally-syndicated radio show with racing-oriented programming.

 

SMI Trackside, a wholly-owned subsidiary of SMI Properties, provides event souvenir merchandising services at the Company’s and other third-party speedway venues, and is a wholesale and retail distributor of racing and other sports related souvenir merchandise and apparel.

TSI is a wholesale and retail distributor of racing and other sports related souvenir merchandise and apparel, and has capabilities to develop electronic media promotional programming.

US Legend Cars (formerly known as 600 Racing), a wholly-owned subsidiary of CMS, developed, operates and is the official sanctioning body of the Legends Racing Circuit. US Legend Cars also manufactures and sells 5/8-scale cars modeled after older-style coupes and sedans (Legends Cars), a line of smaller-scale cars (the Bandolero), a line modeled after older-style roadsters (the Thunder Roadster), and a new higher performance, purpose-built dirt race car (the Legend Dirt Modified), with all four lines collectively referred to as “US Legend Cars” or “Legends Cars”.

Motorsports Authentics Joint Venture Equity Investment (Note 2) – The Company and International Speedway Corporation (ISC) equally own a joint venture (50% non-controlling interest) that operates independently under the name Motorsports Authentics (MA) to market and sell licensed motorsports collectible and consumer products. Prior to the July 2010 formation of the NASCAR Teams Licensing Trust (NASCAR Trust), MA had license agreements with many of the top NASCAR teams and drivers. MA’s products include apparel (including tee-shirts, hats and jackets), die-cast scaled replicas of motorsports vehicles and gifts and other memorabilia. MA’s operations now consist principally of trackside, and to a lesser extent wholesale and retail, event souvenir merchandising as licensed and regulated under NASCAR Trust agreements. From time to time, MA operations may also include fulfillment and warehousing services for certain NASCAR Trust designated distributors. The NASCAR Trust has the ability to significantly influence MA's future operations and results.

Long-Term Management Contract (Note 2) – Levy has exclusive rights to provide on-site food, beverage, and hospitality catering services for essentially all events and operations of the Company’s speedways and other outside venues under a long-term food and beverage management agreement. The management contract commenced in 2002, and Levy has renewed the contract for an additional ten-year period through 2021.

Racing Events – As further described in Note 2, the Company derives a substantial portion of its total revenues from admissions, event related and NASCAR broadcasting revenue. In 2011, the Company held 23 major annual racing events sanctioned by NASCAR, including 13 Sprint Cup and 10 Nationwide Series racing events. The Company also held nine NASCAR Camping World Truck Series racing events, four NASCAR K&N Pro Series racing events, five IndyCar racing events, six major NHRA racing events, one US Legend Cars international circuit, and three WOO racing events. In 2010, the Company held 23 major annual racing events sanctioned by NASCAR, including 13 Sprint Cup and 10 Nationwide Series racing events, eight NASCAR Camping World Truck Series, three NASCAR K&N Pro Series, three IndyCar, six major NHRA, one US Legend Cars international circuit, three WOO, and one ARCA Series racing event. In 2009, the Company held 23 major racing events sanctioned by NASCAR, including 13 Sprint Cup and 10 Nationwide Series, eight NASCAR Camping World Truck Series, three IndyCar, five major NHRA, two ARCA, and three WOO racing events.

The more significant racing schedule changes during the last three years include:

 

   

KyS held one realigned NASCAR Sprint Cup Series racing event in 2011 that was held at AMS in 2010 and 2009

 

   

In 2011, one NASCAR Sprint Cup Series racing event at AMS was postponed and rescheduled due to poor weather

 

   

LVMS and NHMS held IndyCar Series racing events in 2011 that were not held in 2010 or 2009

 

   

In 2010, one NASCAR Sprint Cup and one Nationwide Series racing event at TMS were postponed and rescheduled due to poor weather

 

   

In 2011 and 2010, CMS held a major NHRA Nationals racing event and a holiday season event that were not held in 2009

 

   

US Legend Cars conducted an international circuit racing event at CMS in 2011 and 2010 that was not held in 2009

 

   

In 2009, one NASCAR Sprint Cup Series racing event at CMS was postponed and shortened due to poor weather

SIGNIFICANT ACCOUNTING POLICIES
SIGNIFICANT ACCOUNTING POLICIES

2. SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation – All significant intercompany accounts and transactions have been eliminated in consolidation.

Revenue and Expense Recognition – The Company classifies its revenues as admissions, event related revenue, NASCAR broadcasting revenue, and other operating revenue. “Admissions” includes ticket sales for all Company events. “Event related revenue” includes amounts received from sponsorships and naming rights fees, luxury suite rentals, souvenir sales, commissions from food and beverage sales, advertising and other promotional revenues, hospitality revenues, track rentals, driving school revenues, camping and other non-admission access revenues, broadcasting rights other than NASCAR broadcasting revenue, and other event and speedway related revenues. “NASCAR broadcasting revenue” includes rights fees obtained for domestic television broadcasts of NASCAR-sanctioned events held at the Company’s speedways. “Other operating revenue” includes certain SMI Properties and TSI merchandising revenues, Legends Car and parts sales, The Speedway Club at CMS and The Speedway Club at TMS (together the “Speedway Clubs”) revenues, Oil-Chem revenues, TMS oil and gas mineral rights lease revenues, and industrial park and office tower rentals. “Equity investee losses or earnings” include the Company’s share of joint venture equity investee profits or losses.

The Company classifies its expenses to include direct expense of events, NASCAR purse and sanction fees, and other direct operating expense, among other categories. “Direct expense of events” principally includes cost of souvenir sales, non-NASCAR race purses and sanctioning fees, property and event insurance, compensation of certain employees, advertising, sales and admission taxes, cost of driving school revenues, event settlement payments to non-NASCAR sanctioning bodies and outside event support services. “NASCAR purse and sanction fees” includes payments to, and portions of broadcasting revenues retained by, NASCAR for associated events held at the Company’s speedways. “Other direct operating expense” includes the cost of certain SMI Properties and TSI merchandising, Legends Cars, Speedway Clubs, Oil-Chem, and industrial park and office tower rental revenues.

Event Revenues and Deferred Race Event Income, Net – The Company recognizes admissions, NASCAR broadcasting and event related revenues when an event is held. Event souvenir merchandise sales and commissions from food and beverage sales are recognized at time of sale. Advance revenues and certain related direct expenses pertaining to specific events are deferred until the event is held. Deferred expenses can include race purses and sanction fees remitted to or retained by NASCAR or other sanctioning bodies and sales and admission taxes and credit card processing fees on advance revenues. Deferred race event income relates to scheduled events to be held in upcoming periods. If circumstances prevent a race from being held during the racing season: (i) generally advance revenue is refundable and (ii) all deferred direct event expenses would be immediately recognized except for race purses and sanction fees which would be refundable from NASCAR or other sanctioning bodies, and for sales and admission taxes which would be refundable from taxing authorities. Management believes this accounting policy results in appropriate matching of revenues and expenses associated with the Company’s racing events and helps ensure comparability and consistency between its financial statements. Advance revenues, and certain related direct expenses, if any, for track rentals, driving schools and similar activities are deferred and recognized when the activities take place. Management believes its revenue recognition policies follow applicable authoritative guidance.

NASCAR Broadcasting Revenues and NASCAR Purse and Sanction Fees – NASCAR contracts directly with certain television networks on broadcasting rights for all NASCAR-sanctioned Sprint Cup, Nationwide and Camping World Truck Series racing events. The Company receives television broadcasting revenues under annual contractual sanction agreements for each NASCAR-sanctioned race. The Company negotiates its sanction fees for individual races with NASCAR on an annual basis. Under the sanction agreements, NASCAR typically retains 10% of gross broadcasting revenues as a component of their sanction fees. NASCAR also retains 25% of gross broadcasting revenues for purses awarded to race participants for each race. The remainder of such fees represents additional annually negotiated purse and sanction fees paid to NASCAR by the Company for each race. These amounts retained by and paid to NASCAR are reflected in NASCAR purse and sanction fee expense.

Marketing Agreements – The Company has various marketing agreements for sponsorships, on-site advertising, hospitality and other promotional activities. Sponsorships generally consist of event, official, exclusive and facility naming rights agreements. These various marketing agreements can be event, speedway or period specific, or pertain to multiple events, speedways or years. The Company receives payments based on contracted terms. Marketing customers and agreement terms change from time to time. The Company recognizes contracted fee revenues, and associated expenses, as events or activities are conducted each year in accordance with the respective agreement terms. The Company's marketing agreements sometimes include multiple specified elements such as sponsorships, tickets, hospitality, suites or on-site advertising in varying combinations for one or more events or contract periods, although there is typically a predominant element. Contracted revenues are allocated between admissions and event related revenue financial statement categories based on the relative fair or retail value of the respective multiple elements as such events or activities are conducted each year in accordance with the respective agreement terms. See “Certain Multi-year Marketing Arrangements” below for related discussion involving exchanges of property and equipment. The Company presently has one facility naming rights agreement that renamed Sears Point Raceway as Infineon Raceway, which expires in early 2012. The ten-year naming rights agreement that renamed Charlotte Motor Speedway as Lowe’s Motor Speedway expired after 2009 and was not renewed. These naming rights agreements have provided significant contracted revenues over their ten-year terms. However, the annual contracted revenue received by the Company under these agreements individually was not material.

Non-Event Souvenir Merchandise and Other Revenues – The Company recognizes revenue when products are shipped, title transfers to customers, right of return or cancellation provisions expire, sales prices are final and collection is probable. For products sold on consignment through electronic media programming or other promotional activities, revenues are recognized upon product shipment by promoters to customers, or purchase by reseller customers, and expiration of any right of return or cancellation provisions. Product sold on consignment with right of return or cancellation provisions has not been significant.

Joint Venture Equity Investment – The equity method is used to account for investments in joint ventures and other associated entities where the Company has significant influence, generally representing equity ownership of at least 20% and not more than 50%. As further described in Note 1, the Company’s equity investment consists of its 50% owned Motorsports Authentics joint venture. MA has a November 30 fiscal year end that the Company adopted for reporting its share of MA’s operating results, and the Company records its 50% share of MA’s net income or loss based on their most recent annual audited financial statements under the equity method as further described below. The Company’s share of MA’s operating results is included in “equity investee earnings or losses” for its fiscal year ended December 31. MA reports sales and other taxes collected from customers on a gross basis. All significant unrealized intercompany profits or losses pertain to unsold merchandise and have been eliminated in applying the equity method of accounting. No dividends have been declared or paid since formation of MA. The Company’s share of undistributed equity deficit from equity investee earnings and losses included in the Company’s retained earnings was approximately $133,974,000 at both December 31, 2011 and 2010. There were no significant differences in investor cost and underlying equity in the net assets of MA at acquisition.

NASCAR Teams Licensing Trust Formation and MA’s Ongoing Business. In 2009, MA was facing continuing significant operating challenges including, among other factors, failed efforts to renegotiate its license agreements with essentially all significant licensors of NASCAR merchandising on terms that would allow MA reasonable future opportunities to operate profitably. In July 2010, the NASCAR Trust was formed, including a Board of Directors comprised of representatives from NASCAR and 11 participating NASCAR Teams. This new NASCAR Trust substantially restructured the NASCAR souvenir merchandising and licensing business. The NASCAR Trust represents four key product categories (die-cast, toys, apparel and trackside retail rights), and grants the rights of any NASCAR driver or team that participates in these licensing categories. Concurrent with formation of the NASCAR Trust, MA was released from contracted then current and future unearned guaranteed minimum royalties payable and earned future royalties payable to all NASCAR team licensors, except for one significant licensor. Also, the NASCAR Trust concurrently received all of MA’s die-cast tooling and operations. The NASCAR Trust has the ability to significantly influence MA’s future operating conditions and results. MA continues to restructure its business by implementing process improvements, cost reduction initiatives, improved inventory risk management, and streamlining operations. However, there can be no assurance that MA will achieve sufficient or sustained profitability.

Also concurrent with the NASCAR Trust formation, SMI and ISC renegotiated a contingent guarantee obligation associated with one NASCAR team licensor of MA, which is scheduled for periodic reduction and elimination by MA payments through January 2013. As of December 31, 2011 and 2010, the Company's contingent guarantee approximated $1.2 million and $5.0 million. Should MA not have sufficient future financial resources and such obligation remains due, the Company could be required to fund part or all of the guarantee up to the obligation amount determined at that time. Although reasonably possible that some future obligation could arise, the amount, if any, is not reasonably estimable at this time. Management believes the fair value of this guarantee is presently insignificant and no obligation has been recorded. Although not expected at this time, the Company could be required to record a charge related to the Company's contingent guarantee obligation, if funding was required.

 

MA Operating Results and Investment Impairment. MA results for each of the three years ended 2011 were negatively impacted by decreased attendance at motorsports racing events, recessionary conditions and reduced discretionary spending, and increased competition for products sold under non-exclusive MA licenses. MA income from continuing operations and net income for 2010 results primarily from the accounting reversal of previously contracted accrued and unpaid royalties upon formation of the NASCAR Trust and certain favorable settlements.

The carrying value of the Company’s equity investment in MA was reduced to $0 as of December 31, 2009 from sizable 2009 (and 2007) impairment charges and MA’s historical operating results. Because of continuing uncertainty about MA’s ability to achieve sustained profitability, management believes MA’s estimated fair value remains $0 under applicable authoritative impairment evaluation guidance. Under equity method accounting, the Company no longer records its 50% share of MA operating losses, if any, unless and until this carrying value is increased from additional Company investments in MA or to the extent of future MA operating profits, if any. As such, the Company’s 2011 and 2010 results were not impacted by MA’s operations under the equity method. The Company recognized no income tax benefits in 2009 through 2011 for its 50% share of these MA charges and operating results.

The Company follows applicable authoritative guidance whereby declines in estimated investment fair value below carrying value assessed as other than temporary are recognized as a charge to earnings to reduce carrying value to estimated fair value. MA evaluated and measured impairment under applicable authoritative guidance based on discounted estimated annual future cash flows using the income approach, with the assistance of an independent valuation firm. The inputs for measuring MA fair value are considered “Level 3” or unobservable inputs that are not corroborated by market data under applicable fair value authoritative guidance, as quoted market prices are not available. The Company believes the methods used by MA to determine fair value and evaluate impairment were appropriate, relevant, and represent methods customarily available and used for such purposes and are the best available estimate of MA’s fair value. The Company’s and MA’s evaluations are subjective and based on conditions, trends and assumptions existing at the time of evaluation. Different conditions or assumptions, or changes in cash flows or profitability, could have a material effect on the outcome of these impairment evaluations.

These MA charges and results are included in the Company’s “motorsports event related” reporting segment (see Note 13). MA is not considered significant for 2011 under applicable SEC rules and the reports of the auditors on their financial statements as and for the years ended November 30, 2011 and 2010 are not included in this filing. The following table presents summarized financial information for MA as of November 30, 2011 and 2010 and for the three years ended November 30, 2011 (coinciding with MA fiscal years) (in thousands):

 

      2011     2010      2009  

Current assets

   $ 13,887      $ 20,095           

Noncurrent assets

     506        957           

Current liabilities

     6,963        10,352           

Noncurrent liabilities

     4,065        6,316           

Net sales

     34,788        75,143       $ 118,473   

Gross profit

     19,056        28,971         21,042   

Impairment of goodwill and other long-lived assets

                    136,093   

(Loss) income from continuing operations and net (loss) income

     (1,019     2,800         (151,637

 

Revenue Composition (Note 13) – The Company’s revenues for the three years ended December 31, 2011 are comprised of the following (in thousands):

 

      2011      2010      2009  

Admissions

   $ 130,239       $ 139,125       $ 163,087   

NASCAR broadcasting

     185,394         178,722         173,803   

Sponsorships

     63,378         63,062         75,476   

Other event related

     85,256         80,882         87,588   

Souvenir and other merchandise

     33,677         32,930         42,562   

Other

     7,901         7,522         8,006   

Total revenue

   $ 505,845       $ 502,243       $ 550,522   

Revenues described as “other event related” consist principally of commissions from food, beverage and souvenir sales, luxury suite rentals, advertising and other promotional revenues, hospitality revenues, track rentals, driving school revenues, camping and other non-admission access revenues, broadcasting rights other than NASCAR broadcasting revenue, and other event and speedway related revenues. “Souvenir and other merchandise revenue” consists of SMI Properties and SMI Trackside sales of owned souvenir merchandise during racing and non-racing events and in speedway gift shops (motorsports event related merchandise), certain SMI Properties and TSI sales of racing and other sports related souvenir merchandise and Legends Car operations (non-event motorsports related merchandise), and Oil-Chem product sales (non-motorsports related merchandise). “Other revenue” consists principally of revenues from the Speedway Clubs, industrial park and office tower rentals, US Legend Cars as the sanctioning body for Legends Car Circuit races, and TMS oil and gas mineral rights lease revenues.

Food and Beverage Management Agreement – The long-term Levy food and beverage management agreement (see Note 1) provides for, among other items, specified annual fixed and periodic gross revenue based commission payments to the Company over the contract period. The Company’s commission-based net revenues associated with activities provided by Levy are reported in event related revenue and, to a lesser extent, other operating revenue depending on the venue.

Use of Estimates – The preparation of financial statements in conformity with generally accepted accounting principles requires extensive use of management estimates and assumptions that affect reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at financial statement dates, and reported amounts of revenues and expenses. Actual future results could differ from those estimates. Such significant estimates include (i) recoverability of property and equipment, goodwill and other intangible assets, equity investments in associated entities, and investments associated with discontinued oil and gas activities, (ii) depreciable lives for property and equipment and amortization periods for intangible assets, (iii) accounting for income taxes, (iv) realization of receivables and inventories, (v) accruals for uninsured business risks, litigation, guaranteed obligations and other contingencies, and (vi) disclosures of stock-based compensation.

Cash and Cash Equivalents – The Company classifies as cash equivalents all highly liquid investments with original maturities of three months or less. Cash equivalents principally consist of variable rate, overnight sweep accounts of commercial paper, repurchase agreements, municipal bond and United States Treasury securities.

Accounts and Notes Receivable are reported net of allowance for doubtful accounts summarized as follows (in thousands):

 

      2011     2010     2009  

Balance, beginning of year

   $ 1,588      $ 1,753      $ 1,880   

Bad debt expense

     276        141        112   

Actual write-offs, net of specific accounts recovered

     (519     (306     (239

Balance, end of year

   $ 1,345      $ 1,588      $ 1,753   

 

Other Noncurrent Assets as of December 31, 2011 and 2010 consist of (in thousands):

 

      2011      2010  

Deferred financing costs, net

   $ 10,884       $ 9,632   

Land held for development

     12,265         12,265   

Marketable equity securities

             12   

Other

     6,656         5,746   

Total

   $ 29,805       $ 27,655   

Noncurrent assets are generally reported at cost except for cash surrender values of life insurance policies which are reported at fair value. Management evaluates these assets for recovery when events or circumstances indicate possible impairment may have occurred. As of December 31, 2011, there have been no events or circumstances which might indicate possible recoverability concerns or impairment other than for marketable securities as described below.

Deferred Financing Costs are amortized over the associated debt terms of four to eight years (or remaining terms for loan amendment costs), and are reported net of accumulated amortization of $5,460,000 and $10,172,000 at December 31, 2011 and 2010. See Note 6 for information on a 2011 charge associated with certain previously deferred financing costs.

Land Held For Development represents property adjacent to a regional outlet mall in the Charlotte metropolitan area which management plans to develop and market or possibly sell in suitable market conditions.

Marketable Equity Securities are classified as "available for sale" and reported at fair value. Before December 31, 2011, temporary unrealized gains and losses, net of taxes, were excluded from earnings and reported as a separate component of stockholders’ equity. As of December 31, 2011, management assessed the declines in fair value of these securities as other than temporary and associated insignificant losses were recognized (net of income taxes of $54,000). As such, there are no remaining unrealized gains or losses or accumulated other comprehensive loss as of December 31, 2011. Unrealized gains or losses at each period end, and purchases and sales of marketable equity securities in 2009 through 2010 were not significant.

Property and Equipment (Note 4) are recorded at cost less accumulated depreciation. Depreciation is provided using the straight-line method over the estimated useful lives of the respective assets. Leasehold improvements pertain primarily to industrial park, office and warehouse facilities, and are amortized using the straight-line method over the lesser of associated lease terms or estimated useful lives. Constructed assets, including construction in progress, include all direct costs and capitalized interest until placed into service. Expenditures for repairs and maintenance are charged to expense when incurred, unless useful asset lives are extended or assets improved. When events or circumstances indicate possible impairment may have occurred, the Company evaluates long-lived assets, including tangible assets and intangible assets subject to amortization, for possible impairment based on expected future undiscounted operating cash flows attributable to such assets using applicable authoritative guidance. When improvement projects produce a higher economic yield and require demolition of a component of a speedway facility, capitalization of demolition, construction and historical component costs are limited to the revised estimated value of the project. Also, assets are classified as held for sale when management determines that sale is probable within one year. Management believes no impairment of long-lived assets used in continuing operations exists at December 31, 2011.

In connection with the development and completed construction of TMS in 1997, the Company entered into arrangements with the FW Sports Authority, a non-profit corporate instrumentality of the City of Fort Worth, Texas, whereby the Company conveyed the speedway facility, excluding its on-site condominiums and office and entertainment complex, to the FW Sports Authority. The Company, which has the right to reacquire the facility, operates the speedway facility under a 30-year arrangement with the FW Sports Authority. Because of the Company’s responsibilities, including associated risks, rewards and obligations, under these arrangements, the speedway facility and related liabilities are included in the accompanying consolidated balance sheets.

Goodwill and Other Intangible Assets (Note 5) 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.

The Company evaluates goodwill and other intangible assets for possible impairment annually in the second quarter, or when events or circumstances indicate possible impairment may have occurred. The Company follows applicable authoritative guidance on accounting for goodwill and other intangible assets which specifies, among other things, nonamortization of goodwill and requires testing of intangible assets with indefinite useful lives for possible impairment at least annually. The Company evaluates intangible assets for possible impairment based on expected future discounted operating cash flows and profitability attributable to such assets (using the fair value assessment provisions of applicable authoritative guidance), supported by quoted market prices or comparable transactions where available or applicable. Management considers each speedway and motorsports and non-motorsports merchandising subsidiary an operating segment and separate reporting unit principally because that is the lowest level for which discrete financial information is available to the Company's segment managers and chief operating decision maker. No reporting units are aggregated for purposes of evaluating intangible assets for possible impairment.

Management considered that the estimated market value for comparable NASCAR race event sanction and renewal agreements based on recent and historical sales transactions (the Company had agreements to annually conduct thirteen NASCAR Sprint Cup, ten NASCAR Nationwide, and nine NASCAR Camping World Truck Series races as of the evaluation date), combined with the estimated fair value for all other Company net assets, exceeds its current market capitalization. Management also considered recent market trading ranges of price to earnings and sales multiples, cash flow and other traditional valuation methods, control premiums, and other market information related to the Company’s common stock from historical and forward-looking perspectives. Such information was also compared to available market information for certain motorsports industry peers. Weighting of evaluation results was not required as none of the methods, individually or collectively, indicated possible impairment. Despite ongoing domestic and global economic challenges, management believes there has been no fundamental change in the Company’s core motorsports business. The inputs for measuring fair value are considered "Level 3" or unobservable inputs that are not corroborated by market data under applicable fair value authoritative guidance, as quoted market prices are not available. The Company believes the methods used to determine fair value and evaluate impairment were appropriate, relevant, and represent methods customarily available and used for such purposes and are the best available estimate of fair value. Management believes the Company’s market capitalization decline below its consolidated shareholder’s equity is temporary and not an indicator of further impairment. Management’s latest annual impairment assessment indicated no impairment of goodwill or other intangible assets has occurred except as described below in “Impairment Charges on Goodwill and Other Intangible Assets”, and there has since been no other events or circumstances which indicate possible unrecognized impairment as of December 31, 2011. 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.

Impairment Charges on Goodwill and Other Intangible Assets (Note 5) – Management's latest annual assessment of goodwill and other intangible assets in the second quarter 2011 indicated the estimated fair value of each reporting unit and each indefinite-lived intangible asset exceeded its associated carrying value except for one reporting unit, NHMS. The impairment evaluation was based predominately on management's best estimate of future discounted operating cash flows and profitability for all reporting units, and considered the approved realignment of an annual NASCAR Sprint Cup racing event from AMS to KyS beginning in the third quarter 2011. Realignment of the race date from AMS to KyS resulted in no impairment of intangible or other long-lived assets. However, the evaluation indicated the carrying values for NHMS exceeded estimated fair value. As such, a non-cash impairment charge of $48,609,000 (with no income tax benefit) was reflected in the second quarter 2011 to reduce goodwill related to NHMS to estimated fair value. The Company previously reported that last year’s annual evaluation found the estimated fair value for this reporting unit exceeded carrying values by a relatively nominal amount. This year’s annual evaluation reflected lowered estimated future cash flows principally because of the severity and length of the recession extending beyond the Company’s previous forecast, reducing visibility on profitability recovery. The goodwill originated upon recording deferred tax liabilities associated with race date intangibles of $127.4 million established under purchase method accounting rules over and above NHMS’s net cash purchase price of $330.1 million paid in 2008. Those accounting rules required establishing such deferred tax liabilities assuming the Company would ultimately sell NHMS assets, and not stock, for tax reporting purposes. Those accounting rules prohibit elimination or adjustment notwithstanding such ultimate payment of taxes was, and still is, believed unlikely and that no sale is being contemplated. The impairment does not pertain to or affect the underlying value of the Company’s race date intangibles. The evaluation did not consider the possibility that management may realign one or more other NASCAR Sprint Cup Series racing events among its speedway facilities, which could result in net higher or improved future projected cash flows. The 2011 charge and associated operations are included in the Company's "motorsports event related" reporting segment (see Note 13).

In 2009, the Company reflected an impairment charge on other intangible assets and goodwill associated with potentially unfavorable developments for certain promotional contracts and operations of TSI. The Company’s assessment based on applicable authoritative guidance and methodology described above in “Goodwill and Other Intangible Assets” found that carrying values exceeded estimated fair values. This non-cash 2009 impairment charge amounted to $7,273,000 before income tax benefits of $2,866,000, and consisted of gross carrying values of $8,095,000 and accumulated amortization of $822,000. The charge and associated operations are included in the Company’s “all other” reporting segment (see Note 13).

Deferred Income, Net (noncurrent) as of December 31, 2011 and 2010 consists of (in thousands):

 

      2011      2010  

Preferred Seat License fees, net

   $ 4,814       $ 5,330   

Multi-year marketing arrangements and deferred Speedway Club membership income

     4,957         1,257   

TMS oil and gas mineral rights lease receipts

     2,942           

Total

   $ 12,713       $ 6,587   

Preferred Seat License Fees, Net – KyS and TMS offer Preferred Seat License (PSL) agreements whereby licensees are entitled to purchase annual season-ticket packages for sanctioned racing events under specified terms and conditions. Among other items, licensees are required to purchase all season ticket packages when and as offered each year. License agreements automatically terminate without refund should licensees not purchase any offered ticket and are transferable once each year subject to certain terms and conditions. Also, licensees are not entitled to refunds for postponement or cancellation of events due to weather or certain other conditions. Net PSL fees are deferred when received and amortized into income over the estimated useful life of those facilities or recognized upon license agreement termination.

Certain Multi-year Marketing Arrangements – Certain marketing agreements contain elements of purchased property and equipment exchanged for multi-year marketing and other promotional activities at one or more of our facilities. The associated assets and deferred revenue are initially recorded based on their estimated fair or retail values, with assets then depreciated over estimated useful lives and deferred revenue recognized into income over five-year agreement terms on a straight-line basis as events are conducted each year in accordance with the respective agreement terms. Deferred revenue recognizable in the upcoming fiscal year is reflected as current liabilities in deferred race event and other income.

Deferred Speedway Club Membership Income – The CMS and TMS Speedway Clubs sell memberships that entitle members to certain dining, other club and racing event seating privileges, and require upfront fees and monthly assessments. Net membership revenues are deferred when billed and amortized into income over an estimated average membership term of ten years.

TMS Oil and Gas Mineral Rights Lease Receipts – TMS, in conjunction with the Fort Worth Sports Authority, has entered into a two-year oil and gas mineral rights lease agreement expiring December 2013 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 directly coordinate with the lessor on roadway and pipeline logistics to prevent interference of TMS or lessor activities, and monitor regulatory and other contract compliance. An upfront cash payment received in December 2011 is being accreted into other operating revenue over the two-year agreement term on a straight-line basis. Amounts recognized in 2011 were not significant. Deferred revenue recognizable in the upcoming fiscal year is reflected as current liabilities in deferred race event and other income. 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.

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 $18,438,000 in 2011, $18,790,000 in 2010 and $15,672,000 in 2009. There were no deferred direct-response advertising costs at December 31, 2011 or 2010.

Operating Leases – The Company has various operating leases principally for office and warehouse space and for equipment used in conducting racing events and other operations. These operating leases typically have initial terms of less than one year or are cancelable with minimal notice, although certain operating equipment leases include multi-year terms. Rent expense for operating leases amounted to $5,999,000 in 2011, $5,132,000 in 2010 and $5,694,000 in 2009. Various office and warehouse facilities leased from an affiliate (see Note 9) are cancelable with minimal notice; however, such lease arrangements will likely be renewed annually through specific contract periods. The Company leases various office, warehouse and industrial park space under operating leases to various entities largely involved in motorsports. These operating leases typically have initial terms of one year or more and are noncancelable. Lease revenue for operating leases amounted to $4,275,000 in 2011, $3,997,000 in 2010 and $4,212,000 in 2009.

Future annual minimum lease payments (where initial terms are one year or more and assuming renewal through contracted periods), and contracted future annual minimum leases revenues, under operating leases at December 31, 2011 are as follows (in thousands):

 

      Lease
Payments
    

Lease

Revenues

 

2012

   $ 910       $ 3,719   

2013

     460         3,177   

2014

     421         2,590   

2015

     391         1,853   

2016

     368         1,223   

Thereafter

     1,438         1,775   

Total

   $ 3,988       $ 14,337   

Other (Income) Expense, Net for 2009 through 2011 consists of (in thousands):

 

      2011     2010     2009  

Loss (gain) associated with property sales and other assets

   $ 109      $ (2,432   $ (150

Net loss on abandonment and disposals of property and equipment

     46        128        131   

Other

     (497     (74     356   

Total

   $ (342   $ (2,378   $ 337   

Income Taxes (Note 8) – The Company recognizes deferred tax assets and liabilities for the future income tax effect of temporary differences between financial and income tax bases of assets and liabilities. Income taxes are provided using the liability method whereby estimated deferred income taxes, and significant items giving rise to deferred tax assets and liabilities, reflect management’s assessment of future taxes likely to be paid, including timing, probability of realization and other relevant factors. 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. The Company’s accounting for income taxes reflects management’s assessment of future tax liabilities based on assumptions and estimates for timing, likelihood of realization, and tax laws existing at the time of evaluation. The Company assesses the need for valuation allowances for deferred tax assets based on the sufficiency of estimated future taxable income and other relevant factors. Cash paid for income taxes as reflected on the consolidated statements of cash flows excludes any previous overpayments the Company may have elected to apply to income tax liabilities.

The Company follows applicable authoritative guidance on accounting for uncertainty in income taxes which, among other things, prescribes a recognition threshold and measurement attribute for financial statement recognition and measurement of tax positions taken or expected to be taken in a tax return, and provides guidance on derecognition, classification, interest and penalties, and disclosures. Evaluation of a tax position includes determining whether it is more likely than not a tax position will be sustained upon examination, including resolution of any related appeals or litigation processes, based on the technical merits of the position. In evaluating whether a tax position meets the more-likely-than-not recognition threshold, it is presumed the position will be examined by appropriate taxing authorities having full knowledge of all relevant information. A tax position that meets the more-likely-than-not recognition threshold is measured to determine the amount of benefit to be recognized in the financial statements. The tax position is measured at the largest amount of benefit that is greater than 50 percent likely of being realized upon ultimate settlement.

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 amounted to $6,498,000 in 2011, $7,940,000 in 2010 and $8,815,000 in 2009.

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, short-term investments, accounts and notes receivable, certain other assets and accounts payable approximate fair value because of the short maturity of these financial instruments. Short-term investments, marketable debt and equity securities and cash surrender values are carried at fair value based on binding and non-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. Quoted market prices are not available for determining market value of the Company's equity investment in an associated entity. For equity investments, the Company estimates fair value primarily using estimated discounted cash flows. See "Joint Venture Equity Investment" above for fair value information on a contingent guarantee obligation associated with MA.

 

The following table presents estimated fair values and categorization levels of the Company’s financial instruments as of December 31, 2011 and 2010 (in thousands):

 

                December 31, 2011     December 31, 2010  
      Level        Class        Carrying Value        Fair Value        Carrying Value        Fair Value   

Assets

           

Cash and cash equivalents

    1        R      $     87,368      $ 87,368      $     92,200      $     92,200   

Short-term investments

    2        R                      975        975   

Marketable equity securities

    1        R                      12        12   

Floating rate notes receivable

    2        NR        2,765        2,765        3,145        3,145   

Cash surrender values

    2        NR        4,319        4,319        4,031        4,031   

Liabilities

           

Floating rate revolving Credit Facility, including Term Loan

    2        NR        145,000        145,000        20,000        20,000   

6 3/4% Senior Notes Payable due 2019

    1        NR        150,000        150,750                 

8 3/4% Senior Notes payable due 2016

    1        NR        269,517        298,375        268,275        295,625   

6 3/4% Senior Subordinated Notes

Payable previously due 2013

    1        NR                      330,000        332,475   

Other long-term debt

    2        NR        8,040        8,040        10,422        10,422   

 

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.

Short-term investments consisted principally of auction rate securities held in large, qualified financial institutional investment accounts. These investments were classified as "trading" securities and carried at estimated fair value, and realized and unrealized gains or losses were included in the Company's consolidated statements of operations. The Company’s $975,000 investment in auction rate securities as of December 31, 2010 was fully recovered in 2011.

Concentrations of Credit Risk – Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of cash and cash equivalents, accounts and notes receivable, and cash surrender values. Concentration of credit risk with respect to cash and cash equivalents and cash surrender values is limited through placement with major high-credit qualified financial institutions and insurance carriers, respectively. However, amounts placed often significantly exceed available insured limits. Concentrations of credit risk with respect to accounts receivable are limited due to the large numbers and wide variety of customers and customer industries and their broad geographical dispersion. Also, a significant portion of the Company's accounts receivable typically pertain to advance revenues for specific events which are deferred until the event is held. As such, exposure to credit risk on such receivables that could adversely affect operating results is limited until recognition of the associated deferred race event income. The Company generally requires sufficient collateral equal to or exceeding note amounts, or accepts notes from high-credit quality entities or high net-worth individuals, limiting its exposure to credit risk. Amounts due from affiliates typically can be offset to the extent of amounts payable to affiliates, limiting the Company's exposure to credit risk.

Loss and Other Contingencies and Financial Guarantees – The Company accrues a liability for contingencies if the likelihood of an adverse outcome is probable and the amount is estimable. Legal and other costs associated with loss contingencies are expensed as incurred. The Company accounts for financial guarantees using applicable authoritative guidance which requires, among other things, that guarantors recognize a liability for the fair value of obligations undertaken by issuing a guarantee.

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. However, one landfill at CMS is currently permitted to receive inert debris and waste from land clearing activities (“LCID” landfill), and may allow similar LCID landfill operations in the future on its property. Prior to 1999, CMS leased a portion of its property for construction and demolition debris landfill use (a “C&D” landfill), receiving solid waste resulting solely from construction, remodeling, repair or demolition operations on pavement, buildings or other structures, but not inert debris, land-clearing debris or yard debris. The CMS C&D landfill is now closed. Management believes the active solid waste landfill was constructed in such a manner as to minimize the risk of contamination to surrounding 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.

KyS held an inaugural NASCAR Sprint Cup race in the third quarter 2011. Because of various traffic congestion issues, the Company offered to exchange race tickets meeting certain criteria for tickets to specified KyS or other speedway 2011 race events or KyS’s 2012 Sprint Cup race event. The exchange offer expired November 30, 2011 and cash refunds were not offered. Tickets exchanged for race events held in 2011 were not significant. As of December 31, 2011, the Company has deferred race event income of $589,000 associated with tickets exchanged for KyS’s 2012 Sprint Cup event.

Recently Issued Accounting Standards – The Financial Accounting Standards Board (FASB) issued Accounting Standards Update No. 2009-13 "Revenue Recognition (Topic 605): Multiple-Deliverable Revenue Arrangements" which, among other things, amended the criteria in Subtopic 605 for separating consideration in multi-deliverable arrangements. This amendment: (1) provides updated guidance on whether multiple deliverables exist, on separating arrangement deliverables, and allocating consideration; (2) requires entities to allocate arrangement revenue using estimated selling prices of deliverables if a vendor does not have vendor specific objective evidence or third-party evidence of selling prices; (3) eliminates use of the residual method and requires entities to allocate revenue using the relative selling price method; and (4) expands disclosure requirements pertaining to a vendor's multiple-deliverable revenue arrangements. The amended guidance is effective for fiscal years beginning on or after June 15, 2010, and adoption may be prospective or retrospectively applied. The Company’s adoption had no significant impact on its financial statements or disclosures, and the Company will apply this guidance if and when future applicable transactions occur.

The FASB issued Accounting Standards Update No. 2010-28 "Intangibles – Goodwill and Other (Topic 350): When to Perform Step 2 of the Goodwill Impairment Test for Reporting Units with Zero or Negative Carrying Amounts" which, among other things, modifies Step 1 of goodwill impairment testing (where entities must assess whether reporting unit carrying amounts exceed fair value) for reporting units with zero or negative carrying amounts. For those reporting units, entities are required to perform Step 2 of the goodwill impairment test (additional testing to determine whether goodwill has been impaired and the amount of such impairment, if any) if it is more likely than not that goodwill impairment exists. In determining whether it is more likely than not that goodwill impairment exists, an entity should consider whether any adverse qualitative factors indicate that impairment may exist. These qualitative factors are consistent with the existing guidance which requires that goodwill of a reporting unit be tested for impairment between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. The amendment does not provide guidance on how to determine carrying amounts or measure reporting unit fair value. Any resulting goodwill impairment upon adoption of this guidance should be recorded as a cumulative-effect adjustment to beginning retained earnings in the period of adoption. The guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2010. The Company’s adoption had no impact on its financial statements or disclosures, and the Company will apply this guidance to future impairment assessments.

The FASB issued Accounting Standards Update No. 2011-05 "Comprehensive Income (Topic 220): Presentation of Comprehensive Income” to improve the comparability, consistency and transparency of financial reporting and increase the prominence of items reported in other comprehensive income. The option to present components of other comprehensive income as part of the statement of changes in stockholders’ equity will be eliminated. All non-owner changes in stockholders’ equity will now require presentation either in a single continuous statement of comprehensive income or in two separate but consecutive statements. The guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2011, and applied retrospectively. Early adoption is permitted. The Company is currently evaluating the potential impact that adoption will have on its financial statement presentation.

The FASB issued Accounting Standards Update No. 2011-05 "Comprehensive Income (Topic 220): Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05” which defers changes in Update 2011-05 that relate to reclassification adjustment presentation and supersede certain pending paragraphs in Update 2011-05. The amendments allow the FASB time to redeliberate whether to present on the face of the financial statements the effects of reclassifications out of accumulated other comprehensive income on the components of net income and other comprehensive income for all periods presented. During redeliberation, entities should continue to report reclassifications out of accumulated other comprehensive income consistent with presentation requirements in effect before Update 2011-05 (no other requirements in Update 2011-05 were affected by this Update). The guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. The Company is currently evaluating the potential impact that adoption will have on its financial statement presentation.

The FASB issued Accounting Standards Update No. 2011-08 "Intangibles – Goodwill and Other (Topic 350): Testing Goodwill for Impairment” under which entities have the option to first assess qualitative factors to determine whether events or circumstances exist that lead to determining it is more likely than not that the reporting unit’s fair value is less than its carrying amount. If an entity determines it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, then performing the two-step impairment test described in Topic 350 is unnecessary. Under this update, entities have the option to bypass the qualitative assessment for any reporting unit in any period and proceed directly to performing the first step of the two-step goodwill impairment test, and may resume performing the qualitative assessment in any subsequent period. In concluding on whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount, entities should consider the extent to which each adverse event or circumstance identified could affect the comparison of a reporting unit’s fair value with its carrying amount. Entities should place more weight on events and circumstances that most affect a reporting unit’s fair value or the carrying amount of its net assets, and should consider positive and mitigating events and circumstances that may affect its determination of whether it is more likely than not that the reporting unit’s fair value is less than its carrying amount. Where recent fair value calculations have been performed, the difference between reporting unit fair value and carrying amount must be considered in deciding whether the first step of the impairment test is necessary. This update provides examples of events and circumstances that entities should consider in performing qualitative assessments and other testing that supersede previous examples. Under this update, entities are no longer permitted to carry forward detailed calculations of a reporting unit’s fair value from a prior year. This update does not change current guidance for testing other indefinite-lived intangible assets for impairment. The guidance is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. At this time, management does not believe this guidance will impact the Company’s financial statements when effective.

INVENTORIES
INVENTORIES

3. INVENTORIES

Inventory costs consist of: (i) souvenirs and 5/8-scale and similar small-scale finished vehicles determined on a first-in, first-out basis; and (ii) apparel, micro-lubricant®, and parts and accessories product costs determined on an average current cost basis. No general and administrative costs are included in inventory costs. Cost of sales are charged using the same inventory cost bases. Inventories as of December 31, 2011 and 2010 consist of (in thousands):

 

      2011      2010  

Souvenirs and apparel

   $ 2,867       $ 3,870   

Finished vehicles, parts and accessories

     5,149         4,760   

Micro-lubricant® and other

     614         752   

Total

   $ 8,630       $ 9,382   

All inventories are stated at the lower of cost or market value with provisions for differences between cost and estimated market value based on assumptions about current and future demand, market conditions and trends that might adversely impact realization. Inventories are reflected net of provisions summarized as follows (in thousands):

 

      2011     2010     2009  

Balance, beginning of year

   $ 5,938      $ 6,500      $ 7,727   

Current year provision

     344        241        817   

Current year sales and write-offs

     (517     (803     (2,044

Balance, end of year

   $ 5,765      $ 5,938      $ 6,500
PROPERTY AND EQUIPMENT
PROPERTY AND EQUIPMENT

4. PROPERTY AND EQUIPMENT

Property and equipment as of December 31, 2011 and 2010 is summarized as follows (dollars in thousands):

 

     

Estimated

Useful Lives

     2011     2010  

Land and land improvements

     5-25       $ 446,200      $ 434,574   

Racetracks and grandstands

     5-45         738,991        685,747   

Buildings and luxury suites

     5-40         439,389        426,192   

Machinery and equipment

     3-20         44,867        43,552   

Furniture and fixtures

     5-20         33,482        31,359   

Autos and trucks

     3-10         11,134        11,074   

Construction in progress

              5,381        26,453   

Total

        1,719,444        1,658,951   

Less accumulated depreciation

              (542,290     (489,670

Net

            $ 1,177,154      $ 1,169,281   

Other Information – Depreciation expense amounted to $53,956,000 in 2011, $52,697,000 in 2010 and $52,468,000 in 2009. As of December 31, 2011, the Company has contractual obligations for 2012 capital expenditures of approximately $4.0 million for various planned capital improvements.

GOODWILL AND OTHER INTANGIBLE ASSETS
GOODWILL AND OTHER INTANGIBLE ASSETS

5. GOODWILL AND OTHER INTANGIBLE ASSETS

The composition and accounting for intangible assets are further described in Note 2, except for other intangible assets consisting of amortizable event sanctioning and renewal agreements for certain annual drag racing events to be held for six years commencing in 2010. As of December 31, 2011 and 2010, gross carrying values and accumulated amortization by class of intangible asset are as follows (dollars in thousands):

 

      2011          2010     

Estimated

Amortization

Period

(Years)

 
   Gross
Carrying
Value
     Accumulated
Amortization
    Net           Gross
Carrying
Value
     Accumulated
Amortization
    Net     

Nonamortizable race event sanctioning and renewal agreements

   $ 394,913              $ 394,913         $ 394,913              $ 394,913           

Amortizable race event sanctioning and renewal agreements

     70         (23     47             70         (11     59         6   

Total

   $ 394,983         (23   $ 394,960           $ 394,983         (11   $ 394,972            

Changes in the gross carrying value of other intangible assets and goodwill for 2011 and 2010 are as follows (in thousands):

 

     Other Intangible Assets      Goodwill  
      2011      2010      2011     2010  

Balance, beginning of year

   $ 394,983       $ 394,983       $ 187,326      $ 181,013   

Increase from acquisitions

                            6,313   

Decrease from impairment charges

                     (48,609       

Balance, end of year

   $ 394,983       $ 394,983       $ 138,717      $ 187,326   

 

For 2010, the increase in goodwill from acquisitions reflects an obligation for additional purchase consideration associated with the Company’s purchase of KyS. The obligation was recorded upon satisfaction of certain triggering contingent conditions, one of which was the Company conducting an annual NASCAR Sprint Cup racing event at KyS. Because a NASCAR Sprint Cup racing date was realigned from AMS to KyS beginning in 2011, the obligation was recorded as an increase to goodwill (as opposed to other intangible assets if purchased). See Note 6 for additional information on the recorded purchase obligation. This goodwill is expected to be deductible for tax purposes.

For 2011, the decrease in goodwill reflects an impairment charge (with no income tax benefit) to reduce goodwill related to NHMS to estimated fair value as further described in Note 2 “Impairment Charges on Goodwill and Other Intangible Assets”.

At December 31, 2011, the carrying amounts for goodwill and other intangible assets include accumulated impairments of $57.2 million and $3.3 million, respectively. Amortization expense on other intangible assets amounted to $129,000 in 2009 and was not significant in 2011 or 2010. Estimated annual amortization expense for each of the next five years is not significant.

LONG-TERM DEBT
LONG-TERM DEBT

6. LONG-TERM DEBT

As further described below, the Company amended and restated its Credit Facility, issued new senior notes and redeemed all outstanding senior subordinated notes in the first quarter 2011.

Long-term debt at December 31, 2011 and 2010 consists of (in thousands):

 

      2011     2010  

Revolving credit facility

   $ 10,000      $ 20,000   

Credit facility term loan

     135,000          

Senior notes

     419,517        268,275   

Senior subordinated notes

            330,000   

Other notes payable

     8,040        10,422   

Total

     572,557        628,697   

Less current maturities

     (17,540     (2,381

Long-term debt, excluding current maturities

   $ 555,017      $ 626,316   

Annual maturities of long-term debt at December 31, 2011 are as follows (in thousands):

 

2012    $ 17,540  

2013

     17,709   

2014

     16,347   

2015

     101,444   

2016

     269,517   
Thereafter    150,000  

Total

   $ 572,557   

2011 Bank Credit Facility Amendment – In January 2011, the Company's Credit Facility was amended and restated (the 2011 Credit Facility or Credit Facility) which: (i) provides for a four-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 four-year $150,000,000 senior secured term loan (the Term Loan); (iii) matures in January 2015; (iv) allows the Company to increase revolving commitments or establish a term loan (or a combination of the two) up to an aggregate additional $50,000,000 with certain lender commitment conditions; (v) provides that Credit Facility borrowings must be used solely for refinancing existing indebtedness, working capital and other general corporate needs, capital expenditures and permitted investments; (vi) allows the acquisition of additional motor speedways and related businesses subject to specified limitations; (vii) permits other investments not specifically referenced of up to $5,000,000 each year with unrestricted subsidiaries; (viii) allows 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 (ix) limits annual capital expenditures to $75,000,000. The Term Loan requires quarterly principal payments of at least $3,750,000.

In 2011, the Company borrowed $30,000,000 under the revolving credit facility and $150,000,000 under the Term Loan to fund the tender offer and early redemption of the senior subordinated notes further described below, and repaid $40,000,000 of revolving credit facility and $15,000,000 of Term Loan borrowings. The Company repaid borrowings of $50,000,000 in 2010, and repaid borrowings of $48,953,000 and borrowed $30,000,000 for working capital purposes in 2009. As further discussed below, proceeds from the 2009 Senior Notes offering were used to reduce outstanding Credit Facility borrowings by $261,047,000 in 2009. At December 31, 2011 and 2010, outstanding borrowings under the Credit Facility were $10,000,000 and $20,000,000, and under the Term Loan were $135,000,000 and $0, respectively. At December 31, 2011, outstanding letters of credit amounted to $892,000.

Revolving loans under the Credit Facility may be borrowed, repaid and reborrowed, from time to time, subject to certain conditions on the date borrowed. Interest is based, at the Company's option, upon LIBOR plus 1.75% to 2.75% or the greater of Bank of America's prime rate, Federal Funds rate plus 0.5% or LIBOR plus 1.0%, plus 0.75% to 1.75%. The Credit Facility also contains a commitment fee ranging from 0.35% to 0.55% 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. Prior to the Credit Facility amendment, interest was based, at the Company's option, upon LIBOR plus 2.50% to 3.75% or the greater of Bank of America's prime rate, the Federal Funds rate plus 0.5% or the Eurodollar rate plus 1.0%, plus 1.5% to 2.75%. The Credit Facility contains a number of affirmative and negative financial covenants, including requirements 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, and minimum net worth. Indebtedness under the Credit Facility is secured by a pledge of all capital stock and limited liability company interests of the Guarantors.

Issuance of New Senior Notes – In February 2011, the Company completed a private placement of new 6 3/4% Senior Notes in aggregate principal amount of $150,000,000 (the 2011 Senior Notes). These 2011 Senior Notes were issued at par value, and net proceeds, after commissions and fees, approximated $147,075,000. Net offering proceeds, along with new Term Loan borrowings of $150,000,000 under the Credit Facility and cash on hand, were used to redeem and retire all tendered outstanding senior subordinated notes as further discussed below. The Company completed an exchange offer for substantially identical notes registered under the Securities Act in May 2011.

The 2011 Senior Notes mature in February 2019, and interest payments are due semi-annually on February 1 and August 1 commencing August 1, 2011. The Company may redeem some or all of the 2011 Senior Notes at annually declining redemption premiums ranging from 103.375% of par in fiscal years beginning February 1, 2015 to par after February 1, 2017, and up to 35% of the 2011 Senior Notes before February 1, 2014 with proceeds from certain equity offerings at a redemption premium of 106.75% of par. The Company may also redeem some or all of the 2011 Senior Notes before February 1, 2015 at par plus a "make-whole" premium. In the event of a change of control, the Company must offer to repurchase the 2011 Senior Notes at 101% of par value. The 2011 Senior Notes rank equally in right of payment with all other Company existing and future senior debt, are senior in right of payment to any subordinated debt and are effectively subordinated to all secured debt, including the Credit Facility. The Indenture governing the 2011 Senior Notes permits dividend payments each year of up to approximately $0.48 per share of common stock, increasable subject to meeting certain financial covenants.

2009 Senior Notes – In May 2009, the Company completed a private placement, and a subsequent exchange offer for substantially identical notes registered under the Securities Act, of 8 3/4% senior notes (the 2009 Senior Notes) in aggregate principal amount of $275,000,000. These 2009 Senior Notes were issued at 96.8% of par value and net proceeds were used to reduce outstanding borrowings under the Credit Facility. Original debt issuance discount and deferred financing costs are being amortized over the associated seven-year note term. As of December 31, 2011 and 2010, the 2009 Senior Notes carrying value of $269,517,000 and $268,275,000 is reported net of unamortized issuance discount of $5,483,000 and $6,725,000, respectively.

 

The 2009 Senior Notes mature in 2016 and interest payments are due semi-annually on June 1 and December 1. The Indenture governing the 2009 Senior Notes (the 2009 Senior Notes Indenture) contains certain restrictive and required financial covenants. The 2009 Senior Notes rank equally in right of payment with all existing and future senior debt; rank senior in right of payment to all existing and future subordinated debt; are effectively subordinated to all existing and future debt to the extent of assets securing such debt, including the Credit Facility; and are structurally subordinated to existing and future debt or other liabilities of subsidiaries that do not guarantee the 2009 Senior Notes. The 2009 Senior Notes Indenture permits annual dividend payments of up to approximately $0.48 per share of common stock, increasable subject to meeting certain financial covenants. The Company may redeem some or all of the 2009 Senior Notes at annually declining redemption premiums ranging from 104.375% of par in the twelve month periods beginning June 1, 2013 to par after June 1, 2015, and up to 35% of the 2009 Senior Notes on or before June 1, 2012 with proceeds from certain equity offerings at a redemption premium. In the event of a change of control, the Company must offer to repurchase the 2009 Senior Notes at 101% of par value plus accrued and unpaid interest.

Other General Terms and Conditions – The 2011 Credit Facility, 2009 Senior Notes and 2011 Senior Notes contain certain requirements and restrictive financial covenants and limitations on capital expenditures, acquisitions, dividends, repurchase or issuance of SMI securities, restricted payments, equity and debt security repurchases, limitations or prohibitions on incurring other indebtedness, liens or pledging assets to third parties, consolidation, mergers, transactions with affiliates, guarantees, asset sales, specific types of investments, distributions, redemptions and disposition of property, and entering into new lines of business. The 2011 Credit Facility agreement, 2009 Senior Notes Indenture and 2011 Senior Notes Indenture also contain cross-default provisions. The Company was in compliance with all applicable covenants under these debt agreements as of December 31, 2011.

Early Redemption of Senior Subordinated Notes – In the first quarter 2011, the Company completed a tender offer and redeemed $298,331,000 and $31,669,000 in aggregate principal amount of outstanding 6 3/4% Senior Subordinated Notes (Senior Subordinated Notes) at 101.375% and 101.25% of par, respectively, with proceeds from the 2011 Senior Notes issuance, Term Loan borrowings of $150,000,000 and cash on hand. The Senior Subordinated Notes were previously scheduled to mature in September 2013, guaranteed by all operative Company subsidiaries except Oil-Chem and its subsidiaries, and interest payments were due semi-annually on June 1 and December 1. Cash on hand aggregating approximately $11.3 million was also used to fund the redemption premium, settlement payments and transaction costs for all associated debt transactions.

The 2011 loss on early debt redemption and refinancing represents a charge to earnings for tender offer redemption premium, associated unamortized net deferred loan costs, settlement payment and transaction costs, all associated with the former debt arrangements, and aggregating approximately $7.5 million, before income taxes of $2.9 million.

Other Notes Payable – Long-term debt includes a non-interest bearing debt obligation associated with the Company's December 2008 acquisition of KyS, payable in 60 monthly installments of $125,000 beginning in January 2009. As of December 31, 2011 and 2010, the obligation's carrying value of $2,820,000 and $4,109,000, reflects discounts of $180,000 and $391,000, respectively, based on a 6% effective interest rate. Other long-term debt also includes a non-interest bearing debt obligation for additional purchase consideration, recorded in the fourth quarter 2010 upon satisfaction of certain triggering conditions associated with the Company's purchase of KyS. The obligation is payable in 60 monthly installments of $125,000 beginning in January 2011. As of December 31, 2011 and 2010, the obligation's carrying value of $5,220,000 and $6,313,000 reflects discounts of $780,000 and $1,187,000, respectively, based on a 7% effective interest rate.

Subsidiary Guarantees – Amounts outstanding under the 2011 Credit Facility, 2009 Senior Notes and 2011 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 2011 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 Rate Swap – The Company at times may use interest rate swaps for non-trading purposes to hedge interest rate risk and optimize a combination of variable and fixed interest rate debt. Changes in fair value and differentials paid or received in periodic settlements were reflected as an adjustment to interest expense and included in operating activities in the statement of cash flows. For early terminated swap agreements, net settlement payments at termination were deferred when received and amortized into income as a yield adjustment to interest expense over the underlying hedged debt term. The Company had one interest rate cash flow swap agreement that provided fixed interest rate features on certain variable rate term loan obligations, which expired upon maturity in March 2010. Prior to expiration, the Company paid a 3.87% fixed interest rate and received a variable interest rate based on LIBOR on decreasing principal notional amounts. The agreement provided for quarterly settlements and expired corresponding with the underlying hedged debt term. The cash flow swap agreement did not meet the conditions for hedge accounting under applicable authoritative guidance. Interest expense decreased $42,000 in 2010 and $408,000 in 2009 due to market value changes of the interest rate swap agreement. Interest expense reflects net settlement payments of $42,000 in 2010 and $461,000 in 2009.

Interest Expense, Net – Interest expense, interest income and capitalized interest costs are summarized as follows (in thousands):

 

      2011     2010     2009  

Gross interest costs

   $   44,700      $   53,223      $   46,384   

Less capitalized interest costs

     (2,286     (710     (438

Interest expense

     42,414        52,513        45,946   

Interest income

     (302     (418     (865

Interest expense, net

   $   42,112      $   52,095      $   45,081   

Weighted average interest rate on borrowings under bank Credit Facility

     2.8     3.9     2.4 %
CAPITAL STRUCTURE, PER SHARE DATA AND OTHER EQUITY INFORMATION
CAPITAL STRUCTURE, PER SHARE DATA AND OTHER EQUITY INFORMATION

7. CAPITAL STRUCTURE, PER SHARE DATA AND OTHER EQUITY INFORMATION

Preferred Stock – At December 31, 2011, SMI has authorized 3,000,000 shares of preferred stock with a par value of $.10 per share. Shares of preferred stock may be issued in one or more series with rights and restrictions as may be determined by the Company’s Board of Directors. No preferred shares were issued or outstanding at December 31, 2011 or 2010.

Per Share Data – The following schedule reconciles basic and diluted earnings or loss per share from continuing operations (where computations are anti-dilutive, reported basic and diluted per share amounts are the same) (in thousands except per share amounts):

 

      2011     2010      2009  

(Loss) income from continuing operations applicable to common stockholders and assumed conversions

   $ (5,561   $ 45,263       $ (6,158

Weighted average common shares outstanding

     41,524        41,927         42,657   

Dilution effect of assumed conversions, common stock equivalents – stock awards

            1           

Weighted average common shares outstanding and assumed conversions

     41,524        41,928         42,657   

Basic (loss) earnings per share

   $ (0.14   $ 1.08       $ (0.14

Diluted (loss) earnings per share

   $ (0.14   $ 1.08       $ (0.14

Anti-dilutive common stock equivalents excluded in computing diluted earnings or loss per share

     1,237        1,469         1,686   

Declaration of Cash Dividends – The Company’s Board of Directors approved aggregate dividends on common stock in 2009 through 2011 as follows (in thousands except per share amounts):

 

      2011      2010      2009  

Cash dividends paid

   $ 16,623       $ 16,774       $ 15,352   

Dividends per common share

   $ 0.40       $ 0.40       $ 0.36   

Quarterly dividends were declared in each period, all declaration, record and payment dates were in the same fiscal periods, and all dividends were funded from available cash and cash equivalents on hand. See Note 6 for annual limitations on dividend payments under the Company’s debt agreements. On February 22, 2012, the Company’s Board of Directors declared a quarterly cash dividend of $0.15 per share of common stock aggregating approximately $6.2 million payable on March 15, 2012 to shareholders of record as of March 5, 2012. These 2012 quarterly cash dividends will be paid using available cash and cash investments.

Stock Repurchase Program – The Company’s Board of Directors approved a stock repurchase program authorizing SMI to repurchase up to an aggregate of 4,000,000 shares of the Company’s outstanding common stock from time to time, depending on market conditions, share price, applicable limitations under the Company’s debt agreements (see Note 6), and other factors the Board of Directors or its designees, in their sole discretion, may consider relevant. The purchases can be in the open market or private transactions. The stock repurchase program is presently funded using available cash and cash equivalents and may be suspended or discontinued at any time. The Company repurchased 255,000, 723,000 and 887,000 shares of common stock for $3,597,000 in 2011, $11,264,000 in 2010 and $12,628,000 in 2009, respectively. As of December 31, 2011, the Company could repurchase up to an additional 368,000 shares under the current authorization.

INCOME TAXES
INCOME TAXES

8. INCOME TAXES

Components of the provision for income taxes are as follows (in thousands):

 

      2011     2010     2009  

Current:

      

Federal

   $ (1,051   $ 3,704      $ 9,516   

State

     (2,743     (2,055     885   
       (3,794     1,649        10,401   

Deferred:

      

Federal

     17,612        14,688        27,310   

State

     9,663        9,485        2,509   
       27,275        24,173        29,819   

Total

   $ 23,481      $ 25,822      $ 40,220   
The reconciliation of statutory federal and effective income tax rates is as follows:   
      2011     2010     2009  

Statutory federal tax rate

     35.0     35.0     35.0

State and local income taxes, net of federal income tax effect

     16.8        4.3        (1.5

Non-deductible impairment of goodwill

     94.9                 

Change in valuation allowances, primarily related to losses on equity investees

     2.4        0.2        87.7   

Change in uncertain tax positions, including income tax liabilities for settlements with taxing authorities

     (12.6     (2.5     (3.7

Other, net

     (5.5     (0.7     0.6   

Total

     131.0     36.3     118.1

 

Tax effects of temporary differences resulting in deferred income taxes are as follows (in thousands):

 

      2011     2010  

Deferred tax liabilities:

    

Property and equipment

   $ 251,369      $ 215,141   

Goodwill and other intangible assets

     141,677        136,721   

Expenses deducted for tax purposes and other

     3,536        3,657   

Subtotal

     396,582        355,519   

Deferred tax assets:

    

Income previously recognized for tax purposes

     (17,991     (15,198

Stock option and other deferred compensation expense

     (4,196     (3,858

PSL and other deferred income recognized for tax purposes

     (2,247     (2,543

State and federal net operating loss carryforwards

     (13,431     (2,617

Basis difference for equity investment and subsidiary

     (64,042     (63,291

Subtotal

     (101,907     (87,507

Less: Valuation allowance

     66,299        65,644   

Net deferred tax assets

     (35,608     (21,863

Total net deferred tax liabilities

     360,974        333,656   

Net current deferred tax assets

     5,924        291   

Net non-current deferred tax liabilities

   $ 366,898      $ 333,947   

At December 31, 2011, the Company has approximately $31,174,000 of federal net operating loss carryforwards expiring in 2021 through 2031, and $50,268,000 of state net operating loss carryforwards expiring in 2012 through 2031. At December 31, 2011 and 2010, valuation allowances of $66,299,000 and $65,644,000 have been provided against deferred tax assets because management has determined that ultimate realization is not more likely than not for certain deferred tax assets and state net operating loss carryforwards. The 2011 change in valuation allowance is primarily attributable to a difference in financial and income tax reporting bases created by MA losses.

Effective Tax Rate Comparison for 2009 through 2011 – The Company’s effective income tax rate for 2011 was 131.0%, for 2010 was 36.3%, and for 2009 was 118.1%. The higher 2011 effective income tax rate results primarily from reflecting the goodwill impairment charge (see Note 2) for which no tax benefit is recorded. Excluding the non-deductible goodwill impairment charge, the 2011 effective income tax rate would have been 36.1%. The 2010 effective income tax rate reflects the positive impact of decreases in income tax liabilities related to uncertain tax positions for settlements with taxing authorities. The higher 2009 effective income tax rate reflects increases in valuation allowances of $31,314,000 against deferred tax assets associated with equity investee losses because management determined that ultimate realization is not more likely than not. The 2009 tax rate was positively impacted by decreases in income tax liabilities related to settlements with taxing authorities. Without the valuation allowances, the Company’s effective tax rate for 2009 would have been 30.4%.

Accounting for Uncertainty in Income Taxes – Income tax liabilities for unrecognized tax benefits approximate $1,004,000 and $2,879,000 as of December 31, 2011 and 2010, respectively, and are included in other noncurrent liabilities, all of which would favorably impact the Company’s effective tax rate if recognized. The Company reports interest expense and penalties related to income tax liabilities, when applicable, in income tax expense. Interest and penalties recognized on uncertain tax positions amounted to $270,000 in 2011, $261,000 in 2010 and $429,000 in 2009. As of December 30, 2011 and 2010, the Company had $697,000 and $2,324,000 accrued for the payment of interest and penalties on uncertain tax positions, which is included in other noncurrent liabilities. As of December 31, 2011, 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. The tax years that remain open to examination include 2006 through 2011 by the Georgia Department of Revenue and the California Franchise Tax Board, and 2008 through 2011 by all other taxing jurisdictions to which the Company is subject. The Company has been notified by the Internal Revenue Services that an examination of the Company’s 2010 federal income tax return will be conducted in 2012.

A reconciliation of the change in the total unrecognized tax benefits and other information for the three years ended December 31, 2011 is as follows (in thousands):

 

      2011     2010     2009  

Beginning of period

   $ 2,879      $ 5,081      $ 7,572   

Increases for tax positions of current year

                     

Increases for tax positions of prior years

     358        131          

Decreases for tax positions of prior years

     (1,744              

Reductions for lapse of applicable statute of limitations

                   (507

Reductions for settlements with taxing authorities

     (489     (2,333     (1,984

End of period

   $ 1,004      $ 2,879      $ 5,081
RELATED PARTY TRANSACTIONS
RELATED PARTY TRANSACTIONS

9. 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 December 31, 2011 and 2010 include $4,055,000 and $4,412,000 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 December 31, 2012, is classified as a noncurrent asset in the accompanying consolidated balance sheet. Changes in the amount due from December 31, 2010 primarily reflect increases for accrued interest on outstanding balances and decreases from shared expenses with affiliates. The amounts due were reduced from shared expenses and repayments, if any, net of accrued interest by $358,000 in 2011, $342,000 in 2010 and $330,000 in 2009. Any increases pertain to note receivable arrangements in place before July 30, 2002.

Amounts payable to affiliate at December 31, 2011 and 2010 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 December 31, 2012.

US Legend Cars, SMI Properties and Oil-Chem each lease office and warehouse facilities from Chartown, a Company affiliate through common ownership by the Company's Chairman and Chief Executive Officer, under annually renewable lease agreements. Rent expense for US Legend Cars approximated $244,000 in 2011, $245,000 in 2010 and $246,000 in 2009. Rent expense for SMI Properties approximated $241,000 in 2011, $243,000 in 2010 and $242,000 in 2009. Rent expense for Oil-Chem approximated $69,000 in 2011 and $96,000 in each of 2010 and 2009. At December 31, 2011 and 2010, amounts owed to Chartown 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 approximately $270,000 in 2011, $279,000 in 2010 and $113,000 in 2009. There were no vehicles sold to SAI in 2011, 2010 or 2009. Also, SMI Properties sold merchandise to SAI totaling $640,000 in 2011 and $648,000 in 2010, and an insignificant amount in 2009. Amounts due to or from SAI at December 31, 2011 and 2010 were not significant.

Oil-Chem sold zMAX micro-lubricant® product to certain SAI dealerships for resale to service customers of the dealerships in the ordinary course of business. Total purchases from Oil-Chem by SAI dealerships approximated $1,507,000 in 2011, $1,391,000 in 2010 and $1,491,000 in 2009. At December 31, 2011 and 2010, approximately $161,000 and $114,000 was due from SAI and are reflected in current assets.

 

SMI Properties and, to a lesser extent, other SMI subsidiaries purchased and sold motorsports merchandise, and received commissions for merchandise sold during Company events from Motorsports Authentics. Merchandise purchases approximated $609,000 in 2011, $1,258,000 in 2010 and $5,642,000 in 2009, and merchandise sales and event related commissions approximated $2,801,000 in 2011, $3,807,000 in 2010 and $4,788,000 in 2009. At December 31, 2011 and 2010, net amounts due from MA approximated $138,000 and $157,000. Amounts due to or from MA are reflected in current assets and current liabilities as applicable.

The foregoing related party balances as of December 31, 2011 and 2010, and transactions for the three years ended December 31, 2011 are summarized below (in thousands):

 

            December 31,  
              2011      2010  

Notes and other receivables

      $ 4,386       $ 4,736   

Amounts payable to affiliates

        2,594         2,673   
       2011         2010         2009   

Merchandise and vehicle purchases

   $ 879       $ 1,537       $ 5,755   

Merchandise and vehicle sales, event related commissions, and reimbursed shared expenses

     5,328         6,226         6,663   

Rent expense

     554         584         584   

Interest income

     125         141         157   

Interest expense

     103         103         103
LEGAL PROCEEDINGS AND CONTINGENCIES
LEGAL PROCEEDINGS AND CONTINGENCIES

10. LEGAL PROCEEDINGS AND CONTINGENCIES

The Company is involved in various lawsuits in the normal course of business, some of which involve material claims. Management does not currently believe the outcome of these lawsuits or incidents will have a material adverse effect on the Company’s future financial position, results of operations or cash flows.

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 and will resume discovery at the earliest opportunity. SMIL is considering its options for continued legal action against BNP Suisse.

On June 16, 2009, Melissa Jenks, as guardian for Roderick Jenks, and individually, filed a lawsuit against NHMS and an employee, in the United States District Court for the District of New Hampshire. The lawsuit alleges that Mr. Jenks suffered a traumatic head injury after falling from a golf cart being driven by an NHMS employee, and asserts claims of negligence, vicarious liability, and loss of consortium. The lawsuit claims past medical expenses for Mr. Jenks in excess of $662,000, and future economic losses of between $2,524,915 and $2,857,215 including future medical and life care expenses, and lost future income. Plaintiff has demanded $25 million. NHMS denied all claims in its answer as filed with the court, and it continues to vigorously defend against the allegations and to pursue indemnity claims against two other parties in the lawsuit. This matter has been tentatively scheduled for trial in April 2012. Management does not believe the ultimate resolution of this matter will have a material adverse impact on the Company’s future financial position, results of operations or cash flows.

STOCK COMPENSATION PLANS
STOCK COMPENSATION PLANS

11. STOCK COMPENSATION PLANS

2004 Stock Incentive Plan, Amended and Restated as of February 10, 2009 – The 2004 Stock Incentive Plan (the 2004 Plan) provides equity-based incentives for attracting and retaining key employees, directors and other individuals providing services to the Company. Awards under the 2004 Plan may consist of incentive stock options, non-statutory stock options, restricted stock units or restricted stock. The 2004 Plan is administered by the Compensation Committee of the Board of Directors who has full authority to determine recipients, types and amounts of awards granted and amend the terms, restrictions and conditions of awards. For awards granted to non-employee directors, the Board of Directors shall have the authority otherwise provided to the Compensation Committee. The Compensation Committee also may amend the terms of outstanding awards. However, no amendment, suspension or termination of the 2004 Plan or amendment of outstanding awards may materially adversely affect previously granted awards without the consent of the award recipient.

Under the 2004 Plan, 2,500,000 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 2004 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 aggregating more than 100,000 shares of common stock during any calendar year; and (iii) in the case of restricted stock or restricted stock unit awards that are designated as performance awards, no individual may be granted an aggregate of more than 35,000 shares of common stock during any calendar year. At December 31, 2011, approximately 1,426,000 shares are available for future grant. Exercise prices for awarded stock options generally may not be less than the fair or trading value of the Company’s common stock at, and exercise periods may not exceed ten years from, the option grant date. The 2004 Plan is scheduled to terminate in February 2014.

 

The amendment and restatement of the 2004 Plan was adopted by the Board of Directors on February 10, 2009 and approved by stockholders at the 2009 Annual Meeting. The material amendments incorporated in the 2004 Plan include (a) provisions to allow the grant of restricted stock units; (b) eliminating the 1,000,000 share limit on the number of shares of common stock available under the 2004 Plan with respect to awards other than stock options; (c) changes to the provisions for performance-based awards consistent with similar provisions under the Company’s Incentive Compensation Plan, including additions to the permissible performance goals that can be used and how the goals can be designed; and (d) provisions in connection with Section 409A of the Code. Restricted stock units are non-voting units of measurement that represent the contingent right to receive shares of common stock or the value of shares of common stock in the future, but no shares are actually awarded to recipients on the grant date. 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.

The exercise price of stock options granted under the 2004 Plan is generally the NYSE’s closing price for the Company’s common stock on grant date. The option exercise price may be paid in cash, or if permitted by the Compensation Committee, in shares of Company common stock owned by the option holder. For incentive stock options granted to holders of more than 10% (directly or by attribution through relatives or entities having holder ownership interest) of the total combined voting power of all classes of Company stock, the exercise price may not be less than 110% of the fair or trading value of the Company’s common stock at, and exercise periods may not exceed five years from, the option grant date.

The Compensation Committee determines the type of restrictions and purchase price, if any, for restricted stock and restricted stock unit awards based on, among other factors, achievement of financial, business and performance objectives, the occurrence of specific events, time periods of continued service or other time-based restrictions. Restricted stock and restricted stock units generally are not transferable until all applicable restrictions have lapsed or been satisfied. If restricted stock and restricted stock unit award recipients cease to perform services for the Company, all shares of common stock and restricted stock units still subject to restrictions generally will be forfeited unless waived by the Compensation Committee. Recipients of restricted stock generally will have certain rights and privileges of a stockholder, including the right to vote such shares and receive dividends, if any. Recipients of restricted stock units generally will not have the rights and privileges of a stockholder, except they may be entitled to receive dividend equivalents, if so specified in the award agreements and dividends are declared.

In 2009 through 2011, the exercise price of all stock options granted under the 2004 Plan was the fair or trading value of the Company’s common stock at grant date. To date, stock options expire ten years from grant date and vest 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. As provided in the 2004 Plan, awards of restricted stock or restricted stock units generally remain subject to forfeiture and restrictions on transferability until vested.

 

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 2011, 2010 and 2009. All grants are under the 2004 Plan and must be settled in common stock shares, vest after three years or 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. “Forfeited” amounts below are performance forfeitures under the Incentive Compensation Plan terms and result from differences in the Company’s actual results and the defined full year earnings target. Once the vesting period expires, common stock is issued in settlement of the restricted stock units and all vested shares are no longer subject to forfeiture or restrictions on transferability. The following is a summary of restricted stock and restricted stock units granted, vested and forfeited under the Incentive Compensation Plan for 2009 through 2011 (shares in thousands):

 

      Restricted
Stock
   

Restricted
Stock

Units

 

Outstanding, January 1, 2009

     21          

Granted

     20        20   

Vested

              

Forfeited

     (1       

Outstanding, December 31, 2009

     40        20   

Granted

     35        35   

Vested

              

Forfeited

     (8     (8

Outstanding, December 31, 2010

     67        47   

Granted

     35        35   

Vested

     (27     (7

Forfeited

     (12     (12

Outstanding, December 31, 2011

     63        63   

In 2011 and 2010, the Company also granted to non-executive management employees 61,000 and 60,300 shares of restricted stock that vest in equal installments over three years, and in 2009 granted 40,000 stock options at an exercise price per share of $14.58 that vest after three years, and 197,500 stock options at an exercise price per share of $15.83 that vest in equal installments over three years. Exercise prices for these stock options equaled market value at date of grant. In 2011, 2010 and 2009, the Company repurchased 17,700, 11,000 and 10,200 shares of common stock from non-executive management employees for $244,000, $165,000 and $164,000 related to settlement of income taxes on 60,455, 36,500 and 31,800 shares of restricted stock, respectively, that vested under the 2004 Plan. In 2011, the Company also repurchased 2,300 shares of common stock from a former executive management employee for $36,000 related to settlement of income taxes on 6,608 shares of restricted stock that vested under the Incentive Compensation Plan. Repurchases of common stock related to settlement of income taxes upon restricted stock vesting are reflected as financing activities in the statement of cash flows.

1994 Stock Option Plan – The 1994 Stock Option Plan (the 1994 Plan) expired by its terms on December 21, 2004 and no further options can be granted under that plan. Adoption of the 2004 Plan described above, and termination of the 1994 Plan, did not adversely affect rights under any outstanding stock options previously granted under the 1994 Plan. All options granted to purchase shares under the 1994 Plan are fully vested and generally expire ten years from grant date. The exercise price of all stock options granted under the 1994 Plan was the fair or trading value of the Company’s common stock at grant date.

2008 Formula Restricted Stock Plan – The 2008 Formula Restricted Stock Plan (the 2008 Formula Plan) is intended to promote the interests of the Company and its stockholders by providing non-employee directors with Company ownership interests to more closely align their interests with the Company’s stockholders and to enhance the Company’s ability to attract and retain highly qualified non-employee directors. The 2008 Formula Plan is intended to constitute a “formula plan” within the meaning of SEC Rule 16b-3 of the Exchange Act. Adoption of the 2008 Formula Plan, and termination of the Formula Stock Option Plan, did not adversely affect the rights of any outstanding stock options previously granted under the Formula Stock Option Plan. The 2008 Formula Plan is administered by the Board of Directors, excluding non-employee directors, and expires by its terms in February 2018. The Board of Directors, excluding non-employee directors, may amend, suspend or terminate the 2008 Formula Plan in whole or in part, provided that no such amendment, suspension or termination adversely affects previously granted awards without the consent of the award recipient. Any such amendment, suspension or termination may be subject to stockholder approval.

Under the 2008 Formula Plan, 100,000 shares of SMI’s common stock are reserved for issuance and awards will be in the form of restricted stock. On the first business day following each annual meeting, beginning with the Company’s 2008 Annual Meeting, each non-employee director who is then a member of the Board shall receive a grant of restricted stock consisting of the number of shares equaling $60,000 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. On April 21, 2011, the Company awarded 3,889 shares of restricted stock to each of the Company’s four outside directors in accordance with plan provisions. On April 21, 2010, the Company awarded 3,780 shares of restricted stock to each of the Company’s four outside directors which vested on April 19, 2011 in accordance with plan provisions. On April 22, 2009, the Company awarded 4,792 shares of restricted stock to each of the Company’s four outside directors which vested on April 19, 2010 in accordance with plan provisions. Additionally, a total of 9,524 shares granted to outside directors on April 24, 2008 vested on April 20, 2009 (2,381 shares for each current outside director) in accordance with plan provisions.

An amendment and restatement of the 2008 Formula Plan was adopted by the Board of Directors on February 22, 2012, subject to approval by stockholders at the 2012 Annual Meeting. The principal amendments incorporated in the restatement of the 2008 Formula Plan include increasing the number of shares of SMI’s common stock reserved for issuance under the plan from 100,000 to 250,000 and changing the determination of the number of shares received by each non-employee director from $60,000 divided by the average closing sale price for the twenty days immediately preceding the grant date to $75,000 divided by the average closing sale price for the twenty days immediately preceding the grant date.

Formula Stock Option Plan for Directors – The Formula Stock Option Plan, which was for the benefit of the Company’s outside directors, was suspended in December 2007 and terminated in February 2008, and a new plan, as described above, was approved by stockholders at the 2008 Annual Meeting. Prior to plan suspension and termination, before February 1 each year, individual outside directors were awarded an option to purchase 10,000 shares of common stock at an exercise price equal to the average fair market value per share for the ten-day period prior to award. Termination of the Formula Stock Option Plan did not adversely affect rights under any outstanding stock options previously granted. All options granted under this plan generally vested in six months, and expired ten years, from grant date.

Employee Stock Purchase Plan – The SMI Employee Stock Purchase Plan (the ESPP) is intended to provide employees the opportunity to acquire stock ownership in the Company. The authorized number of shares of common stock issuable under the ESPP is 800,000. At December 31, 2011, approximately 439,000 shares are available for future grant. Prior to each January 1, the Compensation Committee of the Board of Directors determines whether eligible employees electing to participate will be granted the right to purchase shares of common stock for the upcoming calendar year and, if granted, the number of shares available for purchase under each option. All employee grants are for the same number of shares and grant date. No participant can be granted the right to purchase more than 500 shares in each calendar year, nor can an employee purchase stock under this or all other employee stock purchase plans in excess of $25,000 of fair market value at the grant date in each calendar year. The stock purchase price is 90% of the lesser of fair market value at grant date or exercise date. Grants may be exercised once at the end of each calendar quarter, and unexercised grants expire at each calendar year end. No shares were granted to employees under the ESPP for calendar years 2011, 2010 or 2009.

Share-Based Payment – The Company follows applicable authoritative guidance which generally requires recognizing compensation cost for the estimated grant-date fair value of stock options and other equity-based compensation over the requisite service period, and applies to all awards granted, modified, vesting, repurchased or cancelled after January 1, 2006. The Company’s practice has been to issue new shares upon option exercise; however, repurchases of shares in the open market are permitted. The Company generally records stock-based compensation cost either on 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. All stock options granted under the 1994 Plan and the 2004 Plan have an exercise price equal to the market value of the underlying common stock at grant date, and under the Formula Stock Option Plan for Directors have an exercise price equal to the average fair market value per share for the ten-day period prior to award.

Share-based compensation cost totaled $1,885,000 in 2011, $1,979,000 in 2010 and $1,585,000 in 2009, before income taxes of $680,000, $718,000 and $482,000, respectively, and is included in general and administrative expense. There were no capitalized share-based compensation costs at December 31, 2011 or 2010. There were no significant changes in the characteristics of stock options or restricted stock granted during 2009 through 2011 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. The fair value of stock option grants is estimated on grant date using the Black-Scholes option-pricing model based on the following factors and assumptions. Expected volatility is based on implied volatilities from historical volatility of the Company’s stock and other factors. The Company uses historical data to estimate option exercises, forfeitures and employee terminations within the pricing model. Employee groups have similar historical exercise experience and are combined for valuation purposes. The expected term of granted options is estimated based on historical exercise experience and represents the time period that granted options are expected to be outstanding. Risk-free interest rates for periods within the expected life of options are based on the US Treasury yield curve in effect at the time of grant. The Company believes the pricing model and approach utilized to develop the underlying assumptions are appropriate for estimating the fair values of share-based awards. These fair value and other estimates are not intended to predict future events or value ultimately realizable by employees who receive equity awards, and subsequent events are not indicative of the reasonableness of original estimates.

Various stock option information regarding the 1994 Stock Option Plan, 2004 Stock Incentive Plan and Formula Stock Option Plan for 2009 through 2011 is summarized as follows (shares in thousands):

 

      2011      2010      2009  

Options granted

                     238   

Weighted average grant-date fair values

                   $ 4.49   

Total intrinsic value of options exercised

                       

Weighted average expected volatility

                     36.8

Weighted average risk-free interest rates

                     2.2

Weighted average expected lives (in years)

                     5.2   

Weighted average dividend yield

                     2.3

 

    1994 Stock Option Plan         2004 Stock Incentive Plan         Formula Stock Option Plan  
Activity   Shares     Exercise Price
Per Share
    Weighted
Average
Exercise
Price
         Shares     Exercise Price
Per Share
   

Weighted

Average

Exercise
Price

         Shares     Exercise Price
Per Share
   

Weighted

Average

Exercise
Price

 

Outstanding, January 1, 2009

    952      $ 18.85-41.13      $ 31.21          426      $ 35.68-39.22      $ 37.72          350      $ 22.31-38.45      $ 30.75   

Granted

                           238        14.58-15.83        15.62                          

Cancelled

    (350     26.36-41.13        34.71          (16     37.00-38.97        37.25                          

Exercised

                                                                      

Outstanding, December 31, 2009

    602        18.85-37.00        29.18          648        14.58-39.22        29.62          350        22.31-38.45        30.75   

Granted

                                                                  

Cancelled

    (89     18.85-33.81        27.17          (14     15.83-38.97        22.96          (100     25.28-38.45        30.02   

Exercised

                                                                      

Outstanding, December 31, 2010

    513        18.85-37.00        29.53          634        14.58-39.22        29.76          250        22.31-38.45        31.04   

Granted

                                                                  

Cancelled

    (98     18.85-29.64        21.27          (22     15.83-38.97        35.03          (40     22.31        22.31   

Exercised

                                                                      

Outstanding, December 31, 2011

    415      $ 26.36-37.00      $ 31.47            612      $ 14.58-39.22      $ 29.58            210      $ 25.28-38.45      $ 32.70   

Options outstanding and exercisable for the 1994 Plan, 2004 Plan and Formula Stock Option Plan combined as of December 31, 2011 are as follows (shares in thousands):

 

    Options Outstanding         Options Exercisable  
          Weighted Average               Weighted Average  

Range of

Exercise Prices

 

Number

Outstanding

    Exercise
Price
   

Remaining

Contractual

Life-In Years

        

Number

Exercisable

    Exercise
Price
   

Remaining

Contractual

Life-In Years

 

$14.58-$15.83

    226      $ 15.61        7.8          124      $ 15.83        7.9   

25.28-26.36

    169        26.11        0.8          169        26.11        0.8   

28.77-31.05

    186        29.58        2.0          186        29.58        2.0   

34.97-37.00

    424        36.76        3.1          424        36.76        3.1   

38.18-39.22

    232        38.80        4.3            232        38.80        4.3   

$14.58-$39.22

    1,237      $   33.59        5.1            1,135      $   30.52        3.8   

 

    1994 Stock Option Plan         2004 Stock Incentive Plan         Formula Stock Option Plan  
          Weighted Average               Weighted Average               Weighted Average  
    

Number

Exercisable

    Exercise
Price
Per Share
   

Remaining

Contractual

Life-In Yrs

        

Number

Exercisable

    Exercise
Price
Per Share
   

Remaining

Contractual

Life-In Yrs

        

Number

Exercisable

    Exercise
Price
Per Share
   

Remaining

Contractual

Life-In Yrs

 

December 31, 2009

    602      $ 29.18        3.3               407      $ 37.73        5.5               350      $ 30.75        3.7   

December 31, 2010

    513        29.53        2.7          468        34.80        5.1          250        31.04        3.1   

December 31, 2011

    415        31.47        2.0          510        32.42        4.6          210        32.70        2.7   

 

The following is a summary of vested and non-vested option activity regarding the 1994 Plan, 2004 Plan and Formula Stock Option Plan during the year ended December 31, 2011 (shares and aggregate intrinsic value in thousands):

 

    1994 Stock Option Plan         2004 Stock Incentive Plan         Formula Stock Option Plan  

Vested and
Non-vested

Options

  Shares     Weighted
Average
Exercise
Price Per
Share
   

Weighted

Average

Remaining

Contractual

Term (Yrs)

   

Aggregate

Intrinsic

Value

         Shares     Weighted
Average
Exercise
Price Per
Share
   

Weighted

Average

Remaining

Contractual

Term (Yrs)

    Aggregate
Intrinsic
Value
         Shares     Weighted
Average
Exercise
Price Per
Share
   

Weighted

Average

Remaining

Contractual

Term (Yrs)

   

Aggregate

Intrinsic

Value

 
Outstanding, January 1, 2011     513      $ 29.53        2.7                 634      $ 29.76        6.1      $ 30          250      $ 31.04        3.1          

Granted

                                                                                       

Expired, forfeited or cancelled

    (98     21.27                        (22     35.03                        (40     22.31                 

Exercised

                                                                                           
Outstanding, December 31, 2011     415      $ 31.47        2.0                   612      $ 29.58        5.1      $ 30            210      $ 32.70        2.7          
Exercisable, December 31, 2011     415      $ 31.47        2.0                   510      $ 32.42        4.6                   210      $ 32.70        2.7          
Expected to vest, December 31, 2011                                     99      $ 15.32        7.6      $ 30                                   

As of December 31, 2011, there was approximately $91,000 of unrecognized compensation cost related to non-vested stock options granted under the 2004 Plan that is expected to be recognized over a weighted average period of 0.6 year, and none related to the 1994 Plan or the Formula Stock Option Plan. Outstanding and exercisable stock options with no intrinsic value as of December 31, 2011 are excluded from the aggregate intrinsic values presented above. In 2011, 2010 and 2009, options to purchase 61,000, 66,000 and 29,000 shares of common stock vested under the 2004 Plan. All stock options granted under the 1994 Plan and the Formula Stock Option Plan fully vested prior to December 31, 2007. The following is a summary of non-vested option activity regarding the 2004 Plan during the year ended December 31, 2011 (shares in thousands):

 

     2004 Stock Incentive Plan  
Non-vested Options    Shares    

Weighted

Average

Exercise

Price

Per Share

    

Weighted

Average

Remaining

Contractual

Term (Yrs)

     Weighted
Average
Grant-date
Fair Value
Per Share
 

January 1, 2011

     166      $ 15.53         8.7       $ 4.43   

Granted

                              

Vested

     (61     15.83         8.0         4.61   

Forfeited

     (3     15.83         8.7         4.61   

December 31, 2011

     102      $ 15.34         7.6       $ 4.32   

 

The following is a summary of non-vested restricted stock and restricted stock unit activity regarding the 2004 Plan and 2008 Formula Plan for the three years ended December 31, 2011 (shares and aggregate intrinsic value in thousands):

 

    2004 Stock Incentive Plan         2008 Formula Restricted Stock Plan  

Non-vested

Restricted Stock and

Restricted Stock Units

  Shares     Weighted
Average
Grant-
date Fair
Value
Per Share
   

Weighted

Average

Remaining

Contractual

Term (Yrs)

    Aggregate
Intrinsic
Value
         Shares     Weighted
Average
Grant-
date Fair
Value
Per Share
   

Weighted

Average

Remaining

Contractual

Term (Yrs)

    Aggregate
Intrinsic
Value
 

Outstanding, January 1, 2009

    136      $ 26.92        2.0      $ 2,185          12      $ 24.95        0.3      $ 192   

Granted

    40        11.62        3.0                 19        14.05        1.0          

Vested

    (32     39.13                        (10     24.95                 

Forfeited

    (2     30.95        1.3                   (2     24.95        0.2          

Outstanding, December 31, 2009

    142        19.79        1.6        2,494          19        14.05        0.3        338   

Granted

    130        15.40        3.0                 15        16.86        1.0          

Vested

    (36     32.58                        (19     14.05                 

Forfeited

    (20     14.03        1.8                                          

Outstanding, December 31, 2010

    216        15.50        1.3        3,306          15        16.86        0.3        232   

Granted

    131        14.29        3.0                 16        15.44        1.0          

Vested

    (96     16.64                        (15     16.86                 

Forfeited

    (25     14.91        1.0                                          

Outstanding, December 31, 2011

    226      $ 14.38        1.3      $ 3,464            16      $ 15.44        0.3      $ 238   

In 2011, 2010 and 2009, the fair value of restricted stock that vested under the 2004 Plan totaled $1,370,000, $552,000 and $511,000, and the fair value of restricted stock that vested under the 2008 Formula Plan totaled $230,000, $308,000 and $126,000, respectively. As of December 31, 2011, there was approximately $1,671,000 of total unrecognized compensation cost related to non-vested restricted stock and restricted stock units granted under the 2004 Plan and the 2008 Formula Plan that is expected to be recognized over a weighted average period of 0.9 year.

EMPLOYEE BENEFIT PLANS
EMPLOYEE BENEFIT PLANS

12. EMPLOYEE BENEFIT PLANS

The Speedway Motorsports, Inc. 401(k) Plan and Trust is available to Company employees who meet certain eligibility requirements. The Plan allows participants to elect contributions of up to 75% of their annual compensation within certain prescribed limits, of which the Company will match 25% of the first 4% of employee contributions. Participants become fully vested in Company matching contributions over six years. The Company’s contributions for the Plan were $320,000 in 2011, $309,000 in 2010 and $314,000 in 2009.

The Speedway Motorsports, Inc. Deferred Compensation Plan is available to all Company employees who meet eligibility requirements. This plan allows participants to elect to defer up to 75% of their base salary and 100% of their annual bonus and other cash compensation, if any, as permitted by the Plan Administrator. The Company may make discretionary contributions for any one or all eligible employees which, if any, shall be 100% vested following three years of service once first eligible to participate in this plan. There were no Company contributions in 2009 through 2011.

SEGMENT DISCLOSURES
SEGMENT DISCLOSURES

13. 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 Note 1.

 

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, and joint venture equity investee earnings or losses associated with motorsports merchandising. 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, SMI Trackside and MA joint venture 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 TSI non-event motorsports and non-motorsports merchandising, US Legend Cars non-event merchandising and sanctioning body activities, Oil-Chem micro-lubricant activities, and office rentals at certain Company speedways. As further described in Note 14, oil and gas activities are located in foreign countries and are accounted for as discontinued operations. All segment information below pertains to continuing operations, and excludes oil and gas discontinued operations, for all periods presented.

Of the Company’s total revenues, approximately 83% in 2011, 84% in 2010 and 84% in 2009 were derived from NASCAR-sanctioned events. Of the Company’s total revenues, approximately 37% or $185,394,000 for 2011, 36% or $178,722,000 for 2010, and 32% or $173,803,000 for 2009 pertain to NASCAR broadcasting rights fees for domestic television broadcasts of NASCAR-sanctioned events held at the Company’s speedways.

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 or loss excludes interest, taxes and other expense (income) 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. The following segment information on continuing operations is for the three years ended December 31, 2011, and as of December 31, 2011 and 2010 (in thousands):

 

    2011         2010         2009  
     
 
 
Motorsports
Event
Related
 
 
  
   

 

All

Other

  

  

   
 
Consolidated
Total
 
  
       
 
 
Motorsports
Event
Related
  
  
  
   

 

All

Other

  

  

   
 
Consolidated
Total
 
  
       
 
 
Motorsports
Event
Related
  
  
  
   

 

All

Other

  

  

   
 
Consolidated
Total
 
  

Revenues

  $  488,957      $  16,888      $  505,845        $  485,126      $  17,117      $  502,243        $  526,794      $  23,728      $  550,522   

Depreciation and amortization

    53,741        263        54,004          52,476        286        52,762          52,186        468        52,654   

Equity investee losses

                                                  (76,657            (76,657

Segment operating income

    115,051        704        115,755          120,802               120,802          161,933        1,477        163,410   

Capital expenditures

    59,142        179        59,321            37,136        82        37,218            42,439        112        42,551   
     December 31, 2011         December 31, 2010                        

Other intangibles

  $ 394,960             $ 394,960        $ 394,972             $ 394,972           

Goodwill

    138,717               138,717          187,326               187,326           

Total assets

    1,879,606      $ 25,037        1,904,643            1,926,124      $ 25,400        1,951,524             

 

The following table reconciles segment operating income above to consolidated income before income taxes (both from continuing operations) for the three years ended December 31, 2011 (in thousands):

 

      2011     2010     2009  

Total segment operating income from continuing operations

   $ 115,755      $ 120,802      $ 163,410   

Adjusted for:

      

Interest expense, net

     (42,112     (52,095     (45,081

Impairment of goodwill and other intangible assets

     (48,609            (7,273

Loss on early debt redemption and refinancing

     (7,456              

Equity investee losses

                   (76,657

Other income (expense), net

     342        2,378        (337

Consolidated income from continuing operations before income taxes

   $ 17,920      $ 71,085      $ 34,062
DISCONTINUED OIL AND GAS OPERATIONS
DISCONTINUED OIL AND GAS OPERATIONS

14. DISCONTINUED OIL AND GAS OPERATIONS

In the fourth quarter 2008, the Company decided to discontinue its oil and gas operations primarily because of ongoing challenges and business risks in conducting these activities in foreign countries, particularly Russia. These oil and gas operations involved business, credit and other risks different from the Company's motorsports operations, and the ability to invest and compete successfully and profitably has been subject to many factors outside management's control. Many of the operating risks and challenges involved difficult or restrictive governmental situations when attempting to conduct business, access or transfer assets or funds, or facilitate production and similar activities in Russia and other foreign countries. Oasis Trading Group LLC (Oasis), a United States company, provided the Company strategic, management and operational capabilities in connection with these activities. The Company provided financing and access to financial markets for such activities. The Company and Oasis have generally shared equally the profits and losses on all transactions and activities. In 2010, SMIL's management contracts with service providers for the oilfields were terminated, and the Company was fully released from all known or unknown liabilities, with $1.3 million paid to these providers as consideration for release pursuant to the contracts. These activities hereafter are collectively associated with or referred to as "oil and gas activities", "oil and gas business", or "bulk petroleum transactions". The net assets and operating results for these oil and gas activities are presented as discontinued operations in these consolidated financial statements for all periods using applicable authoritative guidance for discontinued operations and assets held for sale. Management believes these operations and assets meet the "held for sale" criteria under such guidance. Also, management believes these oil and gas activities continue to meet the criteria for "discontinued operations" because the Company plans to have no significant continuing involvement or retention of ownership interests after disposal.

SMIL presently owns an interest in one foreign entity owning certain oil and gas mineral rights in Russia, and significant uncertainties continue about its economic viability and ultimate recovery. In 2010, SMIL sold its interest in one foreign entity to a third party owned by a former contracted service provider. Sales consideration was based on the Company's right to receive a specified portion of future profits (as defined), and the Company will receive a specified percentage of any gross sales price or prior year profits (as defined) should the interest be resold to another third party. No gain or loss from this sale was reflected because the Company has no remaining investment or liabilities. These investments have been reflected as fully impaired since December 31, 2008. Also, because of uncertainty regarding recoverability, future gains, if any, would be recognized only if proceeds are received by the Company. At this time, the Company is attempting to finalize sale or transfer of the remaining foreign interest in 2012.

No gain or loss on disposal has been reflected in any of the periods presented. Remaining estimated costs to sell or dispose, if any, have not yet been determined. There were no operating revenues generated from oil and gas activities in 2009 through 2011. In the three years ended 2011, the Company incurred costs primarily for legal fees and other costs associated with efforts to maximize and preserve remaining realizable value, if any, of its foreign investment interests and other oil and gas activities. In 2010, the Company also incurred legal fees and other transaction costs associated with the sale of 100% interest in one of its oilfields as discussed above. No interest expense, corporate general and administrative expense, transaction or transition service costs or continuing costs have been allocated to the discontinued operation for any period presented. There were no associated income tax benefits for any period presented. At December 31, 2010, current assets represent a receivable related to a favorable settlement received in January 2011. At December 31, 2011 there were no current or non-current assets associated with discontinued operations. At December 31, 2010 and 2011 there were no current or non-current liabilities associated with discontinued operations. These costs, fees and assets are associated with and reflected in the discontinued oil and gas operations. At December 31, 2011, the Company had no outstanding standby letters of credit associated with oil and gas activities.

Uncertain Recovery of Receivables – As of December 31, 2011, all receivables associated with oil and gas activities are fully reserved. As of December 31, 2010, all receivables associated with oil and gas activities were fully reserved except for the favorable settlement received in January 2011. As of December 31, 2011 and 2010, uncertainty exists as to the recovery of $12,000,000 drawn by a bank under a Company guarantee for obligations owed by certain third parties for petroleum product purchases utilizing their bank line of credit. The bank claimed and took possession of funds for payment under the guarantee for non-payment by the third parties, notwithstanding the Company's belief that payment was not required nor rightfully drawn upon by the bank. The Company believes it has lawful recourse against the third parties and the bank, and is seeking recovery of the funds. However, uncertainty exists as to ultimate recovery of the amount due, which is reflected in accounts receivable, and has been fully reserved as of December 31, 2011 and 2010.

At December 31, 2011 and 2010, uncertainty exists as to the full realization of receivables due from one foreign entity and Oasis under certain profit and loss sharing arrangements. Uncertainty exists about collecting amounts from this foreign entity because of problems with respect to access to funds, creditworthiness and certain other factors outside of management's control when conducting operations in foreign countries. Management is currently pursuing available recovery alternatives. Under its profit and loss sharing arrangement with Oasis, the Company recorded receivables from Oasis for that entity's reimbursable share of loss associated primarily with recoverability and impairment charges and costs incurred by the Company before and after discontinuing operations. The Company recorded receivables of approximately $442,000 in 2011, $954,000 in 2010 and $ 4,107,000 in 2009, and as of December 31, 2011 and 2010, amounts recorded as due from Oasis totaled approximately $29,501,000 and $29,059,000. Oasis's ability to repay the Company this or any future amount is largely dependent on sufficient profitability and recovery from future oil and gas entities no longer Company owned as described above or from legal proceedings. As such, uncertainty exists regarding recoverability and the Company has recorded allowances to fully reserve these possibly uncollectible amounts as of December 31, 2011 and 2010.

As of December 31, 2011 and 2010, the Company has recorded allowances for possible uncollectible amounts aggregating approximately $52,900,000 and $52,459,000 for these oil and gas activities based on estimated ultimate realization after possible recovery, settlement and other costs and insurance. Recovery allowances, which are included in loss on discontinued operation, amounted to approximately $442,000 in 2011, $954,000 in 2010 and $4,107,000 in 2009. This assessment is subjective and based on facts, circumstances and assumptions existing at the time of evaluation, all of which are subject to significant change. See Note 10 for information on legal proceedings associated with oil and gas activities.

In discontinuing these operations, and prior to sale of the Company's remaining interest, the Company may spend, depending on perceived possibilities, or be required to spend, certain additional amounts or take legal action to protect or preserve its interests in order to maintain or maximize the potential recovery value, and to protect other aspects of the Company's oil and gas investments. Although not expected at this time, such additional expenditures, if significant, could have an adverse effect on the Company's future financial position, results of operations or cash flows. All future expenditures will likely be expensed and included in the results of discontinued operations.