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| ISCA > SEC Filings for ISCA > Form 10-Q on 8-Jul-2009 | All Recent SEC Filings |
8-Jul-2009
Quarterly Report
Results of Operations
General
The general nature of our business is a motorsports themed amusement enterprise,
furnishing amusement to the public in the form of motorsports themed
entertainment. We derive revenues primarily from (i) admissions to motorsports
events and motorsports themed amusement activities held at our facilities,
(ii) revenue generated in conjunction with or as a result of motorsports events
and motorsports themed amusement activities conducted at our facilities, and
(iii) catering, concession and merchandising services during or as a result of
these events and amusement activities.
"Admissions, net" revenue includes ticket sales for all of our racing events,
activities at Daytona 500 EXperience and other motorsports activities and
amusements, net of any applicable taxes.
"Motorsports related" revenue primarily includes television and ancillary media
rights fees, promotion and sponsorship fees, hospitality rentals (including
luxury suites, chalets and the hospitality portion of club seating), advertising
revenues, royalties from licenses of our trademarks and track rentals.
"Food, beverage and merchandise" revenue includes revenues from concession
stands, direct sales of souvenirs, hospitality catering, programs and other
merchandise and fees paid by third party vendors for the right to occupy space
to sell souvenirs and concessions at our motorsports entertainment facilities.
Direct expenses include (i) prize and point fund monies, National Association
for Stock Car Auto Racing's ("NASCAR") sanction fees and, beginning in fiscal
2009, direct expenses also include prize and point fund monies and sanction fees
for Grand American Road Racing ("Grand American") and AMA Pro Racing ("AMA"),
(ii) motorsports related expenses, which include labor, advertising, costs of
competition paid to sanctioning bodies other than NASCAR, and, in fiscal 2009,
Grand American and AMA, and other expenses associated with the promotion of all
of our motorsports events and activities, and (iii) food, beverage and
merchandise expenses, consisting primarily of labor and costs of goods sold.
Starting in fiscal 2009, branding of the NASCAR truck series changed. The NASCAR
Craftsman Truck Series became the NASCAR Camping World Truck Series. Throughout
the interim financial statements, the naming convention for these series is
consistent with the branding in fiscal 2009.
Critical Accounting Policies and Estimates
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities,
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. While our estimates and assumptions are based on conditions
existing at and trends leading up to the time the estimates and assumptions are
made, actual results could differ materially from those estimates and
assumptions. We continually review our accounting policies, how they are applied
and how they are reported and disclosed in the financial statements.
The following is a summary of our critical accounting policies and estimates and
how they are applied in the preparation of the financial statements.
Basis of Presentation and Consolidation. We consolidate all entities we control
by ownership of a majority voting interest and variable interest entities for
which we are the primary beneficiary. Our judgment in determining if we are the
primary beneficiary of a variable interest entity includes assessing our level
of involvement in establishing the entity, determining whether we provide more
than half of any management, operational or financial support to the entity, and
determining if we absorb the majority of the entity's expected losses or
returns.
We apply the equity method of accounting for our investments in joint ventures
and other investees whenever we can exert significant influence on the investee
but do not have effective control over the investee. Our consolidated net income
includes our share of the net earnings or losses from these investees. Our
judgment regarding the level of influence over each equity method investee
includes considering factors such as our ownership interest, board
representation and policy making decisions. We periodically evaluate these
equity investments for potential impairment where a decline in value is
determined to be other than temporary. We eliminate all significant intercompany
transactions from financial results.
Revenue Recognition. Advance ticket sales and event-related revenues for future
events are deferred until earned, which is generally once the events are
conducted. The recognition of event-related expenses is matched with the
recognition of event-related revenues.
NASCAR contracts directly with certain network providers for television rights
to the entire NASCAR Sprint Cup, Nationwide and Camping World Truck series
schedules. Event promoters share in the television rights fees in accordance
with the provision of the sanction agreement for each NASCAR Sprint Cup,
Nationwide and Camping World Truck series event. Under the terms of this
arrangement, NASCAR retains 10.0 percent of the gross broadcast rights fees
allocated to each NASCAR Sprint Cup, Nationwide and Camping World Truck series
event as a component of its sanction fees and remits the remaining 90.0 percent
to the event promoter. The event promoter pays 25.0 percent of the gross
broadcast rights fees allocated to the event as part of awards to the
competitors.
Our revenues from marketing partnerships are paid in accordance with negotiated
contracts, with the identities of partners and the terms of sponsorship changing
from time to time. Some of our marketing partnership agreements are for multiple
facilities and/or events and include multiple specified elements, such as
tickets, hospitality chalets, suites, display space and signage for each
included event. The allocation of such marketing partnership revenues between
the multiple elements, events and facilities is based on relative fair value.
The sponsorship revenue allocated to an event is recognized when the event is
conducted.
Revenues and related costs from the sale of merchandise to retail customers,
internet sales and direct sales to dealers are recognized at the time of sale.
Accounts Receivable. We regularly review the collectability of our accounts
receivable. An allowance for doubtful accounts is estimated based on historical
experience of write-offs and future expectations of conditions that might impact
the collectability of accounts.
Business Combinations. All business combinations are accounted for under the
purchase method. Whether net assets or common stock is acquired, fair values are
determined and assigned to the purchased assets and assumed liabilities of the
acquired entity. The excess of the cost of the acquisition over fair value of
the net assets acquired (including recognized intangibles) is recorded as
goodwill. Business combinations involving existing motorsports entertainment
facilities commonly result in a significant portion of the purchase price being
allocated to the fair value of the contract-based intangible asset associated
with long-term relationships manifest in the sanction agreements with
sanctioning bodies, such as NASCAR, Grand American and/or Indy Racing League
("IRL"). The continuity of sanction agreements with these bodies has
historically enabled the facility operator to host motorsports events year after
year. While individual sanction agreements may be of terms as short as one year,
a significant portion of the purchase price in excess of the fair value of
acquired tangible assets is commonly paid to acquire anticipated future cash
flows from events promoted pursuant to these agreements which are expected to
continue for the foreseeable future and therefore, in accordance with SFAS
No. 141, are recorded as indefinite-lived intangible assets recognized apart
from goodwill.
Capitalization and Depreciation Policies. Property and equipment are stated at
cost. Maintenance and repairs that neither materially add to the value of the
property nor appreciably prolong its life are charged to expense as incurred.
Depreciation and amortization for financial statement purposes are provided on a
straight-line basis over the estimated useful lives of the assets. When we
construct assets, we capitalize costs of the project, including, but not limited
to, certain pre-acquisition costs, permitting costs, fees paid to architects and
contractors, certain costs of our design and construction subsidiary, property
taxes and interest.
We must make estimates and assumptions when accounting for capital expenditures.
Whether an expenditure is considered an operating expense or a capital asset is
a matter of judgment. When constructing or purchasing assets, we must determine
whether existing assets are being replaced or otherwise impaired, which also is
a matter of judgment. Our depreciation expense for financial statement purposes
is highly dependent on the assumptions we make about our assets' estimated
useful lives. We determine the estimated useful lives based upon our experience
with similar assets, industry, legal and regulatory factors, and our
expectations of the usage of the asset. Whenever events or circumstances occur
which change the estimated useful life of an asset, we account for the change
prospectively.
Interest costs associated with major development and construction projects are
capitalized as part of the cost of the project. Interest is typically
capitalized on amounts expended using the weighted-average cost of our
outstanding borrowings, since we typically do not borrow funds directly related
to a development or construction project. We capitalize interest on a project
when development or construction activities begin and cease when such activities
are substantially complete or are suspended for more than a brief period.
Impairment of Long-lived Assets, Goodwill and Other Intangible Assets. Our
consolidated balance sheets include significant amounts of long-lived assets,
goodwill and other intangible assets. Our intangible assets are comprised of
assets having finite useful lives, which are amortized over that period, and
goodwill and other non-amortizable intangible assets with indefinite useful
lives. Current accounting standards require testing these assets for impairment,
either upon the occurrence of an impairment indicator or annually, based on
assumptions regarding our future business outlook. While we continue to review
and analyze many factors that can impact our business prospects in the future,
our analyses are subjective and are based on conditions existing at, and trends
leading up to, the time the estimates and assumptions are made. Actual results
could differ materially from these estimates and assumptions. Our judgments with
regard to our future business prospects could impact whether or not an
impairment is deemed to have occurred, as well as the timing of the recognition
of such an impairment charge. Our equity method investees also perform such
tests for impairment of long-lived assets, goodwill and other intangible assets.
Self-Insurance Reserves. We use a combination of insurance and self-insurance
for a number of risks including general liability, workers' compensation,
vehicle liability and employee-related health care benefits. Liabilities
associated with the risks that we retain are estimated by considering various
historical trends and forward-looking assumptions related to costs, claim counts
and payments. The estimated accruals for these liabilities could be
significantly affected if future occurrences and claims differ from these
assumptions and historical trends.
Income Taxes. The tax law requires that certain items be included in our tax
return at different times than when these items are reflected in our
consolidated financial statements. Some of these differences are permanent, such
as expenses not deductible on our tax
return. However, some differences reverse over time, such as depreciation
expense, and these temporary differences create deferred tax assets and
liabilities. Our estimates of deferred income taxes and the significant items
giving rise to deferred tax assets and liabilities reflect our assessment of
actual future taxes to be paid on items reflected in our financial statements,
giving consideration to both timing and probability of realization. Actual
income taxes could vary significantly from these estimates due to future changes
in income tax law or changes or adjustments resulting from final review of our
tax returns by taxing authorities, which could also adversely impact our cash
flow.
In the ordinary course of business, there are many transactions and calculations
where the ultimate tax outcome is uncertain. Accruals for uncertain tax
positions are provided for in accordance with the requirements of FASB
Interpretation No. 48, "Accounting for Uncertainty in Income Taxes." Under this
interpretation, we may recognize the tax benefit from an uncertain tax position
only if it is more likely than not that the tax position will be sustained on
examination by the taxing authorities, based on the technical merits of the
position. The tax benefits recognized in the financial statements from such a
position should be measured based on the largest benefit that has a greater than
50.0 percent likelihood of being realized upon the ultimate settlement. This
interpretation also provides guidance on de-recognition of income tax assets and
liabilities, classification of current and deferred income tax assets and
liabilities, accounting for interest and penalties associated with tax
positions, and income tax disclosures. Judgment is required in assessing the
future tax consequences of events that have been recognized in our financial
statements or tax returns. Although we believe the estimates are reasonable, no
assurance can be given that the final outcome of these matters will not be
different than what is reflected in the historical income tax provisions and
accruals. Such differences could have a material impact on the income tax
provision and operating results in the period in which such determination is
made.
Derivative Instruments. From time to time, we utilize derivative instruments in
the form of interest rate swaps and locks to assist in managing our interest
rate risk. We do not enter into any interest rate swap or lock derivative
instruments for trading purposes. We account for the interest rate swaps and
locks in accordance with Statement of Financial Accounting Standard ("SFAS")
No. 133 "Accounting for Derivative Instruments and Hedging Activities," as
amended.
Contingent Liabilities. Our determination of the treatment of contingent
liabilities in the financial statements is based on our view of the expected
outcome of the applicable contingency. In the ordinary course of business we
consult with legal counsel on matters related to litigation and other experts
both within and outside our company. We accrue a liability if the likelihood of
an adverse outcome is probable and the amount of loss is reasonably estimable.
We disclose the matter but do not accrue a liability if either the likelihood of
an adverse outcome is only reasonably possible or an estimate of loss is not
determinable. Legal and other costs incurred in conjunction with loss
contingencies are expensed as incurred.
Discontinued Operations
Nazareth Speedway
After the completion of Nazareth Speedway's ("Nazareth") fiscal 2004 events we
discontinued its motorsports event operations. The NASCAR Nationwide Series and
IRL IndyCar Series events, then conducted at Nazareth, were realigned to other
motorsports entertainment facilities within our portfolio. The property on which
the former Nazareth Speedway was located continues to be marketed for sale. For
all periods presented, the results of operations of Nazareth are presented as
discontinued operations.
Impairment of Long-Lived Assets
New York Metropolitan Speedway Development
In connection with our efforts to develop a major motorsports entertainment
facility in the New York metropolitan area, our subsidiary, 380 Development,
LLC, purchased a total of 676 acres located in the New York City borough of
Staten Island in early fiscal 2005 and began improvements including fill
operations on the property. In December 2006, we announced its decision to
discontinue pursuit of the speedway development on Staten Island. In May 2007,
we entered into a Consent Order with the New York Department of Environmental
Conservation ("DEC") to resolve certain issues surrounding the fill operations
and the prior placement of fill at the site that contained constituents above
regulatory thresholds. The Consent Order required us to remove non-compliant
fill pursuant to an approved comprehensive fill removal plan, and to pay a
penalty to DEC of $562,500, half of which was paid in May 2007 and the other
half of which was suspended so long as we complied with the terms of the Consent
Order. During the second quarter of fiscal 2009 the DEC notified us that we had
complied with the terms of the Consent Order and that we had no further
obligations under the Consent Order. The property is currently marketed for sale
and the Company has received interest from multiple parties.
Equity and Other Investments
Motorsports Authentics
We are partners with Speedway Motorsports, Inc. in a 50/50 joint venture, SMISC,
LLC, which, through its wholly-owned subsidiary Motorsports Authentics, LLC
conducts business under the name Motorsports Authentics ("MA"). MA is a leader
in design, promotion, marketing and distribution of motorsports licensed
merchandise.
Our 50.0 percent portion of MA's operating results was equity in net loss of
approximately ($1.7) million for the three months ended May 31, 2009 as compared
to equity in net income of approximately $3.0 million for the same period of the
prior
year and equity in net loss of approximately ($3.3) million for the six months
ending May 31, 2009 as compared to equity in net income of approximately
$4.8 million for the same period of the prior year and are included in Equity in
Net Income (Loss) From Equity Investments in our consolidated statements of
operations. MA's performance in 2008 benefited significantly from product sales
associated with a new team, car number and sponsor for MA's most significant
license and, primarily in the first fiscal quarter of 2008, the 50th running of
the Daytona 500. MA did not benefit from similar unique opportunities for the
sale of licensed merchandise in the same fiscal periods of 2009. In addition,
MA's performance has been impacted by unprecedented adverse economic trends,
particularly the decline in consumer confidence and the rise in unemployment
that began to manifest in early fiscal 2008 and has increasingly contributed to
the decrease in attendance for motorsports entertainment events during the three
and six months ended May 31, 2009. As with our core business, we expect these
adverse economic trends to continue at least through fiscal 2009.
MA designs, markets and distributes officially licensed motorsports merchandise,
including die-cast scaled replicas of motorsports vehicles, apparel and
memorabilia, through a variety of retail and wholesale channels, including
trackside at racing events, specialty retailers, and mass retail department
stores and chains. MA excels in the distribution of merchandise trackside at
racing events and to certain specialty retailers. Additionally, MA is considered
"best in class" in the design and distribution of NASCAR die-cast vehicles. Both
are areas in which we expect MA to maintain and grow its leadership position for
the foreseeable future. Other channels of distribution include licensed apparel
and memorabilia to mass retailers. In recent months, MA management and ownership
have considered various approaches to optimize performance in these distribution
channels. As the challenges have been assessed, it has become apparent that
there is significant risk in future business initiatives in mass apparel,
memorabilia and other yet to be developed products. These initiatives had
previously been deemed achievable and were included in projections that
supported the carrying value of inventory, goodwill and other intangible assets
on MA's balance sheet. This analysis, combined with a long-term macroeconomic
outlook that is now believed to be less robust than previously expected,
triggered MA's review of certain assets under SFAS 142 and 144. MA's management
is currently performing an evaluation of the level of impairment on its
goodwill, intangible and other long-lived assets, which is expected to be
completed within the next one to three months. We have evaluated our carrying
value of our equity investment in MA at May 31, 2009, in accordance with
Accounting Principles Board Opinion ("APB") 18, "The Equity Method of Accounting
for Investments in Common Stock."
The inputs to measure the fair value of MA are considered Level 3 inputs in
accordance with SFAS 157, "Fair Value Investments" as quoted market prices are
not available. We determined the fair value of our equity investment in MA with
the assistance of an independent valuation firm. The valuation analysis was
based on discounted cash flows using the income valuation approach, where annual
future cash flows are estimated and discounted to present value. The valuation
analysis was based on market participant assumptions which included but was not
limited to the following:
• a re-evaluation of the long-term forecasts related to the mass apparel,
memorabilia and other yet to be developed products, given the previously
discussed changes in the business occurring in the fiscal 2009 second
quarter;
• current economic conditions affecting sales and distribution, with a moderate one to two year recovery;
• perpetuity growth rates comparable to economic projections, GDP and CPI;
• contracted sales, expenses and other commitments representative of contractual terms;
• historical buying patterns of customers in the respective channels of distribution;
• management's actions to reduce variable and fixed product and overhead costs; and
• probability weighting of multiple cash flow scenarios that reflect MA's future risk-adjusted growth opportunities.
The discount rate used in the valuation was developed based on market
participant assumptions relating to the weighted average cost of capital
analysis, including the after-tax cost of outstanding and projected debt, and
cost of equity. The cost of equity was derived based on the capital asset
pricing model, which included consideration for the small company risk premium.
As a result of the evaluation performed under APB 18 and SFAS 157, we recognized
an impairment charge of $55.6 million or $1.14 per diluted share after tax,
which is included in our equity investment losses for the fiscal quarter ended
May 31, 2009.
ISC remains committed to the long-term success of MA. As with any business in
this adverse economic environment, management must find the optimal business
model for long-term viability. In addition to revisiting the business vision for
MA, management, with support of ownership, is also undertaking certain
initiatives to improve inventory controls and buying cycles, as well as
implementing changes to make MA a more efficiently operated and profitable
company. We believe a revised MA business vision with focus on its core
competencies along with streamlined operations, reduced operating costs and
inventory risk, will result in a leaner and more profitable operation in the
future.
Stock Purchase Plans
An important component of our capital allocation strategy is returning capital
to shareholders. We have solid operating margins that generate substantial
operating cash flow. Using these internally generated proceeds, we have returned
a significant amount of capital to shareholders primarily through our share
repurchase program.
In December 2006 we implemented a share repurchase program under which we are
authorized to purchase up to $150.0 million of our outstanding Class A common
shares. In February 2008 we announced that our Board of Directors had authorized
an incremental $100.0 million share repurchase program. Collectively these
programs are described as the "Stock Purchase Plans." The Stock Purchase Plans
allow us to purchase up to $250.0 million of our outstanding Class A common
shares. The timing and amount of any shares repurchased under the Stock Purchase
Plans will depend on a variety of factors, including price, corporate and
regulatory requirements, capital availability and other market conditions. The
Stock Purchase Plans may be suspended or discontinued at any time without prior
notice. No shares have been or will be knowingly purchased from Company insiders
or their affiliates.
In September 2008, we suspended purchases under the Stock Purchase Plans as a
result of our desire to build cash balances due to the challenges facing the
credit markets. In June 2009, we reactivated the Stock Purchase Plans.
Since inception of the Stock Purchase Plans through May 31, 2009, we have
purchased 4,730,479 shares of our Class A common shares, for a total of
approximately $208.0 million. There were no purchases of our Class A common
shares during the fiscal period ended May 31, 2009. At May 31, 2009, we have
approximately $42.0 million remaining repurchase authority under the current
Stock Purchase Plans.
Income Taxes
Settlement with the Internal Revenue Service
Effective May 28, 2009, we entered into a definitive settlement agreement (the
"Settlement") with the Internal Revenue Service (the "Service") in connection
with the previously disclosed federal income tax examination for the 1999
through 2005 fiscal years. As a result of the Settlement, on June 17, 2009, we
received approximately $97.4 million of the $117.9 million in deposits that we
had
previously made with the Service, beginning in fiscal 2005, in order to prevent
incurring additional interest. In addition, we received approximately
$14.6 million in cash for interest earned on the deposited funds which were
ultimately returned to us. Our fiscal 2009 second quarter results reflect this
interest income, net of tax, totaling approximately $8.9 million, or $0.18 per
diluted share, in the income tax expense of our consolidated statement of
operations.
The Settlement concludes an examination process the Service opened in fiscal
2002 that challenged the tax depreciation treatment of a significant portion of
our motorsports entertainment facility assets. We believe the Settlement reaches
an appropriate compromise on this issue. As a result of the Settlement, we are
currently pursuing settlements on similar terms with the appropriate state tax
authorities. Under these terms, we expect to pay between $6.0 million and
$9.0 million in total to finalize the settlements with the various states. We
believe that we have provided adequate reserves related to these various state
matters including interest charges through May 31, 2009, and, as a result, do
not expect that such an outcome would have a material adverse effect on results
of operations.
Effective Income Tax Rates
The tax exempt nature of a non-cash charge to correct the carrying value of
certain other assets in the first quarter of fiscal 2008 is the principal cause
of the increased effective income tax rate during the six months ended May 31,
2008. The tax treatment primarily as a result of the uncertainties associated
with the losses incurred in our equity investments, partially offset by the
reduction in income taxes due to the interest income related to the Settlement
with the Service, are the principal causes of the decreased and increased
. . .
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