CHAMPIONSHIP AUTO RACING TEAMS, INC. Teleconference, February 9, 2001 T.E. McHALE: We have a huge turnout on this call. The reason we are all gathered as you probably are aware is that roughly an hour ago, CART announced that the race,...
CHAMPIONSHIP AUTO RACING TEAMS, INC. Teleconference, February 9, 2001
T.E. McHALE: We have a huge turnout on this call. The reason we are all gathered as you probably are aware is that roughly an hour ago, CART announced that the race, the Rio 200 scheduled for March 25th at Nelson Piquet International Raceway has been cancelled. The CART season will now consist of 21 rather than 22 events in seven countries, still a record number, I should point out. Twenty-one is as many races as we've ever run in any given year.
I am joined by Joseph Heitzler, the president and CEO of Championship Auto Racing Teams, who will take your questions in a moment.
Before we begin taking questions, I would like to let you know, remind you again, there are a large number of people on this call. Our operators are going to be taxed somewhat in finding you. After I call upon you, if you could wait please after I call for a question until the operator gives you the go-ahead to begin speaking, I would appreciate it.
And with that, we will begin taking questions for Joe.
Can you give us some background on what finally caused it to be cancelled?
Joseph Heitzler: What led us to take this action today is that we had come to a point in our preparations for the race where we were not receiving any response at all of a responsible nature from the mayor's office in Rio. This is the number one reason why today we had to agree with other individuals involved in this. Emerson Fittipaldi was here in the office today and has left to go back to Brazil, but we concluded by the inappropriate and at times non-response from the mayor's office that we had no other option but to do that today.
What impact do you think this will have, the cancellation and the fact that you won't be getting the sanctioning fee?
Joseph Heitzler: I have here with me today Tom Carter, our CFO, and I'm going to direct that question to him.
<B>TOM CARTER</B>: Right at this point, we just had discussions with Emerson, and we are not in a position where we can give out the financial implications until we finalize those discussions with Emerson, and as soon as we do, then we will let you know and we'll let everyone else know.
<B>Can you tell us, just looking historically, what it might have done last year?
<B>TOM CARTER</B>: We don't give out individual sanction fee amounts. That's kind of our company policy for obvious reasons. So as soon as we can nail down the exact amount of the financial implications, then we will have another press release that will let everybody know.
<B>Was there ever any thought given to replacing this event on your calendar, plugging in something else in place of the Rio race?
Joseph Heitzler</B>: Obviously, there was, but we have been very dutiful because of -- we wanted the Rio race. This is a race that is very important to CART. It is very important to our Brazilian drivers. It is very important to our fans. I should note that this year we had cleared over 200 stations throughout the world that would have received the signal of this race. So that having been said, we felt that this morning was the first reality check of it could not happen due to the inability of the mayor to carry on meaningful discussions. We came to the conclusion this morning that the mayor of Rio, in essence, does not want the race. Now you may ask, what are some of the factors behind that. In addition to ourselves, the mayor has also cancelled a major international motorcycle race. In addition to that, the mayor also did not allow any signage during Carnival this year. The mayor has taken it upon himself to do some sort of sports cleansing in the Rio city. So, we find that to be not in keeping with the agreement that he proposed in the beginning. And one of the other confusing issues is that this mayor, in a previous administration, was the advocate of building the racetrack at the cost of some-odd $40 million dollars, and since that time has put in over $20 million of improvements, lost an election, has now rewon the seat of the mayoral office and now all of the sudden has a distaste for auto racing. So we find that to be most peculiar.
<B>You mention the inappropriate responses, I guess at times. It sounds like the guy just didn't even take this seriously. Is that the impression you got? Is he just blowing you off pretty much or are how does that come about? Joseph Heitzler</B>: That's a very astute observation. I want to quickly answer the first one you had. We were precluded because of our dedication to making this race happen, and the importance of this race, to all of our constituencies. We were not allowed to take any calls during the period of this time from track promoters that would like to replace this race in their location. So we have not been allowed, because of our contractual obligations, to talk to anybody regarding this. And, in fact, up until an hour or so ago, we were dedicated to trying to find a way to resolve this. So my opinion of the situation is I've been blessed with 30-some-odd years in the sports broadcasting entertainment business, and I find this activity to be one of the most immature activities I have ever dealt with in my entire career.
<B>Does this mean that you will likely not go back to Rio in the future or is it still open that you would go back?
Joseph Heitzler</B>: We have every intention through our promoter in Brazil, Mr. Fittipaldi, a man of incredible integrity and reputation in auto racing to find a way to go to Brazil. There has been a tremendous amount of interest in continuing this, and when he left here today, we left with a handshake that we will exercise all of our means to continue our racing in Brazil, albeit, the mayor has decided to interrupt what was becoming one of our most popular races on our schedule.
<B>The mayor of the City of Rio de Janeiro, told our newspaper yesterday that the contract of CART with the city was paid twice by the city in the years '97, '98 and '99. I want to know if this is true. Joseph Heitzler</B>: It is absolutely, categorically untrue, immature, unfounded, unprofessional and borders on illegal.
<B>So that's not the truth? Joseph Heitzler</B>: It is not the truth. It is not the truth. We are a publically-traded company on the New York Stock Exchange that has auditors and investors and published quarterly reports and 10K's, and there have been no double payments to CART at all, period. It is not true.
<B>Let me reward a bit what the gentlemen in Rio said and maybe it come as cross a little differently. In the report that was run down there yesterday, they stated that the sanctioning fee from 2000 to 2001 more than doubled, and that was why the mayor elected not to pursue interest in the race. Can you tell us if that is true or not? Joseph Heitzler</B>: That is not true.
<B>And also, now that you are open to negotiate with other facilities, there's certainly plenty of tracks that I'm sure would love to host a CART event this year. Is that still a possibility?
Joseph Heitzler</B>: That is a possibility, but it is a possibility that we only begun to think of short of an hour ago. So we will be exploring all of our options over this weekend and during the course of next week.
<B>I was thinking if there is any possibility of Phoenix or some other American race could be substituted for that one, and in case -- I don't know how many years it would be the mayor in charge, when he finishes and somebody else comes, there is a possibility that you will go back to Rio?
Joseph Heitzler</B>: The process in Rio is a good question. I'm told by our law firm there that you are allowed to occupy the office for four years before you are up for reelection. We would hope to have our return to Brazil announced way in advance of that termination of that candidacy. As it relates to other tracks to go to, I'll be meeting later this afternoon with the president of our racing operations division, Hal Whiteford and we'll be exploring all of the available options that we have.
<B>When did communication break off and what was the point at which it broke off? Joseph Heitzler</B>: That's a good question. We never -- our law firm that's in Rio representatives that we sent to Rio from our staff here at CART were told on many occasions that we would -- we would actually have a direct meeting with the mayor, but as I speak to you now, those meetings never took place. We had meetings with officials at the federal government, we had meetings with officials at the state government; and the mayor kept us for three days saying he would meet with us, but he never met with us. It was always through an intermediary or through one of his relatives.
<B>Who went down, Joe, yourself and who else? Joseph Heitzler</B>: We had a gentlemen here who -- by the name of Tim Mayer, who is a senior executive in our company and our racing operations who is -- speaks Portuguese, is a very qualified and very well rounded executive in our company, speaks Portuguese, and also is personal friends with a lot of the sponsors, the TV companies, and with the Fittipaldi company, and he was there for the entire process and participated at all of the meetings at the federal level, the state level, and as I previously mentioned, stood by for four or five announced meetings with the mayor that the mayor did not -- did not come to.
<B>Emerson Fittipaldi had suggested to you any other -- inaudible. Joseph Heitzler</B>: Yes, he did, today. He mentioned four of them to me, just one second and I will get the list. One was Brasilia, Curitiba, Goiania, and the other one escapes my memory at the moment, but I would be more than happy to get it and get it to you.
<B>And are you planning to send someone to visit and see if they have condition to hope a CART event?
Joseph Heitzler</B>: In the previous years, we have looked at other tracks thinking that we would go to other areas in Brazil. I don't have an update on the report of those, but obviously, Tim Mayer will be talking this over with Hal Whiteford this weekend, and we'd be able to let you know some time next week.
<B>Was this the final year of CART's contract with the Rio promoters? Joseph Heitzler</B>: No, it was not.
<B>And if so, you know, what kind of options do you think CART has in terms of having the contract fulfilled? Joseph Heitzler</B>: Because of the manner in which CART was treated by the mayor's office, and what we feel is his inability to understand the seriousness of and the ramifications of and the economic aspects of his actions, we are going to pursue very vigorously all legal options available to us, and we will pursue those beginning today.
<B>I'm looking at the CART.COM site and the page where the news release is there and next to if as an ad from computer association, if you were to see down the road and anticipate pitfalls sooner. This Rio-race-in-danger story has been around for a while. Why did it take so long to cancel this race?
Joseph Heitzler</B>: It took so long to cancel this race because we exercised absolutely 1,000 percent energy to find, first of all, why the mayor was cancelling the race; number, two, in the state and/or federal government could step in and encourage the mayor to acquiesce to the terms and conditions of his agreement, and also to meet with all of the sponsors and related parties that have a vested interest in seeing this race go as scheduled.
<B>There's always of these Brazilian sponsors down there. Have any of them suggested that they might be able to step in and solve this problem with the city?
Joseph Heitzler</B>: We met with -- you can imagine Emerson Fittipaldi is a national sports figure and hero and respected businessman in Brazil, and along with Tim Mayer from CART, we met with and were on the phone with a majority of those sponsors. And those sponsors, when the mayor ordered this administrative quote unquote suspension/review, they have schedules of marketing, funding, etc., And knowing Brazilian politics, probably felt that this was going to be a protracted situation and waited along with us to the point where they saw the mayor not responding in a like fashion decided that they were no longer going to stand behind the race this year.
<B>Do you feel that the response was not based not just upon money? Do you think there was any type of political issue behind him?
Joseph Heitzler</B>: I'm not a student of Brazilian politics, but my business instincts suggest that there was more to this than just the financial issues.
<B>I just want to know what Emerson Fittipaldi's mood and response was during your meeting today?
Joseph Heitzler</B>: His mood and his response, first of all, I would say that he feels that this is a great embarrassment for all of Brazil. And secondly, he feels obligated to CART and to the CART owners and drivers and specifically to these young Brazilian drivers who have patterned their lives after Emerson, who paved the way for their careers to be as productive as they are today, he feels that he owes it to all of these constituencies that he proceed forward, albeit there's this cancellation this year, he is very dedicated and left here today with the spirit that he would like to continue the race in 2002 and 2003.
<B>Considering these four circuits which Emerson has talked about as a possibility, if it would be maybe possible to create a new date during this season and make the Brazilian stage in one of these other circuits?
Joseph Heitzler</B>: That's what we will be discussing this weekend with our racing operations department.
<B>And even if small, there is still a possibility? Joseph Heitzler</B>: At this moment, I want to make sure that any opportunity to go to Brazil will be explored, and that includes, you know, reviewing and looking at alternate tracks to go to.
<B>The mayor has said that he has been prevented from paying the -- (inaudible) --by the law of fiscal responsibility which went into effect on January 1. First, how does CART assess of validity of the characterization of that law? And as a follow-up, can you tell us why after signing a contract in 1996 which covered the races through 1999, why was a new contract executed in 1997? And finally, what do you think was the influence of Emerson having appeared in television ad in Brazil for the man that Mayor Maia defeated?
Joseph Heitzler</B>: Which of those questions would you like answered?
<B>The law of fiscal responsibility, doesn't that prevent the mayor from paying the sanctioning fee? Joseph Heitzler</B>: They are all good questions. I am not, in the last hour -- there are a host of things I'm going to learn more about in the next four or five days, and the law of fiscal responsibility is, obviously, going to be one of those. I'm not familiar with all of the Brazilian nuances with that fiscal responsibility.
<B>I can certainly understand that, but not knowing that, is it fair to characterize the mayor's actions as irresponsible and immature? Joseph Heitzler</B>: I have a contract. I have race teams ready to go. I have sponsors ready to go. We have a television package ready to go. If this was important to the mayor, it was important enough to the president of the country, the secretary of tourism, the secretary of sport, and the governor of the state in which Rio is in for them to meet with us directly, but not important enough for the mayor to meet with us, and if we had met with him and had secured the meeting, Tim Mayer would have asked him about the law of fiscal responsibility.
<B>Your points are very well taken, Mr. Heitzler. I would like to know if you could address why a new contract was executed in 1997 when you already had a four-year contract in place?
Joseph Heitzler</B>: I would probably have to get back to you on that, because, as you know, I arrived here in December. I'm not familiar with all of the details of what transpired in '96 and'97, but I'll become more familiar with them as the weekend and next week comes about.
<B>Certainly a fair answer and I certainly appreciate the situation that you personally find yourself in, because of your newness on the job. Because it is a point being made repeatedly by the Brazilian press, I would appreciate an ultimate answer to that. Thank you very much.
Joseph Heitzler</B>: Thank you, Forest.
<B>I'm wondering if this would impact sponsorship support that the CART drivers and teams enjoy from Brazilian and South American sponsors?
Joseph Heitzler</B>: The answer to that question is regrettably, yes, it will, and that's the tragedy of this whole situation, and ergo, why I have said, I don't understand why this mayor would not want to sit down and resolve all of these issues.
<B>And is it fair to say that at this point, it is not possible for a consortium of marketers to get together and save this thing this year?
Joseph Heitzler</B>: First of all, we've tried to do that. We will continue to do that. But now we have an issue where the mayor has not given us access to the track, and that has been an operative of his since, I think we first got the letter on a Thursday afternoon of the administrative suspension review.
<B>If I could have the mayor's name and spelling of his name, I sure would appreciate that.
Joseph Heitzler</B>: Maia.
<B>That's his last name? Joseph Heitzler</B>: That's his last name.
<B>Do you have his first name? Joseph Heitzler</B>: Yes. His first name is Cesar.
<B>If the public outcry in Brazil is strong enough to force the mayor to maybe reverse his decision and he invited you back, would you go back this year, or has this left such a distaste in your mouth that you would not consider going back to that track this year?
Joseph Heitzler</B>: In my job as CEO, the constituents that I represent retained me so the only taste I would have in my mouth is their best interests, and so I would personally help load the cars and the boxes to have this race happen. Assuming that at this particular time, the mayor will assure us that the track will be in the condition where racing operations knows that we can have a race that the drivers will be competitive in, and also be safe in.
<B>Assuming that that did happen, which is very unlikely, would CART consider running on the oval again this year, rather than the road course, assuming there would not be time to prepare a road course for this race?
Joseph Heitzler</B>: I have sitting here, Hal Whiteford, who is president of racing operations and I'll let him answer that question for you. Hal Whiteford: Good afternoon. Assuming that the necessary suppliers, being the chassis manufacturers, engine suppliers and, of course, our good friends at Firestone had the proper inventory, we would certainly consider that and would be able to run on the oval if all of our suppliers could supply us the appropriate materials. I don't think that that would be a problem.
<B>Very briefly, what does this do to the status of the letter of credit that is outstanding with the City of Rio?
Joseph Heitzler</B>: They have not posted their letter of credit, and we will pursue that through all of the legal channels that are available to us.
<B>Does the City of Rio owe CART any money from past races or do you know, are they up to date on payment? TOM CARTER</B>: The City does not owe us any money from past obligations.
<B>Certainly, there's been a lot of speculation about the other tracks and it has been answered already. Joe, is that your first priority, to prior to pick another track in Brazil for this year if at all possible?
Joseph Heitzler</B>: I think my first priority now is to look at all of the options which we will be doing this weekend, as I said, and I think the options are both in Brazil and in the United States.
<B>About what time of the year did the red flag go up that there might be a problem with staging the Brazilian race? Joseph Heitzler</B>: When the letters of credit were not posted, and I believe they were due, I think it was the first week in December.
<B>The testing rule for this year is cut off on the 1st of March in view of the fact that we have a rather large hole between Mexico and Long Beach. Would you relook at the testing program? Joseph Heitzler</B>: I'm going to let Hal Whiteford handle that. Hal Whiteford: All of our calculations for all usage have been based on the race on Rio just happening, and as Joe just said, it was only an hour ago. Certainly, we would entertain the idea of possibly opening up some additional testing, since we have so many new teams, we have so many rookies, but right now would be way too early to commit to that. We have to talk with everyone and see what is going on.
<B>With all of the options -- and the initial opening statement was that it is a 21-race schedule now. There is no consideration of putting anything in between Mexico and Long Beach?
Hal Whiteford</B>: We have to look at that this weekend. It is a 21-race schedule as of today.
<B>I want to know if there is a possibility of still having a race in one of these other four circuits here in Brazil still this year?
Joseph Heitzler</B>: We are certainly going to look into that this weekend.
<B>Emerson had stated that there was a $2 million shortfall. Was it ever an option for CART to take a reduced sank fee for this year?
Joseph Heitzler</B>: This was not a -- strictly a financial decision. We were more than willing to deal with any of the financial and economic issues that the mayor had or sponsors had. What it became in the last two and a half weeks is an access issue. We told the mayor, while we're talking to your representatives, why don't you give us access? In fact, the FIA inspector game to Brazil and as you know we need his certification in order to run a race. He was denied access to the track. So the matter, once again, out of our hands. But it is also an issue of access, as much, if not more, than the financial issues.
<B>For Tom, what about the $2.8 million note? TOM CARTER</B>: It is a $2.4 million note, and we are in discussions with Emerson, and it is premature to speak about that at this point.
<B>What impact, and have you spoken with some of the larger Brazilian firms that are involved on a sponsorship basis, as to what the cancellation of the Rio race will mean in terms of existing contracts?
Joseph Heitzler</B>: I think the issue that we've left the sponsors with is there is concern about this as us, and as confused about the mayor's demeanor as us, and if we can resolve the problems with the mayor and he gave us access, they would be more than willing to proceed forward. Emerson is on his way back to Brazil, and it is my understanding on Monday and Tuesday, he will be meeting with his sponsorship portfolio people to discuss these actions or interactions of the mayor.
<B>This may have been addressed, but is there now or would there be a possibility of still continuing to have the race at Rio, presuming that things all of the sudden mystically and magically were, you know, healed?
Joseph Heitzler</B>: I have dedicated an enormous amount of my time and the staff's time to this, because the Rio and the Brazilian market is so important to CART, and we would dedicate the same amount of energy if the mayor would call us this afternoon or tomorrow and say, "Let's do this race," but he has not done that for three and a half to four weeks. So we, as a company that is traded on the New York Stock Exchange, have obligations to our constituencies to run a professional company, and we've had to conclude that we need to move forward. <B>T.E. McHALE</B>: We want to thank everyone who took the time to join us this afternoon, as well as Joseph Heitzler, Tom Carter and Hal Whiteford. Have a good weekend and we'll talk to you soon.