UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the fiscal year ended December 31, 1997
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from __________________ to
__________________
Commission File Number 0-9385
Bull Run Corporation
(Exact name of registrant as specified in its charter)
Georgia 91-1117599
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
4370 Peachtree Road, N.E., Atlanta, GA 30319
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (404) 266-8333
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports
to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. [ X ] Yes [ ] No
Indicate by check mark if disclosure of delinquent filers in response to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of the voting and non-voting common equity held
by non-affiliates as of February 27, 1998 was $41,613,845, based on the closing
price thereof on The Nasdaq Stock Market.
The number of shares outstanding of the registrant's Common Stock, par
value $.01 per share, as of February 27, 1998, was 22,090,223.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the following documents are incorporated by reference:
Documents Form 10-K Reference
1997 Annual Report to Shareholders Part II, Items 6, 7 and 8
Proxy Statement to be dated April 3, 1998 Part III, Items 10, 11, 12 and 13
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BULL RUN CORPORATION
FORM 10-K INDEX
PART I
Page
----
Item 1. Business......................................................... 3
Item 2. Properties....................................................... 8
Item 3. Legal Proceedings................................................ 8
Item 4. Submission of Matters to a Vote of Security Holders.............. 8
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters......................................... 9
Item 6. Selected Financial Data.......................................... 9
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 9
Item 8. Financial Statements and Supplementary Data...................... 9
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................... 10
PART III
Item 10. Directors and Executive Officers of the Registrant............... 10
Item 11. Executive Compensation........................................... 10
Item 12. Security Ownership of Certain Beneficial Owners and
Management.................................................. 10
Item 13. Certain Relationships and Related Transactions................... 10
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports
on Form 8-K................................................. 11
Signatures....................................................... 14
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PART I
Item 1. Business
General
Bull Run Corporation (the "Company"), a Georgia corporation, was originally
incorporated under the laws of the State of Washington under the name of Bull
Run Gold Mines, Ltd. The Company changed its name and state of incorporation in
December 1992, relocating its corporate office to Atlanta. Prior to selling its
interest in a joint venture in November 1990 for $6,000,000 in cash and the
discharge of its outstanding debt, the Company was a mineral resource company
which had been engaged in the business of developing and mining in Nevada
through the joint venture with another mining company.
In November 1994, the Company acquired by merger (the "Merger") Datasouth
Computer Corporation ("Datasouth"). Datasouth, located in Charlotte, North
Carolina, designs, manufactures and markets heavy-duty dot matrix and thermal
printers for vertical markets including transportation, distribution,
manufacturing and health care. Datasouth sells its products worldwide through
distributors and value-added resellers, and directly to large volume major
accounts. Since the Merger, Datasouth has operated as a wholly-owned subsidiary
of the Company.
In January 1998, Datasouth acquired all of the outstanding common stock and
membership interests of CodeWriter Industries, Inc. and its affiliate, CW
Technologies L.L.C. (collectively referred to as "CodeWriter). CodeWriter, which
was immediately merged into Datasouth, manufactures and sells thermal barcode
label printers used in industrial applications.
The Company, through Datasouth, owns approximately 17.0% of the class A
common stock ("Class A Common Stock") of Gray Communications Systems, Inc.
("Gray"), representing 27.6% of the voting interest in Gray, as of December 31,
1997. The Company also owns shares of series A and series B preferred stock of
Gray and warrants to purchase additional Gray Class A Common Stock. Parties
affiliated with the Company, including officers and directors of the Company and
companies of which they are principal shareholders and/or executive officers,
owned an additional 12.7% of Gray's outstanding Class A Common Stock as of
December 31, 1997, representing an additional 21.0% voting interest in Gray.
Gray is a communications company located in Albany, Georgia which currently
operates: (i) three NBC-affiliated television stations - WALB-TV in Albany,
Georgia; WJHG-TV in Panama City, Florida; WITN-TV, in the
Greenville-Washington-New Bern, North Carolina market, which was acquired during
1997; (ii) five CBS-affiliated television stations - WCTV-TV in Tallahassee,
Florida; WVLT-TV in Knoxville, Tennessee; WKYT-TV in Lexington, Kentucky;
WYMT-TV in Hazard, Kentucky; and WRDW-TV in Augusta, Georgia; (iii) three daily
newspapers, The Albany Herald in Albany, Georgia; The Rockdale Citizen in
Conyers, Georgia; and The Gwinnett Daily Post in Lawrenceville, Georgia; (iv)
two advertising weekly shoppers in Southwest Georgia and North Florida; (v)
Lynqx Communications, a satellite transmission and production services business,
which includes GulfLink Communications, Inc. in Baton Rouge, Louisiana, acquired
during 1997; and (vi) PortaPhone Paging, a communications and paging business in
the Southeast. Gray has also executed a definitive agreement to purchase all of
the outstanding common stock of Busse Broadcasting Corporation, the owner and
operator of KOLN-TV, a CBS affiliate in the Lincoln-Hastings-Kearney, Nebraska
market; its satellite station, KGIN-TV, a CBS affiliate in Grand Island,
Nebraska; and WEAU-TV, an NBC affiliate in the Eau Claire-La Crosse, Wisconsin
market. The acquisition is pending FCC approval. Gray reported revenue of $103.5
million in 1997 and had total assets of $345.0 million as of December 31, 1997.
J. Mack Robinson, the Company's Chairman of the Board, Robert S. Prather, Jr.,
the Company's President, chief executive officer and a director, and Hilton H.
Howell, Jr., the Company's Vice President, Secretary and a director, are members
of Gray's Board of Directors. Mr. Robinson is President and the chief executive
officer of Gray, and Mr. Prather is Executive Vice President - Acquisitions of
Gray. Frederick J. Erickson, the Company's Vice President - Finance and chief
financial officer, is the interim chief financial officer of Gray.
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The Company owns 51.5% of the outstanding common stock of Capital Sports
Properties, Inc. ("CSP"). CSP's assets consist of all of the outstanding 8%
cumulative preferred stock of Host Communications, Inc. ("HCI") and
approximately 49.0% of HCI's outstanding common stock. Since 1995, the Company
has also acquired HCI common stock in a series of transactions, resulting in
direct ownership of approximately 5.0% of HCI's outstanding common stock as of
December 31, 1997. When combined with the Company's pro rata ownership of HCI
common stock through CSP, the Company has an aggregate ownership of 30.2% of HCI
common stock as of December 31, 1997, effectively making it HCI's largest
stockholder. HCI, based in Lexington, Kentucky, provides multimedia, promotional
marketing and event management services to universities, athletic conferences
and associations, the most prominent of which is the National Collegiate
Athletic Association ("NCAA (R)"). HCI's total revenue for its most
recently completed fiscal year ended June 30, 1997 was $40.0 million and
total assets were $25.7 million as of such date.
In 1995, the Company purchased, for $650,000, convertible preferred stock
of Universal Sports America, Inc. ("USA"), representing 13.3% of USA's
outstanding preferred stock. The preferred stock owned by the Company is
convertible into USA common stock, representing approximately 3% of USA's
outstanding common stock after giving effect to such conversion. USA offers
corporate sponsorships, advertising and other promotional opportunities
involving college athletics and participatory sporting events, such as the
Hoop-It-Up(TM) 3-on-3 basketball tournaments. HCI owns approximately 33.8%
of USA's outstanding common stock. Mr. Prather is a director of HCI, CSP and
USA.
In November 1997, the Company entered into an Investment Purchase Agreement
with Rawlings Sporting Goods Company, Inc. ("Rawlings"). Pursuant to this
agreement, the Company acquired warrants to purchase 925,804 shares of Rawlings'
common stock, and has the right, under certain circumstances, to purchase
additional warrants. The warrants have a four year term and an exercise price of
$12.00 per share, but are exercisable only if Rawlings' common stock closes at
or above $16.50 for 20 consecutive trading days during the four year term. In
addition, under the terms of the agreement, the Company purchased 10.4% of the
outstanding shares of Rawlings' common stock in the open market from November
1997 through January 1998, of which, 5.0% was acquired through December 31,
1997. Simultaneously with the execution of the Investment Purchase Agreement,
Rawlings and HCI entered into a five year strategic marketing alliance, under
which HCI and Rawlings will jointly market and sell Rawlings' products primarily
through corporate promotions, local events and international programs.
Rawlings, headquartered near St. Louis, Missouri is a leading supplier of
team sports equipment in North America, operating eight manufacturing facilities
throughout the United States, Canada and Latin America, as well as distribution
centers in the United States and Canada. Rawlings' total revenue for its most
recently completed fiscal year ended August 31, 1997 was $147.6 million and
total assets were $101.3 million as of such date.
As of December 31, 1997, Datasouth represented 18.8% of the Company's total
assets; investments in Gray represented 56.9%; investments in HCI, CSP and USA,
collectively represented 15.7%; and investments in Rawlings represented 7.6%.
Principal Products and Markets
The Company, through Datasouth, designs, manufactures and markets
heavy-duty dot matrix and thermal printers for industrial applications,
generally selling under the "Datasouth" name. It has historically targeted the
heavy-duty, multipart forms segment of the serial matrix impact printer market
in vertical markets such as transportation/travel, healthcare and
manufacturing/distribution, but has also entered the industrial thermal printer
market through the development of a new Automated Ticket / Boarding Pass version
2 ("ATB2") printer for the travel industry, as well as the thermal barcode label
printer market, through its line of portable and desktop printers, some of which
were added as a result of the acquisition of Codewriter in January 1998. The
printer business is not seasonal to any significant degree.
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The Company's impact printers compete in the medium and high speed (i.e.,
300 to 600 characters per second, or "cps") serial impact dot matrix printer
markets. Datasouth's dot matrix products distinguish themselves from many lower
priced printers in their ability to print forms and reports as thick as nine
parts and to withstand rugged duty cycles. These printers are used primarily for
forms such as invoices, purchase orders, bills of lading, customs documents,
insurance documents, travel documents and patient admission forms. Datasouth
currently manufactures two dot matrix product families: Documax and the XL line.
A third line, Performax, was discontinued in 1997. Documax, a heavy-duty dot
matrix printer designed to provide maximum forms printing capabilities in a
minimum amount of space, is a narrow carriage printer intended for printing on
demand industry specific documents such as hotel bills, patient
admissions/discharge forms, airline tickets, packing slips and invoices. A
multipath printer for multipart forms, Documax offers a dual-tractor feature
which allows the operator to switch automatically from one form to another. The
original Documax versions print at speeds up to 333 cps and generate bar codes,
OCR and industrial graphics as well. In 1996, the Company began shipping a 600
cps version of Documax. "Documax" is a registered trademark of Datasouth. The XL
line is a family of medium speed wide carriage serial impact dot matrix printers
which operate at speeds ranging from 300 to 400 cps.
The Company also has provided a line of portable and desktop thermal
printers since 1994, with the introduction of the 4-inch wide portable
"FreeLiner", and added a desktop version of the printer, the "FreeLiner DT" in
1995. The Company has filed a trademark application for "FreeLiner". In 1996,
the Company began shipments of the "WinLiner," its first internally developed
and manufactured thermal printer, a portable 2-inch wide printer targeted at
label and receipt applications which also take advantage of "liner-free" label
adaptations. "Liner-free" labels has no silicone coated liner, offering several
advantages over conventional liner-backed labels, including more printable
labels per roll, superior print image and durability, and elimination of label
liner waste, resulting in lower cost of use and greater efficiency. In January
1998, Datasouth acquired CodeWriter, which designs and manufactures a line of
direct thermal and thermal transfer desktop and portable bar code label
printers. CodeWriter's product line includes the new 4500 Series of 4.25" print
width desktop thermal / thermal transfer barcode printers, and a 4.1" print
width portable thermal / thermal transfer barcode printer. Datasouth will
continue to market CodeWriter's products under the "CodeWriter" name, which is a
registered trademark of the Company.
The Company was awarded a contract by The SABRE Group in February 1997 to
develop and manufacture a new ATB2 airline ticket printer. In December 1997, the
Company began shipping to The SABRE Group the resulting product, "Journey", for
which the Company has filed a trademark application. This printer, which uses
thermal printing technology, was designed to be small, easy to use, and to have
a simpler design than currently available airline ticket printers, with features
such as a jam free paper path and a simpler method to load ticket stock.
Additional information concerning the Company's airline ticket printer is set
forth under the caption "Sales and Distribution" below in this Item 1.
Competition
Competition in the computer printer industry is generally quite intense and
some of the Company's competitors have greater financial and other resources. As
the printer market continues to segment by speed, application and technology,
the Company believes its dot matrix products to be competitive in the medium and
high speed serial impact dot matrix printer markets for applications requiring
high performance output of text, graphics and bar codes, and believes its
thermal printer products to be competitive in the portable and desktop thermal
printer markets, and in the airline ticket printer market. The Company believes
that its products do not generally compete in "mass market" dot matrix and
thermal printer applications. The Company's products are intended for use in
industrial markets often avoided by large Japanese and domestic printer
manufacturers, which may not deem these markets large enough to pursue.
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Manufacturing and Quality Control
The Company believes that its printer manufacturing capabilities provide a
strategic advantage over most competitors. Focusing on customer response time
and high quality customer service, the Company's goal is to provide quick,
on-time product delivery while maintaining low finished goods inventories.
Product configurations are scheduled daily based on customer orders. Raw
materials and manufactured assemblies, including PC boards assembled by the
Company, are transferred to work-in-process as materials and assemblies are
consumed in the manufacturing process, thereby eliminating unnecessary
inventories and scheduling. After configuration, the units are burned-in and are
available for shipment within 24 hours. As a result, the product mix can be
altered within hours, allowing the Company to deliver its products more quickly
than many of its competitors.
The Company assembles products in accordance with the Company's designs and
specifications. The Company utilizes components and sub-assemblies procured from
outside suppliers, some of which produce parts from tooling designed and owned
by the Company. Most of the materials, components and subassemblies are
available from a variety of sources and are generally not subject to significant
price volatility. Although the Company has not experienced any significant
problems in obtaining materials, components or subassemblies, future shortages
could result in production delays which would adversely affect its business.
Product design reflects an awareness of the practical aspects of
manufacturing high quality products. Commonality of components and subassemblies
across product lines provides efficiencies in quality control, productivity,
material cost and inventory control. The Company utilizes automated component
insertion, wave soldering and automated test equipment to reduce labor costs
while maintaining high quality. The Company verifies the quality of its products
by thorough testing at various stages of the assembly process.
Warranty and Service
The Company warrants its printers against defects in workmanship, generally
for one year, in addition to providing in-house depot repair service.
Distributors and national third party service organizations provide on-site
repair under service contracts. The Company has a technical support staff
accessible to all customers through a toll-free telephone number, as well as
through the Company's Internet Website.
The Company's warranty experience over the past three years has ranged from
approximately .3% to .6% of revenue. Total warranty expense for 1997, 1996 and
1995 was approximately $124,000, $104,000, and $88,000, respectively.
Sales and Distribution
Printers, parts, accessories and consumables are sold through an
international network of approximately 60 independent distributors and directly
to large volume major accounts, which consist of end-users and original
equipment manufacturers. During 1997, finished product sales to distributors
represented 28% of total revenue, and finished product sales to major accounts
represented 48%, compared to 31% and 46% in 1996, respectively.
Distributors typically operate in nonexclusive territories on a local,
regional, national or international basis. The distributors carry complementary
lines of computers and peripheral products and may carry products competitive
with the Company's products. The distributors sell principally to large
industrial companies, hospitals, banks, government agencies, educational
institutions, airlines, rental car companies and travel agencies.
Since 1993, the Company has been supplying Documax printers to The SABRE
Group under a five year contract. The contract is, however, cancelable at any
time by The SABRE Group. Moreover, The SABRE Group is under no contractual
obligation to purchase any minimum number of printers from Datasouth during the
term of the contract. Sales to The
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SABRE Group were approximately $7,200,000 in 1997, $7,200,000 in 1996 and
$7,800,000 in 1995, representing 33%, 30% and 30% of total sales of Datasouth,
respectively.
As mentioned above under "Principal Products and Markets," in 1997 the
Company completed the development of a new ATB2 airline ticket printer,
"Journey". As the travel market embraces a number of new technologies, such as
Internet reservation booking and electronic ticketing, the Company believes that
travel agencies will require more cost-effective equipment. Priced at less than
$2,000, Journey will provide an attractively priced alternative to traditional
ATB2 printers and will be affordable for even small travel agencies.
Additionally, the Company intends to promote the use of this printer for
satellite ticket printing applications in remote locations, such as corporate
offices and hotels/motels. The SABRE Group has the exclusive right to Journey
through June 1998, after which time the Company will be entitled to sell the
product to other Computer Reservation Systems ("CRSs"), airlines and selected
distributors.
The Company intends to continue aggressively pursuing new major account
business in 1998, while maintaining and strengthening relationships with key
distributors.
Backlog
The Company sells its products to its customers pursuant to cancelable
purchase orders and, accordingly, does not require firm quantity commitments.
Customers generally issue cancelable purchase orders with short delivery lead
times. The time lapse between receipt of a purchase order and shipment of
printers generally ranges from one to 90 days. For this reason, the Company's
production schedule is based substantially on anticipated releases, and
management does not regard the backlog of purchase orders at any one time to be
indicative of future trends in its revenue.
As of December 31, 1997, the Company had unfilled cancelable purchase
orders with an aggregate selling price of approximately $1,724,000, compared
with $1,821,000 and $755,000 as of December 31, 1996 and 1995, respectively.
Advertising and Promotion
The Company participates in numerous regional, national and international
trade shows and actively promotes its products through direct mail,
telemarketing and co-operative advertising arrangements with distributors. It
also advertises its products in publications serving the industrial markets
targeted by its products. Advertising costs were approximately $130,000,
$227,000 and $198,000 in 1997, 1996, and 1995, respectively.
Research and Development
The Company employs over 20 engineers, technicians and support personnel to
engage in basic and applied research. In 1997, the Company's engineering team
developed and released the new ATB2 airline ticket printer, "Journey". In 1998,
the Company's primary product development focus will be on complementary
products to Journey, and additional products to broaden the "CodeWriter" line
acquired in January 1998. In addition, engineering efforts are focused on
enhancement of existing products to expand market penetration and customization
of existing products to meet special printing applications for specific customer
needs. As opportunities arise, new markets and technologies will also be
explored in conjunction with strategic business partners, where the Company
believes it can add value through design, manufacturing or distribution
capabilities.
Total research and development expense was $2,417,000, $1,568,000 and
$1,872,000 in 1997, 1996 and 1995, respectively.
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Patents, Trademarks and Related Contracts
The Company's business is not dependent upon the existence of any patents,
trademarks or related contracts.
Employees
As of December 31, 1997, the Company had 123 full-time employees, most of
whom were located at Datasouth's administrative and manufacturing facility in
Charlotte, North Carolina. No employees are subject to collective bargaining
agreements, and there have been no work stoppages due to labor difficulties.
Management believes that its relationship with its employees is good.
Export Sales
Sales to non-domestic customers, located principally in Western Europe and
South America, totaled $2,497,000 in 1997, $2,954,000 in 1996, and $2,361,000 in
1995.
Item 2. Properties
The Company's executive offices are located in Atlanta, Georgia in
approximately 2,000 square feet of office space leased from Delta Life Insurance
Company, an affiliate of J. Mack Robinson, the Company's Chairman of the Board.
The lease expires in December 2002, subject to several renewal options on the
part of the Company.
Datasouth's administrative offices and operations are located in Charlotte,
North Carolina in approximately 74,000 square feet of fully-utilized leased
facilities. Although present facilities are suitable and adequate for its
current needs, the Company owns approximately eight acres of land contiguous to
its Charlotte facility for future expansion, if necessary. Datasouth's main
administrative and manufacturing facility is leased through December 1998 having
a three year renewal option, and additional office and warehousing space is
leased through December 2000. The Company expects that the lease expiring in
1998 will be renewed on terms similar to the existing lease. Datasouth acquired
CodeWriter in January 1998. CodeWriter currently operates in a 19,584 square
foot fully-utilized facility in Vista, California leased from CodeWriter's
former shareholders on a month-to-month basis. Upon moving CodeWriter's printer
manufacturing operation to Charlotte, Datasouth will relocate its remaining west
coast operation to smaller space in the Vista, California area.
Item 3. Legal Proceedings
The Company is not currently a party to any legal proceedings.
Item 4. Submission of Matters to a Vote of Security Holders
None
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PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder
Matters
Market Information
The Company's common stock, par value $.01 per share (the "Common Stock"),
trades on The Nasdaq Stock Market under the symbol "BULL." The following table
sets forth for each period indicated the high and low sale prices for the Common
Stock as reported by The Nasdaq Stock Market. Such prices reflect interdealer
prices without adjustments for retail markups, markdowns or commissions.
High Low
---- ---
1996
First Quarter 2.94 2.44
Second Quarter 3.44 2.44
Third Quarter 2.88 2.13
Fourth Quarter 2.81 2.06
1997
First Quarter 3.06 2.00
Second Quarter 2.75 2.13
Third Quarter 2.84 2.25
Fourth Quarter 3.84 2.56
Holders
As of March 6, 1998, there were 2,798 holders of record of Common Stock.
Dividends
It is the present policy of the Company's Board of Directors to retain all
earnings to finance the development and growth of the Company's business. The
Company has never declared or paid a cash dividend on its Common Stock. The
Company's future dividend policy will depend upon its earnings, capital
requirements, financial condition and other relevant factors.
Item 6. Selected Financial Data
The information required by this item is set forth under the caption
"Selected Financial Data" in the Company's 1997 Annual Report, which is
incorporated herein by reference.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The information required by this item is set forth under the caption
"Management's Discussion and Analysis" in the Company's 1997 Annual Report,
which is incorporated herein by reference.
Item 8. Financial Statements and Supplementary Data
Financial statements of the Company required by this item are set forth in
the Company's 1997 Annual Report, and the supplementary data required by this
item is set forth under the caption "Selected Quarterly Financial Data
(Unaudited)" in the Company's 1997 Annual Report, which is incorporated herein
by reference. Financial statements and the
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financial statement schedule of Gray as of December 31, 1997 and 1996 and for
the three years in the period ended December 31, 1997 are included on pages F-1
through F-32 of this report.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
Not applicable
PART III
Item 10. Directors and Executive Officers of the Registrant
Except for the information stated below, the information required by this
item is set forth under the caption "Election of Directors - General" in the
Company's Proxy Statement to be dated April 3, 1998, which is incorporated
herein by reference.
In addition to Messrs. Prather, Howell and Robinson, listed in the
Company's Proxy Statement to be dated April 3, 1998, which is incorporated
herein by reference, the Company has the following executive officer:
FREDERICK J. ERICKSON, 39, has been Vice President - Finance, Treasurer and
Chief Financial Officer of the Company since 1994; Executive Vice President -
Finance & Administration of Datasouth since March 1997; Vice President - Finance
& Administration of Datasouth from 1993 to March 1997; Chief Financial Officer,
Treasurer and Secretary of Datasouth since 1993; and interim Chief Financial
Officer of Gray since March 1998. He was employed by Coopers & Lybrand from 1981
to 1993 as a certified public accountant.
Item 11. Executive Compensation
The information required by this item is set forth beginning under the
caption "Executive Compensation" in the Company's Proxy Statement to be dated
April 3, 1998, which is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information required by this item is set forth under the caption
"Election of Directors General" in the Company's Proxy Statement to be dated
April 3, 1998, which is incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions
The information required by this item is set forth under the caption
"Certain Relationships and Related Transactions" in the Company's Proxy
Statement to be dated April 3, 1998, which is incorporated herein by reference.
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PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) List of documents filed as part of this report:
(1) Financial Statements and Related Independent Auditors' Reports:
The following consolidated financial statements of the Company and
Report of Independent Auditors are incorporated by reference in Item 8
from the Company's 1997 Annual Report, set forth as Exhibit 13 to this
report:
Report of Independent Auditors
Consolidated Balance Sheets as of December 31, 1997 and 1996
Consolidated Statements of Operations for
the years ended December 31, 1997, 1996 and 1995
Consolidated Statements of Stockholders' Equity for the years
ended December 31, 1997, 1996 and 1995
Consolidated Statements of Cash Flows for the years ended
December 31, 1997, 1996 and 1995
Notes to Consolidated Financial Statements
Supplementary Data, Selected Quarterly Financial Data (Unaudited)
The following consolidated financial statements of Gray Communications
Systems, Inc. and Report of Independent Auditors are included on pages
F-1 through F-32 of this report:
Report of Independent Auditors
Consolidated Balance Sheets as of December 31, 1997
and 1996
Consolidated Statements of Operations for the years ended
December 31, 1997, 1996 and 1995
Consolidated Statements of Stockholders' Equity for the years
ended December 31, 1997, 1996 and 1995
Consolidated Statements of Cash Flows for the years ended
December 31, 1997, 1996 and 1995
Notes to Consolidated Financial Statements
Report of Independent Auditors on Financial Statement Schedule
Schedule II - Valuation and qualifying accounts
Independent Auditors' Report on the financial statements of Capital
Sports Properties, Inc. as of June 30, 1996 and December 31, 1995, and
the six months ended June 30, 1996 and the year ended December 31,
1995 on page F-33 of this report
Independent Auditors' Report on the consolidated financial statements
of Host Communications, Inc. as of and for the year ended June 30,
1996 and 1995 on page F-34 of this report
(2) The following financial statement schedule of Bull Run Corporation and
subsidiaries is included in Item 14(d):
Schedule II - Valuation and qualifying accounts
The following financial statement schedule of Gray Communications
Systems, Inc. and subsidiaries is included in Item 14(d):
Schedule II - Valuation and qualifying accounts
All other schedules for which provision is made in the applicable
accounting regulation of the Securities and Exchange Commission are
not required under the related instructions or are inapplicable and
therefore have been omitted.
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(b) Reports on Form 8-K
The Company filed a Form 8-K Current Report dated November 21, 1997
regarding its announcement relating to the execution of an Investment
Purchase Agreement between the Company and Rawlings Sporting Goods Company,
Inc.
(c) Exhibits
Exhibit
Numbers Description
------- -----------
(3.1) Articles of Incorporation (b)
(3.2) Certificate of Amendment to Articles of Incorporation, filed
November 29, 1994 (b)
(3.3) By-laws of the Registrant (b)
(10.1) Employment Agreement - Robert S. Prather, Jr. (f)
(10.2) Employee Agreement - Frederick J. Erickson (d)
(10.3) 1994 Long Term Incentive Plan (b)
(10.4) Non-Employee Directors' 1994 Stock Option Plan (b)
(10.5) 1987 Non-Qualified Stock Option Plan (c)
(10.6) Datasouth Key Employee Bonus and Employee Incentive Bonus
Plan (e)
(10.7) Lease Agreement between Delta Life Insurance Company and
Bull Run Corporation dated as of January 1, 1993 (a)
(10.8) Lease Agreements between Hans L. Lengers and Datasouth
Computer Corporation dated November 27, 1981 (d)
(10.9) $10,000,000 Amended and Restated Credit Agreement dated as
of February 20, 1998 between Datasouth Computer Corporation
and Wachovia Bank, N.A. (h)
(10.10) Gray Communications Systems, Inc. Warrant dated September
24, 1996 (487,500 shares) (f)
(10.11) Gray Communications Systems, Inc. Warrant dated September
24, 1996 (250,000 shares) (f)
(10.12) Investment Purchase Agreement dated November 21, 1997 by and
between Rawlings Sporting Goods Company, Inc. and Bull Run
Corporation (g)
(10.13) Common Stock Purchase Warrant dated November 21, 1997 issued
by Rawlings Sporting Goods Company, Inc. to Bull Run
Corporation (g)
(10.14) Standstill Agreement dated November 21, 1997 by and between
Rawlings Sporting Goods Company, Inc. and Bull Run
Corporation (g)
(10.15) Registration Rights Agreement dated November 21, 1997 by and
between Rawlings Sporting Goods Company, Inc. and Bull Run
Corporation (g)
(13) 1997 Annual Report to Shareholders (h)
(21) List of Subsidiaries of Registrant (e)
(23.1) Consent of Ernst & Young LLP - Bull Run Corporation (h)
(23.2) Consent of Ernst & Young LLP - Gray Communications Systems,
Inc. (h)
12
<PAGE>
Exhibit
Numbers Description
------- -----------
(23.3) Consent of KPMG Peat Marwick LLP - Capital Sports
Properties, Inc. (h)
(23.4) Consent of KPMG Peat Marwick LLP - Host Communications, Inc.
(h)
(27.1) Financial Data Schedule - 1997 (h)
(27.2) Financial Data Schedule - 1996 Restated (h)
(a) Filed as an exhibit to Form 10-KSB Annual Report for the year ended
December 31, 1992 and incorporated by reference herein
(b) Filed as an exhibit to Registration Statement on Form S-4
(Registration No. 33-81816), effective November 3, 1994 and
incorporated by reference herein
(c) Filed as an exhibit to Form 10-K Annual Report for the year ended
December 31, 1988 and incorporated by reference herein
(d) Filed as an exhibit to Form 10-KSB Annual Report for the year ended
December 31, 1994 and incorporated by reference herein
(e) Filed as an exhibit to Form 10-KSB Annual Report for the year ended
December 31, 1995 and incorporated by reference herein
(f) Filed as an exhibit to Form 10-KSB Annual Report for the year ended
December 31, 1996 and incorporated by reference herein
(g) Filed as an exhibit to Form 8-K Current Report dated as of November
21, 1997 and incorporated by reference herein
(h) Filed herewith
(d) Financial Statement Schedules
The response to this section is submitted as part of Item 14(a)(1) and Item
14(a)(2).
13
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 of 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, on March 27, 1998.
BULL RUN CORPORATION
BY: /s/ ROBERT S. PRATHER, JR.
-------------------------------------
Robert S. Prather, Jr.
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the date indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ ROBERT S. PRATHER, JR. President, Chief March 27, 1998
- -------------------------------------- Executive Officer and
Robert S. Prather, Jr. Director
(Principal Executive
Officer)
/s/ GERALD N. AGRANOFF Director March 27, 1998
- --------------------------------------
Gerald N. Agranoff
/s/ JAMES W. BUSBY Director March 27, 1998
- --------------------------------------
James W. Busby
/s/ FREDERICK J. ERICKSON Vice President - Finance March 27, 1998
- -------------------------------------- and Treasurer
Frederick J. Erickson (Principal Accounting and
Financial Officer)
/s/ HILTON H. HOWELL, JR. Director March 27, 1998
- --------------------------------------
Hilton H. Howell, Jr.
/s/ J. MACK ROBINSON Chairman of the Board March 27, 1998
- --------------------------------------
J. Mack Robinson
</TABLE>
14
<PAGE>
REPORT OF INDEPENDENT AUDITORS
We have audited the consolidated financial statements of Bull Run
Corporation as of December 31, 1997 and 1996, and for each of the three years in
the period ended December 31, 1997, and have issued our report thereon dated
February 10, 1998 (except for Note 5, for which the date is March 20, 1998). Our
audits also included the financial statement schedule of Bull Run Corporation
listed in Item 14(a). This schedule is the responsibility of the Company's
management. Our responsibility is to express an opinion based on our audits.
In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
/s/ ERNST & YOUNG LLP
Atlanta, Georgia
February 10, 1998
15
<PAGE>
BULL RUN CORPORATION
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
Additions
-------------------------
Balance at Charged to Charged to Balance at
Beginning Costs and Other End of
Description Of Period Expenses Accounts Deductions* Period
- ----------- --------- ---------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1997
Allowance for doubtful accounts $ 45,000 $ 27,000 $ 0 $ 17,000 $ 55,000
Year ended December 31, 1996
Allowance for doubtful accounts $ 50,000 $ 1,000 $ 0 $ 6,000 $ 45,000
Year ended December 31, 1995
Allowance for doubtful accounts $ 60,000 $ 58,000 $ 0 $ 68,000 $ 50,000
</TABLE>
* "Deductions" represent write-offs of amounts not considered collectible
16
EXHIBIT 10.9
$10,000,000.00
Amended and Restated Credit Agreement
dated as of
February 20, 1998
between
Datasouth Computer Corporation
and
Wachovia Bank, N.A.
<PAGE>
TABLE OF CONTENTS
[Not a part of the Agreement]
ARTICLE I. DEFINITIONS........................................................1
SECTION 1.01. Definitions.....................................................1
SECTION 1.02. Accounting Terms and Determinations.............................9
SECTION 1.03. References.....................................................10
ARTICLE II. THE CREDITS.......................................................10
SECTION 2.01. Commitment to Lend.............................................10
SECTION 2.02 Method of Borrowing............................................10
SECTION 2.03. Notes..........................................................11
SECTION 2.04. Maturity of Advances...........................................11
SECTION 2.05. Interest Rates.................................................12
SECTION 2.06. Commitment Fee.................................................13
SECTION 2.07. Optional Termination or Reduction of Facility B Commitment.....14
SECTION 2.08. Mandatory Reduction and Termination of Commitments.............14
SECTION 2.09. Optional Prepayments...........................................14
SECTION 2.10. Mandatory Prepayments..........................................14
SECTION 2.11. General Provisions Concerning Payments.........................14
SECTION 2.12. Computation of Interest and Fees...............................15
ARTICLE III. CHANGE IN CIRCUMSTANCES; COMPENSATION...........................15
SECTION 3.01. Basis for Determining Interest Rate Inadequate or Unfair.......15
SECTION 3.02. Illegality.....................................................15
SECTION 3.03. Increased Cost and Reduced Return..............................16
SECTION 3.04. Base Rate Loans Substituted for Affected Euro-Dollar Loans.....16
SECTION 3.05. Compensation...................................................17
ARTICLE IV. CONDITIONS TO BORROWINGS..........................................17
SECTION 4.01. Conditions to First Borrowing..................................17
SECTION 4.02. Conditions to All Borrowings...................................18
ARTICLE V. REPRESENTATIONS AND WARRANTIES....................................18
SECTION 5.01. Corporate Existence and Power..................................18
SECTION 5.02. Corporate and Governmental Authorization; Contravention........19
SECTION 5.03. Binding Effect.................................................19
SECTION 5.04. Financial Information..........................................19
SECTION 5.05. Litigation.....................................................19
SECTION 5.06. Compliance with ERISA..........................................19
SECTION 5.07. Taxes..........................................................19
SECTION 5.08. Subsidiaries...................................................20
SECTION 5.09. Not an Investment Company......................................20
SECTION 5.10. Ownership of Property; Liens...................................20
SECTION 5.11. No Default.....................................................20
SECTION 5.12. Full Disclosure................................................20
SECTION 5.13. Environmental Matters.........................................20
SECTION 5.14. Compliance with Laws. ........................................21
ARTICLE VI. COVENANTS........................................................21
SECTION 6.01. Information....................................................21
SECTION 6.02. Inspection of Property, Books and Records......................22
SECTION 6.03. Ratio of Consolidated Funded Debt to EBITDA. .................22
SECTION 6.04. Minimum Stockholders' Equity...................................22
i
<PAGE>
SECTION 6.05. Fixed Charges Coverage.........................................22
SECTION 6.06. Investments. .................................................23
SECTION 6.07. Negative Pledge. .............................................23
SECTION 6.08. Maintenance of Existence. ....................................23
SECTION 6.09. Dissolution. .................................................23
SECTION 6.10. Consolidations, Mergers and Sales of Assets. .................23
SECTION 6.11. Use of Proceeds. .............................................23
SECTION 6.12. Compliance with Laws; Payment of Taxes. ......................23
SECTION 6.13. Insurance. ...................................................24
SECTION 6.14. Change in Fiscal Year. .......................................24
SECTION 6.15. Maintenance of Property. .....................................24
SECTION 6.16. Environmental Notices. .......................................24
SECTION 6.17. Environmental Matters. .......................................24
SECTION 6.18. Environmental Release. .......................................24
SECTION 6.19. Debt...........................................................24
SECTION 6.20. Collateral Maintenance.........................................24
SECTION 6.21 Interest Rate Protection........................................25
ARTICLE VII. DEFAULTS........................................................25
SECTION 7.01. Events of Default..............................................25
SECTION 7.02. Remedies on Default............................................27
SECTION 7.03. Security.......................................................27
ARTICLE VIII. MISCELLANEOUS..................................................27
SECTION 8.01. Notices........................................................27
SECTION 8.02. No Waivers.....................................................28
SECTION 8.03. Expenses; Documentary Taxes....................................28
SECTION 8.04. Amendments and Waivers.........................................28
SECTION 8.05. Successors and Assigns.........................................28
SECTION 8.06. Confidentiality................................................30
SECTION 8.07. Interest Limitation............................................30
SECTION 8.08. Governing Law..................................................30
SECTION 8.09. Counterparts...................................................30
SECTION 8.10. Consent to Jurisdiction........................................30
SECTION 8.11. Severability...................................................30
SECTION 8.12. Captions.......................................................30
EXHIBIT A Form of Facility A Note
EXHIBIT B Form of Facility B Note
EXHIBIT C Form of Assignment and Acceptance
EXHIBIT D Form of Opinion of Counsel
ii
<PAGE>
AMENDED AND RESTATED CREDIT AGREEMENT
THIS AMENDED AND RESTATED CREDIT AGREEMENT, made as of the 20th day of
February, 1998, by and between DATASOUTH COMPUTER CORPORATION, a Delaware
corporation (together with its successors, the "Borrower"), and WACHOVIA BANK,
N.A., a national banking association (together with endorsees, successors and
assigns, the "Bank").
BACKGROUND
The Borrower and the Bank entered into an Amended and Restated Credit
Agreement dated as of October 9, 1997 (the "1997 Credit Agreement") pursuant to
which the Bank agreed to provide to the Borrower revolving loans of up to
$5,500,000.00 from time to time outstanding as therein provided. The Borrower
and the Bank desire to amend and restate the 1997 Credit Agreement in order,
among other things, to decrease the maximum amount of revolving loans which may
at any time be outstanding to $5,000,000.00 and to provide for a term loan in
the principal amount of $5,000,000.00, subject to the terms and conditions
hereinafter set forth.
NOW, THEREFORE, in consideration of the premises and the promises herein
contained, and each intending to be legally bound hereby, the parties agree as
follows:
ARTICLE I. DEFINITIONS
SECTION 1.01 Definitions. The terms as defined in this Section 1.01 shall,
for all purposes of this Agreement and any amendment hereto (except as herein
otherwise expressly provided or unless the context otherwise requires), have the
meanings set forth herein (terms defined in the singular to have the same
meanings when used in the plural and vice versa):
"Adjusted London Interbank Offered Rate" applicable to any Interest Period
means a rate per annum equal to the quotient obtained (rounded upwards, if
necessary, to the next higher 1/100th of 1%) by dividing (i) the applicable
London Interbank Offered Rate for such Interest Period by (ii) 1.00 minus the
Euro-Dollar Reserve Percentage.
"Advance" means any advance by the Bank under the Commitments.
"Affiliate" of any Person means (i) any other Person which directly, or
indirectly through one or more intermediaries, controls such Person, (ii) any
other Person which directly, or indirectly through one or more intermediaries,
is controlled by or is under common control with such Person, or (iii) any other
Person of which such Person owns, directly or indirectly, 20% or more of the
common stock or equivalent equity interests. As used herein, the term "control"
means possession, directly or indirectly, of the power to direct or cause the
direction of the management or policies of a Person, whether through the
ownership of voting securities, by contract or otherwise.
"Agreement" means this Amended and Restated Credit Agreement, together with
all amendments and supplements hereto.
"Applicable Margin" means (x) for any Base Rate Loan, for any day a number
equal to zero percent (0.0%), and (y) for any Euro-Dollar Loan, the applicable
percentage determined in accordance with Section 2.05(c).
"Assignee" has the meaning set forth in Section 8.05(c).
"Assignment and Acceptance" means an Assignment and Acceptance executed in
accordance with Section 8.05(c) in the form attached hereto as Exhibit C.
1
<PAGE>
"Authority" has the meaning set forth in Section 3.02.
"Base Rate" means for any Base Rate Loan for any day, the rate per annum
equal to the higher as of such day of (i) the Prime Rate, and (ii) one-half of
one percent above the Federal Funds Rate for such day. For purposes of
determining the Base Rate for any day, changes in the Prime Rate and/or the
Federal Funds Rate shall be effective on the date of each such change.
"Base Rate Loan" means an Advance made or to be made as a Base Rate Loan
pursuant to the applicable Notice of Borrowing or Article III.
"Borrowing" shall mean a borrowing under either of the Commitments
consisting of an Advance by the Bank. A Borrowing is a "Euro-Dollar Borrowing"
if the Advance is made as a Euro-Dollar Loan and a "Base Rate Borrowing" if the
Advance is made as a Base Rate Loan.
"Bull Run" means Bull Run Corporation, a Georgia corporation of which the
Borrower is a Wholly Owned Subsidiary.
"Capital Stock" means any nonredeemable capital stock of the Borrower or
any Consolidated Subsidiary of the Borrower (to the extent issued to a Person
other than the Borrower), whether common or preferred.
"CERCLA" means the Comprehensive Environmental Response Compensation and
Liability Act.
"CERCLIS" means the Comprehensive Environmental Response Compensation and
Liability Inventory System established pursuant to CERCLA.
"Change of Law" shall have the meaning set forth in Section 3.02.
"Closing Date" means February 20, 1998.
"Code" means the Internal Revenue Code of 1986, as amended, or any
successor Federal tax code.
"Commitments" means, collectively, the Facility A Commitment and the
Facility B Commitment.
"Commitment Fee Payment Date" means the first day of each June, September,
December and March, commencing March 1, 1998; provided that if any such day is
not a Domestic Business Day, the Commitment Fee Payment Date shall be on the
next succeeding Domestic Business Day.
"Commitment Fee Rate" has the meaning set forth in Section 2.06(b) and is
expressed as a percentage
"Consolidated Debt" means at any date the Debt of the Borrower and its
Consolidated Subsidiaries, determined on a consolidated basis as of such date.
"Consolidated Fixed Charges" for any period means the sum (without
duplication) of Consolidated Interest Expense for such period, plus capital
lease expense for the Borrower and its Consolidated Subsidiaries for such
period, plus operating lease expense for the Borrower and its Consolidated
Subsidiaries for all leases which require aggregate lease payments during the
term of such lease of $2,500.00 or more, plus scheduled principal payments on
Consolidated Debt for such period.
"Consolidated Funded Debt" means Funded Debt of the Borrower and its
Consolidated Subsidiaries in accordance with GAAP applied on a consistent basis.
2
<PAGE>
"Consolidated Interest Expense" for any period means interest, whether
expensed or capitalized, in respect of Debt of the Borrower or any of its
Consolidated Subsidiaries outstanding during such period.
"Consolidated Operating Profits" means, for any period, the Operating
Profits of the Borrower and its Consolidated Subsidiaries.
"Consolidated Subsidiary" means as to Bull Run or the Borrower, as the
context hereof may require, at any date, any Subsidiary or other entity the
accounts of which, in accordance with GAAP, would be consolidated with those of
Bull Run or the Borrower, as applicable, in its consolidated financial
statements as of such date.
"Consolidated Total Assets" means, at any time, the total assets of the
Borrower and its Consolidated Subsidiaries, determined on a consolidated basis,
as set forth or reflected on the most recent consolidated balance sheet of the
Borrower and its Consolidated Subsidiaries, prepared in accordance with GAAP.
"Controlled Group" means all members of a controlled group of corporations
and all trades or businesses (whether or not incorporated) under common control
which, together with the Borrower, are treated as a single employer under
Section 414 of the Code.
"Debt" of any Person means at any date, without duplication, (i) all
obligations of such Person for borrowed money, (ii) all obligations of such
Person evidenced by bonds, debentures, notes or other similar instruments, (iii)
all obligations of such Person to pay the deferred purchase price of property or
services, except trade accounts payable arising in the ordinary course of
business, (iv) all obligations of such Person as lessee under capital leases,
(v) all obligations of such Person to reimburse any bank or other Person in
respect of amounts payable under a banker's acceptance, (vi) all Redeemable
Preferred Stock of such Person (in the event such Person is a corporation),
(vii) all obligations of such Person to reimburse any bank or other Person in
respect of amounts paid under a standby letter of credit or similar instrument,
(viii) all Debt of others secured by a Lien on any asset of such Person, whether
or not such Debt is assumed by such Person, and (ix) all Debt of others
Guaranteed by such Person; provided, however, that the amount of such Debt
shall, in the case of clause (viii), be deemed to be the lesser of the fair
market value of such asset or the amount of the Debt so secured, and provided
further that for purposes of any calculation of the Debt of the Borrower and its
Consolidated Subsidiaries, Debt of Bull Run shall be excluded for purposes of
clauses (viii) and (ix) of this definition.
"Default" means any condition or event which constitutes an Event of
Default or which with the giving of notice or lapse of time or both would,
unless cured or waived, become an Event of Default.
"Depreciation" means for any Person for any period the sum of all
depreciation expenses of such Person for such period, as determined in
accordance with GAAP.
"Dollars" or "$" means dollars in lawful currency of the United States of
America.
"Domestic Business Day" means any day except a Saturday, Sunday or other
day on which commercial banks in Charlotte, North Carolina are authorized by law
to close.
"EBITDA" means, without duplication, for any fiscal period, as applied to
the Borrower and its Consolidated Subsidiaries, the sum of the amounts for such
fiscal period of: (i) Net Income (Loss), (ii) Depreciation, (iii) amortization
expense and non cash charges, less any non cash gains, (iv) all interest expense
determined in accordance with GAAP during such period on Debt, (v) all taxes
paid, accrued or deferred, during such period, all as determined and computed in
accordance with GAAP, and (vi) the Borrower's pretax gain (or loss) attributable
to shares of common stock of Gray Communications Systems, Inc.
"Environmental Authority" means any foreign, federal, state, local or
regional
3
<PAGE>
government that exercises any form of jurisdiction or authority under any
Environmental Requirement.
"Environmental Authorizations" means all licenses, permits, orders,
approvals, notices, registrations or other legal prerequisites for conducting
the business of the Borrower required by any Environmental Requirement.
"Environmental Judgments and Orders" means all judgments, decrees or orders
arising from or in any way associated with any Environmental Requirements,
whether or not entered upon consent or written agreements with an Environmental
Authority or other entity arising from or in any way associated with any
Environmental Requirement, whether or not incorporated in a judgment, decree or
order.
"Environmental Liabilities" means any liabilities, whether accrued,
contingent or otherwise, arising from and in any way associated with any
Environmental Requirements.
"Environmental Notices" means notice from any Environmental Authority or by
any other person or entity, of possible or alleged noncompliance with any
Environmental Requirement, including without limitation any complaints,
citations, demands or requests from any Environmental Authority or from any
other person or entity for correction of any violation of any Environmental
Requirement or any investigations concerning any violation of any Environmental
Requirement.
"Environmental Proceedings" means any judicial or administrative
proceedings arising from or in any way associated with any Environmental
Requirement.
"Environmental Releases" means releases as defined in CERCLA or under any
applicable state or local environmental law or regulation.
"Environmental Requirements" means any legal requirement relating to
health, safety or the environment and applicable to the Borrower, any Subsidiary
of the Borrower or the Properties, including but not limited to any such
requirement under CERCLA or similar state legislation.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended from time to time, or any successor law, including any rules or
regulations promulgated thereunder. Any reference to any provision of ERISA
shall also be deemed to be a reference to any successor provision or provisions
thereof.
"Euro-Dollar Business Day" means any Domestic Business Day on which
dealings in Dollar deposits are carried out in the London interbank market.
"Euro-Dollar Loan" means an Advance made or to be made (pursuant to the
applicable Notice of Borrowing) as a Euro-Dollar Loan.
"Euro-Dollar Reserve Percentage" means for any day that percentage
(expressed as a decimal) which is in effect on such day, as prescribed by the
Board of Governors of the Federal Reserve System (or any successor) for
determining the maximum reserve requirement for a member bank of the Federal
Reserve System in respect of "Eurocurrency liabilities" (or in respect of any
other category of liabilities which includes deposits by reference to which the
interest rate on Euro-Dollar Loans is determined or any category of extensions
of credit or other assets which includes loans by a non-United States office of
the Bank to United States residents). The Adjusted London Interbank Offered Rate
shall be adjusted automatically on and as of the effective date of any change in
the Euro-Dollar Reserve Percentage.
"Event of Default" shall have the meaning assigned to such term in Section
7.01.
"Facility A Commitment" shall have the meaning assigned to it in Section
2.01(a).
4
<PAGE>
"Facility A Commitment Reduction Date" shall mean the last day of each
March, June, September and December commencing March 31, 1998 and continuing
through the Facility A Maturity Date; provided that if any such day is not a
Domestic Business Day, the Facility A Commitment Reduction Date shall be on the
next succeeding Domestic Business Day.
"Facility A Maturity Date" shall mean December 31, 2002.
"Facility A Note" shall mean a promissory note of the Borrower payable to
the order of the Bank, in substantially the form of Exhibit A hereto, evidencing
the maximum principal indebtedness of the Borrower to the Bank under the
Facility A Commitment, either as originally executed or as it may be from time
to time supplemented, modified, amended, renewed or extended.
"Facility B Commitment" shall have the meaning assigned to it in Section
2.01(b).
"Facility B Commitment Reduction Date" shall mean February 1, 1999,
provided that if such day is not a Domestic Business Day, the Facility B
Commitment Reduction Date shall be the next succeeding Domestic Business Day.
"Facility B Note" shall mean a promissory note of the Borrower payable to
the order of the Bank, in substantially the form of Exhibit B hereto, evidencing
the maximum principal indebtedness of the Borrower to the Bank under the
Facility B Commitment, either as originally executed or as it may be from time
to time supplemented, modified, amended, renewed or extended.
"Facility B Termination Date" shall mean February 20, 2001 or such later
date as to which the Borrower and the Bank may agree pursuant to Section
2.04(b).
"Federal Funds Rate" means, for any day, the rate per annum (rounded
upward, if necessary, to the next higher 1/100th of 1%) equal to the weighted
average of the rates on overnight Federal funds transactions with members of the
Federal Reserve System arranged by Federal funds brokers on such day, as
published by the Federal Reserve Bank of New York on the Domestic Business Day
next succeeding such day, provided that (i) if the day for which such rate is to
be determined is not a Domestic Business Day, the Federal Funds Rate for such
day shall be such rate on such transactions on the next preceding Domestic
Business Day as so published on the next succeeding Domestic Business Day, and
(ii) if such rate is not so published for any day, the Federal Funds Rate for
such day shall be the average rate charged to Wachovia on such day on such
transactions.
"Fiscal Quarter" means any fiscal quarter of the Borrower.
"Fiscal Year" means any fiscal year of the Borrower.
"Fixed Charges Coverage Ratio" has the meaning set forth in Section
6.05(b).
"Funded Debt" means as of the end of each Fiscal Quarter, without
duplication, the sum of Long-Term Debt (excluding for purposes of this
definition of Funded Debt any indebtedness of Bull Run Corporation) plus the
principal portion of all obligations of the Borrower and its Consolidated
Subsidiaries under capital leases plus current maturities of Long-Term Debt and
notes payable of the Borrower and its Consolidated Subsidiaries.
"GAAP" means generally accepted accounting principles applied on a basis
consistent with those which, in accordance with Section 1.02, are to be used in
making the calculations for purposes of determining compliance with the terms of
this Agreement.
"Guarantee" by any Person means any obligation, contingent or otherwise, of
such Person directly or indirectly guaranteeing any Debt or other obligation of
any other Person and, without limiting the generality of the foregoing, any
obligation, direct or indirect, contingent or
5
<PAGE>
otherwise, of such Person (i) to secure, purchase or pay (or advance or supply
funds for the purchase or payment of) such Debt or other obligation (whether
arising by virtue of partnership arrangements, by agreement to keep-well, to
purchase assets, goods, securities or services, to provide collateral security,
to take-or-pay, or to maintain financial statement conditions or otherwise) or
(ii) entered into for the purpose of assuring in any other manner the obligee of
such Debt or other obligation of the payment thereof or to protect such obligee
against loss in respect thereof (in whole or in part), provided that the term
Guarantee shall not include endorsements for collection or deposit in the
ordinary course of business. The term "Guarantee" used as a verb has a
corresponding meaning.
"Hazardous Materials" includes, without limitation, (a) solid or hazardous
waste, as defined in the Resource Conservation and Recovery Act of 1980, or in
any applicable state or local law or regulation, (b) hazardous substances, as
defined in CERCLA, or in any applicable state or local law or regulation, (c)
gasoline, or any other petroleum product or by-product, (d) toxic substances, as
defined in the Toxic Substances Control Act of 1976, or in any applicable state
or local law or regulation or (e) insecticides, fungicides, or rodenticides, as
defined in the Federal Insecticide, Fungicide, and Rodenticide Act of 1975, or
in any applicable state or local law or regulation, as each such Act, statute or
regulation may be amended from time to time.
"Income Available for Fixed Charges" for any period means EBITDA as
determined with respect to the Borrower and its Consolidated Subsidiaries on a
consolidated basis for such period and in accordance with GAAP and less the
aggregate amount of capital expenditures for the Borrower and its Consolidated
Subsidiaries for such period in accordance with GAAP.
"Interest Period" means: with respect to each Euro-Dollar Borrowing under
the Facility A Commitment, the period commencing on the date of such Borrowing
and ending on the numerically corresponding day in the third calendar month
thereafter, and with respect to Euro-Dollar Borrowings under the Facility B
Commitment, the period commencing on the date of such Borrowing and ending on
the numerically corresponding day in the first, second, third or sixth calendar
month thereafter, as the Borrower may elect in the applicable Notice of
Borrowing; provided that:
(a) any Interest Period (other than an Interest Period determined
pursuant to clause (c) or (d) below) which would otherwise end on a day
which is not a Euro-Dollar Business Day shall be extended to the next
succeeding Euro-Dollar Business Day unless such Euro-Dollar Business Day
falls in another calendar month, in which case such Interest Period shall
end on the next preceding Euro-Dollar Business Day;
(b) any Interest Period which begins on the last Euro-Dollar Business
Day of a calendar month (or on a day for which there is no numerically
corresponding day in the appropriate subsequent calendar month) shall,
subject to clauses (c) and (d) below, end on the last Euro-Dollar Business
Day of the appropriate subsequent calendar month;
(c) any Interest Period which begins before the Facility B Termination
Date and would otherwise end after the Facility B Termination Date shall
end on the Facility B Termination Date; and
(d) any Interest Period which begins before the Facility A Maturity
Date and would otherwise end after the Facility A Maturity Date shall end
on the Facility A Maturity Date.
"Investment" means any investment in any Person, whether by means of
purchase or acquisition of obligations or securities of such Person, capital
contribution to such Person, loan or advance to such Person, making of a time
deposit with such Person, Guarantee or assumption of any obligation of such
Person or otherwise.
"Lending Office" means the Bank's office located at its address set forth
on the signature pages hereof (or identified on the signature pages hereof as
its Lending Office) or such other office as the Bank may hereafter designate as
its Lending Office by notice to the
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Borrower.
"Lien" means, with respect to any asset, any mortgage, lien, pledge,
charge, security interest or encumbrance of any kind in respect of such asset.
For the purposes of this Agreement, the Borrower or any Subsidiary of the
Borrower shall be deemed to own subject to a Lien any asset which it has
acquired or holds subject to the interest of a vendor or lessor under any
conditional sale agreement, capital lease or other title retention agreement
relating to such asset.
"Loan Access Agreement" means the Financial Management Account
Investment/Commercial Loan Access Agreement dated February 20, 1998 between the
Borrower and the Bank, together with all amendments and supplements thereto.
"Loan Documents" means this Agreement, the Notes, the Security Agreement,
the Pledge Agreement and any other document evidencing or securing the Advances.
"London Interbank Offered Rate" applicable to any Euro-Dollar Loan means
for the Interest Period of such Euro-Dollar Loan the rate per annum determined
on the basis of the rate for deposits in Dollars of amounts equal or comparable
to the principal amount of such Euro-Dollar Loan offered for a term comparable
to such Interest Period, which rate appears on the display designated as Page
A3750@ of the Telerate Service (or such other page as may replace page 3750 of
that service or such other service or services as may be nominated by the
British Bankers= Association for the purpose of displaying London interbank
offered rates for U.S. dollar deposits), determined as of 1:00 p.m. (Charlotte,
North Carolina time), 2 Euro-Dollar Business Days prior to the first day of such
Interest Period.
"Long-Term Debt" means at any date any Consolidated Debt which matures (or
the maturity of which may at the option of the Borrower or any Consolidated
Subsidiary be extended such that it matures) more than one year after such date,
excluding any Consolidated Debt which is subordinated to Debt outstanding under
this Agreement.
"Margin Stock" means "margin stock" as defined in Regulations G, T, U or X
of the Board of Governors of the Federal Reserve System, as in effect from time
to time, together with all official rulings and interpretations issued
thereunder.
"Multiemployer Plan" shall have the meaning set forth in Section 4001(a)(3)
or ERISA.
"Net Income (Loss)" means, as applied to any Person for any period, net
income or loss of such Person as determined in accordance with GAAP.
"Notes" means collectively the Facility A Note and the Facility B Note.
"Notice of Borrowing" shall have the meaning assigned to it in Section
2.02.
"Obligations" means all indebtedness, obligations and liabilities to the
Bank existing on the date of this Agreement or arising thereafter, direct or
indirect, joint or several, absolute or contingent, matured or unmatured,
liquidated or unliquidated, secured or unsecured, arising by contract, operation
of law or otherwise, of the Borrower under this Agreement or any other Loan
Document.
"Operating Profits" means, as applied to any Person for any period, the
operating income of such Person for such period, as determined in accordance
with GAAP.
"Participant" has the meaning set forth in Section 8.05(b).
"PBGC" means the Pension Benefit Guaranty Corporation or any entity
succeeding to any or all of its functions under ERISA.
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"Permitted Encumbrances" means:
(a) Liens existing on the date of this Agreement;
(b) any Lien existing on any asset of any Person at the time such
Person becomes a Consolidated Subsidiary of the Borrower and not created in
contemplation of such event;
(c) any Lien on any asset securing Debt incurred or assumed for the
purpose of financing all or any part of the cost of acquiring or
constructing such asset, provided that such Lien attaches to such asset
concurrently with or within 18 months after the acquisition or completion
of construction thereof;
(d) any Lien on any asset of any Person existing at the time such
Person is merged or consolidated with or into the Borrower or a
Consolidated Subsidiary of the Borrower and not created in contemplation of
such event;
(e) any Lien existing on any asset prior to the acquisition thereof by
the Borrower or a Consolidated Subsidiary of the Borrower and not created
in contemplation of such acquisition;
(f) Liens securing Debt owing by any Subsidiary of the Borrower to the
Borrower;
(g) any Lien arising out of the refinancing, extension, renewal or
refunding of any Debt secured by any Lien permitted by any of the foregoing
clauses of this Section, provided that (i) such Debt is not secured by any
additional assets, and (ii) the amount of such Debt secured by any such
Lien is not increased;
(h) Liens incidental to the conduct of its business or the ownership
of its assets which (i) do not secure Debt and (ii) do not in the aggregate
materially detract from the value of its assets or materially impair the
use thereof in the operation of its business;
(i) any Lien on Margin Stock; and
(j) Liens in favor of the Bank.
"Person" means any individual, joint venture, corporation, company,
voluntary association, partnership, trust, joint stock company, limited
liability company, unincorporated organization, association, government, or any
agency, instrumentality, or political subdivision thereof, or any other form of
entity or organization.
"Plan" means at any time an employee pension benefit plan which is covered
by Title IV of ERISA or subject to the minimum funding standards under Section
412 of the Code and is either (i) maintained by a member of the Controlled Group
for employees of any member of the Controlled Group or (ii) maintained pursuant
to a collective bargaining agreement or any other arrangement under which more
than one employer makes contributions and to which a member of the Controlled
Group is then making or accruing an obligation to make contributions or has
within the preceding five plan years made contributions.
"Pledge Agreement" means the Pledge Agreement of even date herewith
executed by the Borrower for the benefit of the Bank, together with all
amendments and supplements thereto, covering certain capital stock of Gray
Communications Systems, Inc.
"Prime Rate" refers to that interest rate so denominated and set by
Wachovia from time to time as an interest rate basis for borrowings. The Prime
Rate is but one of several interest rate bases used by Wachovia. Wachovia lends
at interest rates above and below the Prime Rate. A change in the Prime Rate
shall be effective on the date of such change.
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"Properties" means all real property owned, leased or otherwise used or
occupied by the Borrower or any Subsidiary of the Borrower, wherever located.
"Rate Determination Date" has the meaning given such term in Section
2.05(c).
"Redeemable Preferred Stock" of any Person means any preferred stock issued
by such Person which is at any time prior to the Facility A Maturity Date either
(i) mandatorily redeemable (by sinking fund or similar payments or otherwise) or
(ii) redeemable at the option of the holder thereof.
"Reportable Event" has the meaning given such term in Section 4043(b) of
Title V of ERISA.
"Reported Net Income" means, for any period, the Net Income (Loss) of the
Borrower and its Consolidated Subsidiaries determined on a consolidated basis.
"Security Agreement" means the General Security Agreement of even date
herewith executed by the Borrower for the benefit of the Bank, together with all
amendments and supplements thereto.
"Stockholders' Equity" means, at any time, the shareholders' equity of the
Borrower and its Consolidated Subsidiaries, as set forth or reflected on the
most recent consolidated balance sheet of the Borrower and its Consolidated
Subsidiaries prepared in accordance with GAAP, but excluding any Redeemable
Preferred Stock of the Borrower or any of its Consolidated Subsidiaries.
Shareholders' Equity would generally include, but not be limited to (i) the par
or stated value of all outstanding Capital Stock, (ii) capital surplus, (iii)
retained earnings, and (iv) various deductions such as (A) purchases of treasury
stock, (B) receivables due from an employee stock ownership plan, (C) employee
stock ownership plan debt guarantees, and (D) translation adjustments for
foreign currency transactions.
"Subsidiary" of a Person means any corporation or other entity of which
securities or other ownership interests having ordinary voting power to elect a
majority of the board of directors or other persons performing similar functions
are at the time directly or indirectly owned by such Person. Unless otherwise
indicated, all references herein to Subsidiaries refer to Subsidiaries of Bull
Run or the Borrower as the context may require.
"Third Parties" means all lessees, sublessees, licenses and other users of
the Properties, excluding those users of the Properties in the ordinary course
of the Borrower's business and on a temporary basis.
"Transferee" has the meaning set forth in Section 8.05(d).
"Unused Commitment" means at any date an amount equal to the Facility B
Commitment less the aggregate outstanding principal amount of the Advances made
pursuant to the Facility B Commitment.
"Wachovia" means Wachovia Bank, N.A., a national banking association,
together with its successors.
"Wholly Owned Subsidiary" means any Subsidiary all of the shares of capital
stock or other ownership interests of which (except directors' qualifying
shares) are at the time directly or indirectly owned by Bull Run or the
Borrower, as the context of this Agreement may require.
SECTION 1.02. Accounting Terms and Determinations. Unless otherwise
specified herein, all terms of an accounting character used herein shall be
interpreted, all accounting determinations hereunder shall be made, and all
financial statements required to be delivered hereunder shall be prepared in
accordance with GAAP, applied on a basis consistent (except for changes
concurred in by Bull Run's independent public accountants) with the most recent
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audited consolidating and consolidated financial statements of Bull Run and its
Consolidated Subsidiaries delivered to the Bank.
SECTION 1.03. References. Except as otherwise expressly provided in this
Agreement: the words "herein," "hereof," "hereunder" and other words of similar
import refer to this Agreement as a whole, including the Schedule hereto which
is a part hereof, and not to any particular Section, Article, paragraph or other
subdivision; the singular includes the plural and the plural includes the
singular; "or" is not exclusive; the words "include," "includes" and "including"
are not limiting; a reference to any agreement or other contract includes past
and future permitted supplements, amendments, modifications and restatements
thereto or thereof; a reference to an Article, Section, paragraph or other
subdivision is a reference to an Article, Section, paragraph or other
subdivision of this Agreement; a reference to any law includes any amendment or
modification to such law and any rules and regulations promulgated thereunder; a
reference to a Person includes its permitted successors and assigns; any right
may be exercised at any time and from time to time; and, except as otherwise
expressly provided therein, all obligations under any agreement or other
contract are continuing obligations throughout the term of such agreement or
contract.
ARTICLE II. THE CREDITS
SECTION 2.01. Commitment to Lend.
(a) The Bank agrees, in addition to the funds to be advanced under
subsection (b) below and on the terms and conditions set forth herein, to make
Advances to the Borrower on the Closing Date in an aggregate principal amount
equal to $5,000,000.00 (as such figure may be reduced from time to time as
provided in this Agreement, the "Facility A Commitment"). Funds advanced under
the Facility A Commitment may not be reborrowed. The Bank shall have no
obligation to advance funds in excess of the amount of the Facility A Commitment
under this Section 2.01(a).
(b) The Bank agrees, in addition to the funds to be advanced under
subsection (a) above and on the terms and conditions set forth herein, to make
Advances to the Borrower from time to time before the Facility B Termination
Date; provided that, immediately after each such Advance is made, the aggregate
principal amount of outstanding Advances (exclusive of all Advances made in
respect of the Facility A Commitment) shall not exceed $5,000,000.00 (as such
figure may be reduced from time to time as provided in this Agreement, the
"Facility B Commitment"). Within the foregoing limits, the Borrower may borrow
under this Section, repay or, to the extent permitted by Section 2.09, prepay
Advances and reborrow under this Section at any time before the Facility B
Termination Date. The Bank shall have no obligation to advance funds in excess
of the amount of the Facility B Commitment.
(c) Each Euro-Dollar Borrowing under this Section shall be in an aggregate
principal amount of $100,000.00 or any larger multiple of $50,000.00.
SECTION 2.02. Method of Borrowing. (a) The Borrower shall give the Bank
notice (a "Notice of Borrowing") at least three Euro-Dollar Business Days before
each Euro-Dollar Borrowing and at least one Domestic Business Day before each
Base Rate Borrowing, specifying:
(i) the date of such Borrowing, which shall be a Euro-Dollar Business
Day for Euro-Dollar Borrowings or a Domestic Business Day for Base Rate
Borrowings,
(ii) the aggregate amount of such Borrowing, and
(iii) the duration of the Interest Period applicable thereto, subject
to the provisions of the definition of Interest Period, for Euro-Dollar
Borrowings;
(b) A Notice of Borrowing, once given, shall be irrevocable. The Bank shall
be entitled
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to rely on any telephonic Notice of Borrowing which it believes in good faith to
have been given by a duly authorized officer of the Borrower and any Advances
made by the Bank based on such telephonic notice shall, when credited by the
Bank to the regular deposit account maintained by the Borrower with the Bank, be
an Advance for all purposes hereunder. Not later than 2:00 p.m., Charlotte,
North Carolina time, on the date specified for the Borrowing in the Notice of
Borrowing, the Bank shall credit, in immediately available funds, the amount of
such Borrowing to the regular deposit account maintained by the Borrower with
the Bank.
(c) Notwithstanding the foregoing provisions of this Section 2.02, all
Advances under the Facility B Commitment shall be funded by the Bank in
accordance with the Loan Access Agreement.
(d) If the Bank makes a new Advance hereunder on a day on which the
Borrower is to repay all or any part of an outstanding Advance, the Bank shall
apply the proceeds of its new Advance to make such repayment and only an amount
equal to the difference (if any) between the amount being borrowed and the
amount being repaid shall be made available by the Bank to the Borrower as
provided in subsection (b) or (c) of this Section, or remitted by the Borrower
to the Bank as provided in Section 2.11, as the case may be.
(e) Notwithstanding anything to the contrary contained in this Agreement,
no Euro-Dollar Borrowing may be made if there shall have occurred a Default or
an Event of Default, which Default or Event of Default shall not have been cured
or waived.
(f) If the Borrower is otherwise entitled under this Agreement to repay any
Advance maturing at the end of an Interest Period applicable thereto with the
proceeds of a new Borrowing, and the Borrower fails to repay such Advance using
its own moneys and fails to give a Notice of Borrowing in connection with such
new Borrowing, a new Borrowing shall be deemed to be made on the date such
Advance matures in an amount equal to the principal amount of the Advance so
maturing, and the Advance comprising such new Borrowing shall be a Base Rate
Loan.
SECTION 2.03. Notes. The Advances under the Facility A Commitment shall be
evidenced by the Facility A Note payable to the order of the Bank for the
account of its Lending Office in an amount equal to the original principal
amount of the Facility A Commitment. The Advances under the Facility B
Commitment shall be evidenced by the Facility B Note payable to the order of the
Bank for the account of its Lending Office in an amount equal to the original
principal amount of the Facility B Commitment. The Bank shall record, and prior
to any transfer of either Note shall endorse on the schedule forming a part
thereof appropriate notations to evidence, the date, amount and maturity of, and
effective interest rate for, each Advance made by it, the date and amount of
each payment of principal made by the Borrower with respect thereto and whether
such Advance is a Base Rate Loan or a Euro-Dollar Loan, and such recordations
and endorsements shall constitute rebuttable presumptive evidence of the
principal amount owing and unpaid on the Notes; provided that the failure of the
Bank to make any such recordation or endorsement shall not affect the obligation
of the Borrower hereunder or under the Notes. The Bank is hereby irrevocably
authorized by the Borrower so to endorse the Notes and to attach to and make a
part of either Note a continuation of any such schedule as and when required.
SECTION 2.04. Maturity of Advances. (a) Each Advance included in any
Euro-Dollar Borrowing shall mature, and the principal amount thereof shall be
due and payable, on the last day of the Interest Period applicable to such
Euro-Dollar Borrowing. Each Advance included in any Base Rate Borrowing shall
finally mature on the Facility A Maturity Date or the Facility B Termination
Date, as applicable, and the principal amount thereof shall be due and payable
from time to time as herein provided or as provided in the Loan Access
Agreement, if applicable to such Advance.
(b) Upon written request of Borrower, which may be made from time to time
and which shall be made in writing and delivered to the Bank on a Domestic
Business Day no fewer than
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60 days prior to the third and fourth anniversary of the Closing Date, the Bank
in its sole and absolute discretion may (but shall not be obligated to) extend
the then effective Facility B Termination Date for a period of 1 year; provided
that in no event shall the Facility B Termination Date be extended later than
February 20, 2003. In the event that the Bank chooses to extend the Facility B
Termination Date for such a 1 year period, notice shall be given by the Bank to
the Borrower not more than 45, nor fewer than 30, days prior to the next
succeeding anniversary of the Closing Date.
SECTION 2.05. Interest Rates. (a) Each Advance made as a Base Rate Loan
shall bear interest on the outstanding principal amount thereof, for each day
from the date such Advance is made until it becomes due, at a rate per annum
equal to the Base Rate for such day plus the Applicable Margin. Such interest on
Advances under the Facility B Commitment shall be payable as provided in the
Loan Access Agreement, or if the Loan Access Agreement shall have terminated as
provided therein, monthly on the first Domestic Business Day of each month. Such
interest on Advances under the Facility A Commitment shall be payable monthly on
the first Domestic Business Day of each month. Any overdue principal of and, to
the extent permitted by applicable law, overdue interest on any Advance so made
as a Base Rate Loan shall bear interest, payable on demand, for each day until
paid at a rate per annum equal to the sum of 2% plus the rate otherwise
applicable to such Advance, so made as a Base Rate Loan, for such day.
(b) Each Advance made as a Euro-Dollar Loan shall bear interest on the
outstanding principal amount thereof, for the Interest Period applicable
thereto, at a rate per annum equal to the sum of the Applicable Margin plus the
applicable Adjusted London Interbank Offered Rate for such Interest Period;
provided that if any Advance made as a Euro-Dollar Loan shall, as a result of
clauses (1)(c) or 1(d) of the definition of Interest Period, have an Interest
Period of less than one month, such Advance so made as a Euro-Dollar Loan shall
bear interest during such Interest Period at the rate applicable to Advances
made as Base Rate Loans during such period. Such interest on Advances under the
Facility B Commitment shall be payable as provided in the Loan Access Agreement,
or if the Loan Access Agreement shall have terminated as therein provided, for
each Interest Period on the last day thereof and if such Interest Period is
longer than three months, at intervals of three months after the first day
thereof. Such interest on Advances under the Facility A Commitment shall be
payable for each Interest Period on the last day thereof and, if such Interest
Period is longer than three months, at intervals of three months after the first
day thereof. Any overdue principal of and, to the extent permitted by law,
overdue interest on any Euro-Dollar Loan shall bear interest, payable on demand,
for each day until paid at a rate per annum equal to the sum of 2% plus the
higher of (x) the sum of the Applicable Margin plus the Adjusted London
Interbank Offered Rate applicable to such Euro-Dollar Loan or (y) the rate which
would be applicable for such day to such Advance if it had been made as Base
Rate Loan.
(c) The Applicable Margin for any Euro-Dollar Loan for any day shall be the
rate per annum set forth below as determined to be applicable based on the
applicable ratio of Consolidated Funded Debt to EBITDA:
(i) if the ratio of Consolidated Funded Debt to EBITDA is greater than
or equal to 2.00 to 1.00, then the Applicable Margin for Euro-Dollar Loans
shall be 2.75% per annum;
(ii) if the ratio of Consolidated Funded Debt to EBITDA is less than
2.00 to 1.00 but greater than 1.00 to 1.00, then the Applicable Margin for
Euro-Dollar Loans shall be 2.50% per annum; and
(iii) if the ratio of Consolidated Funded Debt to EBITDA is less than
or equal to 1.00 to 1.00, then the Applicable Margin for Euro-Dollar Loans
shall be 2.25% per annum.
The Applicable Margin for Euro-Dollar Loans shall be determined and
adjusted quarterly on the date (each a "Rate Determination Date") five (5)
Domestic Business Days after the date by which the annual and quarterly
compliance certificates and related financial statements and
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information are required in accordance with the provisions of Sections 6.01(a),
(b) and (c), as appropriate; provided that (A) the initial Applicable Margin for
Euro-Dollar Loans shall be 2.75% and shall remain in effect until the first Rate
Determination Date to occur after the Closing Date, and (B) in the event an
annual or quarterly compliance certificate and related financial statements and
information are not delivered timely to the Bank by the date required by
Sections 6.01(a), (b) and (c), as appropriate, the Applicable Margin shall be
two and three quarters percent (2.75%) until such time as such an appropriate
compliance certificate and related financial statements and information are
delivered, whereupon the Applicable Margin shall be adjusted based on the
information contained in such compliance certificate and related financial
statements and information. Each Applicable Margin shall be effective from a
Rate Determination Date until the next such Rate Determination Date, and shall
be effective as to existing Advances as well as new Advances made thereafter.
(d) Notwithstanding anything herein to the contrary, if one or more
Facility A Commitment Reduction Dates are scheduled to occur during an Interest
Period in which the Facility A Advances are Euro-Dollar Loans other than on the
last day of such Interest Period, then during such Interest Period a portion of
the outstanding balance of the Facility A Advances which is equal to the
aggregate amount of the principal payment due under the Facility A Commitment on
such Facility A Commitment Reduction Dates shall be Base Rate Loans, and only
the remaining portion of the outstanding principal of the Advances under the
Facility A Commitment shall constitute Euro-Dollar Loans.
SECTION 2.06. Commitment Fee. (a) From and after the date hereof up to and
including the Facility B Termination Date, the Borrower shall pay to the Bank a
commitment fee at the Commitment Fee Rate, as determined in accordance with
Section 2.06(b) (calculated from the date hereof on the basis of a year of 360
days and payable for the actual number of days elapsed) on the average daily
balance of the Unused Commitment (the "Commitment Fee"). The Commitment Fee
shall be payable by the Borrower quarterly in arrears on each Commitment Fee
Payment Date and on the Facility B Termination Date, provided that should the
Facility B Commitment be terminated at any time prior to the Facility B
Termination Date (whether by termination of the Facility B Commitment as
provided in Section 2.07 or Section 2.08, refinancing of the Advances or
otherwise), the entire accrued and unpaid Commitment Fee shall be paid on the
date of such termination.
(b) The Commitment Fee Rate for any day shall be the percentage rate per
annum set forth below as determined to be applicable based on the applicable
ratio of Consolidated Funded Debt to EBITDA:
(i) if the ratio of Consolidated Funded Debt to EBITDA is greater than
or equal to 2.00 to 1.00, then the Commitment Fee Rate shall be 0.500% per
annum;
(ii) if the ratio of Consolidated Funded Debt to EBITDA is less than
2.00 to 1.00 but greater than 1.00 to 1.00, then the Commitment Fee Rate
shall be 0.400% per annum; and
(iii) if the ratio of Consolidated Funded Debt to EBITDA is less than
or equal to 1.00 to 1.00, then the Commitment Fee Rate shall be 0.300% per
annum.
The Commitment Fee Rate shall be determined and adjusted quarterly on each
Rate Determination Date; provided that (A) the initial Commitment Fee Rate shall
be 0.500% and shall remain in effect until the first Rate Determination Date to
occur after the Closing Date, and (B) in the event an annual or quarterly
compliance certificate and related financial statements and information are not
delivered timely to the Bank by the date required by Sections 6.01(a), (b) and
(c), as appropriate, the Commitment Fee Rate shall be one-half of one percent
(0.500%) until such time as such an appropriate compliance certificate and
related financial statements and information are delivered, whereupon the
Commitment Fee Rate shall be adjusted based on the information contained in such
compliance certificate and related financial statements and information. Each
Commitment Fee Rate shall be effective from a Rate Determination Date until the
next such Rate Determination Date.
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SECTION 2.07. Optional Termination or Reduction of Facility B Commitment.
The Borrower may, upon at least three Domestic Business Days' notice to the
Bank, terminate the Facility B Commitment at any time, or reduce the Facility B
Commitment from time to time by an aggregate minimum amount of at least
$500,000.00 or an integral multiple of $100,000.00 in excess thereof. If the
Facility B Commitment is so reduced, such reduction shall be accounted for in
determining the fees due under Section 2.06. If the Facility B Commitment is so
terminated in its entirety, all accrued fees (as provided under Section 2.06)
shall be payable on the effective date of such termination. A notice of
reduction or termination of the Facility B Commitment hereunder, once given,
shall not thereafter be revocable by the Borrower.
SECTION 2.08. Mandatory Reduction and Termination of Commitments.
(a) The Facility A Commitment shall terminate and the unpaid principal
balance and all accrued and unpaid interest on the Facility A Note will be due
and payable upon the first of the following dates or events to occur: (i)
acceleration of the maturity of the Facility A Note in accordance with the
remedies contained in Section 7.02; or (ii) the Facility A Maturity Date.
(b) The amount of the Facility A Commitment shall be reduced on each
Facility A Commitment Reduction Date by an amount equal to $250,000.00.
(c) The Facility B Commitment shall terminate and the unpaid principal
balance and all accrued and unpaid interest on the Facility B Note will be
payable upon the first of the following dates or events to occur: (i)
acceleration of the maturity of the Facility B Note in accordance with the
remedies contained in Section 7.02; or (ii) upon the expiration of the Facility
B Commitment on the Facility B Termination Date.
(d) The amount of the Facility B Commitment shall be reduced on the
Facility B Commitment Reduction Date by an amount equal to $1,000,000.00.
SECTION 2.09. Optional Prepayments. (a) The Borrower may, upon at least one
Domestic Business Days' notice to the Bank, prepay any Base Rate Borrowing in
whole at any time, or from time to time in part, by paying the principal amount
to be prepaid together with accrued interest thereon to the date of prepayment.
(b) Except as provided in Section 3.05, the Borrower may not prepay all or
any portion of the principal amount of any Euro-Dollar Loan prior to the
maturity thereof.
(c) A notice of prepayment pursuant to this Section, once given, shall not
thereafter be revocable by the Borrower.
SECTION 2.10. Mandatory Prepayments. On each date on which the Commitments
are reduced or terminated pursuant to Section 2.07 and 2.08, the Borrower shall
repay or prepay such principal amount of the outstanding Advances, if any
(together with interest accrued thereon), as may be necessary so that after such
payment the aggregate unpaid principal amount of the outstanding Advances does
not exceed the aggregate amount of the respective Commitments as then reduced.
Each such mandatory prepayment shall be applied to reduce the Facility A
Commitment or the Facility B Commitment, as the case may be, on the applicable
Facility A Commitment Reduction Date or the Facility B Commitment Reduction Date
or on the date on which either of the Facility A Commitment or the Facility B
Commitment is terminated, as applicable.
SECTION 2.11. General Provisions Concerning Payments. (a) All payments of
principal of, or interest on, the Notes, and of the Commitment Fee, shall be
made in Federal or other funds immediately available to the Bank at its office
in Charlotte, North Carolina not later than 11:00 a.m., Charlotte, North
Carolina time. Funds received after 11:00 a.m. shall be deemed to have been paid
on the next following Domestic Business Day.
(b) Whenever any payment of principal of, or interest on, the Base Rate
Loans or of the
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Commitment Fees shall be due on a day which is not a Domestic Business Day, the
date for payment thereof shall be extended to the next succeeding Domestic
Business Day. Whenever any payment of principal of, or interest on, the
Euro-Dollar Loans shall be due on a day which is not a Euro-Dollar Business Day,
the date for payment thereof shall be extended to the next succeeding
Euro-Dollar Business Day unless such Euro-Dollar Business Day falls in another
calendar month, in which case the date for payment thereof shall be the next
preceding Euro-Dollar Business Day. If the date for any payment of principal is
extended by operation of law or otherwise, interest thereon shall be payable for
such extended time.
SECTION 2.12. Computation of Interest and Fees. Interest on Base Rate Loans
and Euro-Dollar Loans shall be computed on the basis of a year of 360 days and
paid for the actual number of days elapsed, in the case of Base Rate Loans as
provided in the Loan Access Agreement and in the case of Euro-Dollar Loans, as
to each Interest Period from and including the first day thereof to but
excluding the last day thereof. Commitment fees hereunder shall be computed on
the basis of a year of 360 days and paid for the actual number of days elapsed
(including the first day but excluding the last day).
ARTICLE III. CHANGE IN CIRCUMSTANCES; COMPENSATION
SECTION 3.01. Basis for Determining Interest Rate Inadequate or Unfair. If
on or prior to the first day of any Interest Period:
(a) the Bank determines that deposits in Dollars (in the applicable
amounts) are not being offered in the relevant market for such Interest
Period, or
(b) the Bank determines that the Interbank Offered Rate as determined
by the Bank will not adequately and fairly reflect the cost to the Bank of
funding Euro-Dollar Loans for such Interest Period,
the Bank shall forthwith give notice thereof to the Borrower, whereupon until
the Bank notifies the Borrower that the circumstances giving rise to such
suspension no longer exist, the obligations of the Bank to make or maintain
Euro-Dollar Loans shall be suspended. Unless the Borrower notifies the Bank at
least two Domestic Business Days before the date of any Borrowing of or the
commencement of any Interest Period for Euro-Dollar Loans for which a Notice of
Borrowing has previously been given that it elects not to borrow on such date,
such Borrowing shall instead be made as a Base Rate Borrowing.
SECTION 3.02. Illegality. If, after the date hereof, the adoption of any
applicable law, rule or regulation, or any change therein, or any change in the
interpretation or administration thereof by any governmental authority, central
bank or comparable agency charged with the interpretation or administration
thereof (any such authority, bank or agency being referred to as an "Authority"
and any such event being referred to as a "Change of Law"), or compliance by the
Bank (or its Lending Office) with any request or directive (whether or not
having the force of law) of any Authority shall make it unlawful or impossible
for the Bank (or its Lending Office) to make, maintain or fund its Euro-Dollar
Loans and the Bank shall so notify the Borrower, whereupon until the Bank
notifies the Borrower that the circumstances giving rise to such suspension no
longer exist, the obligation of the Bank to make Euro-Dollar Loans shall be
suspended. Before giving any notice pursuant to this paragraph, the Bank shall
designate a different Lending Office if able to do so and if such designation
will avoid the need for giving such notice and will not, in the judgment of the
Bank, be otherwise disadvantageous to the Bank. If the Bank shall determine that
it may not lawfully continue to maintain and fund any of its outstanding
Euro-Dollar Loans to maturity and shall so specify in such notice, the Borrower
shall immediately prepay in full the then outstanding principal amount of each
Euro-Dollar Loan, together with accrued interest thereon. Concurrently with
prepaying each such Advance, the Borrower shall borrow an Advance as a Base Rate
Loan in an equal principal amount from the Bank and the Bank shall make such an
Advance.
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SECTION 3.03. Increased Cost and Reduced Return. (a) If after the date
hereof, a Change of Law or compliance by the Bank (or its Lending Office) with
any request or directive (whether or not having the force of law) of any
Authority:
(i) shall subject the Bank (or its Lending Office) to any tax, duty or
other charge with respect to its Euro-Dollar Loans, the Notes or its
obligation to make or maintain Euro-Dollar Loans, or shall change the basis
of taxation of payments to the Bank (or its Lending Office) of the
principal of or interest on its Euro-Dollar Loans or any other amounts due
under this Agreement in respect of its Euro-Dollar Loans or its obligation
to make or maintain Euro-Dollar Loans (except for changes in the rate of
tax on the overall net income of the Bank or its Lending Office imposed by
the jurisdiction in which the Bank's principal executive office or Lending
Office is located); or
(ii) shall impose, modify or deem applicable any reserve, special
deposit or similar requirement (including, without limitation, any such
requirement imposed by the Board of Governors of the Federal Reserve
System, but excluding with respect to any Euro-Dollar Loan any such
requirement included in an applicable Euro-Dollar Reserve Percentage)
against assets of, deposits with or for the account of, or credit extended
by, the Bank (or its Lending Office); or
(iii) shall impose on the Bank (or its Lending Office) or the London
interbank market any other condition affecting its Euro-Dollar Loans, its
Notes or its obligation to make or maintain Euro-Dollar Loans;
and the result of any of the foregoing is to increase the cost to the Bank (or
its Lending Office) of making or maintaining any Euro-Dollar Loan, or to reduce
the amount of any sum received or receivable by the Bank (or its Lending Office)
under this Agreement or under the Notes with respect thereto, by an amount
deemed by the Bank to be material, then, within 15 days after demand by the
Bank, the Borrower shall pay to the Bank such additional amount or amounts as
will compensate the Bank for such increased cost or reduction.
(b) If the Bank shall have determined that after the date hereof the
adoption of any applicable law, rule or regulation regarding capital adequacy,
or any change therein, or any change in the interpretation or administration
thereof, or compliance by the Bank (or its Lending Office) with any request or
directive regarding capital adequacy (whether or not having the force of law) of
any Authority, has or would have the effect of reducing the rate of return on
the Bank's capital as a consequence of its obligations under this Agreement with
respect to any Advance to a level below that which the Bank could have achieved
but for such adoption, change or compliance (taking into consideration the
Bank's policies with respect to capital adequacy) by an amount deemed by the
Bank to be material, then from time to time, within 15 days after demand by the
Bank, the Borrower shall pay to the Bank such additional amount or amounts as
will compensate the Bank for such reduction.
(c) The Bank will promptly notify the Borrower of any event of which it has
knowledge, occurring after the date hereof, which will entitle the Bank to
compensation pursuant to this Section and will designate a different Lending
Office if such designation will avoid the need for, or reduce the amount of,
such compensation and will not, in the judgment of the Bank, be otherwise
disadvantageous to the Bank. A certificate of the Bank claiming compensation
under this Section and setting forth the additional amount or amounts to be paid
to it hereunder shall be conclusive in the absence of manifest error. In
determining such amount, the Bank may use any reasonable averaging and
attribution methods.
(d) The provisions of this Section shall be applicable with respect to any
Participant in, or Assignee or other Transferee of, the obligations of the
Borrower hereunder to the Bank, and any calculations required by such provisions
shall be made based upon the circumstances of such Participant, Assignee or
other Transferee.
SECTION 3.04. Base Rate Loans Substituted for Affected Euro-Dollar Loans.
If (i) the
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obligation of the Bank to make or maintain Euro-Dollar Loans has been suspended
pursuant to Section 3.01 or Section 3.02, or (ii) the Bank has demanded
compensation under Section 3.03, and if in either case the Borrower, by at least
one Domestic Business Day's prior notice to the Bank shall have elected that the
provisions of this Section shall apply, then, unless and until the Bank notifies
the Borrower that the circumstances giving rise to such suspension or demand for
compensation no longer apply:
(a) all Advances which would otherwise be made by the Bank as
Euro-Dollar Loans shall be made instead as Base Rate Loans, and
(b) after each of its Euro-Dollar Loans has been repaid, all payments
of principal which would otherwise be applied to repay such Euro-Dollar
Loans shall be applied to repay its Base Rate Loans instead.
SECTION 3.05. Compensation. Upon the request of the Bank, delivered to the
Borrower, the Borrower shall pay to the Bank such amount or amounts as shall
compensate the Bank for any loss, cost or expense actually incurred by the Bank
as a result of:
(a) any optional or mandatory payment or prepayment (pursuant to
Section 3.02 or otherwise) of a Euro-Dollar Loan on a date other than the
last day of an Interest Period for such Euro-Dollar Loan; or
(b) any failure by the Borrower to prepay a Euro-Dollar Loan on the
date for such prepayment specified in the relevant notice of prepayment of
or notice of reduction of either Commitment hereunder, as the case may be;
or
(c) any failure by the Borrower to borrow an Advance as a Euro-Dollar
Loan on the date for the Borrowing specified in the applicable Notice of
Borrowing delivered pursuant to Section 2.02;
such compensation to include, without limitation, but only to the extent such
loss, cost or expense is actually incurred by the Bank, an amount equal to the
excess, if any, of (x) the amount of interest which would have accrued on the
amount so paid or prepaid or not prepaid or borrowed, for the period from the
date of such payment, prepayment or failure to prepay or borrow to the last day
of the then current Interest Period for such Euro-Dollar Loan (or, in the case
of a failure to prepay or borrow, the Interest Period for such Euro-Dollar Loan
which would have commenced on the date of such failure to prepay or borrow) at
the applicable rate of interest for such Euro-Dollar Loan provided for herein
over (y) the amount of interest (as reasonably determined by the Bank) the Bank
would have paid on deposits in Dollars of comparable amounts having terms
comparable to such period placed with it by leading banks in the London
interbank market.
ARTICLE IV. CONDITIONS TO BORROWINGS
SECTION 4.01. Conditions to First Borrowing. The obligation of the Bank to
make an Advance on the occasion of the first Borrowing is subject to the
satisfaction of the conditions set forth in Section 4.02 and the following
additional conditions:
(a) receipt by the Bank from the Borrower of a duly executed
counterpart of this Agreement signed by the Borrower;
(b) receipt by the Bank of the duly executed Notes complying with the
provisions of Section 2.03;
(c) receipt by the Bank of the duly executed Security Agreement,
Pledge Agreement and related financing statements in form and substance
satisfactory to the Bank;
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(d) receipt by the Bank of a certificate, dated the date of the first
Borrowing, signed by a principal financial officer of the Borrower to the
effect that (i) no Default hereunder has occurred and is continuing on the
date of the first Borrowing and (ii) the representations and warranties of
the Borrower contained in Article V are true on and as of the date of the
first Borrowing hereunder;
(e) receipt by the Bank of all documents which the Bank may reasonably
request relating to the existence of the Borrower, the corporate authority
for and the validity of this Agreement and the Notes, and any other matters
relevant hereto, all in form and substance satisfactory to the Bank,
including without limitation a certificate of incumbency of the Borrower,
signed by the Secretary or an Assistant Secretary of the Borrower,
certifying as to the names, true signatures and incumbency of the officer
or officers of the Borrower authorized to execute and deliver the Loan
Documents, and certified copies of the following items: (i) the Borrower's
Certificate of Incorporation, (ii) the Borrower's Bylaws, (iii) a
certificate of the Secretary of State (or other appropriate office) of the
jurisdiction of the Borrower's incorporation as to the good standing of the
Borrower as a corporation of such jurisdiction, and (iv) the action taken
by the Board of Directors of the Borrower authorizing the Borrower's
execution, delivery and performance of this Agreement, the Notes and the
other Loan Documents to which the Borrower is a party; and
(f) receipt by the Bank of an opinion of counsel of Alston & Bird LLP,
counsel for the Borrower, substantially in the form of Exhibit D hereto,
and covering such additional matters relating to the transactions
contemplated hereby as the Bank may reasonably request.
SECTION 4.02. Conditions to All Borrowings. The obligation of the Bank to
make an Advance on the occasion of each Borrowing is subject to the satisfaction
of the following conditions:
(a) receipt by the Bank of Notice of Borrowing if required by Section
2.02;
(b) the fact that, immediately after such Borrowing, no Default shall
have occurred and be continuing;
(c) the fact that the representations and warranties of the Borrower
contained in Article V shall be true on and as of the date of such
Borrowing; and
(d) the fact that, immediately after such Borrowing, the aggregate
outstanding principal amount of the Advances under the respective
Commitments will not exceed the amount of the respective Commitments.
Each Borrowing hereunder shall be deemed to be a representation and warranty by
the Borrower on the date of such Borrowing as to the facts specified in clauses
(b), (c) and (d) of this Section; provided that such Borrowing shall not be
deemed to be such a representation and warranty to the effect set forth in
Section 5.04(b) as to any material adverse change which has theretofore been
disclosed in writing by the Borrower to the Bank if the aggregate outstanding
principal amount of the Advances immediately after such Borrowing will not
exceed the aggregate outstanding principal amount of Advances immediately before
such Borrowing.
ARTICLE V. REPRESENTATIONS AND WARRANTIES
The Borrower represents and warrants that:
SECTION 5.01. Corporate Existence and Power. The Borrower is a corporation
duly organized, validly existing and in good standing under the laws of the
jurisdiction of its incorporation, is duly qualified to transact business in
every jurisdiction where, by the nature of its business, such qualification is
necessary, and has all corporate powers and all governmental licenses,
authorizations, consents and approvals required to carry on its business as now
conducted.
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SECTION 5.02. Corporate and Governmental Authorization; Contravention. The
execution, delivery and performance by the Borrower of this Agreement, the Notes
and the other Loan Documents (i) are within the Borrower's corporate powers,
(ii) have been duly authorized by all necessary corporate action, (iii) require
no action by or in respect of, or filing with, any governmental body, agency or
official, (iv) do not contravene, or constitute a default under, any provision
of applicable law or regulation or of the certificate of incorporation or
by-laws of the Borrower or of any agreement, judgment, injunction, order, decree
or other instrument binding upon the Borrower or any of its Subsidiaries, and
(v) do not result in the creation or imposition of any Lien on any asset of the
Borrower or any of its Subsidiaries except for Permitted Encumbrances.
SECTION 5.03. Binding Effect. This Agreement constitutes a valid and
binding agreement of the Borrower enforceable in accordance with its terms, and
the Notes and the other Loan Documents, when executed and delivered in
accordance with this Agreement, will constitute valid and binding obligations of
the Borrower enforceable in accordance with their respective terms, provided
that the enforceability hereof and thereof is subject in each case to general
principles of equity and to bankruptcy, insolvency and similar laws affecting
the enforcement of creditors' rights generally.
SECTION 5.04. Financial Information. (a) The consolidating and consolidated
balance sheet of Bull Run and its Consolidated Subsidiaries as of December 31,
1996 and the related consolidating and consolidated statements of income,
shareholders' equity and cash flows for the Fiscal Year then ended, reported on
(in the case of the consolidated balance sheet and consolidated statements of
income, shareholders' equity and cash flows only) by Ernst & Young LLP, copies
of which have been delivered to the Bank, and the unaudited consolidating and
consolidated financial statements of Bull Run and its Consolidated Subsidiaries
for the interim period ended September 30, 1997, copies of which have been
delivered to the Bank, fairly present, in conformity with GAAP, the
consolidating and consolidated financial position of Bull Run and its
Consolidated Subsidiaries as of such dates and their consolidating results of
operations and cash flows for such periods stated.
(b) Since September 30, 1997 there has been no material adverse change in
the business, financial position, results of operations or prospects of Bull Run
and its Consolidated Subsidiaries.
SECTION 5.05. Litigation. Except as disclosed on Schedule 5.05 hereto,
there is no action, suit or proceeding pending, or to the knowledge of the
Borrower threatened, against or affecting Bull Run, the Borrower or any of their
respective Subsidiaries before any court or arbitrator or any governmental body,
agency or official which could materially adversely affect the business,
consolidated financial position or consolidated results of operations of Bull
Run, the Borrower and their respective Consolidated Subsidiaries, or which in
any manner draws into question the validity of, or could impair the ability of
the Borrower to perform its obligations under, this Agreement, the Notes or any
of the other Loan Documents.
SECTION 5.06. Compliance with ERISA. (a) The Borrower and each member of
the Controlled Group have fulfilled their obligations under the minimum funding
standards of ERISA and the Code with respect to each Plan and are in compliance
in all material respects with the presently applicable provisions of ERISA and
the Code, and have not incurred any liability to the PBGC or a Plan under Title
IV of ERISA.
(b) Neither the Borrower nor any member of the Controlled Group is or ever
has been obligated to contribute to any Multiemployer Plan.
SECTION 5.07. Taxes. There have been filed on behalf of Bull Run, the
Borrower and their respective Subsidiaries all Federal, state and local income,
excise, property and other tax returns which are required to be filed by them
and all taxes due pursuant to such returns or pursuant to any assessment
received by or on behalf of Bull Run, the Borrower or any Subsidiary of Bull Run
or the Borrower have been paid except for those which are in good faith
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being contested by such Person and for which adequate reserves have been
provided in accordance with GAAP. The charges, accruals and reserves on the
books of Bull Run, the Borrower and their respective Subsidiaries in respect of
taxes or other governmental charges are, in the opinion of the Borrower,
adequate. United States income tax returns of Bull Run, the Borrower and their
respective Subsidiaries have been examined and closed through the Fiscal Year
ended December 31, 1996.
SECTION 5.08. Subsidiaries. Each of Bull Run's Subsidiaries is a
corporation duly organized, validly existing and in good standing under the laws
of its jurisdiction of incorporation, and has all corporate powers and all
governmental licenses, authorizations, consents and approvals required to carry
on its business as now conducted except where the failure to have such licenses,
authorizations, consents and approvals could not reasonably be expected to have
a material adverse effect on such Subsidiaries, taken as a whole.
SECTION 5.09. Not an Investment Company. The Borrower is not an "investment
company" within the meaning of the Investment Company Act of 1940, as amended.
SECTION 5.10. Ownership of Property; Liens. Each of the Borrower and its
Consolidated Subsidiaries has title to its properties sufficient for the conduct
of its business, and none of such property is subject to any Lien except for
Permitted Encumbrances.
SECTION 5.11. No Default. Neither the Borrower nor any of its Consolidated
Subsidiaries is in default under or with respect to any agreement, instrument or
undertaking to which it is a party or by which it or any of its property is
bound which will be materially adverse to the business, operations, property or
financial or other condition of the Borrower and its Consolidated Subsidiaries,
or which will materially adversely affect the ability of the Borrower to perform
its obligations under the Loan Documents. No Default has occurred and is
continuing (except for the Defaults existing on the date of this Agreement
described in Section 7.01(f)).
SECTION 5.12. Full Disclosure. All information heretofore furnished by the
Borrower to the Bank for purposes of or in connection with this Agreement or any
transaction contemplated hereby is, and all such information hereafter furnished
by the Borrower to the Bank will be, true, accurate and complete in every
material respect or based on reasonable estimates on the date as of which such
information is stated or certified. The Borrower has disclosed to the Bank in
writing any and all facts which materially and adversely affect or may affect
(to the extent the Borrower can now reasonably foresee), the business,
operations, prospects or condition, financial or otherwise, of the Borrower and
its Consolidated Subsidiaries or the ability of the Borrower to perform its
obligations under this Agreement.
SECTION 5.13. Environmental Matters. (a) Neither the Borrower nor any
Subsidiary of the Borrower is subject to any Environmental Liability which is
likely to have a material adverse effect on the business, financial position,
results of operations or prospects of the Borrower or any of its Subsidiaries
and neither the Borrower nor any of its Subsidiaries has been designated as a
potentially responsible party under CERCLA or under any state statute similar to
CERCLA. None of the Properties have been identified on any current or proposed
(i) National Priorities List under 40 C.F.R. Sec. 300, (ii) CERCLIS list or
(iii) any list arising from a state statute similar to CERCLA.
(b) No Hazardous Materials have been or are being used, produced,
manufactured, processed, generated, stored, disposed of, managed at, or shipped
or transported to or from the Properties or are otherwise present at, on, in or
under the Properties, or, to the best of the knowledge of the Borrower, at or
from any adjacent site or facility, except for Hazardous Materials, such as
cleaning solvents, pesticides and other materials used, produced, manufactured,
processed, generated, stored, disposed of, and managed in the ordinary course of
business in compliance with all applicable Environmental Requirements.
(c) The Borrower and each of its Subsidiaries has procured all
Environmental
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Authorizations necessary for the conduct of its business, and is in compliance
with all Environmental Requirements in connection with the operation of the
Properties and the Borrower's and each of its Subsidiary's and Affiliate's
respective businesses except, in either case, where the failure to procure such
Environmental Authorizations or to be in compliance with such Environmental
Requirements could not reasonably be expected to have a material adverse effect
on the Borrower and its Subsidiaries, taken as a whole.
SECTION 5.14. Compliance with Laws. The Borrower and each Subsidiary of the
Borrower is in compliance with all applicable laws, except where any failure to
comply with any such laws could not, alone or in the aggregate, be reasonably
expected to have a material adverse effect on the business, financial position,
results of operations or prospects of the Borrower or any of its Subsidiaries,
taken as a whole.
ARTICLE VI. COVENANTS
The Borrower agrees that, so long as the Commitments are in effect
hereunder or any amount payable under this Agreement remains unpaid:
SECTION 6.01. Information. The Borrower will deliver or cause to be
delivered to the Bank:
(a) as soon as available and in any event within 90 days after the end
of each Fiscal Year, a consolidating and consolidated balance sheet of Bull
Run and its Consolidated Subsidiaries as of the end of such Fiscal Year and
the related consolidating and consolidated statements of income,
shareholders' equity and cash flows for such Fiscal Year, setting forth in
each case in comparative form the figures for the previous fiscal year, and
in the case of the consolidated balance sheet and consolidated statements
of income, shareholders' equity and cash flows certified by Ernst & Young
LLP or other independent public accountants of nationally recognized
standing, with such certification to be free of exceptions and
qualifications not acceptable to Bank, and in the case of the consolidating
balance sheet and the consolidating statements of income, shareholders'
equity and cash flows certified by the chief financial officer or the chief
accounting officer of Bull Run or the Borrower as to fairness of
presentation, GAAP and consistency.
(b) as soon as available and in any event within 60 days after the end
of each of the first three quarters of each Fiscal Year, a consolidating
and consolidated balance sheet of Bull Run and its Consolidated
Subsidiaries as of the end of such quarter and the related consolidating
and consolidated statement of income and statement of cash flows for such
quarter and for the portion of the Fiscal Year ended at the end of such
quarter, all certified (subject to normal year-end adjustments) as to
fairness of presentation, GAAP and consistency by the chief financial
officer or the chief accounting officer of Bull Run or the Borrower;
(c) simultaneously with the delivery of each set of financial
statements referred to in clauses (a) and (b) above, a certificate of the
chief financial officer or the chief accounting officer of Bull Run or the
Borrower (i) setting forth in reasonable detail the calculations required
to establish whether the Borrower was in compliance with the requirements
of Sections 6.03 through 6.07, inclusive, on the date of such financial
statements and (ii) stating whether any Default exists on the date of such
certificate and, if any Default then exists, setting forth the details
thereof and the action which the Borrower is taking or proposes to take
with respect thereto;
(d) within five Domestic Business Days after the Borrower becomes
aware of the occurrence of any Default, a certificate of the chief
financial officer or the chief accounting officer of the Borrower setting
forth the details thereof and the action which the Borrower is taking or
proposes to take with respect thereto;
(e) promptly upon the mailing thereof to the shareholders of Bull Run
or the Borrower generally, copies of all financial statements, reports and
proxy statements so mailed;
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(f) promptly upon the filing thereof, copies of all registration
statements (other than the exhibits thereto and any registration statements
on Form S-8 or its equivalent) and annual, quarterly or monthly reports
which the Borrower or Bull Run shall have filed with the Securities and
Exchange Commission;
(g) if and when any member of the Controlled Group (i) gives or is
required to give notice to the PBGC of any Reportable Event with respect to
any Plan which might constitute grounds for a termination of such Plan
under Title IV of ERISA, or knows that the plan administrator of any Plan
has given or is required to give notice of any such Reportable Event, a
copy of the notice of such Reportable Event given or required to be given
to the PBGC; (ii) receives notice of complete or partial withdrawal
liability under Title IV of ERISA, a copy of such notice; or (iii) receives
notice from the PBGC under Title IV of ERISA of an intent to terminate or
appoint a trustee to administer any Plan, a copy of such notice; and
(h) from time to time such additional information regarding the
financial position or business of Bull Run, the Borrower and their
respective Subsidiaries as the Bank may reasonably request.
SECTION 6.02. Inspection of Property, Books and Records. The Borrower will
keep, and will cause each of its Subsidiaries to keep, proper books of record
and account in which full, true and correct entries in conformity with GAAP
shall be made of all dealings and transactions in relation to its business and
activities; and will permit, and will cause each of its Subsidiaries to permit,
representatives of the Bank at the Bank's expense prior to the occurrence of an
Event of Default and at the Borrower's expense after the occurrence of an Event
of Default to visit and inspect any of their respective properties, to examine
and make abstracts from any of their respective books and records and to discuss
their respective affairs, finances and accounts with their respective officers,
employees and independent public accountants. The Borrower agrees to cooperate
and assist in such visits and inspections, in each case at such reasonable times
and as often as may reasonably be desired.
SECTION 6.03. Ratio of Consolidated Funded Debt to EBITDA. The ratio of
Consolidated Funded Debt to EBITDA will not at any time exceed the following
limits:
(a) from December 31, 1998 through December 31, 1999, the ratio of
Consolidated Funded Debt to EBITDA will not exceed 4.00 to 1.00;
(b) from January 1, 2000 through December 31, 2000, the ratio of
Consolidated Funded Debt to EBITDA will not exceed 2.50 to 1.00; and
(c) from January 1, 2001 until the Facility A Maturity Date, the ratio
of Consolidated Funded Debt to EBITDA will not exceed 2.00 to 1.00.
SECTION 6.04. Minimum Stockholders' Equity. Stockholders' Equity will at no
time be less than $22,456,681.00 plus the sum of 50% of the cumulative Reported
Net Income of the Borrower and its Consolidated Subsidiaries during any period
after December 31, 1996 (taken as one accounting period), calculated quarterly
beginning March 31, 1998 and quarterly thereafter but excluding from such
calculations any quarter in which the Net Income of the Borrower and its
Consolidated Subsidiaries is negative.
SECTION 6.05. Fixed Charges Coverage. (a) At the end of each Fiscal
Quarter, commencing with the Fiscal Quarter ending December 31, 1998, the Fixed
Charges Coverage Ratio, as determined in accordance with Section 6.05(b), shall
not be less than the following limits:
(i) from December 31, 1998 through December 31, 1999, the Fixed
Charges Coverage Ratio shall not be less than 1.00 to 1.00;
(ii) from January 1, 2000 through December 31, 2000, the Fixed Charges
Coverage
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Ratio shall not be less than 2.00 to 1.00;
(iii) from January 1, 2001 and thereafter, the Fixed Charges Coverage
Ratio shall not be less than 2.50 to 1.00.
(b) The Fixed Charges Coverage Ratio shall be determined at the end of each
Fiscal Quarter, commencing with the Fiscal Quarter ending December 31, 1998, and
shall be the ratio of Income Available for Fixed Charges for the twelve months
then ended to Consolidated Fixed Charges for the twelve months then ended.
SECTION 6.06. Investments. The Borrower shall not make Investments in any
Person except (a) Investments in (i) direct obligations of the United States
Government maturing within one year, (ii) certificates of deposit issued by a
commercial bank whose credit is satisfactory to the Bank, (iii) commercial paper
rated A-1 or the equivalent thereof by Standard & Poor's Corporation or P-1 or
the equivalent thereof by Moody's Investors Service, Inc. and in either case
maturing within 6 months after the date of acquisition and/or (iv) tender bonds
the payment of the principal of and interest on which is fully supported by a
letter of credit issued by a United States bank whose long-term certificates of
deposit are rated at least AA or the equivalent thereof by Standard & Poor's
Corporation and Aa or the equivalent thereof by Moody's Investors Service, Inc.
and (b) other Investments to the extent such Investments do not cause the
Borrower to be in violation of any other provision of this Agreement, including,
without limitation, Section 6.04.
SECTION 6.07. Negative Pledge. Neither the Borrower nor any Consolidated
Subsidiary of the Borrower will create, assume or suffer to exist any Lien on
any asset now owned or hereafter acquired by it, except for Permitted
Encumbrances.
SECTION 6.08. Maintenance of Existence. The Borrower shall, and shall cause
each of its Subsidiaries to, maintain its corporate existence and carry on its
business in substantially the same manner and in substantially the same fields
as such business is now carried on and maintained.
SECTION 6.09. Dissolution. Neither the Borrower nor any of its Subsidiaries
shall suffer or permit dissolution or liquidation either in whole or in part or
redeem or retire any shares of its own stock or that of any of its Subsidiaries,
except through corporate reorganization to the extent permitted by Section 6.10.
SECTION 6.10. Consolidations, Mergers and Sales of Assets. The Borrower
will not, nor will it permit any of its Subsidiaries to, consolidate or merge
with or into, or sell, lease or otherwise transfer all or any substantial part
of its assets to, any other Person, or discontinue or eliminate any business
line or segment, provided that
(a) the Borrower may merge with another Person if (i) such Person was
organized under the laws of the United States of America or one of its
states, (ii) the Borrower is the corporation surviving such merger and
(iii) immediately after giving effect to such merger, no Default shall have
occurred and be continuing, and
(b) Subsidiaries of the Borrower may merge with one another.
SECTION 6.11. Use of Proceeds. No portion of the proceeds of the Advances
will be used by the Borrower (i) in connection with any tender offer for, or
other acquisition of, stock of any corporation with a view towards obtaining
control of such other corporation, (ii) directly or indirectly, for the purpose,
whether immediate, incidental or ultimate, of purchasing or carrying any Margin
Stock, or (iii) for any purpose in violation of any applicable law or
regulation.
SECTION 6.12. Compliance with Laws; Payment of Taxes. The Borrower will,
and will cause each of its Subsidiaries and each member of the Controlled Group
to, comply with
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applicable laws (including but not limited to ERISA), regulations and similar
requirements of governmental authorities (including but not limited to PBGC),
except where the necessity of such compliance is being contested in good faith
through appropriate proceedings or where the failure to comply could not
reasonably be expected to have a material adverse effect on the Borrower or any
of its Consolidated Subsidiaries. The Borrower will, and will cause each of its
Subsidiaries to, pay promptly when due all taxes, assessments, governmental
charges, claims for labor, supplies, rent and other obligations which, if
unpaid, might become a lien against the property of the Borrower or any of its
Subsidiaries, except liabilities being contested in good faith and against
which, if requested by the Bank, the Borrower will set up reserves satisfactory
to the Bank.
SECTION 6.13. Insurance. The Borrower will maintain, and will cause each of
its Subsidiaries to maintain (either in the name of the Borrower or in such
Subsidiary's own name), with financially sound and reputable insurance
companies, insurance on all its property in at least such amounts and against at
least such risks as are usually insured against in the same general area by
companies of established repute engaged in the same or similar business.
SECTION 6.14. Change in Fiscal Year. The Borrower will not change its
Fiscal Year without the consent of the Bank.
SECTION 6.15. Maintenance of Property. The Borrower shall, and shall cause
each of its Subsidiaries to, maintain all of its properties and assets in good
condition, repair and working order, ordinary wear and tear excepted.
SECTION 6.16. Environmental Notices. The Borrower shall furnish to the Bank
prompt written notice of all Environmental Liabilities, pending, threatened or
anticipated Environmental Proceedings, Environmental Notices, Environmental
Judgments and Orders, and Environmental Releases at, on, in, under or in any way
affecting the Properties or any adjacent property, and all facts, events, or
conditions that could lead to any of the foregoing.
SECTION 6.17. Environmental Matters. The Borrower will not, and will not
permit any Third Party to, use, produce, manufacture, process, generate, store,
dispose of, manage at, or ship or transport to or from the Properties any
Hazardous Materials except for Hazardous Materials such as cleaning solvents,
pesticides and other similar materials used, produced, manufactured, processed,
generated, stored, disposed or managed in the ordinary course of business in
compliance with all applicable Environmental Requirements.
SECTION 6.18. Environmental Release. The Borrower agrees that upon the
occurrence of an Environmental Release it will act immediately to investigate
the extent of, and to take appropriate remedial action to eliminate, such
Environmental Release, whether or not ordered or otherwise directed to do so by
any Environmental Authority.
SECTION 6.19. Debt. The Borrower will not, and will not permit any of its
Consolidated Subsidiaries to, incur, borrow, assume or suffer to exist any Debt
other than Debt outstanding under this Agreement and other Debt outstanding on
the date of this Agreement and reflected in the financial statements referenced
in Section 5.04 (but not increases of any such other Debt outstanding on the
date of this Agreement).
SECTION 6.20. Collateral Maintenance. The Obligations are secured by
personal property described in the Security Agreement and certain investment
securities described in the Pledge Agreement. The Borrower agrees that the
Borrower will at all times maintain collateral in which the Bank shall have a
first priority perfected security interest having an aggregate value (as
determined quarterly based on the value reflected for such collateral in the
financial statements furnished to the Bank pursuant to Section 6.01(a) and (b))
at least equal to the aggregate amount of the Obligations at the time of
determination; provided that in determining the value of collateral pledged to
the Bank to secure the Obligations as provided in this Section, the investment
securities pledged to the Bank pursuant to the Pledge Agreement shall be
excluded.
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SECTION 6.21 Interest Rate Protection. The Borrower shall enter into on or
before the Closing Date and maintain so long as any Obligations under the
Facility A Commitment remain outstanding an interest rate protection agreement
or other interest rate hedge or arrangement in form and substance satisfactory
to the Bank fixing the interest rate on Advances under the Facility A
Commitment. The Bank acknowledges that the International Swap Dealers
Association Master Agreement and related documentation dated January 15, 1998
executed by the Borrower and the Bank satisfy the requirements of this Section
so long as such documentation remains in effect.
ARTICLE VII. DEFAULTS
SECTION 7.01. Events of Default. The occurrence of any one or more of the
following events shall constitute an Event of Default by the Borrower under this
Agreement:
(a) the Borrower shall fail to pay when due any principal of any
Advance or shall fail to pay any interest on any Advance within five
Domestic Business Days after such interest shall become due, or shall fail
to pay any fee or other amount payable hereunder within five Domestic
Business Days after such fee or other amount becomes due; or
(b) the Borrower shall fail to observe or perform any covenant
contained in Sections 6.03 through 6.11, inclusive; or
(c) the Borrower shall fail to observe or perform any covenant or
agreement contained in this Agreement (other than those covered by clause
(a) or (b) above) for thirty days after the earlier of (i) the first day on
which a responsible officer of the Borrower has knowledge of such failure,
or (ii) written notice thereof has been given to the Borrower by the Bank;
or
(d) any representation, warranty, certification or statement made by
the Borrower in Article V or in any certificate, financial statement or
other document delivered pursuant to this Agreement shall prove to have
been incorrect in any material respect when made (or deemed made); or
(e) Bull Run shall fail to make any payment in respect of any Debt
outstanding in the aggregate in excess of $500,000 when due or within any
applicable grace period or the Borrower or any Subsidiary of Bull Run or
the Borrower shall fail to make any payment in respect of any Debt
outstanding (other than the Notes) in the aggregate in excess of $250,000
when due or within any applicable grace period; or
(f) (i) any event or condition shall occur which results in the
acceleration of the maturity of Debt outstanding of Bull Run in the
aggregate in excess of $500,000 or of Debt of the Borrower or any
Subsidiary of Bull Run or the Borrower in the aggregate in excess of
$250,000 or the purchase of such Debt in the aggregate in excess of
$500,000 by Bull Run (or its designees) prior to the scheduled maturity
thereof, or the purchase of such Debt in the aggregate in excess of
$250,000 by the Borrower (or its designee) or such Subsidiary of Bull Run
(or its designee) or such Subsidiary of the Borrower (or its designee)
prior to the scheduled maturity thereof or (ii) enables (or, with the
giving of notice or lapse of time or both, would enable) the holders of
such Debt or any Person acting on such holders' behalf to accelerate the
maturity of Debt in the aggregate in excess of $500,000 or require the
purchase thereof by Bull Run (or its designee) prior to the scheduled
maturity thereof, or enables (or, with the giving of notice or lapse of
time or both, would enable) the holders of such Debt or any Person acting
on such holders' behalf to accelerate the maturity of Debt in the aggregate
in excess of $250,000 or require the purchase thereof by the Borrower (or
its designee) or such Subsidiary of Bull Run (or its designee) or such
subsidiary of the Borrower (or its designee) prior to the scheduled
maturity thereof, without regard to whether such holders or other Person
shall have exercised or waived their right to do so; provided, however,
that if the holder of any such Debt shall have waived its right to
accelerate the maturity of such Debt or require the purchase of such Debt
prior to its scheduled maturity and the Bank shall not have declared the
Notes to be due and payable pursuant to Section 7.02, Bank shall be deemed
to have waived any Event of Default
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(and its right to declare an Event of Default) arising by reason of this
subsection (ii); and provided further that the defaults under the financing
agreements between Bull Run and NationsBank, N.A. existing on the date of
this Agreement resulting from violations of the leverage ratio and debt
service coverage covenants shall not constitute Events of Default hereunder
so long as (A) NationsBank, N.A. does not accelerate the maturity of the
Debt outstanding thereunder or exercise any other remedies in connection
therewith, (B) such defaults have been cured or waived on or before April
20, 1998 and no other defaults under such financing agreements shall then
be in existence, and (C) the Borrower shall certify to the Bank no later
than April 20, 1998 that the conditions specified in clauses (A) and (B)
above have been satisfied and furnish to the Bank no later than April 20,
1998 copies of the documents executed by NationsBank, N.A. and Bull Run
evidencing the waiver and/or modification of the existing covenant
defaults.
(g) Bull Run, the Borrower or any Subsidiary of Bull Run or the
Borrower shall commence a voluntary case or other proceeding seeking
liquidation, reorganization or other relief with respect to itself or its
debts under any bankruptcy, insolvency or other similar law now or
hereafter in effect or seeking the appointment of a trustee, receiver,
liquidator, custodian or other similar official of it or any substantial
part of its property, or shall consent to any such relief or to the
appointment of or taking possession by any such official in an involuntary
case or other proceeding commenced against it, or shall make a general
assignment for the benefit of creditors, or shall fail generally to pay its
debts as they become due, or shall take any corporate action to authorize
any of the foregoing; or
(h) an involuntary case or other proceeding shall be commenced against
Bull Run, the Borrower or any Subsidiary of Bull Run or the Borrower
seeking liquidation, reorganization or other relief with respect to it or
its debts under any bankruptcy, insolvency or other similar law now or
hereafter in effect or seeking the appointment of a trustee, receiver,
liquidator, custodian or other similar official of it or any substantial
part of its property, and such involuntary case or other proceeding shall
remain undismissed and unstayed for a period of 60 days; or an order for
relief shall be entered against Bull Run, the Borrower or any Subsidiary of
Bull Run or the Borrower under the federal bankruptcy laws as now or
hereafter in effect; or
(i) the Borrower or any member of the Controlled Group shall fail to
pay when due any material amount which it shall have become liable to pay
to the PBGC or to a Plan under Title IV of ERISA; or the PBGC shall
institute proceedings under Title IV of ERISA to terminate or to cause a
trustee to be appointed to administer any such Plan or Plans or a
proceeding shall be instituted by a fiduciary of any such Plan or Plans to
enforce Section 515 or 4219(c)(5) of ERISA and such proceeding shall not
have been dismissed within 60 days thereafter; or a condition shall exist
by reason of which the PBGC would be entitled to obtain a decree
adjudicating that any such Plan or Plans must be terminated; or
(j) one or more judgments or orders for the payment of money in an
aggregate amount in excess of $250,000.00 (exclusive of any amounts covered
by insurance as to which the insurance carrier is not disputing its
obligations with respect to such insurance) shall be rendered against the
Borrower or any Subsidiary of the Borrower and such judgment or order shall
continue unsatisfied and unstayed for a period of 30 days; or
(k) a federal tax lien shall be filed against the Borrower under
Section 6323 of the Code or a lien of the PBGC shall be filed against the
Borrower under Section 4068 of ERISA and in either case such lien shall
remain undischarged for a period of 60 days after the date of filing; or
(l) any Person or two or more Persons acting in concert shall have
acquired beneficial ownership (within the meaning of Rule 13d-3 of the
Securities and Exchange Commission under the Securities Exchange Act of
1934) of 20% or more of the outstanding shares of the voting stock of Bull
Run or the Borrower; or (ii) as of any date a majority of the Board of
Directors of Bull Run or the Borrower consists of individuals who were not
either (A) directors of Bull Run or the Borrower as of the corresponding
date of the previous year, (B) selected or nominated
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to become directors by the Board of Directors of Bull Run or the Borrower
of which a majority consisted of individuals described in clause (A), or
(C) selected or nominated to become directors by the Board of Directors of
Bull Run or the Borrower of which a majority consisted of individuals
described in clause (A) and individuals described in clause (B).
SECTION 7.02. Remedies on Default. Upon the occurrence of an Event of
Default, the Bank may, by notice to the Borrower, terminate the Commitments
which shall thereupon terminate, and by notice to the Borrower declare the Notes
(together with accrued interest thereon) to be, and the Notes and all
outstanding Advances shall thereupon become, immediately due and payable without
presentment, demand, protest or other notice of any kind, all of which are
hereby waived by the Borrower; provided that if any Event of Default specified
in clause (g) or (h) above occurs with respect to the Borrower, without any
notice to the Borrower or any other act by the Bank, the Commitments shall
thereupon terminate and the Notes and all outstanding Advances (together with
accrued interest thereon) and fees shall become immediately due and payable
without presentment, demand, protest or other notice of any kind, all of which
are hereby waived by the Borrower.
SECTION 7.03. Security Interest; Offset. In addition to, and not in
limitation of, all rights of offset that the Bank or other holder of either Note
may have under applicable law, the Borrower hereby grants to the Bank, and to
each Participant, Assignee or other Transferee, as security for the full and
punctual payment and performance of the obligations to pay to the Bank the
principal of and interest on the Advances and other amounts due hereunder, a
continuing lien on and security interest in all deposits and other sums credited
by or due from the Bank (or such Participant, Assignee or other Transferee) to
the Borrower or subject to withdrawal by the Borrower; and regardless of the
adequacy of any collateral or other means of obtaining repayment of the
Obligations, the Bank (and each such Assignee and, to the extent permitted by
applicable law, each such Participant and other Transferee) may, at any time
after the occurrence of an Event of Default and without notice to the Borrower,
set off the whole or any portion or portions of any or all such deposits and
other sums against the amounts owing under this Agreement and the Notes, whether
or not any other Person or Persons could also withdraw money therefrom.
ARTICLE VIII. MISCELLANEOUS
SECTION 8.01. Notices. All notices, requests and other communications to
any party hereunder shall be in writing (including facsimile transmission or
similar writing) and shall be given to such party at its address set forth below
or such other address as such party may hereafter specify for the purpose by
notice to the other party:
(a) If to the Borrower:
Datasouth Computer Corporation
P. O. Box 240947
Charlotte, North Carolina 28224
Attention: Frederick J. Erickson
Fax number: (704) 525-1301
(b) If to the Bank:
Wachovia Bank, N.A.
P. O. Box 31608
Charlotte, North Carolina 28231-6071
Attention: Christopher L. Fincher
Fax number: (704) 378-5035
Each such notice, request or other communication shall be effective (i) if given
by mail, 72 hours after such communication is deposited in the mails with first
class postage prepaid,
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addressed as aforesaid or (ii) if given by any other means, when delivered at
the address specified in this Section; provided that notices to the Bank under
Article II or Article III shall not be effective until received.
SECTION 8.02. No Waivers. No failure or delay by the Bank in exercising any
right, power or privilege hereunder or under the Notes shall operate as a waiver
thereof nor shall any single or partial exercise thereof preclude any other or
further exercise thereof or the exercise of any other right, power or privilege.
The rights and remedies herein provided shall be cumulative and not exclusive of
any rights or remedies provided by law.
SECTION 8.03. Expenses; Documentary Taxes. (a) The Borrower shall pay (i)
all out-of-pocket expenses of the Bank, including fees and disbursements of
counsel for the Bank, in connection with the preparation of this Agreement and
the other Loan Documents, any waiver or consent hereunder or any amendment
hereof or any actual or alleged Default hereunder and (ii) if an Event of
Default occurs, all out-of-pocket expenses incurred by the Bank, including fees
and disbursements of counsel, in connection with such Event of Default and
collection and other enforcement proceedings resulting therefrom, including
out-of-pocket expenses incurred in enforcing this Agreement and the other Loan
Documents. The Borrower shall indemnify the Bank against any transfer taxes,
documentary taxes, assessments or charges made by any Authority by reason of the
execution and delivery of this Agreement or the other Loan Documents.
(b) The Borrower shall indemnify the Bank and each Affiliate thereof and
their respective directors, officers, employees and agents from, and hold each
of them harmless against, any and all losses, liabilities, claims or damages to
which any of them may become subject, insofar as such losses, liabilities,
claims or damages arise out of or result from any actual or proposed use by the
Borrower of the proceeds of any extension of credit by the Bank hereunder or
breach by the Borrower of this Agreement or any other Loan Document or from
investigation, litigation (including, without limitation, any actions taken by
the Bank to enforce this Agreement or any of the other Loan Documents) or other
proceeding (including, without limitation, any threatened investigation or
proceeding) relating to the foregoing, and the Borrower shall reimburse the
Bank, and each Affiliate thereof and their respective directors, officers,
employees and agents, upon demand for any expenses (including, without
limitation, legal fees) incurred in connection with any such investigation or
proceeding; but excluding any such losses, liabilities, claims, damages or
expenses incurred by reason of the gross negligence or willful misconduct of the
Person to be indemnified.
SECTION 8.04. Amendments and Waivers. Any provision of this Agreement, the
Notes or any other Loan Documents may be amended or waived if, but only if, such
amendment or waiver is in writing and is signed by the Borrower and the Bank.
SECTION 8.05. Successors and Assigns. (a) The provisions of this Agreement
shall be binding upon and inure to the benefit of the parties hereto and their
respective successors and assigns; provided that the Borrower may not assign or
otherwise transfer any of its rights under this Agreement.
(b) The Bank may at any time sell to one or more Persons (each a
"Participant") participating interests in any Advance, the Notes, the
Commitments hereunder or any other interest of the Bank hereunder. In the event
of any such sale by the Bank of a participating interest to a Participant, the
Bank's obligations under this Agreement shall remain unchanged, the Bank shall
remain solely responsible for the performance thereof, the Bank shall remain the
holder of the Notes for all purposes under this Agreement, and the Borrower
shall continue to deal solely and directly with the Bank in connection with the
Bank's rights and obligations under this Agreement. In no event shall the Bank
be obligated to the Participant to take or refrain from taking any action
hereunder except that the Bank may agree that it will not (except as provided
below), without the consent of the Participant, agree to (i) the change of any
date fixed for the payment of principal of or interest on the related Advance or
Advances, (ii) the change of the amount of any principal, interest or fees due
on any date fixed for the payment
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thereof with respect to the related Advance or Advances, (iii) the change of the
principal of the related Advance or Advances, (iv) any change in the rate at
which either interest is payable thereon or (if the Participant is entitled to
any part thereof) commitment fee is payable hereunder from the rate at which the
Participant is entitled to receive interest or commitment fee (as the case may
be) in respect of such participation, (v) the release or substitution of all or
any substantial part of the collateral (if any) held as security for the
Advances, or (vi) the release of any guaranty given to support payment of the
Advances. The Bank shall, within ten Domestic Business Days after selling a
participating interest in any Advance, the Notes, the Commitments or other
interest under this Agreement, provide the Borrower with written notification
stating that such sale has occurred and identifying the Participant and the
interest purchased by such Participant. The Borrower agrees that each
Participant shall be entitled to the benefits of Article III and Section 7.03
with respect to its participation in Advances outstanding from time to time.
(c) The Bank may at any time assign to one or more banks or financial
institutions (each an "Assignee") all, or a proportionate part of all, of its
rights and obligations under this Agreement and one or both Notes, and such
Assignee shall assume all such rights and obligations, pursuant to an Assignment
and Acceptance in the form attached hereto as Exhibit C executed by such
Assignee, the Bank and the Borrower; provided that (i) no interest may be sold
by the Bank pursuant to this paragraph (c) unless the Assignee shall agree to
assume ratably equivalent portions of the respective Commitment, and (ii) no
interest may be sold by the Bank pursuant to this paragraph (c) to any Assignee
which is not an Affiliate of the Bank without the consent of the Borrower, which
consent shall not be unreasonably withheld or delayed. Upon (A) execution of the
Assignment and Acceptance by the Bank, such Assignee, and the Borrower, (B)
delivery of an executed copy of the Assignment and Acceptance to the Borrower,
and (C) payment by such Assignee to the Bank of an amount equal to the purchase
price agreed between the Bank and such Assignee, such Assignee shall for all
purposes be a Bank party to this Agreement and shall have all the rights and
obligations of a Bank under this Agreement to the same extent as if it were an
original party hereto with a Commitment as set forth in such instrument of
assumption, and the Bank shall be released from its obligations hereunder to a
corresponding extent, and no further consent or action by the Borrower or the
Bank shall be required. Upon the consummation of any transfer to an Assignee
pursuant to this paragraph (c), the Bank and the Borrower shall make appropriate
arrangements so that, if required, a new Note or Notes are issued to such
Assignee.
(d) Subject to the provisions of Section 8.06, the Borrower authorizes the
Bank to disclose to any Participant, Assignee or other transferee (each a
"Transferee") and any prospective Transferee any and all financial information
in the Bank's possession concerning the Borrower which has been delivered to the
Bank by the Borrower pursuant to this Agreement or which has been delivered to
the Bank by the Borrower in connection with the Bank's credit evaluation prior
to entering into this Agreement.
(e) No Transferee shall be entitled to receive any greater payment under
Section 3.03 than the transferor Bank would have been entitled to receive with
respect to the rights transferred, unless such transfer is made with the
Borrower's prior written consent or by reason of the provisions of Section 3.02
or 3.03 requiring the Bank to designate a different Lending Office under certain
circumstances or at a time when the circumstances giving rise to such greater
payment did not exist.
(f) Anything in this Section 8.05 to the contrary notwithstanding, the Bank
may assign and pledge all or any portion of the loans and/or obligations owing
to it to any Federal Reserve Bank or the United States Treasury as collateral
security pursuant to Regulation A of the Board of Governors of the Federal
Reserve System and Operating Circular issued by such Federal Reserve Bank,
provided that any payment in respect of such assigned Loan and/or obligations
made by the Borrower to the Bank in accordance with the terms of this Agreement
shall satisfy the Borrower's obligations hereunder in respect of such assigned
Loan and/or obligations to the extent of such payment. No such assignment shall
release the Bank from its obligations hereunder.
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SECTION 8.06. Confidentiality. The Bank agrees to exercise its best efforts
to keep any information delivered or made available by the Borrower to it which
is clearly indicated to be confidential information, confidential from any one
other than persons employed or retained by the Bank who are or are expected to
become engaged in evaluating, approving, structuring or administering the
Advances; provided, however, that nothing herein shall prevent the Bank from
disclosing such information (i) upon the order of any court or administrative
agency, (ii) upon the request or demand of any regulatory agency or authority
having jurisdiction over the Bank, (iii) which has been publicly disclosed, (iv)
to the extent reasonably required in connection with any litigation to which the
Bank or their respective Affiliates may be a party, (v) to the extent reasonably
required in connection with the exercise of any remedy hereunder, (vi) to the
Bank's legal counsel and independent auditors and (vii) to any actual or
proposed Participant, Assignee or other Transferee of all or part of its rights
hereunder which has agreed in writing to be bound by the provisions of this
Section.
SECTION 8.07. Interest Limitation. Notwithstanding any other term of this
Agreement, the Notes or any other Loan Document, the maximum amount of interest
which may be charged to or collected from any person liable hereunder or under
the Notes by the Bank shall be absolutely limited to, and shall in no event
exceed, the maximum amount or interest which could lawfully be charged or
collected under applicable law (including, to the extent applicable, the
provisions of section 5197 of the Revised Statutes of the United States of
America, as amended, 12 U.S.C. Sec. 85, as amended), so that the maximum of
all amounts constituting interest under applicable law, howsoever computed,
shall never exceed as to any Person liable therefor such lawful maximum, and
any term of this Agreement, the Notes or any other Loan Document which could be
construed as providing for interest in excess of such lawful maximum shall be
and hereby is made expressly subject to and modified by the provisions of this
paragraph.
SECTION 8.08. Governing Law. This Agreement and the Notes shall be
construed in accordance with and governed by the law of the State of North
Carolina. This Agreement and the Notes are intended to be effective as
instruments executed under seal.
SECTION 8.09. Counterparts. This Agreement may be signed in any number of
counterparts, each of which shall be an original, with the same effect as if the
signatures thereto and hereto were upon the same instrument.
SECTION 8.10. Consent to Jurisdiction. The Borrower (a) submits to personal
jurisdiction in the State of North Carolina, the courts thereof and the United
States District Courts sitting therein, for the enforcement of this Agreement,
the Notes and the other Loan Documents, (b) waives any and all personal rights
under the law of any jurisdiction to object on any basis (including, without
limitation, inconvenience of forum) to jurisdiction or venue within the State of
North Carolina for the purpose of litigation to enforce this Agreement, the
Notes or the other Loan Documents, and (c) agrees that service of process may be
made upon it in the manner prescribed in Section 8.01 for the giving of notice
to the Borrower. Nothing herein contained, however, shall prevent the Bank from
bringing any action or exercising any rights against any security and against
the Borrower personally, and against any assets of the Borrower, within any
other state or jurisdiction.
SECTION 8.11. Severability. If any provisions of this Agreement shall be
held invalid under any applicable laws, such invalidity shall not affect any
other provision of this Agreement that can be given effect without the invalid
provision, and, to this end, the provisions hereof are severable.
SECTION 8.12. Captions. Captions in this Agreement are for the convenience
of reference only and shall not affect the meaning or interpretation of the
provisions hereof.
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IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed as of the year and day first above written.
BORROWER:
DATASOUTH COMPUTER CORPORATION
ATTEST:
/s/ FREDERICK J. ERICKSON By: /s/ FREDERICK J. ERICKSON
- ------------------------- ----------------------------------
Secretary Title: Executive VP - Finance &
Administration
--------------------------------
[CORPORATE SEAL]
BANK:
Lending Office WACHOVIA BANK, N.A.
Wachovia Bank, N.A.
P. O. Box 31608
Charlotte, North Carolina 28231-6071 By: /s/ JOHN S. GRAHAM
----------------------------------
Title: Banking Officer
--------------------------------
31
EXHIBIT 13
1997 ANNUAL REPORT TO SHAREHOLDERS
<PAGE>
BULL RUN Corporation
[BULL RUN LOGO APPEARS HERE)
1997 Annual Report
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BULL RUN CORPORATION
30.2%
HOST
COMMUNICATIONS,
INC.
Fiscal Year End: 6/30/97
Revenue: $39,591,000
Net Income: $1,626,000
Total Assets: $25,707,000
17.0% 100% 33.8% 10.4%
(27.6% voting) (plus a warrant to
purchase 10%)
GRAY DATASOUTH UNIVERSAL RAWLINGS
COMMUNICATIONS COMPUTER SPORTS AMERICA, SPORTING GOODS
SYSTEMS, INC. CORPORATION INC. COMPANY, INC.
Fiscal Year End: 12/31/97 Fiscal Year End: 12/31/97 Fiscal Year End: 6/30/97 Fiscal Year End: 8/31/97
Revenue: $103,548,000 Revenue: $21,639,000 Revenue: $52,872,000 Revenue: $147,600,000
Net Loss: $(1,402,000) Total Assets: $10,092,000 Net Income: $1,597,000 Net Income: $5,470,000
Total Assets: $345,051,000 Total Assets: $26,073,000 Total Assets: $101,264,000
*Market Value: $205,028,000 *Market Value: $92,340,000
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*Based on 12/31/97 closing price per share as quoted by a national stock
exchange.
[COMPANY LOGOS APPEAR HERE]
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LETTER TO STOCKHOLDERS
Fellow Stockholders of Bull Run Corporation,
We are very pleased with the progress we have made on your behalf in 1997,
strategically laying a foundation for continued success. 1997 was a year of
investment, strengthening and diversifying your Company for continued growth in
stockholder value. The addition of Rawlings Sporting Goods Company, Inc. to the
Bull Run family provides us a "name brand" company, and Rawlings new five-year
marketing agreement with Host Communications, Inc. ("HCI") provides both
companies some exciting opportunities for growth. We are encouraged by the
growth and prospects for Gray Communications Systems, Inc., and as a result, we
increased our investment position in Gray by $3.1 million in 1997. Datasouth
Computer Corporation developed a revolutionary new airline ticket printer which
began shipping in December, and significantly broadened its thermal printer
product line with a recent acquisition.
FINANCIAL RESULTS
We reported a net loss for 1997, but we believe that there is more to the story
than simply the bottom line as determined by generally accepted accounting
principles. Three factors need to be considered when evaluating our 1997
financial performance.
First, our Company and our affiliated companies are very acquisition - oriented.
As a result of acquisitions, traditional accounting rules require us and our
affiliates to report, and amortize, goodwill. We attribute this goodwill to such
intangibles as strategic customer relationships, brand names and FCC
broadcasting licenses. Even though we believe that many of these intangible
assets actually appreciate over time, goodwill amortization is required to be
charged against our earnings for financial statement purposes. Our 1997 pretax
results were negatively impacted by over $2 million in non-cash goodwill
amortization charges.
Second, Datasouth embarked on, and completed, a very significant product
development project in 1997. In concert with The SABRE Group, Datasouth's
largest customer, a new low cost airline ticket printer was designed and
introduced to the market. This development project, costing us more than $2
million, not only substantially increased our R&D expense in 1997, but also
consumed virtually all of Datasouth's engineering resources at the expense of
generating any new product revenue.
Third, the value of our common stock investments in Gray Communications and
Rawlings, based on the publicly-reported per share closing prices, appreciated
more than $9.4 million in 1997, none of which could be included as 1997 earnings
under generally accepted accounting principles.
RAWLINGS SPORTING GOODS COMPANY, INC.
On November 21, 1997 we entered into an Investment Agreement with Rawlings,
whereby we acquired from Rawlings a warrant to purchase, under certain
conditions, up to 10% of Rawlings common stock at $12.00 per share.
Additionally, we were afforded the right to acquire additional Rawlings'
outstanding common stock through open market purchases. We completed the open
market purchases in January, and as a result, now hold 10.4% of Rawlings
outstanding common stock. I was elected to the Rawlings' board of directors in
January and have been appointed to their committee conducting a search for a new
President and CEO. Simultaneously with the execution of the Investment
Agreement, Rawlings' entered into a five-year Strategic Marketing Agreement with
HCI. The combination of HCIs marketing prowess and position as manager of the
NCAA's Corporate Partner Program, with Rawlings' products and brand appeal,
should be
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very formidable and mutually beneficial. We believe Rawlings has outstanding
growth potential given the right tools,such as HCI's marketing expertise, and
given the right strategic direction, in which we will actively participate.
HOST COMMUNICATIONS, INC.
The affiliation with Rawlings was clearly one of HCI's many highlights in 1997.
A new five-year contract with the NCAA(R) kicked off in September, which
provides HCI exclusive corporate partners promotional licensing, championship
event radio broadcasts, as well as publication and distribution of championship
event programs. This contract extends what is currently HCI's 23-year business
relationship with the NCAA. In 1997, HCI signed several major companies to NCAA
corporate sponsorships, including Compaq Computer, General Motors Corporation,
Gillette, Marriott, Nabisco, Phoenix Home Mutual and Tricon Global Restaurants.
In 1997, HCI's association management business grew significantly as a result of
its acquisition of Wayne Smith Company last January. Additionally, "Hoop-It-Up"
3-on-3 basketball tournaments, which are operated by HCI's 33.8%-owned
affiliate, Universal Sports America, Inc., continue to grow in world-wide
popularity.
We increased our common stock investment position in privately-held HCI during
1997 to effectively 30.2% of HCI's common equity.
GRAY COMMUNICATIONS SYSTEMS, INC.
In part due to the 1997 acquisition of WITN-TV, an NBC-affiliate in the
Greenville-Washington-New Bern, North Carolina market, Gray's "Media Cash Flow",
a commonly-used statistic and valuation measurement in the broadcasting
industry, increased 36% for 1997 to $38.1 million, from $28 million in 1996. In
1997, Gray also acquired GulfLink Communications, Inc., a business providing
transportable uplink satellite services for on-site satellite broadcasts. By
virtue of this acquisition, Gray is now the largest single provider of such
services in the United States.
In February 1998, Gray announced the signing of a definitive purchase agreement
to acquire Busse Broadcasting Corporation, the owner and operator of three
television stations, KOLN-TV in the Lincoln-Hastings-Kearney, Nebraska
television market, its satellite station KGIN-TV in Grand Island, Nebraska, and
WEAU-TV serving the Eau Claire-La Crosse, Wisconsin market. The purchase is
subject to FCC approval. The stations are the highest rated stations in their
respective markets and are also the local news leaders.
Mack Robinson and I continue to be actively involved in Gray's management. We
continue to conduct a search for a President and CEO, however we have the utmost
confidence in those who manage the day-to-day operations of the business, and do
not presently feel that the absence of a chief executive has been, or will be in
the foreseeable future, a detriment or deterrent to Gray's continued growth.
In 1997, we invested an additional $3.1 million in Gray's common stock,
increasing our investment position in Gray's common equity to 17.0%, and
increasing our voting rights to 27.6%.
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DATASOUTH COMPUTER CORPORATION
Datasouth, Bull Run's wholly-owned subsidiary, recently achieved two very
significant milestones, the successful completion of its "Journey" product
development project and acquisition of a printer manufacturer.
In December, Datasouth began shipping "Journey", a low cost airline ticket
printer designed for travel agencies, city ticket offices, and satellite ticket
printing locations. The printer includes specifications provided by Datasouth's
largest customer, The SABRE Group, accommodating all facets of the travel agency
and airline business and complementing electronic ticketing.
In January 1998, Datasouth acquired CodeWriter Industries, Inc. and its
affiliate, CW Technologies, LLC, which design and manufacture thermal bar code
printers. We are very excited about Datasouth adding the CodeWriter products to
its line, and leveraging its design and manufacturing capabilities through
consolidation of product manufacturing at Datasouth's facility. The CodeWriter
products, like Datasouth's, are designed for industrial applications, and can
therefore be sold through Datasouth's existing distribution channels.
PLANS FOR 1998
There are plenty of challenges and opportunities ahead.
In 1998, we plan to actively participate in Rawlings' management and strategic
direction, and oversee the development of an effective business relationship
with HCI.
We intend to manage Gray for continued growth through internal improvement of
operations, assist with the successful integration of newly-acquired properties,
and seek possible acquisitions of new properties which meet our criteria.
We plan to manage an effective roll out of Datasouth's new airline ticket
printer and begin development of complementary products for the travel industry,
along with managing an efficient integration of the CodeWriter operations.
We believe that we are strategically building shareholder value through the
acquisition and development of well managed operating companies having excellent
growth potential. We appreciate the continued support of our shareholders,
business partners and employees, all of whom play a vital role in our success.
Sincerely,
Robert S. Prather, Jr.
President and CEO
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[CHART APPEARS BELOW WITH THE FOLLOWING INFORMATION:]
SIGNIFICANT EVENTS
1992
July - Robinson-Prather Partnership acquires 30% of Bull Run Gold Mines, Ltd.,
subsequently reincorporated as "Bull Run Corporation".
1993
April - Bull Run acquires 43.6% of Datasouth Computer Corporation for $7.5
million.
August - Bull Run invests initial $11.1 million in Gray Communciations Systems,
Inc.
1994
May - Gray acquires The Rockdale Citizen, a daily newspaper, for $4.8
million.
September - Gray acquires WKYT-TV in Lexington, KY and WYMT-TV in Hazard, KY for
$42.5 million.
October - Gray acquires weekly shoppers in SW Georgia for $1.5 million.
November - Bull Run acquires remaining 56.4% of Datasouth for $15.2 million of
Bull Run common stock.
1995
January - Bull Run invests initial $900,000 in Host Communications, Inc.
("HCI").
January - Gray acquires the Gwinnett Daily Post (then the Gwinnett Post
Tribune), for $3.7 million.
March - Bull Run acquires 50% of Capital Sports Properties ("CSP"), whose assets
consists solely of investments in HCI, for $9.7 million.
October - HCI sells certain operating assets to Universal Sports America, Inc.
("USA") in return for a 33.8% ownership position.
November - Bull Run acquires USA convertible preferred stock for $650,000.
1996
January - Gray acquires WRDW-TV, in Augusta, GA, for $37.2 million.
January - Bull Run invests $10 million in Gray series A preferred stock, plus
warrants to purchase additional Gray class A common stock
August - HCI acquires AdCraft Sports Marketing for $1.6 million.
August - CSP exercises warrants for approximately 48% of the outstanding HCI
common stock.
September - Gray raises $220 million from public offerings of class B common
stock and 10 5/8% senior subordinated notes.
September - Bull Run invests $5 million in Gray series B preferred stock, plus
warrants to purchase additional Gray class A common stock.
September - Gray acquires, for $183.9 million, WCTV-TV in Tallahassee, WVLT-TV
in Knoxville, TN and other communications businesses.
1997
April - Gray acquires GulfLink Communications, Inc., a transportable satellite
uplink business, for $5.2 million.
August - Gray acquires WITN-TV in Greenville-Washington-New Bern, NC market for
$41.7 million.
September - HCIs new 5-year contract with the NCAA takes effect.
November - Rawlings Sporting Goods Company, Inc. and HCI announce 5-year
Strategic Marketing Agreement.
November - Investment Purchase Agreement with Rawlings announced, providing for
Bull Run's acquisition of approximately 20% of Rawlings common stock.
December - Datasouth begins shipping Journey, a new airline ticket printer.
1998
January - Datasouth acquires CodeWriter, a designer and manufacturer of thermal
bar code printers, for $6.2 million.
February - Gray signs agreement to acquire Busse Broadcasting, owner of three TV
stations, for an estimated $112 million, subject to FCC approval.
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[CHART APPEARS BELOW WITH THE FOLLOWING INFORMATION:]
INVESTMENTS IN SUBSIDIARIES and AFFILIATES
Since Robinson-Prather Partnership's investment in Bull Run in July 1992,
management has embarked on a strategy to acquire significant and/or controlling
interests in operating companies. In addition to its own investments in
Datasouth, Gray, HCI and Rawlings presented below, Bull Run has generated
consulting fees of over $2.6 million in connection with assistance provided to
Gray on over $310 million in acquisitions made by Gray.
Cumulative investments by Bull Run (in 000,000's)
1993 - Datasouth $7.5; Gray $11.1; Total $18.6
1994 - Datasouth $22.7; Gray $12.1; Total $34.8
1995 - Datasouth $22.7; Gray $14.0; HCI $11.6; Total $48.3
1996 - Datasouth $22.7; Gray $29.2; HCI $11.9; Total $63.8
1997 - Datasouth $22.7; Gray $32.3; HCI $12.1; Rawlings $5.8; Total $72.9
1998*- Datasouth $25.2; Gray $32.3; HCI $12.1; Rawlings $10.7; Total $80.3
Annual investments by Bull Run (in 000,000's)
1993 - Datasouth $7.5; Gray $11.1; Total $18.6
1994 - Datasouth $15.2; Gray $1.0; Total $16.2
1995 - Gray $1.9; Gray $11.6; Total $13.5
1996 - Gray $15.2; HCI $0.3; Total $15.5
1997 - Gray $3.1; HCI $0.2; Rawlings $5.8; Total $9.1
1998* - Datasouth $2.5; Rawlings $4.9; Total $7.4
* through February 28, 1998
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[CHART APPEARS BELOW WITH THE FOLLOWING INFORMATION:]
HIGH/LOW/CLOSING MARKET PRICE PER SHARE
AS OF AND FOR THE YEARS ENDED DECEMBER 31
Compounded Annual Growth Rate from 6/30/92 to 12/31/97 = 37.4%
1991
High - $0.53 Low - $0.38 Closing - $0.38
1992
High - $1.31 Low - $0.38 Closing - $1.19 $0.66 (1)
1993
High - $1.94 Low - $0.78 Closing - $1.56
1994
High - $1.91 Low - $1.19 Closing - $1.63
1995
High - $4.25 Low - $1.63 Closing - $2.89
1996
High - $3.44 Low - $2.06 Closing - $2.13
1997
High - $3.84 Low - $2.00 Closing - $3.84
1998*
High - $4.25 Low - $2.88 Closing - $4.06
(1) Closing price as of June 30, 1992, the first quarterly period following
Robinson-Prather Partnership's investment in the Company.
* through March 25, 1998
TOTAL MARKET VALUE
AS OF DECEMBER 31
Compounded Annual Growth Rate from 6/30/92 to 12/31/97 = 60%
1991 - $3.4 million
1992 - $12.7 million
$6.0 million (1)
1993 - $19.5 million
1994 - $36.0 million
1995 - $64.0 million
1996 - $46.2 million
1997 - $81.8 million
1998* - $89.7 million
(1) Total market value as of June 30, 1992, the first quarterly period following
Robinson-Prather Partnership's investment in the Company.
* through March 25, 1998
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SELECTED FINANCIAL DATA
(Dollars and shares in thousands, except per share amounts)
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Operating results for the years ended:
1997 1996 1995 1994 1993
Revenue from printer operations $ 21,639 $ 23,810 $ 26,432 $ 2,751
Cost of goods sold 15,967 17,170 18,649 1,853
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Gross profit 5,672 6,640 7,783 898
Other operating revenue 681 844 721 323 $ 464
Operating expenses (6,852) (6,255) (6,764) (1,174) (595)
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Income (loss) from operations (499) 1,229 1,740 47 (131)
Equity in earnings (losses) of affiliated companies (599) 1,731 107 266 243
Gain on issuance of common shares by
affiliated company 8,179
Interest and dividend income (expense), net (1,614) (1,250) (944) (11) 116
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Income (loss) before income taxes,
extraordinary item and cumulative effect of
accounting change (2,712) 9,889 903 302 228
Income tax benefit (provision) 939 (4,012) (180) (86) (48)
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Income (loss) before extraordinary item and
cumulative effect of accounting change (1,773) 5,877 723 216 180
Extraordinary loss (295)
Cumulative effect of accounting change (274)
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Net income (loss) $ (1,773) $ 5,308 $ 723 $ 216 $ 180
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Earnings (loss) per share - Basic:
Income (loss) before extraordinary item and
cumulative effect of accounting change $ (.08) $ .26 $ .03 $ .02 $ .01
Net income (loss) $ (.08) $ .24 $ .03 $ .02 $ .01
Weighted average shares - Basic 21,302 22,013 22,127 13,350 12,377
Earnings (loss) per share Diluted:
Income (loss) before extraordinary item and
cumulative effect of accounting change $ (.08) $ .25 $ .03 $ .02 $ .01
Net income (loss) $ (.08) $ .23 $ .03 $ .02 $ .01
Weighted average shares-Diluted 21,302 22,945 23,236 13,534 12,503
FINANCIAL POSITION AS OF DECEMBER 31:
1997 1996 1995 1994 1993
Working capital $ 2,513 $ 3,990 $ 3,739 $ 4,813 $ 400
Investment in affiliated companies 61,551 53,752 29,246 15,709 7,798
Total assets 76,832 67,851 44,300 30,756 8,250
Long-term obligations 41,998 31,364 14,896 2,775
Stockholders equity 25,056 28,318 24,079 23,584 8,151
Current ratio 1.4 2.1 1.9 2.6 8.9
Book value per share $ 1.18 $ 1.30 $ 1.09 $ 1.07 $ 0.65
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The changes in financial position from 1996 to 1997 were due to the Company's
investments in affiliated companies, primarily Rawlings. The changes in
financial position from 1995 to 1996 were due to the purchase of $15,000 in Gray
preferred stock, as well as the result of an $8,179 increase in the Company's
investment in affiliated companies resulting from Gray's public offering of its
class B common stock. The changes in financial position from 1994 to 1995 were
due to the Company's investments in CSP, HCI and USA. The changes in financial
position from 1993 to 1994, and the changes in operating results from 1993 to
1994 to 1995, were due to the investment in a 43.6% interest in Datasouth in
1993 and merger with Datasouth in 1994. No dividends were declared or paid
during the periods presented. The earnings per share amounts prior to 1997 have
been restated as required to comply with Statement of Financial Accounting
Standards No. 128, "Earnings Per Share". For further discussion of earnings per
share and the impact of Statement No. 128, see the Notes to Consolidated
Financial Statements.
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[Gray Communications Systems, Inc. Photos appear here]
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Gray Communications Systems, Inc. ("Gray") is a 101-year old communications
company headquartered in Albany, Georgia. Gray's class A and class B common
stocks are traded on the New York Stock Exchange under the symbols "GCS" and
"GCS.B", respectively. In 1997, Bull Run increased its ownership in Gray to
17.0% of Gray's total outstanding common stock, representing 27.6% of the voting
power.
Gray operates eight television stations - WKYT-TV, the CBS affiliate in
Lexington, Kentucky; WYMT-TV, a CBS affiliate in Hazard, Kentucky, acquired by
Gray along with WKYT-TV in 1994; WRDW-TV, a CBS affiliate in Augusta, Georgia,
acquired in 1996; WCTV-TV, a CBS affiliate, in the Tallahassee, Florida /
Thomasville, Georgia market, acquired in 1996; WVLT-TV (formerly, WKXT-TV), a
CBS affiliate in Knoxville, Tennessee acquired with WCTV-TV in 1996; WALB-TV, an
NBC affiliate established over 40 years ago, in Albany, Georgia; WJHG-TV, an NBC
affiliate in the Panama City, Florida market; and, WITN-TV, an NBC affiliate in
the Greenville-Washington-New Bern, North Carolina market, acquired in 1997. Six
of the eight stations are currently the highest ranked station in their markets.
Gray also operates three daily newspapers - The Albany Herald, established in
1897, a Southwest Georgia daily newspaper having a daily circulation of
approximately 32,000 and approximately 37,000 on Sundays; The Rockdale Citizen,
acquired by Gray in 1994, a Conyers, Georgia daily newspaper established in
1953, having a circulation of approximately 10,000; and, The Gwinnett Daily
Post, acquired by Gray in 1995, a daily newspaper in Lawrenceville, Georgia
having a circulation of 49,000 in the fast growing Gwinnett County market. In
addition, Gray publishes advertising weekly shoppers in Southwest Georgia and
North Florida, having a total circulation of 55,000.
Gray also operates two businesses acquired in 1996, Satellite & Production
Services in Tallahassee, and PortaPhone Paging, a communications and paging
business in the Southeast, and one acquired in 1997, GulfLink Communications,
Inc., a transportable satellite uplink business, headquartered in Baton Rouge,
Louisiana. Satellite Production Services and GulfLink operate under the name
Lynqx Communications.
In February 1998, Gray executed a definitive purchase agreement to acquire Busse
Broadcasting Corporation, owner and operator of CBS-affiliates KOLN-TV, the
Lincoln-Hastings-Kearney, Nebraska market leader; its satellite station, KGIN-TV
in Grand Island, Nebraska; and NBC-affiliate WEAU-TV, the Eau Claire-La Crosse,
Wisconsin market leader.
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[Datasouth Computer Corporation Photos appear here]
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Datasouth Computer Corporation ("Datasouth"), Bull Run's wholly-owned
subsidiary, designs, manufactures and markets heavy-duty dot matrix and thermal
printers for industrial applications. Datasouth sells its products through a
network of approximately 60 distributors worldwide and direct to high volume
major accounts primarily in the transportation/travel, healthcare and
manufacturing/distribution industries.
Based in Charlotte, North Carolina, Datasouth has historically targeted the
heavy-duty, multipart forms segment of the serial matrix impact printer market.
These printers are used primarily for forms such as invoices, purchase orders,
bills of lading, customs documents, insurance documents, travel documents and
patient admission forms.
In December 1997, Datasouth's DS Travel Automation Group began shipping its new
Automated Ticket/Boarding Pass Version 2 ("ATB2") printer, "Journey" to The
SABRE Group, the Company's largest customer. Journey establishes a new
price/performance benchmark for ATB2 printers, which provides excellent value to
travel agencies and city ticket offices. Journey will primarily be sold to
Computer Reservation Systems ("CRSs"), such as The SABRE Group, and airlines
worldwide. It is an excellent complement to Electronic Ticketing, and, priced
at under $2,000, it makes satellite ticket printing a more feasible and cost
effective option.
Datasouth acquired Vista, California-based CodeWriter Industries, Inc. and its
affiliate, CW Technologies, LLC, in January 1998. CodeWriter designs and
manufactures a line of direct thermal and thermal transfer desktop and portable
bar code label printers. Datasouth will manufacture CodeWriter products at its
Charlotte facility, but is retaining a presence on the west coast to offer
service repair, product distribution, and label conversion. The acquisition
enables Datasouth's Printer Products Group to provide its customers a broader
line of industrial printers.
Datasouth's manufacturing capabilities provide a strategic advantage over most
competitors. Focusing on customer response time and high quality customer
service, Datasouth can provide quick, on-time product delivery while maintaining
low finished goods inventories by scheduling product configuration each day to
meet changing order requirements. Raw materials and assemblies, including PC
boards assembled by Datasouth, are pulled through to replenish stock consumed,
thereby eliminating unnecessary inventories and scheduling. Datasouth's
warranty expense is well under 1% of revenue, evidencing Datasouth's quality
workmanship and designs.
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[Host Communications, Inc./Universal Sports America, Inc. Photos appear here]
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Privately-held Host Communications, Inc. ("HCI"), based in Lexington, Kentucky,
provides multimedia, promotional marketing and event management services to
universities, athletic conferences and associations, the most prominent of which
is the National Collegiate Athletic Association (NCAA(R)). In 1997, Bull Run
increased its effective ownership in HCI's common stock to 30.2%, plus 51.5% of
HCI's outstanding preferred stock. Most of Bull Run's investment in HCI is held
through its 51.5%-owned affiliate, Capital Sports Properties, Inc., whose assets
consist solely of HCI common stock and HCI preferred stock. HCI's operations
include:
Sports Marketing - HCI manages the production, sales and syndication of
basketball and football radio and television broadcasts, as well as the
publishing and printing of award-winning sports magazines for an impressive list
of client universities and conferences. HCI's new five-year agreement with the
NCAA, an HCI client since 1975, took effect in 1997, providing HCI the exclusive
rights to NCAA corporate partners promotional licensing marks, championship
radio broadcasts, publication and distribution of championship event programs
and associated materials, as well as exclusive marketing rights to market NCAA
fan festivals in conjunction with championship events.
Audio / Video Services - HCI's MainStreet Productions operates recording studios
equipped to handle live broadcast productions and soundtracks for radio, video
and multi-range presentations such as the NCAA Today broadcasts on ESPN,
producing video presentations from concept to completion.
Publishing and Printing - Among the 400-plus annual publications produced by HCI
are NCAA basketball championship programs, including the high-profile NCAA Men's
and Women's Final Four programs. HCI provides services to over 600 clients
annually, ranging from graphic design, typesetting and image assembly, to
printing and binding. Such services were provided to Bull Run in connection with
the printing of this 1997 Annual Report.
Management Services - HCI manages the affairs of the National Tour Association,
Quest Association (i.e., the national J. D. Edwards users group), International
Spa and Fitness Association, National Limousine Association and United Motor
Coach Association, by providing services in the areas of marketing, publishing,
government affairs, business, education and membership growth.
HCI's 33.8%-owned affiliate, Universal Sports America, Inc. ("USA"), provides
sponsorship and promotional opportunities involving college athletics and
participatory sporting events to corporate sponsors and advertisers. Bull Run
also directly owns USA preferred stock, which is convertible to approximately 3%
of USA's fully-diluted common stock. USA's operations include: Collegiate Sports
- - USA provides management and marketing services to athletic departments and
conferences, including the development and marketing of corporate sponsor
programs, providing print, publication, and video production services (generally
outsourced to HCI). Events - USA manages and/or operates participatory sporting
events, on the local, collegiate, national and international levels, such as the
Hoop-It-Up(TM) three-on-three basketball tournaments. Properties - USA develops
and markets trademarks that currently include the Historically Black Collegiate
Coalition (HBCC(TM)), Pepito Ball(TM) and Tradition Bowl games, such as the Dr
Pepper Red River Shoot-out(TM), the annual football contest between the
University of Texas and the University of Oklahoma.
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[Rawlings Sporting Goods Company, Inc. Photos appear here]
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In November 1997, Bull Run acquired from Rawlings Sporting Goods Company, Inc.
("Rawlings"), a warrant to purchase, under certain conditions, up to 10% of
Rawlings common stock. Bull Run also accumulated additional shares of Rawlings
common stock in the open market totaling 5.0% of Rawling's currently outstanding
shares by December 31, 1997, and 10.4% by January 31, 1998. Rawlings common
stock is traded on the Nasdaq Stock Market under the symbol RAWL.
Rawlings, headquartered near St. Louis, Missouri, is a leading supplier of team
sports equipment in North America. It offers a wide range of quality products
for baseball and softball (gloves, baseballs, bats, helmets, protective gear,
team uniforms, accessories), basketball (balls, team uniforms, warm-ups,
accessories), football (balls, shoulder pads, protective gear, team uniforms),
hockey (sticks, protective gloves, pads) and other sports. The company operates
eight manufacturing facilities throughout the United States, Canada and Latin
America, as well as distribution centers in the United States and Canada. For
more than 100 years, Rawlings products have been recognized as The Finest in the
Field.
For nearly 20 years, Rawlings has been the exclusive supplier of baseballs to
Major League Baseball, and since 1994, has been the official supplier to all 18
Minor Leagues. It has established a long-standing tradition of innovation in
team sports equipment and uniforms, including the development of the first
football shoulder pads in 1902, the original deep pocket baseball glove in 1920
and double knit nylon and cotton uniforms for Major League Baseball in 1970.
More recently, Rawlings introduced a new power forged aluminum bat and a speed
sensing baseball. Since 1958, Rawlings has annually presented the Rawlings Gold
Glove Award(R) to the best fielder at each position in the National and American
Leagues.
Since 1986, Rawlings has been the exclusive supplier of basketballs for the NCAA
Men's and Women's Division I, II and III championship games (including the Final
Four), and is also the exclusive supplier of basketballs to the National
Association of Intercollegiate Athletics ("NAIA"). Since 1987, Rawlings has been
the exclusive supplier of footballs for the NCAA Division IAA, II and III
championship games, and also supplies the official football to the NAIA.
In September 1997, Rawlings acquired the Victoriaville hockey business which
includes the Vic, Victoriaville and McMartin brands for hockey sticks and
protective equipment. Since 1996, Rawlings has offered a full line of protective
equipment for ice, roller and street hockey.
Rawlings entered into a five year Strategic Marketing Agreement with HCI in
November 1997. Under this agreement, Rawlings and HCI will jointly market and
sell Rawlings products primarily through corporate promotions, grass roots
events and international programs.
15
<PAGE>
MANAGEMENT'S DISCUSSION and ANALYSIS
The consolidated operating results include those of Bull Run Corporation ("Bull
Run") and Datasouth Computer Corporation ("Datasouth", and collectively, with
Bull Run, the "Company"), after elimination of intercompany accounts and
transactions.
Results of Operations - 1997 as compared to 1996
Total revenue for 1997, primarily from the printer manufacturing operations of
Datasouth, was $22,320,000 compared to $24,654,000 in 1996. Revenue from
Datasouth's printer operations of $21,639,000 in 1997 represented a 9% decrease
from such revenue in 1996 of $23,810,000. Printer sales to the Company's largest
customer were approximately $7,200,000 in 1997 and 1996. Sales to two
significant distributors were approximately $980,000 lower in 1997 than in 1996,
and a product line generating sales of $1,230,000 in 1996 was discontinued in
1997. Short term revenue trends in the Company's printer business fluctuate due
to variable ordering patterns of large customers. Gross profit from printer
operations of 26.2% for 1997 decreased from the 27.9% realized in 1996,
primarily due to a different mix of products sold, initial production costs
associated with the introduction of a new printer line, and greater
manufacturing overhead efficiencies gained in 1996 as a result of higher unit
volumes.
The Company provides consulting services to Gray Communications Systems, Inc.
("Gray") in connection with Gray's acquisitions and acquisition financing.
Income on a portion of such fees is deferred and recognized over forty years as
a result of the Company's equity investment position in Gray. Consulting fee
income of $681,000 was recognized in 1997 compared to $844,000 in 1996. There
can be no assurance that the Company will recognize any consulting fees in the
future, other than the recognition of currently deferred fees.
The Company's consolidated operating expenses of $6,852,000 in 1997 represented
a $597,000, or 9.5%, increase from 1996, due to the cost of research and
development efforts incurred for the design of a new printer introduced in the
fourth quarter of 1997 and certain general and administrative expenses.
Operating expenses include non-cash goodwill amortization associated with the
acquisition of Datasouth of $301,000 in 1997 and $292,000 in 1996.
Equity in earnings (losses) of affiliated companies, totaling ($599,000) in 1997
and $1,731,000 in 1996, includes the Company's proportionate share of the
earnings of Gray, Host Communications, Inc. ("HCI") and Capital Sports
Properties, Inc. ("CSP"), net of goodwill amortization totaling $610,000 and
$487,000, respectively. Approximately $975,000 of the decrease from 1996 to 1997
in equity in earnings of affiliated companies can be attributed to Gray's gain
on the sale of a television station and HCI's gain on the sale of assets to
Universal Sports America, Inc. ("USA") in 1996. Additional decreases in Gray's
earnings for 1997 compared to 1996 are attributable to increased interest
expense and amortization of goodwill associated with Gray's acquisitions.
Interest and dividend income in 1997 of $1,102,000 was primarily derived from
dividends accrued on the Company's investment in Gray's series A and series B
preferred stock. Interest expense, totaling $2,716,000 in 1997, was incurred
primarily in connection with bank term loans, the proceeds of which were used to
finance the Company's investments in Gray, HCI, CSP, USA and Rawlings Sporting
Goods Company, Inc. ("Rawlings").
As of December 31, 1997, the Company has an Alternative Minimum Tax ("AMT")
credit carryforward of approximately $500,000 to reduce regular Federal tax
liabilities in the future. In part resulting from the carryback of the 1997
taxable loss to 1995, the Company has a business credit carryforward of
approximately $125,000 to reduce regular Federal tax liabilities in the future.
Nondeductible goodwill amortization reduced the Company's tax benefit in 1997
and increased the Company's tax expense in 1996, thereby reducing the Company's
effective tax rate from 40.6% in 1996 to 34.5% in 1997.
16
<PAGE>
Results of Operations - 1996 as compared to 1995
Total revenue for 1996, primarily from the printer manufacturing operations of
Datasouth, was $24,654,000 compared to $27,153,000 in 1995. Revenue from
Datasouth's printer operations of $23,810,000 in 1996 represented a 10% decrease
from such revenue in 1995 of $26,432,000. Printer sales to the Company's largest
customer were approximately $7,200,000 in 1996 compared to $7,800,000 in 1995.
Sales to a large distributor were approximately $1,500,000 lower in 1996 than in
1995, as a result of a significant printer installation project by the
distributor's customer maturing in 1995. Short term revenue trends in the
Company's printer business fluctuate due to variable ordering patterns of these
and other large customers. Gross profit from printer operations of 27.9% for
1996 decreased from the 29.4% realized in 1995, primarily due to a different mix
of products sold and greater manufacturing overhead efficiencies gained in 1995
as a result of higher unit volumes.
The Company provides consulting services to Gray Communications Systems, Inc.
("Gray") in connection with Gray's acquisitions and acquisition financing.
Consulting fee income of $844,000 was recognized in 1996 compared to $721,000 in
1995. Due to the reduction in the Company's equity investment from 27.1% to
15.2% of Gray's outstanding common shares (primarily as a result of Gray's
public offering of stock in 1996 described below), $174,000 of previously
deferred fees were recognized as consulting fee income in 1996. There can be no
assurance that the Company will recognize any consulting fees in the future.
The Company's consolidated operating expenses of $6,255,000 in 1996 represented
a $509,000, or 7.5%, decrease from 1995, due to reductions in certain
project-specific research and development expenses and certain general and
administrative expenses. Operating expenses include non-cash goodwill
amortization associated with the acquisition of Datasouth of $292,000 in 1996
and $309,000 in 1995.
Equity in earnings of affiliated companies, totaling $1,731,000 in 1996 and
$107,000 in 1995 included the Company's proportionate share of the earnings of
Gray, Host Communications, Inc. ("HCI") and Capital Sports Properties, Inc.
("CSP"), net of goodwill amortization totaling $487,000 and $378,000,
respectively. Approximately $975,000 of the increase from 1995 to 1996 in equity
in earnings of affiliated companies can be attributed to Gray's gain on the sale
of a television station, and HCI's gain on the sale of assets to Universal
Sports America, Inc. ("USA").
In 1996, Gray consummated a public offering of 3.5 million shares of its
newly-issued class B common stock at $20.50 per share, resulting in net proceeds
of $67.1 million. As a result of this issuance, the Company's common equity
ownership of Gray was reduced from 27.1% to 15.2%, resulting in a pretax gain
for the Company of approximately $8.2 million (approximately $5.0 million after
tax). This offering also reduced the Company's common equity voting power in
Gray from 27.1% to 25.1%. There is no assurance that such sales of a material
nature will occur in the future.
Interest and dividend income in 1996 of $874,000 was primarily derived from an
8% Subordinated Note due from Gray in the principal amount of $10 million (the
"8% Note") and dividends accrued on the Company's investment in Gray's series A
and series B preferred stock. Interest expense, totaling $2,124,000 in 1996 was
incurred primarily in connection with bank term loans, the proceeds of which
were used to finance the Company's investments in Gray, HCI, CSP and USA.
The Company recognizes its equity in earnings of HCI on a six month lag basis,
in order to align HCI's fiscal year ending June 30 with the Company's fiscal
year. Effective July 1, 1995 (the first day of HCI's 1996 fiscal year), HCI
adopted a new accounting policy for the recognition of corporate sponsor license
fee revenue and guaranteed rights fee expenses, since the nature of HCI's
contracts was changing to include revenue-sharing or net profit split
arrangements, rather than guaranteed rights fee payments. As a result, the
rights fee expense associated with this type of contract could not be accurately
measured until the expiration of each contract period when the revenue-sharing
or net profit split amount was determined. Under the new policy, license fee
revenue and rights fee expense are recognized on a straight-line basis over the
life of the contract, instead of recognizing revenue and expense in their
entirety on the effective date of the contract, thereby providing for the
uniform matching of revenue and expenses. As a result of such adoption, HCI
recognized a $4,559,000 charge against its earnings, representing the after-tax
cumulative effect of the accounting change. The Company reported 9.1% of such
charge, or $415,000, less a $141,000 deferred tax benefit, as a charge against
its 1996 earnings.
In 1996, Gray retired certain debt with the proceeds from its public offerings
of class B common stock and notes,
17
<PAGE>
and the sale of its series B preferred stock. As a result, Gray incurred an
after-tax extraordinary loss of $3,159,000 related to costs associated with the
retired debt. The Company therefore recognized 15.2% of Gray's charge, or
$480,000, less a $185,000 deferred tax benefit, as an extraordinary loss.
As of December 31, 1996, the Company had an Alternative Minimum Tax ("AMT")
credit carryforward of $341,000 to reduce future regular Federal tax
liabilities. As a result of recognizing approximately $79,000 and $58,000 in AMT
credits in 1996 and 1995, respectively, and a change in judgment regarding the
realizability of the remaining AMT credit carryforward, the valuation allowance
on deferred tax assets was reduced in the fourth quarter of 1996, thereby
reducing the 1996 income tax provision and goodwill by approximately $47,000 and
$131,000, respectively.
Liquidity and Capital Resources
The Company amended all of its long-term debt agreements with two banks
subsequent to December 31, 1997. Under an agreement amended February 20, 1998,
the Company entered into a $5,000,000 term note, payable to a bank in quarterly
installments of $250,000 through December 2002, bearing interest at the London
Interbank Offered Rate ("LIBOR") plus 2.75%, and, a revolving bank credit
facility for borrowings of up to $5,000,000 expiring February 2001, bearing
interest principally at LIBOR plus 2.75%, with a mandatory reduction in February
1999 to $4,000,000 in available borrowings. The $5,000,000 revolving credit
facility replaced a previous $5,500,000 facility under which $5,472,000 was
outstanding as of December 31, 1997. Under an agreement amended March 20, 1998,
the Company has outstanding two term notes for bank borrowings of up to
$42,900,000, requiring no principal payments prior to maturity on January 1,
2003, bearing interest at LIBOR plus 1.75%, and, a revolving bank credit
facility for borrowings of up to $3,500,000 expiring May 1, 1999, bearing
interest at the bank's prime rate, under which $3,183,000 was outstanding as of
December 31, 1997. The Company also has a demand bank note for borrowings of up
to $2.0 million under which $1,500,000 was outstanding as of December 31, 1997,
bearing interest at the bank's prime rate.
In January 1998, the Company executed two interest rate swap agreements, which
effectively modify the interest characterics of $24,750,000 of the Company's
outstanding long-term debt. The agreements involve the exchange of amounts based
on a fixed interest rate for amounts based on variable interest rates over the
life of the agreements, without an exchange of the notional amount upon which
the payments are based. The differential to be paid or received as interest
rates change will be accrued and recognized as an adjustment of interest expense
related to the debt. The Company effectively converted $20,000,000 and
$4,750,000 of floating rate debt to a fixed rate basis under two separate
agreements. Under the first agreement, $20,000,000 of long-term debt is subject
to a one-year forward swap arrangement, whereby beginning January 1, 1999 and
for the following nine years, the Company will be subject to a fixed rate of
7.83%, instead of LIBOR plus 1.75%, the rate in effect until then. Under the
second agreement, $4,750,000 of long-term debt will be subject to a fixed rate
of no more than 8.9% beginning March 31, 1998, instead of LIBOR plus 2.75%, the
rate in effect until then. The notional amount on the $4,750,000 interest rate
swap agreement amortizes $250,000 per quarter through December 31, 2002.
Dividends on the series B preferred stock of Gray owned by the Company are
payable in cash at an annual rate of $600 per share or, at Gray's option,
payable in additional shares of series B preferred stock. The Company
anticipates that dividends on the series B preferred stock will continue to be
paid in additional shares of series B preferred stock for the foreseeable
future.
The Company has an active stock repurchase program authorized by its Board of
Directors for the repurchase of up to 2,000,000 shares of its common stock.
Repurchases may be made from time to time in the open market or directly from
shareholders at prevailing market prices, and may be discontinued at any time.
During 1997, the Company repurchased 706,010 shares at a total cost of
$1,751,000. Since the program's inception in November 1994, 1,286,510 shares
have been repurchased at an average cost of $2.48 per share.
Inventories as of December 31, 1997 increased to $3,757,000 from $3,315,000 as
of December 31, 1996, due to an increase in raw materials on hand associated
with the initial production of a new printer beginning in December 1997. As of
December 31, 1997, the Company had open purchase commitments totaling
approximately $8,000,000 primarily for raw materials inventories. The Company's
total working capital of $2,513,000 as of December 31, 1997 decreased from
$3,990,000 as of December 31, 1996, as a result of borrowings under the bank
demand notes and a $1,000,000 increase in the current portion of long-term debt,
net of the increase in inventories.
Effective January 2, 1998, the Company acquired all of the outstanding common
stock of CodeWriter Industries,
18
<PAGE>
Inc. ("CodeWriter") and all of the outstanding membership interests of
CodeWriter's affiliate, CW Technologies, LLC ("CWT"), in a transaction valued at
approximately $6,200,000, of which $5,000,000 million was paid at closing in the
form of $2,500,000 in cash and $2,500,000 in the Company's common stock. In
addition, the Company is obligated to pay quarterly to the members of CWT, a
specified percentage of revenue generated by the Company from CodeWriter and CWT
products and services during each calendar quarter through December 31, 2001,
but in no event will the aggregate amount of such payments exceed $1,200,000.
The cash acquisition price was financed under the $5,000,000 term note
previously described.
In 1997, the Company entered into an Investment Purchase Agreement with
Rawlings. Pursuant to this agreement, the Company acquired warrants to purchase
925,804 shares of Rawlings' common stock, and has the right, under certain
circumstances, to purchase additional warrants. The Company's total cost to
purchase the warrants pursuant to this agreement (excluding the additional
warrants) was $2,842,000. Fifty percent of the purchase price, or $1,421,000,
was paid to Rawlings in 1997. The remaining fifty percent of the purchase price,
plus interest at 7% per annum from November 21, 1997 until the date of payment,
will be due on the earlier of the date of exercise and the date of expiration of
the warrants. In the event of a partial exercise of the warrants, a pro rata
portion of the purchase price with interest accrued thereon will be payable. The
warrants have a four year term and an exercise price of $12.00 per share, but
are exercisable only if Rawlings' common stock closes at or above $16.50 for
twenty consecutive trading days during the four year term. In addition, under
the terms of the agreement, the Company purchased 10.4% of the outstanding
shares of Rawlings' common stock in the open market from November 1997 through
January 1998 (of which, 5.0% was acquired as of December 31, 1997 at a cost of
$4,382,000). Investments in Rawlings were financed with borrowings under the
$42,900,000 term loans previously described.
Capital spending for 1998, excluding assets acquired from CodeWriter and CWT, is
expected to be approximately $600,000. The Company anticipates that its current
working capital, funds available under its revolving credit facilities,
quarterly cash dividends on the Gray series A preferred stock and Gray class A
common stock, and cash flow from operations will be sufficient to fund its debt
service, working capital requirements and capital spending requirements for at
least the next twelve months. Any capital required for potential additional
business acquisitions would have to be funded by issuing additional securities
or by entering into other financial arrangements.
Impact of Year 2000
Some of the Company's older computer programs were written using two digits
rather than four to define the applicable year. As a result, those computer
programs have time-sensitive software that recognize a date using "00" as the
year 1900 rather than the year 2000. This could cause a system failure or
miscalculations causing disruptions of operations, including, among other
things, a temporary inability to process transactions, send invoices, or engage
in similar normal business activities.
The Company has completed an assessment and will have to modify or replace
portions of its software so that its computer systems will function properly
with respect to dates in the year 2000 and thereafter. The total Year 2000
project cost is estimated to be less than $200,000, including the cost of
upgraded computer hardware and software. Most of this cost will be realized over
the estimated useful lives of the new hardware and software. To date, the
Company has not incurred significant expenses associated with the Year 2000
issue.
The project is estimated to be completed not later than December 31, 1998, which
is prior to any anticipated impact on its operating systems. The Company
believes that with modifications to existing software and conversions to new
software, the Year 2000 issue will not pose significant operational problems for
its computer systems. However, if such modifications and conversions are not
made, or are not completed timely, the Year 2000 issue could have a material
impact on the operations of the Company.
The costs of the project and the date on which the Company believes it will
complete the Year 2000 modifications are based on management's best estimates,
which were derived utilizing numerous assumptions of future events, including
the continued availability of certain resources and other factors. However,
there can be no guarantee that these estimates will be achieved and actual
results could differ materially from those anticipated. Specific factors that
might cause such material differences include, but are not limited to, the
availability and cost of personnel trained in this area, the ability to locate
and correct all relevant computer codes, and similar uncertainties.
19
<PAGE>
CONSOLIDATED BALANCE SHEETS
(Dollars and shares in thousands)
<TABLE>
<CAPTION>
December 31
1997 1996
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 142 $ 81
Accounts receivable 4,600 4,074
Inventories 3,757 3,315
Other 193 198
--------- ---------
Total current assets 8,692 7,668
Property and equipment, net 2,638 2,251
Investment in affiliated companies 61,551 53,752
Goodwill 3,589 3,890
Other assets 362 290
--------- ---------
$ 76,832 $ 67,851
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable and current portion of long-term debt $ 2,500 $ 500
Accounts payable 2,462 2,116
Accrued and other liabilities:
Employee compensation and related taxes 430 542
Interest 553 308
Other 234 212
--------- ---------
Total current liabilities 6,179 3,678
Long-term debt 41,998 31,364
Deferred income taxes 3,599 4,491
Stockholders' equity:
Common stock, $.01 par value (authorized 100,000
shares; issued 22,583 and 22,325 shares as of
December 31, 1997 and 1996, respectively) 226 223
Additional paid-in capital 20,800 20,541
Treasury stock, at cost (1,287 and 581 shares as of
December 31, 1997 and 1996, respectively) (3,188) (1,437)
Retained earnings 7,218 8,991
--------- ---------
Total stockholders' equity 25,056 28,318
--------- ---------
$ 76,832 $ 67,851
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
20
<PAGE>
CONSOLIDATED STATEMENTS 0F OPERATIONS
(Dollars and shares in thousands except per share amounts)
<PAGE>
<TABLE>
<CAPTION>
Years Ended December 31
1997 1996 1995
<S> <C> <C> <C>
Revenue from printer operations $ 21,639 $ 23,810 $ 26,432
Cost of goods sold 15,967 17,170 18,649
------ ------ ------
Gross profit 5,672 6,640 7,783
Consulting fee income 681 844 721
Operating expenses:
Research and development 2,418 1,568 1,872
Selling, general and administrative 4,434 4,687 4,892
------ ------ ------
6,852 6,255 6,764
------ ------ ------
Income (loss) from operations (499) 1,229 1,740
Other income (expense):
Equity in earnings (losses) of affiliated companies (599) 1,731 107
Gain on issuance of common shares by affiliated company 8,179
Interest and dividend income 1,102 874 40
Interest expense (2,716) (2,124) (984)
------ ------ ------
Income (loss) before income taxes, extraordinary item
and cumulative effect of accounting change (2,712) 9,889 903
Income tax benefit (provision) 939 (4,012) (180)
------ ------ ------
Income (loss) before extraordinary item and
cumulative effect of accounting change (1,773) 5,877 723
Extraordinary loss recognized by affiliated
company (net of $185 tax benefit) (295)
Cumulative effect of accounting change
recognized by affiliate (net of $141 tax benefit) (274)
------ ------ ------
Net income (loss) $ (1,773) $ 5,308 $ 723
------ ------ ------
Earnings (loss) per share - Basic:
Income (loss) before extraordinary item and
cumulative effect of accounting change $ (.08) $ .26 $ .03
Extraordinary loss (.01)
Cumulative effect of accounting change (.01)
------ ------ ------
Net income (loss) $ (.08) $ .24 $ .03
------ ------ ------
Earnings (loss) per share - Diluted:
Income (loss) before extraordinary item and
cumulative effect of accounting change $ (.08) $ .25 $ .03
Extraordinary loss (.01)
Cumulative effect of accounting change (.01)
------ ------ ------
Net income (loss) $ (.08) $ .23 $ .03
------ ------ ------
Weighted average number of shares outstanding:
Basic 21,302 22,013 22,127
Diluted 21,302 22,945 23,236
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
21
<PAGE>
CONSOLIDATED STATEMENTS
OF STOCKHOLDERS' EQUITY
(Dollars and shares in thousands)
<TABLE>
<CAPTION>
Additional Total
Common Stock Paid-In Treasury Retained Stockholders'
Shares Amount Capital Stock Earnings Equity
<S> <C> <C> <C> <C> <C> <C> <C>
Balances, January 1, 1995 22,137 $ 221 $20,403 $ 0 $ 2,960 $ 23,584
Purchase of treasury stock (330) (330)
Exercise of stock options 143 2 100 102
Net income 723 723
------ ------ ------- -------- ------- --------
Balances, December 31, 1995 22,280 223 20,503 (330) 3,683 24,079
Purchase of treasury stock (1,107) (1,107)
Exercise of stock options 45 38 38
Net income 5,308 5,308
------ ------ ------- -------- ------- --------
Balances, December 31, 1996 22,325 223 20,541 (1,437) 8,991 28,318
Purchase of treasury stock (1,751) (1,751)
Exercise of stock options 258 3 259 262
Net loss (1,773) (1,773)
------ ------ ------- -------- ------- --------
Balances, December 31, 1997 22,583 $ 226 $ 20,800 $ (3,188) $ 7,218 $ 25,056
====== ====== ======== ======== ======= ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
22
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOW
(Dollars in thousands)
<PAGE>
<TABLE>
<CAPTION>
Years Ended December 31
1997 1996 1995
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (1,773) $ 5,308 $ 723
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Cumulative effect of accounting change 415
Extraordinary loss 480
Gain on issuance of common shares by affiliate (8,179)
Provision for bad debts 27 1 58
Depreciation and amortization 1,001 950 1,124
Equity in (earnings) losses of affiliated companies 599 (1,731) (107)
Deferred income taxes (892) 3,553 (211)
Preferred stock dividend income (300)
Change in operating assets and liabilities:
Accounts receivable (553) (166) (158)
Inventories (442) 440 (1,146)
Other current assets (6) 74 (111)
Accounts payable and accrued expenses 501 600 34
Accrued income taxes 11 (478) 204
------ ------ ------
Net cash provided by (used in) operating activities (1,827) 1,267 410
------ ------ ------
Cash flows from investing activities:
Sale of marketable securities 500
Capital expenditures (1,160) (366) (920)
Investments in affiliated companies (9,099) (5,566) (13,586)
Note purchased from affiliated company (10,000)
Dividends received from affiliated companies 1,002 73 92
------ ------ ------
Net cash used in investing activities (9,257) (15,859) (13,914)
------ ------ ------
Cash flows from financing activities:
Borrowings on notes payable 1,500
Borrowings on revolving lines of credit 15,232 11,339 12,014
Repayments on revolving lines of credit (9,941) (10,656) (10,729)
Proceeds from long-term debt 5,843 15,000 15,152
Repayments on long-term debt (3,257)
Loan commitment fees (87) (126)
Issuance of common stock 262 38 102
Repurchase of common stock (1,751) (1,107) (330)
------- -------- --------
Net cash provided by financing activities 11,145 14,527 12,826
------- -------- --------
Net increase (decrease) in cash and cash equivalents 61 (65) (678)
Cash and cash equivalents, beginning of year 81 146 824
------ ------ ------
Cash and cash equivalents, end of year $ 142 $ 81 $ 146
------ ------ ------
Supplemental cash flow disclosures:
Interest paid $ 2,460 $ 1,917 $ 794
Income taxes paid (recovered), net (58) 612 187
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
23
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share amounts)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation - The accompanying consolidated financial statements
include the accounts of Bull Run Corporation ("Bull Run") and its wholly-owned
subsdiary, Datasouth Computer Corporation ("Datasouth", and collectively, the
"Company"), after elimination of intercompany accounts and transactions.
Use of Estimates - The preparation of the consolidated financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates.
Cash and Cash Equivalents - Cash equivalents are composed of all highly liquid
investments with an original maturity of three months or less.
Accounts Receivable - The Company sells computer printers and provides service
worldwide to distributors, value-added resellers and large volume end users. The
Company performs ongoing credit evaluations of its customers financial condition
and generally requires no collateral from its customers. In addition, the
Company receives consulting fees generally payable in monthly installments from
Gray Communications Systems, Inc. ("Gray"), an investee, for the performance of
services in connection with Gray's acquisitions. As of December 31, 1997 and
1996, fees of $850 and $1,000, respectively, were receivable from Gray. The
allowance for doubtful accounts was $55 as of December 31, 1997 and $45 as of
December 31, 1996.
Inventories - Inventories are associated with the printer operations and are
stated at the lower of cost, determined on the first-in, first-out method, or
market.
Property and Equipment - Property and equipment is stated at cost less
depreciation computed under the straight-line method over the estimated useful
life of the asset, generally from 3 to 7 years. When assets are disposed, the
associated cost and accumulated depreciation are eliminated from the respective
accounts and any resulting gain or loss is reflected in income. Expenditures for
maintenance, repairs and minor renewals are charged to expense. Depreciation
expense was $614 in 1997, $590 in 1996, and $783 in 1995.
Investment in Affiliated Companies - The Company accounts for its investments in
Gray, Host Communications, Inc. ("HCI") and Capital Sports Properties, Inc.
("CSP") by the equity method, and its investment in Rawlings Sporting Goods
Company, Inc. ("Rawlings") and Universal Sports America, Inc. ("USA") by the
cost method. The excess of the Company's investments over the underlying equity
of Gray and HCI, totaling $24,221 as of December 31, 1997, is being amortized
over 40 years, with such amortization (totaling $610, $487, and $378 in 1997,
1996, and 1995, respectively) reported as a reduction in the Company's equity in
earnings of affiliated companies. The equity in earnings of HCI is recognized by
the Company on a six month lag basis, in order to align HCI's fiscal year ending
each June 30 with the Company's fiscal year.
Goodwill and Other Long-Lived Assets - Goodwill associated with Bull Run's
acquisition of Datasouth's common stock is being amortized over 15 years. The
carrying value of goodwill, as well as other long-lived assets, are reviewed if
the facts and circumstances suggest that they may be impaired. If this review
indicates that the assets will not be recoverable, as determined based on
undiscounted estimated cash flows over the remaining amortization period, the
carrying value of the assets would be reduced to their estimated fair value.
Goodwill amortization was $301 in 1997, $292 in 1996 and $309 in 1995, and
accumulated amortization was $928 and $627 as of December 31, 1997 and 1996,
respectively.
Warranty Costs - An estimated allowance for future warranty costs of the printer
operations, based on past experience, is recorded as a charge to cost of goods
sold. Included in other accrued liabilities is $60 and $65 for future warranty
costs as of December 31, 1997 and 1996, respectively.
24
<PAGE>
Research and Development - Research and development costs of the printer
operations, including the costs of software developed internally, are expensed
as incurred.
Income Taxes - Income taxes are recognized in accordance with Statement of
Accounting Standards No. 109, "Accounting for Income Taxes", whereby deferred
income tax liabilities or assets at the end of each period are determined using
the tax rate expected to be in effect when the taxes are actually paid or
recovered. Accordingly, income tax expense will increase or decrease in the same
period in which a change in tax rates is enacted. A valuation allowance is
recognized on certain deferred tax assets whose realization is not reasonably
assured.
Stock-Based Compensation - The Company grants stock options for a fixed number
of shares to employees with an exercise price equal to the fair value of the
shares at the date of grant. In accordance with APB Opinion No. 25, "Accounting
for Stock Issued to Employees", no compensation expense is recognized for such
grants.
Earnings (Loss) Per Share - In 1997, the Financial Accounting Standards Board
issued Statement No. 128, "Earnings Per Share". Statement No. 128 replaced the
calculation of primary and fully-diluted earnings per share with basic and
diluted earnings per share. Unlike primary earnings per share, basic earnings
per share excludes any dilutive effects of options. Diluted earnings per share
is very similar to the previously reported primary earnings per share. All
earnings (loss) per share amounts for all periods have been presented, and where
appropriate, restated to conform to the Statement No. 128 requirements. In
periods where they are anti-dilutive, dilutive effects of options are excluded
from the calculation of diluted earnings (loss) per share.
2. INVESTMENT IN AFFILIATED COMPANIES
Investment in Rawlings - On November 21, 1997, the Company entered into an
Investment Purchase Agreement with Rawlings. Pursuant to this agreement, the
Company acquired warrants to purchase 925,804 shares of Rawlings' common stock,
and has the right, under certain circumstances, to purchase additional warrants.
The Company's total cost to purchase the warrants pursuant to this agreement
(excluding the additional warrants) was $2,842. Fifty percent of the purchase
price, or $1,421, was paid to Rawlings on November 21, 1997. The remaining fifty
percent of the purchase price, plus interest at 7% per annum from November 21,
1997 until the date of payment, will be due on the earlier of the date of
exercise and the date of expiration of the warrants. In the event of a partial
exercise of the warrants, a pro rata portion of the purchase price with interest
accrued thereon will be payable. The warrants have a four year term and an
exercise price of $12.00 per share, but are exercisable only if Rawlings' common
stock closes at or above $16.50 for twenty consecutive trading days during the
four year term. In addition, under the terms of the agreement, the Company
purchased 10.4% of the outstanding shares of Rawlings' common stock in the open
market from November 1997 through January 1998 (of which, 5.0% was acquired as
of December 31, 1997 at a cost of $4,382). Rawlings' common stock is publicly
traded on The Nasdaq Stock Market (symbol: RAWL).
The Company and Rawlings also entered into a Standstill Agreement, which, among
other things, provides that, for a specified period, the Company will be
restricted in acquiring additional shares of Rawlings' common stock or
participating in certain types of corporate events relating to the Company,
including proxy contests and tender offers, subject to certain exceptions.
Pursuant to a Registration Rights Agreement, Rawlings has also granted the
Company rights to have the shares issuable upon exercise of the warrants (and
the additional warrants, if any) registered under the Securities Act of 1933
under certain circumstances.
Investment in Gray and Gain on Issuance of Common Shares - In 1996, Gray
consummated a public offering of 3.5 million shares of its newly-issued class B
common stock at $20.50 per share, resulting in net proceeds to Gray of $67,060.
As a result of such issuance, the Company's common equity ownership of Gray was
reduced from 27.6% to 15.2%, (subsequently increasing to 17.0% as of December
31, 1997, as a result of additional investments in Gray made by the Company),
resulting in a pretax gain for the Company of $8,179 in 1996. Such offering also
reduced the Company's common equity voting power in Gray from 27.1% to 25.1%
(subsequently increasing to 27.1% as of December 31, 1997). Gray is a
communications company, based in Albany, Georgia, that operates eight network
affiliated television stations, three daily newspapers, advertising weekly
shoppers, plus a satellite broadcasting operation and a paging business. Gray's
class A and class B common stock is publicly traded on the New York Stock
Exchange (symbols: GCS and GCS.B, respectively).
25
<PAGE>
The Company provides consulting services to Gray from time to time in connection
with Gray's acquisitions and acquisition financing. Income on a portion of such
fees is deferred and recognized over forty years as a result of the Company's
equity investment position in Gray. Due to the reduction in the Company's equity
ownership of Gray as described above, $174 of previously deferred consulting
fees were recognized as consulting fee income in 1996. The Company recognized
consulting fee income from Gray of $681, $844, and $721 in 1997, 1996, and 1995,
respectively, for services rendered in connection with certain of Gray's
acquisitions. As of December 31, 1997 and 1996, income from additional
consulting fees of $400 and $272, respectively, has been deferred and will be
recognized as Gray amortizes goodwill associated with the acquisitions.
In January 1996, the Company purchased an 8% Subordinated Note (the "8% Note")
of Gray in the principal amount of $10,000, on which the Company received
interest income of $580 during 1996. In connection with the purchase of the 8%
Note, Gray issued to the Company warrants to purchase up to 487,500 shares of
Gray's class A common stock at $17.88 per share. In September 1996, the Company
exchanged the 8% Note for 1,000 shares of Gray's series A preferred stock, which
entitles the holder thereof to cash dividends at an annual rate of $800 per
share. At that same time, the Company purchased for $5,000, 500 shares of Gray's
series B preferred stock entitling the holder thereof to annual dividends of
$600 per share, which are cumulative. Dividends on the series B preferred stock
are payable in cash or in additional shares of series B preferred stock, at
Gray's option. Total dividend income of $1,100 and $293 was recognized by the
Company in 1997 and 1996, respectively, on Gray series A and B preferred stock.
In connection with the Company's acquisition of series B preferred stock, Gray
issued to the Company warrants to purchase up to 250,000 shares of Gray's class
A common stock at $24.00 per share. Of the total warrants owned by the Company
to purchase 737,500 shares of Gray's class A common stock, 457,500 are fully
vested, with the remaining warrants vesting periodically through 2001. Such
warrants are exercisable beginning in January 1998 and expire in 2006.
In 1996, Gray retired certain of its debt, thereby incurring an after-tax
extraordinary loss of $3,159 related to costs associated with the retired debt.
As a result, the Company recognized 15.2% of Gray's charge, or $480, less a $185
deferred tax benefit, as an extraordinary loss in its 1996 financial statements.
Investments in HCI, CSP and USA - The Company acquired its initial interests in
the outstanding common stock of HCI and CSP in 1995. In 1996, CSP exercised
warrants to acquire HCI common shares. As a result of this exercise of warrants
and subsequent purchases of HCI common stock by the Company, the Company's
direct common equity ownership in HCI, plus the Company's indirect common equity
ownership in HCI through its investment in CSP, was increased to 30.2% as of
December 31, 1997. Additionally, the Company owns indirectly, through CSP, 51.5%
of HCI's 8% series B preferred stock having a face value of $3,750. HCI, based
in Lexington, Kentucky, and HCI's 33.8%-owned affiliate, Universal Sports
America, Inc. ("USA"), provide media and marketing services to universities,
athletic conferences and various associations representing collegiate sports
and, in addition, market and operate amateur participatory sporting events.
The Company recognizes its equity in earnings of HCI on a six month lag basis,
in order to align HCI's fiscal year ending June 30 with the Company's fiscal
year. Effective July 1, 1995 (the first day of HCI's 1996 fiscal year), HCI
adopted a new accounting policy for the recognition of corporate sponsor license
fee revenue and guaranteed rights fee expenses, since the nature of HCI's
contracts were changing to include revenue-sharing or net profit split
arrangements, rather than guaranteed rights fee payments. As a result, the
rights fee expense associated with this type of contract could not be accurately
measured until the expiration of each contract period when the revenue-sharing
or net profit split amount was determined. Under the revised policy, license fee
revenue and rights fee expense are recognized on a straight-line basis over the
life of the contract, instead of recognizing revenue and expense in their
entirety on the effective date of the contract, thereby providing for the
uniform matching of revenue and expenses. As a result of such adoption, HCI
recognized a $4,559 charge against its earnings, representing the after-tax
cumulative effect of the accounting change. The Company has reported 9.1% of
such charge, or $415, less a $141 deferred tax benefit, as a charge against its
1996 earnings.
In September 1995, HCI sold certain operating assets to USA in exchange for its
33.8% common equity position. The transaction resulted in a gain, net of tax, of
approximately $4,000 for HCI, the Company's share of which amounted to $377, as
reflected in the Company's 1996 equity in earnings of affiliated companies. In
1995, the Company invested $650 in preferred stock of USA, which is convertible
to 3.0% of USA's total common shares, assuming conversion of all USA preferred
stock.
26
<PAGE>
Summarized Aggregate Financial Information - The summarized aggregate
financial information of affiliated companies, in which the Company accounts by
the equity method, follows:
Aggregate financial position (reflecting Gray and CSP as of December 31, 1997
and 1996 combined with HCI as of June 30, 1997 and 1996):
1997 1996
Current assets $ 37,253 $ 39,062
Property and equipment 47,508 41,184
Total assets 370,758 328,053
Current liabilities 31,275 40,635
Long-term debt 229,200 174,985
Total liabilities 271,118 225,116
Stockholders' equity 99,640 102,937
Aggregate operating results (reflecting Gray and CSP for the years ended
December 31, 1997, 1996 and 1995, combined with HCI for the years ended June 30,
1997, 1996 and 1995):
1997 1996 1995
Operating revenue $ 143,139 $ 120,759 $ 105,726
Income from operations 23,042 18,026 9,441
Net income (loss) (20) 3,442 2,196
Cumulative distributions exceed cumulative earnings of investments accounted for
by the equity method by approximately $100 as of December 31, 1997.
Estimate of Aggregate Fair Value - As of December 31, 1997, the aggregate value
of the Company's investment in affiliated companies was approximately $73,000,
based on, in the case of publicly-traded Gray and Rawlings, quoted market prices
on the New York Stock Exchange and The Nasdaq Stock Market, respectively, and in
the case of privately-held HCI and CSP, recent transactions in HCI common stock
and management estimates.
3. INVENTORIES
Inventories related to the Company's printer operations consist of the following
as of December 31:
1997 1996
Raw materials $ 2,734 $ 2,356
Work-in-process 711 673
Finished goods 312 286
------- -------
$ 3,757 $ 3,315
------- -------
4. PROPERTY AND EQUIPMENT
The Company's property and equipment consist of the following as of December 31:
1997 1996
Land $ 750 $ 750
Production equipment 2,797 2,060
Research and development equipment 534 366
Office furniture and equipment 568 477
------- -------
4,649 3,653
Accumulated depreciation and amortization 2,011 1,402
------- -------
$ 2,638 $ 2,251
------- -------
Bull Run's executive offices are leased from a company affiliated with a
principal stockholder and director of the Company under an operating lease
expiring in 2002. Datasouth leases its main facility for printer operations
under an operating lease expiring in 1998, having a renewal option for an
additional three year period, and leases additional office and warehouse space
under operating leases expiring in 2000. The Company's total rental expense was
$328, $309, and $317 in 1997, 1996, and 1995, respectively. The minimum annual
rental commitments under these and other leases with an original lease term
exceeding one year are approximately $367 for 1998, $167 for each of 1999 and
2000, and $17 for each of 2001 and 2002.
27
<PAGE>
5. LONG-TERM DEBT AND NOTE PAYABLE
The Company amended all of its long-term debt agreements with two banks
subsequent to December 31, 1997. An agreement amended February 20, 1998 (the
"February Agreement") provides:
(a) a $5,000 term note, payable $250 per quarter beginning March 31, 1998,
bearing interest at the London Interbank Offered Rate ("LIBOR") plus 2.75%; and,
(b) a revolving bank credit facility for borrowings of up to $5,000 expiring
in February 2001, bearing interest principally at LIBOR plus 2.75%, with a
mandatory reduction in February 1999 to $4,000 in available borrowings. This
revolving bank credit facility replaced a similar $5,500 facility under which
$5,472 was outstanding as of December 31, 1997 and $1,865 was outstanding as of
December 31, 1996.
An agreement amended March 20, 1998 (the "March Agreement") provides:
(a) term notes for borrowings of up to $42,900 requiring no principal
payments prior to maturity on January 1, 2003, bearing interest at LIBOR plus
1.75%, under which $34,343 was outstanding as of December 31, 1997 and $28,500
was outstanding as of December 31, 1996; and,
(b) a revolving bank credit facility for borrowings of up to $3,500 expiring
May 1, 1999, bearing interest at the bank's prime rate, under which $3,183 was
outstanding as of December 31, 1997 and $1,499 was outstanding as of December
31, 1996.
Loans made under the February Agreement are collateralized by Datasouth's
accounts receivable, inventories and property and equipment. Loans made under
the March Agreement are collateralized by all of the common stocks of Gray
(except for certain shares of Gray common stock pledged under the note payable
discussed below), HCI, CSP and Rawlings owned by the Company; the preferred
stock of Gray owned by the Company; warrants to purchase Gray's and Rawlings'
common stock owned by the Company; and shares of the Company's common stock held
by a significant shareholder of the Company. The loans require adherence to
certain financial covenants, the most restrictive of which requires maintaining
a cash flow coverage ratio of at least 1.1 to 1.0 beginning December 31, 1998.
In January 1998, the Company executed two interest rate swap agreements, which
effectively modify the interest characteristics of $24,750 of the Company's
outstanding long-term debt. The agreements involve the exchange of amounts based
on a fixed interest rate for amounts based on variable interest rates over the
life of the agreements, without an exchange of the notional amount upon which
the payments are based. The differential to be paid or received as interest
rates change will be accrued and recognized as an adjustment of interest expense
related to the debt. The Company effectively converted $20,000 and $4,750 of
floating rate debt to a fixed rate basis under two separate agreements. Under
the first agreement, $20,000 of long-term debt is subject to a one-year forward
swap arrangement, whereby beginning January 1, 1999 and for the following nine
years, the Company will be subject to a fixed rate of 7.83%, instead of LIBOR
plus 1.75%, the rate in effect until then. Under the second agreement, $4,750 of
long-term debt will be subject to a fixed rate of no more 8.9% beginning March
31, 1998, instead of LIBOR plus 2.75%, the rate in effect until then. The
notional amount on the $4,750 interest rate swap agreement amortizes $250 per
quarter through December 31, 2002. The fair value of the swap agreements is not
recognized in the financial statements. If, in the future, an interest rate swap
agreement was terminated, any resulting gain or loss would be deferred and
amortized to interest expense over the remaining life of the interest rate swap
agreement. In the event of early extinguishment of a designated debt obligation,
any realized or unrealized gain or loss from the swap would be recognized in the
income coincident with the extinguishment.
The Company also has a demand bank note for borrowings of up to $2,000 under
which $1,500 was outstanding as of December 31, 1997, bearing interest at the
bank's prime rate, collateralized by certain shares of Gray common stock owned
by the Company. As of December 31, 1996, $500 of the Company's long-term debt
was presented as a short-term obligation, even though there was no obligation to
repay any amounts outstanding.
The banks' prime rate as of December 31, 1997 was 8.5%. The interest rate on the
Company's LIBOR-based borrowings of $34,343 for the 120-day period including
December 31, 1997 was approximately 7.56%. The interest rate on the Company's
LIBOR-based borrowings of $2,500 for the 90-day period including December 31,
1997 was approximately 8.13%.
The carrying amount of long-term debt approximates fair value.
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<PAGE>
6. INCOME TAXES
The Company's income tax benefit (provision) for the years ending December 31
consists of the following:
1997 1996 1995
Current:
Federal $ 50 $ (67) $ (300)
State (3) (66) (91)
----- -------- ------
Total - current 47 (133) (391)
Deferred 892 (3,879) 211
----- -------- ------
Total benefit (provision) $ 939 $ (4,012) $ (180)
----- -------- ------
Deferred tax liabilities (assets) are comprised of the following as of December
31:
1997 1996
Property and equipment $ 204 $ 228
Investment in affiliated companies 4,420 4,984
------- ------
Gross deferred tax liabilities 4,624 5,212
------- ------
Deferred consulting fee income (141) (92)
Allowance for doubtful accounts (21) (17)
Inventory costs and reserves (154) (154)
Employee benefits (40) (32)
Warranty reserve (23) (25)
Business credit carryforward (129)
Alternative Minimum Tax credit carryforward (503) (341)
Other, net (14) (60)
------- -----
Gross deferred tax assets (1,025) (721)
------ -------
Total deferred taxes, net $3,599 $ 4,491
------ -------
The principal differences between the federal statutory tax rate and the
effective tax rate are as follows:
1997 1996 1995
Federal statutory tax rate 34.0% 34.0% 34.0%
Realization of Alternative Minimum
Tax credit carryforward (6.4)
Reduction in valuation allowance (0.5) (28.1)
Goodwill amortization (3.8) 1.0 11.6
State income taxes, net of federal
benefit 1.7 4.6 6.7
Other, net 2.6 1.5 2.1
---- ---- ----
Effective tax rate 34.5% 40.6% 19.9%
---- ---- ----
A valuation allowance was provided principally to offset a portion of the
deferred tax asset associated with Alternative Minimum Tax ("AMT") credit
carryforward as of December 31, 1995, the realization of which was uncertain.
Following two successive years in which the Company utilized some of its AMT
credit carryforward, the Company determined that the realization of the entire
AMT credit carryforward was reasonably certain, and as a result, reduced its
valuation allowance to zero. The reduction in the valuation allowance resulted
in a tax benefit of $47 and a reduction in goodwill of $131 in 1996. In 1995,
the Company reduced its valuation allowance resulting in a tax benefit of $250.
29
<PAGE>
7. STOCK OPTIONS
In 1994, the Company adopted the 1994 Long Term Incentive Plan (the "1994 Plan")
under which 2,500,000 shares of the Company's common stock have been reserved
for issuance of stock options, restricted stock awards and stock appreciation
rights. Under terms of the Merger with Datasouth, all outstanding stock options
to purchase Datasouth common stock were converted to Bull Run stock options
under the 1994 Plan. Certain options granted under the 1994 Plan are fully
vested at the date of grant, and others vest over three to five year periods.
Options granted under the 1994 Plan have terms ranging from three to ten years
Shares available for future option grants under the 1994 Plan as of December 31,
1997 and 1996 were 567,000 and 662,000, respectively.
Also in 1994, the Company adopted the Non-Employee Directors' 1994 Stock Option
Plan (the "1994 Directors' Plan") under which 350,000 shares of the Company's
common stock have been reserved for issuance of stock options. Options under the
1994 Directors' Plan are fully vested when granted. Shares available for future
option grants under the 1994 Directors' Plan as of December 31, 1997 and 1996
were 180,000 and 190,000, respectively. The weighted average fair value of
options granted was $1.26 in 1997 and $1.03 in 1996.
Information with respect to the Company's stock option plans follows:
Option Option
Shares Price Range
Outstanding as of January 1, 1995 1,794,000 $ 0.42 - $ 1.66
Exercised (143,000) $ 0.42 - $ 0.88
Forfeited (10,000) $ 0.88
---------
Outstanding as of December 31, 1995 1,641,000 $ 0.75 - $ 1.66
Grants 535,000 $ 2.44 - $ 2.68
Exercised (45,000) $ 0.88
Forfeited (96,000) $ 0.88
---------
Outstanding as of December 31, 1996 2,035,000 $ 0.75 - $ 2.68
Grants 135,000 $ 2.31 - $ 2.44
Exercised (258,000) $ 0.75 - $ 1.48
Forfeited (30,000) $ 2.44
---------
Outstanding as of December 31, 1997 1,882,000 $ 0.75 - $ 2.68
---------
Exercisable as of December 31:
1995 930,000 $ 0.42 - $ 1.66
1996 1,120,000 $ 0.75 - $ 2.44
1997 1,287,000 $ 0.75 - $ 2.68
As of December 31, 1997, the number of outstanding shares under option, weighted
average option exercise price and weighted average remaining option contractual
life is as follows: 75,000 exercisable shares at $.75 per share, expiring in 4.8
years; 867,000 shares at $.90 per share, expiring in 4.2 years (717,000 shares
of which are exercisable); 300,000 exercisable shares at $1.46 per share,
expiring in 6.5 years; 535,000 shares at $2.64 per share, expiring in 2.4 years
(185,000 shares of which are exercisable); and, 105,000 shares at $2.40 per
share, expiring in 8.8 years (none of which are exerciseable).
Pro forma net income and earnings per share required by FASB Statement No. 123,
"Accounting for Stock-Based Compensation" ("FAS 123") has been determined as if
the Company had accounted for its employee stock options under the fair value
method of that Statement. The fair values for these options were estimated at
the time of grant using a Black-Scholes option pricing model assuming a
risk-free interest rate of 5.93%, dividend yield of 0.0%, a volatility factor of
.469, and a weighted-average expected life for the options of four to six years.
Had compensation cost been measured based on the fair value based accounting of
FAS 123, net loss for 1997 would have been $(1,900), or $(.09) per share (basic
and diluted), and net income for 1996 would have been $5,225, or $.24 per share
(basic) and $.23 per share (diluted). These pro forma results are provided for
comparative purposes only and do not purport to be indicative of what would had
occurred had compensation cost been measured under FAS 123 or of results which
may occur in the future. Since FAS 123 is applicable only to options granted
subsequent to December 31, 1994, its pro forma effect will not be fully
reflected until future years.
30
<PAGE>
8. EARNINGS (LOSS) PER SHARE
The following table sets forth the computation of basic and diluted earnings
(loss) per share:
1997 1996 1995
Income (loss) before extraordinary item and
cumulative effect of accounting change $ (1,773) $ 5,877 $ 723
Weighted average shares for basic earnings -------- ------- ------
(loss) per share 21,302 22,013 22,127
Effect of dilutive employee stock options 0 932 1,109
Adjusted weighted average shares and -------- ------- ------
assumed conversions for diluted earnings
(loss) per share 21,302 22,945 23,236
------ ------ ------
Basic earnings (loss) per share $ (.08) $ .26 $ .03
Diluted earnings (loss) per share $ (.08) $ .25 $ .03
9. RETIREMENT PLANS
The Company has a 401(k) defined contribution benefit plan, whereby employees of
the Company may contribute 1% to 15% of their gross pay to the plan subject to
limitations set forth by the Internal Revenue Service. The Company may make
matching and/or discretionary contributions to the employees accounts in amounts
to be determined annually. Total Company contributions to the plan were $208 in
1997, $243 in 1996 and $255 in 1995.
10. GEOGRAPHIC DATA AND SIGNIFICANT CUSTOMER
Sales to non-domestic customers, located principally in Western Europe and South
America, were $2,497 in 1997, $2,954 in 1996 and $2,361 in 1995. A significant
amount of revenue from printer operations is derived from one customer. In 1997,
1996 and 1995, 33%, 30% and 30% of such revenue was attributable to this
customer, respectively.
11. ACQUISITION OF PRINTER MANUFACTURER
Effective January 2, 1998, the Company acquired all of the outstanding common
stock of CodeWriter Industries, Inc. ("CodeWriter") and all of the outstanding
membership interests of CodeWriters affiliate, CW Technologies, LLC ("CWT"), in
a transaction valued at approximately $6,200, of which $5,000 was paid at
closing in the form of $2,500 cash and $2,500 in the Company's common stock. In
addition, the Company is obligated to pay quarterly to the members of CWT, a
specified percentage of revenue generated by the Company from CodeWriter and CWT
products and services during each calendar quarter through December 31, 2001,
but in no event will the aggregate amount of such payments exceed $1,200. The
transaction will be accounted for as a purchase.
31
<PAGE>
SELECTED QUARTERLY FINANCIAL DATA
(Unaudited)
(Dollars and shares in thousands, except per share amounts)
<TABLE>
<CAPTION>
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
<S> <C> <C> <C> <C>
1997
Revenue from printer operations $ 5,465 $ 5,102 $ 5,545 $ 5,527
Gross profit 1,528 1,313 1,566 1,265
Other operating revenue 598 9 72 2
Net income (loss) 20 (469) (374) (950)
Earnings (loss) per share - Basic $ .00 $ (.02) $ (.02) $ (.04)
Earnings (loss) per share - Diluted $ .00 $ (.02) $ (.02) $ (.04)
Weighted average number of shares:
Basic 21,363 21,260 21,290 21,294
Diluted 22,259 21,260 21,290 21,294
1996
Revenue from printer operations $ 6,044 $ 5,810 $ 5,988 $ 5,968
Gross profit 1,775 1,658 1,597 1,610
Other operating revenue 368 2 473 1
Income before extraordinary item and cumulative
effect of accounting change 49 293 5,480 55
Net income (loss) (225) 293 5,185 55
Earnings per share - Basic:
Income before extraordinary item and
cumulative effect of accounting change $ .00 $ .01 $ .25 $ .00
Net income (loss) $ (.01) $ .01 $ .24 $ .00
Earnings per share - Diluted:
Income before extraordinary item and
cumulative effect of accounting change $ .00 $ .01 $ .24 $ .00
Net income (loss) $ (.01) $ .01 $ .23 $ .00
Weighted average number of shares:
Basic 22,123 22,079 21,971 21,879
Diluted 23,113 23,084 22,851 22,721
</TABLE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Stockholders of Bull Run Corporation:
We have audited the accompanying consolidated balance sheets of Bull Run
Corporation as of December 31, 1997 and 1996, and the related consolidated
statements of operations, stockholders equity and cash flows for each of the
three years in the period ended December 31, 1997. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits. The
financial statements of Host Communications, Inc. ("HCI") and Capital Sports
Properties, Inc. ("CSP") as of and for the year ended June 30, 1996 and 1995 and
as of and for the six months ended June 30, 1996 and the year ended December 31,
1995, respectively, have been audited by other auditors whose reports have been
furnished to us; the report as to HCI included an explanatory paragraph relating
to an accounting change in 1996 in the method of recognizing certain revenue and
related expenses. Our opinion, insofar as it relates to data included for HCI
and CSP for their respective periods in 1996 and 1995, is based solely on the
reports of the other auditors. In the consolidated financial statements, the
Company's investment in HCI and CSP is stated at $11,854,000 at December 31,
1996; the Company's equity in the net income of HCI and CSP is stated at
$762,000 and $245,000 for the years ended December 31, 1996 and 1995,
respectively; and the Company's cumulative effect of accounting change
recognized by affiliate is stated at $(274,000) for the year ended December 31,
1996.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits and the reports of the other auditors provide a
reasonable basis for our opinion.
In our opinion, based on our audits and, for 1996 and 1995, the reports of other
auditors, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Bull
Run Corporation at December 31, 1997 and 1996, and the consolidated results of
its operations and its cash flows for each of the three years in the period
ended December 31, 1997, in conformity with generally accepted accounting
principles.
As discussed in Note 2 to the Consolidated Financial Statements, during 1996 HCI
changed its method of recognizing certain revenue and related expenses.
Ernst & Young LLP
Atlanta, Georgia
February 10, 1998, except as to Note 5, for which the date is March 20, 1998.
32
<PAGE>
(INSIDE BACK COVER)
DIRECTORS
J. MACK ROBINSON - Chairman of the Board of Bull Run Corporation; Chairman and
President of Delta Life Insurance Company since 1958; Chairman of Atlantic
American Corporation, an insurance holding company, since 1974, and President
from 1988 to 1995; President and CEO of Gray Communications Systems, Inc. and a
director; director emeritus of Wachovia Corporation.
GERALD N. AGRANOFF - Affiliated with Plaza Securities Company and Edelman
Securities Company L.P., investment firms, since 1982, and currently General
Counsel and a general partner; Vice President, General Counsel and a director of
Datapoint Corporation; director of Canal Capital Corporation and American Energy
Group, Ltd.
JAMES W. BUSBY - Retired; President of Datasouth Computer Corporation from 1984
through June 1997 and one of its founders in 1977.
HILTON H. HOWELL, JR. - Vice President and Secretary of Bull Run Corporation;
President of Atlantic American Corporation since 1995 and Executive Vice
President from 1992 to 1995; Executive Vice President and General Counsel of
Delta Life and Delta Fire & Casualty Insurance Companies since 1991; director of
Gray Communications Systems, Inc.
ROBERT S. PRATHER, JR. - President and Chief Executive Officer of Bull Run
Corporation; Executive Vice President - Acquisitions of Gray Communications
Systems, Inc. and a director; director of Host Communications, Inc., Capital
Sports Properties, Inc., Universal Sports America, Inc., Rawlings Sporting Goods
Company, Inc. and The Morgan Group, Inc.
OFFICERS
J. MACK ROBINSON - Chairman of the Board
ROBERT S. PRATHER, JR. - President and Chief Executive Officer
HILTON H. HOWELL, JR. - Vice President and Secretary
FREDERICK J. ERICKSON - Vice President - Finance, Treasurer and Chief Financial
Officer
STOCKHOLDER INFORMATION
CORPORATION HEADQUARTERS
Bull Run Corporation
4370 Peachtree Road, N.E.
Atlanta, GA 30319
Phone (404) 266-8333
Fax (404) 261-9607
Internet-http://www.bullruncorp.com
TRANSFER AGENT & REGISTRAR
TranSecurities International, Inc.
2510 N. Pines Road
Spokane, WA 99206-7624
Phone (509) 927-1255
INDEPENDENT AUDITORS
Ernst & Young LLP
Suite 2800
600 Peachtree Street
Atlanta, GA 30308-2215
SUBSIDIARIES & AFFILIATES
Datasouth Computer Corporation
4216 Stuart Andrew Boulevard
Charlotte, NC 28217
Phone (704) 523-8500
Fax (704) 525-6104
Internet-http://www.datasouth.com
Gray Communications Systems, Inc.
126 N. Washington Street
Albany, GA 31702
Phone (912) 888-9302
Fax (912) 888-9374
Host Communications, Inc.
546 East Main Street
Lexington, KY 40508
Phone (606) 226-4678
Fax (606) 226-4419
Rawlings Sporting Goods Company, Inc.
1859 Intertech Drive
Fenton, Missouri 63026
Phone (314) 349-3500
Fax (314) 349-3598
Internet-http://www.rawlings.com
STOCK EXCHANGE
Bull Run's common stock trades on The Nasdaq Stock Market under the symbol
"BULL".
Gray's common stocks trade on the New York Stock Exchange under the symbols
"GCS" and "GCS.B".
Rawlings'common stock trades on The Nasdaq Stock Market under the symbol "RAWL".
FORM 10-K
A copy of the Company's Annual Report on Form 10-K submitted to the U.S.
Securities and Exchange Commission may be obtained by contacting Investor
Relations at the Company's Corporate Headquarters.
<PAGE>
(BACK COVER)
[BULL RUN LOGO APPEARS HERE]
BULL RUN
CORPORATION
4370 Peachtree Road, N.E. o Atlanta, GA 30319 o 404-266-8333
EXHIBIT 23.1
We consent to the incorporation by reference in the Registration Statement (Form
S-8 No.33-91296) pertaining to the Bull Run Corporation 1994 Long Term Incentive
Plan and the Registration Statement (Form S-8 No. 33-91298) pertaining to the
Bull Run Corporation Non-Employee Directors' 1994 Stock Option Plan of our
reports dated February 10, 1998, except as to Note 5 to the financial
statements, for which the date is March 20, 1998, with respect to the
consolidated financial statements and schedule of Bull Run Corporation included
herein or incorporated by reference in the Annual Report (Form 10-K) of Bull Run
Corporation for the year ended December 31, 1997, filed with the Securities and
Exchange Commission.
/s/ ERNST & YOUNG LLP
Atlanta, Georgia
March 25, 1998
EXHIBIT 23.2
We consent to the incorporation by reference of our reports dated January 27,
1998 (except for the Pending Acquisition of Note C, as to which the date is
February 13, 1998), with respect to the consolidated financial statements and
schedule of Gray Communications Systems, Inc. included in the Annual Report
(Form 10-K) of Bull Run Corporation, in the Registration Statement (Form S-8 No.
33-91296) pertaining to the Bull Run Corporation 1994 Long Term Incentive Plan
and the Registration Statement (Form S-8 No. 33-91298) pertaining to the Bull
Run Corporation Non-Employee Directors' 1994 Stock Option Plan.
/s/ ERNST & YOUNG LLP
Atlanta, Georgia
March 25, 1998
EXHIBIT 23.3
To the Board of Directors
Bull Run Corporation:
We consent to the incorporation by reference in the Registration Statements
(Nos. 33-91296 and 33-91298) on Form S-8 of Bull Run Corporation of our report
dated February 10, 1997 with respect to the balance sheets of Capital Sports
Properties, Inc. as of June 30, 1996 and December 31, 1995, and the related
statements of earnings, changes in stockholders' equity, and cash flows for the
six-months ended June 30, 1996 and the year ended December 31, 1995, which
report appears in the December 31, 1997 annual report on Form 10-K of Bull Run
Corporation.
/s/ KPMG PEAT MARWICK LLP
Stamford, Connecticut
March 25, 1998
EXHIBIT 23.4
Independent Auditors' Consent
The Board of Directors
Bull Run Corporation:
We consent to the incorporation by reference in the Registration Statements
(Nos. 33-91296 and 33-91298) on Form S-8 of Bull Run Corporation of our report
dated October 11, 1996 with respect to the consolidated balance sheets of Host
Communications, Inc. and subsidiaries as of June 30, 1996 and 1995, and the
related consolidated statements of earnings, stockholders' equity, and cash
flows for the year then ended, which report appears in the December 31, 1997
annual report on Form 10-K of Bull Run Corporation.
Our report refers to a change in the method of accounting for license fee
revenues and rights fee expenses.
/s/ KPMG PEAT MARWICK LLP
Cincinnati, Ohio
March 25, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 142,097
<SECURITIES> 0
<RECEIVABLES> 4,654,548
<ALLOWANCES> 55,000
<INVENTORY> 3,757,437
<CURRENT-ASSETS> 8,692,095
<PP&E> 4,648,481
<DEPRECIATION> 2,010,829
<TOTAL-ASSETS> 76,832,182
<CURRENT-LIABILITIES> 6,178,559
<BONDS> 41,998,483
0
0
<COMMON> 225,827
<OTHER-SE> 24,830,046
<TOTAL-LIABILITY-AND-EQUITY> 76,832,182
<SALES> 21,639,299
<TOTAL-REVENUES> 22,319,835
<CGS> 15,966,801
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 2,417,236
<LOSS-PROVISION> 27,315
<INTEREST-EXPENSE> 2,716,261
<INCOME-PRETAX> (2,112,702)
<INCOME-TAX> (938,981)
<INCOME-CONTINUING> (1,772,992)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,772,992)
<EPS-PRIMARY> (.08)
<EPS-DILUTED> (.08)
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 81,291
<SECURITIES> 0
<RECEIVABLES> 4,119,357
<ALLOWANCES> 45,000
<INVENTORY> 3,315,093
<CURRENT-ASSETS> 7,667,787
<PP&E> 3,652,943
<DEPRECIATION> 1,402,327
<TOTAL-ASSETS> 67,851,369
<CURRENT-LIABILITIES> 3,678,229
<BONDS> 0
0
0
<COMMON> 223,247
<OTHER-SE> 28,094,850
<TOTAL-LIABILITY-AND-EQUITY> 67,851,369
<SALES> 23,810,276
<TOTAL-REVENUES> 24,654,666
<CGS> 17,169,915
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 1,567,798
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,123,856
<INCOME-PRETAX> 8,157,768
<INCOME-TAX> 4,011,749
<INCOME-CONTINUING> 5,877,122
<DISCONTINUED> 0
<EXTRAORDINARY> (295,322)
<CHANGES> (274,248)
<NET-INCOME> 5,307,552
<EPS-PRIMARY> .24
<EPS-DILUTED> .23
</TABLE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Stockholders
Gray Communications Systems, Inc.
We have audited the accompanying consolidated balance sheets of Gray
Communications Systems, Inc., as of December 31, 1997 and 1996 and the related
consolidated statements of operations, stockholders' equity and cash flows for
each of the three years in the period ended December 31, 1997. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Gray
Communications Systems, Inc., at December 31, 1997 and 1996, and the
consolidated results of its operations and its cash flows for each of the three
years in the period ended December 31, 1997, in conformity with generally
accepted accounting principles.
Ernst & Young LLP
Atlanta, Georgia
January 27, 1998 except for the Pending Acquisition of
Note C, as to which the date is February 13, 1998
F-1
<PAGE>
GRAY COMMUNICATIONS SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
1997 1996
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 2,367,300 $ 1,051,044
Trade accounts receivable, less allowance for doubtful accounts
of $1,253,000 and $1,450,000, respectively 19,527,316 17,373,839
Recoverable income taxes 2,132,284 1,747,687
Inventories 846,891 624,118
Current portion of program broadcast rights 2,850,023 2,362,742
Other current assets 968,180 379,793
------------- -------------
Total current assets 28,691,994 23,539,223
Property and equipment (Notes C and D):
Land 889,696 785,682
Buildings and improvements 11,951,700 11,253,559
Equipment 52,899,547 41,954,501
------------- -------------
65,740,943 53,993,742
Allowance for depreciation (23,635,256) (18,209,891)
------------- -------------
42,105,687 35,783,851
Other assets:
Deferred loan costs (Note D) 8,521,356 9,141,262
Goodwill and other intangibles (Note C) 263,425,447 228,692,018
Other 2,306,143 1,507,488
------------- -------------
274,252,946 239,340,768
------------- -------------
$ 345,050,627 $ 298,663,842
============= =============
</TABLE>
See accompanying notes.
F-2
<PAGE>
GRAY COMMUNICATIONS SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS (Continued)
<TABLE>
<CAPTION>
December 31,
1997 1996
<S> <C> <C>
Liabilities and stockholders' equity Current liabilities:
Trade accounts payable (includes $850,000 and $1,000,000 payable to
Bull Run Corporation, respectively) $ 3,321,903 $ 6,043,062
Employee compensation and benefits 3,239,694 7,152,786
Accrued expenses 2,265,725 1,059,769
Accrued interest 4,533,366 4,858,775
Current portion of program broadcast obligations 2,876,060 2,362,144
Deferred revenue 1,966,166 1,764,509
Current portion of long-term debt 400,000 140,000
------------- -------------
Total current liabilities 18,602,914 23,381,045
Long-term debt (Notes C and D) 226,676,377 173,228,049
Other long-term liabilities:
Program broadcast obligations, less current portion 617,107 545,889
Supplemental employee benefits (Note E) 1,161,218 1,357,275
Deferred income taxes (Note H) 1,203,847 -0-
Deferred interest swap -0- 191,055
Other acquisition related liabilities (Notes C and D) 4,494,016 4,735,013
------------- -------------
7,476,188 6,829,232
Commitments and contingencies (Notes C, D and J)
Stockholders' equity (Notes C, D and F)
Serial Preferred Stock, no par value; authorized 20,000,000 shares; 20,600,000 20,000,000
issued 2,060 and 2,000, respectively ($20,600,000
and $20,000,000 aggregate liquidation value, respectively)
Class A Common Stock, no par value; authorized 15,000,000 10,358,031 7,994,235
shares; issued 5,307,716 and 5,155,331 shares, respectively
Class B Common Stock, no par value; authorized 15,000,000 66,397,804 66,065,762
shares; issued 3,515,364 and 3,500,000 shares, respectively
Retained earnings 6,603,191 10,543,940
------------- -------------
103,959,026 104,603,937
Treasury Stock at cost, Class A Common, 781,921 and 663,180 (9,011,369) (6,638,284)
shares, respectively
Treasury Stock at cost, Class B Common, 166,790 and 172,300 (2,652,509) (2,740,137)
shares, respectively ------------- -------------
92,295,148 95,225,516
------------- -------------
$ 345,050,627 $ 298,663,842
============= =============
</TABLE>
See accompanying notes.
F-3
<PAGE>
GRAY COMMUNCIATIONS SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year Ended December 31,
1997 1996 1995
<S> <C> <C> <C>
Operating revenues:
Broadcasting (less agency commissions) $ 72,300,105 $ 54,981,317 $ 36,750,035
Publishing 24,536,348 22,845,274 21,866,220
Paging 6,711,426 1,478,608 -0-
------------- ------------- -------------
103,547,879 79,305,199 58,616,255
Expenses:
Broadcasting 41,966,493 32,438,405 23,201,990
Publishing 19,753,387 17,949,064 20,016,137
Paging 4,051,359 1,077,667 -0-
Corporate and administrative 2,528,461 3,218,610 2,258,261
Depreciation 7,800,217 4,077,696 2,633,360
Amortization of intangible assets 6,718,302 3,584,845 1,325,526
Non-cash compensation paid in common stock
(Note E) -0- 880,000 2,321,250
------------- ------------- -------------
82,818,219 63,226,287 51,756,524
------------- ------------- -------------
20,729,660 16,078,912 6,859,731
Miscellaneous income and (expense), net (Note B) (30,851) 5,704,582 143,612
------------- ------------- -------------
20,698,809 21,783,494 7,003,343
Interest expense 21,861,267 11,689,053 5,438,374
------------- ------------- -------------
INCOME (LOSS) BEFORE INCOME TAXES
AND EXTRAORDINARY CHARGE (1,162,458) 10,094,441 1,564,969
Federal and state income taxes (Note H) 240,000 4,416,000 634,000
------------- ------------- -------------
INCOME (LOSS) BEFORE
EXTRAORDINARY CHARGE (1,402,458) 5,678,441 930,969
Extraordinary charge on extinguishment of debt, net of
applicable income tax benefit of $2,157,000 (Note D) -0- 3,158,960 -0-
------------- ------------- -------------
NET INCOME (LOSS) (1,402,458) 2,519,481 930,969
Preferred dividends (Note F) 1,409,690 376,849 -0-
------------- ------------- -------------
NET INCOME (LOSS) AVAILABLE TO
COMMON STOCKHOLDERS $ (2,812,148) $ 2,142,632 $ 930,969
============= ============= =============
Average outstanding common shares-basic 7,901,697 5,398,436 4,354,183
Average outstanding common shares-diluted 7,901,697 5,625,548 4,481,317
Basic earnings per common share:
Income (loss) before extraordinary charge available to
common stockholders $ (0.36) $ 0.98 $ 0.21
Extraordinary charge -0- (0.58) -0-
------------- ------------- -------------
NET INCOME (LOSS) AVAILABLE TO
COMMON STOCKHOLDERS $ (0.36) $ 0.40 $ 0.21
============= ============= =============
Diluted earnings per common share:
Income (loss) before extraordinary charge available to
common stockholders $ (0.36) $ 0.94 $ 0.21
Extraordinary charge -0- (0.56) -0-
------------- ------------- -------------
NET INCOME (LOSS) AVAILABLE TO
COMMON STOCKHOLDERS $ (0.36) $ 0.38 $ 0.21
============= ============= =============
</TABLE>
See accompanying notes.
F-4
<PAGE>
GRAY COMMUNICATIONS SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Class A Class B Restricted
Preferred Stock Common Stock Common Stock Stock
Shares Amount Shares Amount Shares Amount Deferrals
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1994 -0- $ -0- 4,841,785 $ 3,393,747 -0- $ -0- $ -0-
Net Income -0- -0- -0- -0- -0- -0- -0-
Class A Common Stock Cash Dividends
($0.08) per share -0- -0- -0- -0- -0- -0- -0-
Issuance of Class A Common Stock
(Notes C, E, F, G and I):
401(k) Plan -0- -0- 18,354 298,725 -0- -0- -0-
Directors' Stock Plan -0- -0- 23,500 238,919 -0- -0- -0-
Non-qualified Stock Plan -0- -0- 5,000 48,335 -0- -0- -0-
Gwinnett Acquisition -0- -0- 44,117 500,000 -0- -0- -0-
Restricted Stock Plan -0- -0- 150,000 2,081,250 -0- -0- (2,081,250)
Amortization of Restricted Stock
Plan deferrals -0- -0- -0- -0- -0- -0- 2,081,250
Income tax benefits relating to
stock plans -0- -0- -0- 235,000 -0- -0- -0-
Balance at December 31, 1995 -0- -0- 5,082,756 6,795,976 -0- -0- -0-
Net Income -0- -0- -0- -0- -0- -0- -0-
Common Stock Cash Dividends:
Class A ($0.08 per share) -0- -0- -0- -0- -0- -0- -0-
Class B ($0.02 per share) -0- -0- -0- -0- -0- -0- -0-
Purchase of Class B Common Stock
(Note F) -0- -0- -0- -0- -0- -0- -0-
Issuance of Class A Common Stock
(Notes F, G and I):
401(k) Plan -0- -0- 13,225 262,426 -0- -0- -0-
Directors' Stock Plan -0- -0- 22,500 228,749 -0- -0- -0-
Non-qualified Stock Plan -0- -0- 36,850 358,417 -0- -0- -0-
Preferred Stock Dividends -0- -0- -0- -0- -0- -0- -0-
Issuance of Class A Common Stock
Warrants (Notes C and F) -0- -0- -0- 2,600,000 -0- -0- -0-
Issuance of Series A Preferred
Stock in exchange for
Subordinated Note
(Notes C and F) 1,000 10,000,000 -0- (2,383,333) -0- -0- -0-
Issuance of Series B Preferred
Stock (Notes C and F) 1,000 10,000,000 -0- -0- -0- -0- -0-
Issuance of Class B Common Stock,
net of expenses (Notes C and
F) -0- -0- -0- -0- 3,500,000 66,065,762 -0-
Income tax benefits relating to
stock plans -0- -0- -0- 132,000 -0- -0- -0-
----- ----------- --------- ----------- --------- ----------- ----------
Balance at December 31, 1996 2,000 $20,000,000 5,155,331 $ 7,994,235 3,500,000 $66,065,762 $ -0-
</TABLE>
<TABLE>
<CAPTION>
Class A Class B
Treasury Stock Treasury Stock Retained
Shares Amount Shares Amount Earnings Total
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1994 (663,180) $(6,638,284) -0- $ -0- $ 8,245,626 5,001,089
Net Income -0- -0- -0- -0- 930,969 930,969
Class A Common Stock Cash Dividends
($0.08) per share -0- -0- -0- -0- (348,689) (348,689)
Issuance of Class A Common Stock
(Notes C, E, F, G and I):
401(k) Plan -0- -0- -0- -0- -0- 298,725
Directors' Stock Plan -0- -0- -0- -0- -0- 238,919
Non-qualified Stock Plan -0- -0- -0- -0- -0- 48,335
Gwinnett Acquisition -0- -0- -0- -0- -0- 500,000
Restricted Stock Plan -0- -0- -0- -0- -0- -0-
Amortization of Restricted Stock
Plan deferrals -0- -0- -0- -0- -0- 2,081,250
Income tax benefits relating to
stock plans -0- -0- -0- -0- -0- 235,000
Balance at December 31, 1995 (663,180) (6,638,284) -0- -0- 8,827,906 8,985,598
Net Income -0- -0- -0- -0- 2,519,481 2,519,481
Common Stock Cash Dividends:
Class A ($0.08 per share) -0- -0- -0- -0- (357,598) (357,598)
Class B ($0.02 per share) -0- -0- -0- -0- (69,000) (69,000)
Purchase of Class B Common Stock
(Note F) -0- -0- (172,300) (2,740,137) -0- (2,740,137)
Issuance of Class A Common Stock
(Notes F, G and I):
401(k) Plan -0- -0- -0- -0- -0- 262,426
Directors' Stock Plan -0- -0- -0- -0- -0- 228,749
Non-qualified Stock Plan -0- -0- -0- -0- -0- 358,417
Preferred Stock Dividends -0- -0- -0- -0- (376,849) (376,849)
Issuance of Class A Common Stock
Warrants (Notes C and F) -0- -0- -0- -0- -0- 2,600,000
Issuance of Series A Preferred
Stock in exchange for
Subordinated Note
(Notes C and F) -0- -0- -0- -0- -0- 7,616,667
Issuance of Series B Preferred
Stock (Notes C and F) -0- -0- -0- -0- -0- 10,000,000
Issuance of Class B Common Stock,
net of expenses (Notes C and
F) -0- -0- -0- -0- -0- 66,065,762
Income tax benefits relating to
stock plans -0- -0- -0- -0- -0- 132,000
-------- ----------- -------- ----------- ----------- --------------
Balance at December 31, 1996 (663,180) $(6,638,284) (172,300) $(2,740,137) $10,543,940 $ 95,225,516
</TABLE>
See accompanying notes.
F-5
<PAGE>
GRAY COMMUNICATIONS SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (continued)
<TABLE>
<CAPTION>
Class A Class B Restricted
Preferred Stock Common Stock Common Stock Stock
Shares Amount Shares Amount Shares Amount Deferrals
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1996 2,000 $20,000,000 5,155,331 $ 7,994,235 3,500,000 $66,065,762 $ -0-
Net Loss -0- -0- -0- -0- -0- -0- -0-
Common Stock Cash Dividends
($0.08) per share -0- -0- -0- -0- -0- -0- -0-
Preferred Stock Dividends -0- -0- -0- -0- -0- -0- -0-
Issuance of Class A Common Stock
(Notes F and G):
Directors' Stock Plan -0- -0- 501 9,645 -0- -0- -0-
Non-qualified Stock Plan -0- -0- 29,850 317,151 -0- -0- -0-
Stock Award Restricted
Stock Plan -0- -0- 122,034 1,200,000 -0- -0- -0-
Issuance of Class B Common Stock
(Notes F and I):
401(k) Plan -0- -0- -0- -0- 15,364 282,384 -0-
Issuance of Series B Preferred
Stock (Note F) 60 600,000 -0- -0- -0- -0- -0-
Issuance of Treasury Stock
(Notes F, G, and I):
401(k) Plan -0- -0- -0- -0- -0- 49,658 -0-
Non-qualified Stock Plan -0- -0- -0- -0- -0- -0- -0-
Purchase of Class A Common Stock
(Note F): -0- -0- -0- -0- -0- -0- -0-
Income tax benefits relating to
stock plans -0- -0- -0- 837,000 -0- -0- -0-
----- ----------- --------- ----------- --------- ----------- -------
Balance at December 31, 1997 2,060 $20,600,000 5,307,716 $10,358,031 3,515,364 $66,397,804 $ -0-
===== =========== ========= =========== ========= =========== =======
<CAPTION>
Class A Class B
Treasury Stock Treasury Stock Retained
Shares Amount Shares Amount Earnings Total
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1996 (663,180) (6,638,284) $(172,300) $(2,740,137) $ 10,543,940 $ 95,225,516
Net Loss -0- -0- -0- -0- (1,402,458) (1,402,458
Common Stock Cash Dividends
($0.08) per share -0- -0- -0- -0- (628,045) (628,045
Preferred Stock Dividends -0- -0- -0- -0- (1,409,690) (1,409,690
Issuance of Class A Common Stock
(Notes F and G):
Directors' Stock Plan -0- -0- -0- -0- -0- 9,645
Non-qualified Stock Plan -0- -0- -0- -0- -0- 317,151
Stock Award Restricted
Stock Plan -0- -0- -0- -0- -0- 1,200,000
Issuance of Class B Common Stock
(Notes F and I):
401(k) Plan -0- -0- -0- -0- -0- 282,384
Issuance of Series B Preferred
Stock (Note F) -0- -0- -0- -0- -0- 600,000
Issuance of Treasury Stock
(Notes F, G, and I):
401(k) Plan -0- -0- 5,510 87,628 -0- 137,286
Non-qualified Stock Plan 54,159 1,082,390 -0- -0- (500,556) 581,834
Purchase of Class A Common Stock
(Note F): (172,900) (3,455,475) -0- -0- -0- (3,455,475
Income tax benefits relating to
stock plans -0- -0- -0- -0- -0- 837,000
-------- ----------- --------- ----------- ---------- -----------
Balance at December 31, 1997 (781,921) $(9,011,369) $(166,790) $(2,652,509) $6,603,191 $92,295,148
======== =========== ========= =========== ========== ===========
</TABLE>
See accompanying notes.
F-6
<PAGE>
GRAY COMMUNCIATIONS SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31,
1997 1996 1995
<S> <C> <C> <C>
Operating activities
Net income (loss) $ (1,402,458) $ 2,519,481 $ 930,969
Items which did not use (provide) cash:
Depreciation 7,800,217 4,077,696 2,633,360
Amortization of intangible assets 6,718,302 3,584,845 1,325,526
Amortization of deferred loan costs 1,083,303 270,813 -0-
Amortization of program broadcast rights 3,501,330 2,742,712 1,647,035
Amortization of original issue discount on 8% subordinated note -0- 216,667 -0-
Write-off of loan acquisition costs from early extinguishment of debt -0- 1,818,840 -0-
Gain on disposition of television station -0- (5,671,323) -0-
Payments for program broadcast rights (3,629,350) (2,877,128) (1,776,796)
Compensation paid in Common Stock -0- 880,000 2,321,250
Supplemental employee benefits (196,057) (855,410) (370,694)
Common Stock contributed to 401(K) Plan 419,670 262,426 298,725
Deferred income taxes 1,283,000 (44,000) 863,000
Loss on asset sales 108,998 201,792 1,652
Changes in operating assets and liabilities:
Trade accounts receivable (369,675) (1,575,723) (852,965)
Recoverable income taxes (384,597) (400,680) (1,347,007)
Inventories (101,077) 254,952 (181,034)
Other current assets (569,745) (21,248) (11,208)
Trade accounts payable (2,825,099) 2,256,795 1,441,745
Employee compensation and benefits (2,848,092) 2,882,379 1,011,667
Accrued expenses 1,279,164 (2,936,155) (414,087)
Accrued interest (325,409) 3,794,284 78,536
Deferred revenue 201,657 710,286 -0-
------------- ------------- -------------
Net cash provided by operating activities 9,744,082 12,092,301 7,599,674
Investing activities
Acquisitions of newspaper businesses -0- -0- (2,084,621)
Acquisition of television businesses (45,644,942) (210,944,547) -0-
Disposition of television business -0- 9,480,699 -0-
Purchases of property and equipment (10,371,734) (3,395,635) (3,279,721)
Proceeds from asset sales 24,885 174,401 2,475
Deferred acquisition costs (89,056) -0- (3,330,481)
Payments on purchase liabilities (764,658) (243,985) (111,548)
Other (652,907) (139,029) (125,356)
------------- ------------- -------------
Net cash used in investing activities (57,498,412) (205,068,096) (8,929,252)
Financing activities Proceeds from borrowings:
Short-term debt -0- -0- 1,200,000
Long-term debt 75,350,000 238,478,310 2,950,000
Repayments of borrowings:
Short-term debt -0- -0- (1,200,000)
Long-term debt (22,678,127) (109,434,577) (1,792,516)
Deferred loan costs (463,397) (9,410,078) -0-
Dividends paid (1,428,045) (426,598) (348,689)
Class A Common Stock transactions 1,163,796 719,166 522,254
Proceeds from equity offering B Class B Common Stock, net of
expenses -0- 66,065,762 -0-
Proceeds from offering of Series B Preferred Stock -0- 10,000,000 -0-
Proceeds from settlement of interest rate swap agreement -0- 215,000 -0-
Proceeds from sale of treasury shares 581,834 -0- -0-
Purchase of Class A Common Stock (3,455,475) -0- -0-
Purchase of Class B Common Stock -0- (2,740,137) -0-
------------- ------------- -------------
Net Cash provided by financing activities 49,070,586 193,466,848 1,331,049
------------- ------------- -------------
Increase in cash and cash equivalents 1,316,256 491,053 1,471
Cash and cash equivalents at beginning of year 1,051,044 559,991 558,520
------------- ------------- -------------
Cash and cash equivalents at end of year $ 2,367,300 $ 1,051,044 $ 559,991
============= ============= =============
</TABLE>
See accompanying notes.
F-7
<PAGE>
GRAY COMMUNICATIONS SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A. Summary of Significant Accounting Policies
Description of Business
The Company's operations, which are located in eight southeastern states,
include eight television stations, three daily newspapers, two area weekly
advertising only publications and paging operations.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and its subsidiaries. All significant intercompany accounts and transactions
have been eliminated.
Revenue Recognition
The Company recognizes revenues as services are performed.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Cash and Cash Equivalents
Cash and cash equivalents include cash on deposit with a bank. Deposits
with the bank are generally insured in limited amounts.
Inventories
Inventories, principally newsprint and supplies, are stated at the lower of
cost or market. The Company uses the last-in, first-out ("LIFO") method of
determining costs for substantially all of its inventories. Current cost
exceeded the LIFO value of inventories by approximately $15,000 and $13,000 at
December 31, 1997, and 1996, respectively.
Program Broadcast Rights
Rights to programs available for broadcast under program license agreements
are initially recorded at the beginning of the license period for the amounts of
total license fees payable under the license agreements and are charged to
operating expense on the basis of total programs available for use on the
straight-line method. The portion of the unamortized balance expected to be
charged to operating expense in the succeeding year is classified as a current
asset, with the remainder classified as a non-current asset. The liability for
the license fees payable under the program license agreements is classified as
current or long-term, in accordance with the payment terms of the various
license agreements.
F-8
<PAGE>
GRAY COMMUNICATIONS SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
A. Summary of Significant Accounting Policies (Continued)
Property and Equipment
Property and equipment are carried at cost. Depreciation is computed
principally by the straight-line method for financial reporting purposes and by
accelerated methods for income tax purposes. Buildings, improvements and
equipment are depreciated over estimated useful lives of approximately 35 years,
10 years and 5 years, respectively.
Intangible Assets
Intangible assets are stated at cost and are amortized using the
straight-line method. Goodwill is amortized over 40 years. Loan acquisition fees
are amortized over the life of the applicable indebtedness. Non-compete
agreements are amortized over the life of the specific agreement. Accumulated
amortization of intangible assets resulting from business acquisitions was $11.5
million and $4.9 million as of December 31, 1997, and 1996, respectively.
If facts and circumstances indicate that the goodwill, property and
equipment or other assets may be impaired, an evaluation of continuing value
would be performed. If an evaluation is required, the estimated future
undiscounted cash flows associated with these assets would be compared to their
carrying amount to determine if a write down to fair market value or discounted
cash flow value is required.
Income Taxes
Deferred income taxes are provided on the differences between the financial
statement and income tax basis of assets and liabilities. The Company and its
subsidiaries file a consolidated federal income tax return. Consolidated state
income tax returns are filed when appropriate and separate state tax returns are
filed when consolidation is not available. Local tax returns are filed
separately.
Capital Stock
On August 17, 1995, the Board of Directors declared a 50% stock dividend on
the Company's Class A Common Stock payable October 2, 1995 to stockholders of
record on September 8, 1995, to effect a three for two stock split. All
applicable share and per share data have been adjusted to give effect to the
stock split.
Earnings Per Common Share
In 1997, the Financial Accounting Standards Board issued Statement No. 128,
Earnings per Share ("Statement 128"). Statement 128 replaced the calculation of
primary and fully diluted earnings per share with basic and diluted earnings per
share. Unlike primary earnings per share, basic earnings per share excludes any
dilutive effects of options, warrants and convertible securities. Diluted
earnings per share is very similar to the previously reported fully diluted
earnings per share. All earnings per share amounts for all periods have been
presented, and where appropriate, restated to conform to Statement 128
requirements.
F-9
<PAGE>
GRAY COMMUNICATIONS SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
A. Summary of Significant Accounting Policies (Continued)
Stock Based Compensation
The Company has elected to follow Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" ("APB 25") and related
interpretations in accounting for its stock options. Under APB 25, if the
exercise price of the stock options granted by the Company equals the market
price of the underlying stock on the date of the grant, no compensation expense
is recognized.
Concentration of Credit Risk
The Company provides print advertising and advertising air time to
national, regional and local advertisers within the geographic areas in which
the Company operates. Credit is extended based on an evaluation of the
customer's financial condition, and generally advance payment is not required.
Credit losses are provided for in the financial statements and consistently have
been within management's expectations.
Fair Value of Financial Instruments
The Company has adopted FASB Statement No. 107, Disclosure about Fair Value
of Financial Instruments, which requires disclosure of fair value, to the extent
practical, of certain of the Company's financial instruments. The fair value
amounts do not necessarily represent the amount that could be realized in a sale
or settlement. The Company's financial instruments are comprised principally of
long-term debt and preferred stock.
The estimated fair value of long-term debt at December 31, 1997, and 1996
exceeded book value by $13.2 million and $9.6 million, respectively. The fair
value of the Preferred Stock at December 31, 1997, and 1996 approximates its
carrying value at that date. The Company does not anticipate settlement of
long-term debt or preferred stock at other than book value.
The fair value of other financial instruments classified as current assets
or liabilities approximates their carrying values due to the short-term
maturities of these instruments.
Reclassifications
Certain amounts in the accompanying consolidated financial statements have
been reclassified to conform to the 1997 format.
B. Business Disposition
The Company sold the assets of KTVE Inc. (the "KTVE Sale"), its
NBC-affiliated television station, in Monroe, Louisiana-El Dorado, Arkansas on
August 20, 1996. The sales price included $9.5 million in cash plus the amount
of the accounts receivable on the date of closing to the extent collected by the
buyer, to be paid to the Company within 150 days following the closing date
(approximately $829,000). The Company recognized a pre-tax gain of approximately
$5.7 million and estimated income taxes of approximately $2.8 million in
connection with the sale.
F-10
<PAGE>
GRAY COMMUNICATIONS SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
C. Business Acquisitions
The Company's acquisitions have been accounted for under the purchase
method of accounting. Under the purchase method of accounting, the results of
operations of the acquired businesses are included in the accompanying
consolidated financial statements as of their respective acquisition dates. The
assets and liabilities of acquired businesses are included based on an
allocation of the purchase price.
Pending Acquisition
On February 13, 1998, the Company signed a definitive purchase agreement to
acquire all of the outstanding capital stock of Busse Broadcasting Corporation
("Busse"). The purchase price is approximately $112.0 million plus Busse's cash
and cash equivalents less Busse's indebtedness including its 11 5/8 % Senior
Secured Notes due 2000. Busse owns and operates three VHF television stations:
KOLN-TV, the CBS-affiliate operating on Channel 10 in the
Lincoln-Hastings-Kearney, Nebraska television market, and its satellite station
KGIN-TV, the CBS-affiliate operating on Channel 11 serving Grand Island,
Nebraska; and WEAU-TV, the NBC-affiliate operating on Channel 13 serving the Eau
Claire-La Crosse, Wisconsin market. The purchase of Busse is subject to FCC
approval. The acquisition is expected to close on or before September 1, 1998.
In connection with the proposed purchase of Busse, the Company will pay Bull Run
Corporation ("Bull Run"), a principal stockholder of the Company, a finder's fee
equal to 1% of the purchase price for services performed, none of which was due
and included in accounts payable at December 31, 1997.
1997 Acquisitions
On August 1, 1997, the Company purchased the assets of WITN-TV ("WITN").
The purchase price of approximately $41.7 million consisted of $40.7 million
cash, $600,000 in acquisition related costs, and approximately $400,000 in
liabilities which were assumed by the Company. Based on the preliminary
allocation of the purchase price, the excess of the purchase price over the fair
value of net tangible assets acquired was approximately $37.4 million. The
Company funded the costs of this acquisition through its senior credit facility
(the "Senior Credit Facility"). WITN operates on Channel 7 and is the
NBC-affiliate in the Greenville-Washington-New Bern, North Carolina market. In
connection with the purchase of the assets of WITN ("WITN Acquisition"), the
Company will pay Bull Run a fee equal to 1% of the purchase price for services
performed, of which $400,000 was due and included in accounts payable at
December 31, 1997.
On April 24, 1997, the Company acquired all of the issued and outstanding
common stock of GulfLink Communications, Inc. ("GulfLink") of Baton Rouge,
Louisiana. The GulfLink operations include nine transportable satellite uplink
trucks. The purchase price of approximately $5.2 million consisted of $4.1
million cash, $127,000 in acquisition related costs, and approximately $1.0
million in liabilities which were assumed by the Company. Based on the
preliminary allocation of the purchase price, the excess of the purchase price
over the fair value of net tangible assets acquired was approximately $3.6
million. The Company funded the costs of this acquisition through its Senior
Credit Facility. In connection with the purchase of the common stock of GulfLink
Communications, Inc. (the "GulfLink Acquisition"), the Company paid Bull Run a
fee equal to $58,000 for services performed.
Unaudited pro forma operating data for the year ended December 31, 1997,
and 1996 is presented below and assumes that the WITN Acquisition and the
GulfLink Acquisition occurred on January 1, 1996.
F-11
<PAGE>
GRAY COMMUNICATIONS SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Business Acquisitions (continued)
1997 Acquisitions (continued)
This unaudited pro forma operating data does not purport to represent the
Company's actual results of operations had the WITN Acquisition and the GulfLink
Acquisition occurred on January 1, 1996, and should not serve as a forecast of
the Company's operating results for any future periods. The pro forma
adjustments are based solely upon certain assumptions that management believes
are reasonable under the circumstances at this time. Unaudited pro forma
operating data for the year ended December 31, 1997, are as follows (in
thousands, except per common share data):
<TABLE>
<CAPTION>
WITN GulfLink Pro forma Adjusted
Gray Acquisition Acquisition Adjustments Pro Forma
(Unaudited)
<S> <C> <C> <C> <C> <C>
Revenues, net $ 103,548 $ 4,551 $ 1,000 $ -0- $ 109,099
========= ======= ======= ===== =========
Net income (loss) available to common
stockholders $ (2,812) $ 146 $ 74 $ (1,177) $ (3,769)
======== ===== ==== ======== ========
Income (loss) per share available to
common stockholders:
Basic $ (0.36) $ (0.48)
======= =======
Diluted $ (0.36) $ (0.48)
======= =======
</TABLE>
Unaudited pro forma operating data for the year ended December 31, 1996, are as
follows (in thousands, except per common share data):
<TABLE>
<CAPTION>
WITN GulfLink KTVE First Pro forma Adjusted
Gray Acquisition Acquisition Sale American Adjustments Pro Forma
Acquisition
(Unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues, net $ 79,305 $ 8,431 $ 2,937 $ (2,968) $ 21,203 $ -0- $108,908
======== ======= ======= ======== ======== ===== ========
Net income (loss)
available to common
stockholders $ 2,143 $ 2,566 $ 197 $ (3,173) $ (1,773) $ (2,357) $ (2,397)
======= ======= ===== ======== ========= ======== ========
Income (loss) per
share available to
common stockholders:
Basic $ 0.40 $ (0.30)
====== =======
Diluted $ 0.38 $ (0.30)
====== =======
</TABLE>
The pro forma results presented above include adjustments to reflect (i)
the incurrence of interest expense to fund the GulfLink Acquisition, the WITN
Acquisition, and the First American Acquisition (as defined in 1996
Acquisitions), (ii) depreciation and amortization of assets acquired, (iii) the
reduction of employee compensation related to severance and vacation
compensation for 1996, (iv) the elimination of the corporate expense allocation
net of additional accounting and administrative expenses for the WITN
Acquisition and the First American Acquisition, (v) increased pension expense
for the First American Acquisition, and (vi) the income tax effect of such pro
forma adjustments. Average outstanding shares used to calculate pro forma
earnings per share data for 1996 include the 3,500,000 Class B Common shares
issued in connection with the First American Acquisition.
F-12
<PAGE>
GRAY COMMUNICATIONS SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
C. Business Acquisitions (continued)
1996 Acquisitions
On September 30, 1996, the Company purchased from First American Media,
Inc. substantially all of the assets used in the operation of two CBS-affiliated
television stations, WCTV-TV ("WCTV") serving Tallahassee, Florida-Thomasville,
Georgia and WKXT-TV ("WKXT") in Knoxville, Tennessee, as well as those assets
used in the operations of a satellite uplink and production services business
and a communications and paging business (the "First American Acquisition").
Subsequent to the First American Acquisition, the Company rebranded WKXT with
the call letters WVLT ("WVLT") as a component of its strategy to promote the
station's upgraded news product. The purchase price of approximately $183.9
million consisted of $175.5 million cash, $1.8 million in acquisition related
costs, and the assumption of approximately $6.6 million of liabilities. The
excess of the purchase price over the fair value of net tangible assets acquired
was approximately $160.2 million. The Company's Board of Directors has agreed to
pay Bull Run, a fee equal to approximately $1.7 million for services performed
in connection with this acquisition. At December 31, 1997, $450,000 of this fee
remains payable and is included in accounts payable.
The First American Acquisition and the early retirement of the Company's
existing bank credit facility and other senior indebtedness (see Notes D and F),
were funded as follows: net proceeds of $66.1 million from the sale of 3,500,000
shares of the Company's Class B Common Stock; net proceeds of $155.2 million
from the sale of $160.0 million principal amount of the Company's 10 5/8% Senior
Subordinated Notes due 2006; $16.9 million of borrowings under the Senior Credit
Facility; and $10.0 million net proceeds from the sale of 1,000 shares of the
Company's Series B Preferred Stock with warrants to purchase 500,000 shares of
the Company's Class A Common Stock at $24 per share. The shares of Series B
Preferred Stock were issued to Bull Run and to J. Mack Robinson, Chairman of the
Board of Bull Run and President and Chief Executive Officer of the Company, and
certain of his affiliates. The Company obtained an opinion from an investment
banker as to the fairness of the terms of the sale of such Series B Preferred
Stock with warrants.
In connection with the First American Acquisition, the Federal
Communications Commission (the "FCC") ordered the Company to apply for FCC
approval to divest itself of WALB-TV ("WALB") in Albany, Georgia and WJHG-TV
("WJHG") in Panama City, Florida by March 31, 1997 to comply with regulations
governing common ownership of television stations with overlapping service
areas. The FCC is currently reexamining these regulations, and if it revises
them in accordance with the interim policy it has adopted, divestiture of WJHG
would not be required. Accordingly, the Company requested and in July of 1997
received an extension of the divestiture deadline with regard to WJHG
conditioned upon the outcome of the rulemaking proceedings. It can not be
determined when the FCC will complete its rulemaking on this subject. Also in
July of 1997, the Company obtained FCC approval to transfer control of WALB to a
trust with a view towards the trustee effecting (i) a swap of WALB's assets for
assets of one or more television stations of comparable value and with
comparable broadcast cash flow in a transaction qualifying for deferred capital
gains treatment under the "like-kind exchange" provision of Section 1031 of the
Internal Revenue Code of 1986, or (ii) a sale of such assets. Under the trust
arrangement, the Company relinquished operating control of the station to a
trustee while retaining the economic risks and benefits of ownership. If the
trustee is required to effect a sale of WALB, the Company would incur a
significant gain and related tax liability, the payment of which could have an
adverse effect on the Company's ability to acquire comparable assets without
incurring additional indebtedness. The FCC allowed up to six months for the
trustee to file an application seeking the agency's approval of a swap or sale.
This six month period expired in January 1998 without a swap or
F-13
<PAGE>
GRAY COMMUNICATIONS SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
C. Business Acquisitions (continued)
1996 Acquisitions (continued)
sale being executed. The trustee has filed an application requesting a six month
extension to effect a swap or sale. The FCC has not yet ruled on this extension
application.
Condensed unaudited balance sheets of WALB and WJHG are as follows (in
thousands):
<TABLE>
<CAPTION>
WALB WJHG
December 31,
1997 1996 1997 1996
(Unaudited)
<S> <C> <C> <C> <C>
Current assets $ 2,379 $ 2,058 $ 1,053 $ 1,079
Property and equipment 1,473 1,579 848 981
Other assets 471 100 346 55
------- ------- ------- -------
Total assets $ 4,323 $ 3,737 $ 2,247 $ 2,115
======= ======= ======= =======
Current liabilities $ 994 $ 1,189 $ 350 $ 497
Other liabilities 215 242 127 -0-
Stockholder's equity 3,114 2,306 1,770 1,618
------- ------- ------- -------
Total liabilities and stockholder's equity $ 4,323 $ 3,737 $ 2,247 $ 2,115
======= ======= ======= =======
</TABLE>
Condensed unaudited income statement data for the three years ended
December 31, 1997, for WALB and WJHG are as follows (in thousands):
<TABLE>
<CAPTION>
WALB WJHG
Year ended December 31, Year ended December 31,
1997 1996 1995 1997 1996 1995
(Unaudited)
<S> <C> <C> <C> <C> <C> <C>
Broadcasting revenues $ 10,090 $ 10,611 $ 9,445 $ 4,896 $ 5,217 $ 3,843
Expenses 4,770 5,070 4,650 3,757 4,131 3,573
-------- -------- ------- ------- ------- -------
Operating income 5,320 5,541 4,795 1,139 1,086 270
Other income (expense) 3 7 17 (5) 6 60
-------- -------- ------- ------- ------- -------
Income before income taxes $ 5,323 $ 5,548 $ 4,812 $ 1,134 $ 1,092 $ 330
======== ======== ======= ======= ======= =======
Net income $ 3,295 $ 3,465 $ 2,984 $ 737 $ 685 $ 205
======== ======== ======= ======= ======= =======
</TABLE>
On January 4, 1996, the Company purchased substantially all of the assets
of WRDW-TV, a CBS television affiliate serving the Augusta, Georgia television
market (the "Augusta Acquisition"). The purchase price of approximately $37.2
million which included assumed liabilities of approximately $1.3 million, was
financed primarily through long-term borrowings. The assets acquired consisted
of office equipment and broadcasting operations located in North Augusta, South
Carolina. The excess of the purchase price over the fair value of net tangible
assets acquired was approximately $32.5 million. In connection with the Augusta
Acquisition, the Company's Board of Directors approved the payment of a $360,000
fee to Bull Run.
Funds for the Augusta Acquisition were obtained from the modification of
the Company's existing bank debt on January 4, 1996 (the "Bank Loan") to a
variable rate reducing revolving credit facility (the
F-14
<PAGE>
GRAY COMMUNICATIONS SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
C. Business Acquisitions (continued)
1996 Acquisitions (continued)
"Old Credit Facility") and the sale to Bull Run of an 8% subordinated note due
January 3, 2005 in the principal amount of $10.0 million (the "8% Note"). In
connection with the sale of the 8% Note, the Company also issued warrants to
Bull Run to purchase 487,500 shares of Class A Common Stock at $17.88 per share,
337,500 shares of which were vested at December 31, 1997. The remainder vests in
four equal annual installments of 37,500 shares through 2001. Approximately $2.6
million of the $10.0 million of proceeds from the 8% Note was allocated to the
warrants and increased Class A Common Stock. The Old Credit Facility provided
for a credit line up to $54.2 million. This transaction also required a
modification of the interest rate of the Company's $25.0 million senior secured
note with an institutional investor (the "Senior Note") from 10.08% to 10.7%.
As part of the financing arrangements for the First American Acquisition,
the Old Credit Facility and the Senior Note were retired and the Company issued
to Bull Run, in exchange for the 8% Note, 1,000 shares of Series A Preferred
Stock. The warrants issued with the 8% Note were retired and the warrants issued
with the Series A Preferred Stock will vest in accordance with the same schedule
described above provided the Series A Preferred Stock remains outstanding. The
Company recorded an extraordinary charge of $5.3 million ($3.2 million after
taxes or $0.58 per basic common share and $0.56 per diluted common share for
1996) in connection with the early retirement of the $25.0 million Senior Note
and the write-off of loan acquisition costs from the early extinguishment of
debt.
Unaudited pro forma operating data for the year ended December 31, 1996,
and 1995 is presented below and assumes that the Augusta Acquisition, the First
American Acquisition, and the KTVE Sale occurred on January 1, 1995.
This unaudited pro forma operating data does not purport to represent the
Company's actual results of operations had the Augusta Acquisition, the First
American Acquisition, and the KTVE Sale occurred on January 1, 1995, and should
not serve as a forecast of the Company's operating results for any future
periods. The pro forma adjustments are based solely upon certain assumptions
that management believes are reasonable under the circumstances at this time.
Unaudited pro forma operating data for the year ended December 31, 1996, are as
follows (in thousands, except per common share data):
<TABLE>
<CAPTION>
First
KTVE American Pro forma Adjusted
Gray Sale Acquisition Adjustments Pro Forma
(Unaudited)
<S> <C> <C> <C> <C> <C>
Revenues, net $ 79,305 $ (2,968) $ 21,203 $ -0- $ 97,540
======== ======== ======== ===== ========
Net income (loss) before extraordinary
charge available to common
stockholders $ 5,301 $ (3,173) $ (1,773) $ (1,743) $ (1,388)
======= ======== ======== ======== ========
Income (loss) per share available to
common stockholders before
extraordinary charge:
Basic $ 0.98 $ (0.17)
====== =======
Diluted $ 0.94 $ (0.17)
====== =======
</TABLE>
F-15
<PAGE>
GRAY COMMUNICATIONS SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
C. Business Acquisitions (continued)
1996 Acquisitions (continued)
Unaudited pro forma operating data for the year ended December 31, 1995,
are as follows (in thousands, except per common share data):
<TABLE>
<CAPTION>
Augusta KTVE First Pro forma Adjusted
Gray Acquisition Sale American Adjustments Pro Forma
Acquisition
(Unaudited)
<S> <C> <C> <C> <C> <C> <C>
Revenues, net $ 58,616 $ 8,660 $ (4,188) $ 27,321 $ 228 $ 90,637
======== ======= ======== ======== ====== ========
Net income (loss) available
to common stockholders $ 931 $ 2,242 $ (278) $ 6,348 $ (15,316) $ (6,073)
======= ======= ====== ======= ========= ========
Income (loss) per share
available to common
stockholders:
Basic $ 0.21 $ (0.77)
========= =======
Diluted $ 0.21 $ (0.77)
========= =======
</TABLE>
The pro forma results presented above include adjustments to reflect (i)
the incurrence of interest expense to fund the First American Acquisition and
the WRDW Acquisition, (ii) depreciation and amortization of assets acquired,
(iii) the reduction of employee compensation related to severance and vacation
compensation for 1996, (iv) the elimination of the corporate expense allocation
net of additional accounting and administrative expenses for the First American
Acquisition, (v) increased pension expense for the First American Acquisition,
and (vi) the income tax effect of such pro forma adjustments. Average
outstanding shares used to calculate pro forma earnings per share data for 1996
and 1995 include the 3,500,000 Class B Common shares issued in connection with
the First American Acquisition.
1995 Acquisitions
On January 6, 1995, the Company purchased substantially all of the assets
of the Gwinnett Post-Tribune and assumed certain liabilities ( the "Gwinnett
Acquisition"). The assets consisted of office equipment and publishing
operations located in Lawrenceville, Georgia. The purchase price of $3.7
million, including assumed liabilities of approximately $370,000, was paid by
approximately $1.2 million in cash (financed through long-term borrowings and
cash from operations), the issuance of 44,117 shares of the Company's Class A
Common Stock (having fair value of $500,000), and $1.5 million payable to the
sellers pursuant to non-compete agreements. The excess of the purchase price
over the fair value of net tangible assets acquired was approximately $3.4
million. In connection with the Gwinnett Acquisition the Company's Board of
Directors approved the payment of a $75,000 fee to Bull Run.
F-16
<PAGE>
GRAY COMMUNICATIONS SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
D. Long-term Debt
Long-term debt consists of the following (in thousands):
December 31,
1997 1996
10 5/8 % Senior Subordinated Notes due 2006 $ 160,000 $ 160,000
Senior Credit Facility 65,630 12,680
Other 1,446 688
--------- ---------
227,076 173,368
Less current portion (400) (140)
--------- ---------
$ 226,676 $ 173,228
========= =========
On September 20, 1996, the Company sold $160.0 million principal amount of
the Company's 10 5/8% Senior Subordinated Notes (the "Senior Subordinated
Notes") due 2006. The net proceeds of $155.2 million from this offering, along
with the net proceeds from (i) the KTVE Sale, (ii) the issuance of Class B
Common Stock, (iii) the issuance of Series B Preferred Stock and (iv) borrowings
under the Senior Credit Facility, were used in financing the First American
Acquisition as well as the early retirement of the Senior Note and the Old
Credit Facility. Interest on the Senior Subordinated Notes is payable
semi-annually on April 1 and October 1, commencing April 1, 1997.
The Senior Subordinated Notes are jointly and severally guaranteed (the
"Subsidiary Guarantees") by all of the Company's subsidiaries (the "Subsidiary
Guarantors"). The obligations of the Subsidiary Guarantors under the Subsidiary
Guarantees is subordinated, to the same extent as the obligations of the Company
in respect of the Senior Subordinated Notes, to the prior payment in full of all
existing and future senior debt of the Subsidiary Guarantors (which will include
any guarantee issued by such Subsidiary Guarantors of any senior debt).
The Company is a holding company with no material independent assets or
operations, other than its investment in its subsidiaries. The aggregate assets,
liabilities, earnings and equity of the Subsidiary Guarantors are substantially
equivalent to the assets, liabilities, earnings and equity of the Company on a
consolidated basis. The Subsidiary Guarantors are, directly or indirectly,
wholly-owned subsidiaries of the Company and the Subsidiary Guarantees will be
full, unconditional and joint and several. All of the current and future direct
and indirect subsidiaries of the Company will be guarantors of the Notes.
Accordingly, separate financial statements and other disclosures of each of the
Subsidiary Guarantors are not presented because management has determined that
they are not material to investors.
The Company has a $125.0 million Senior Credit Facility, as amended, which is
comprised of a term loan (the "Term Commitment") of $71.5 million and a
revolving credit facility (the "Revolving Commitment") of $53.5 million. The
agreement pursuant to which the Senior Credit Facility was issued contains
certain restrictive provisions, which, among other things, limit capital
expenditures and additional indebtedness and require minimum levels of cash
flows. The Senior Subordinated Notes also contained similar restrictive
provisions. Additionally, the effective interest rate of the Senior Credit
Facility can be changed based upon the Company's maintenance of certain
operating ratios as defined by the Senior Credit Facility, not to exceed the
lender's prime rate plus 0.5% or LIBOR plus 2.25%. The effective interest rate
on the Senior Credit Facility at December 31, 1997, and 1996 was 7.9% and 8.4%,
respectively.
F-17
<PAGE>
GRAY COMMUNICATIONS SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
D. Long-term Debt (continued)
The amounts available under the Revolving Commitment will be reduced by
$7,356,000 in 1998; $8,025,000 in years 1999, 2000, 2001 and 2002; $9,363,000 in
2003; and $4,681,000 in 2004.
The amount borrowed by the Company on December 31, 1999 under the Term
Commitment will be converted to a four and one-half year term loan. The
principal of the term loan shall be repaid in nineteen consecutive quarterly
installments commencing on December 31, 1999. Each of the first five quarterly
installments are equal to 2.50% of the principal balance outstanding at December
31, 1999. Each of the next thirteen quarterly installments are equal to 3.75% of
the principal balance outstanding at December 31, 1999. The nineteenth and final
installment due June 30, 2004 will be equal to the remaining balance outstanding
and any outstanding interest due on June 30, 2004.
The Company is charged a commitment fee on the excess of the aggregate
average daily undisbursed amount of the Revolving Commitment and the Term
Commitment over the amount outstanding. At December 31, 1997, the commitment fee
was 0.375% per annum. At December 31, 1997, the Company has approximately $65.6
million outstanding on the Senior Credit Facility. At December 31, 1997, the
Company's interest rate for the Senior Credit Facility, was based on a spread
over LIBOR of 1.75% or Prime.
The Senior Subordinated Notes and the Senior Credit Facility are secured by
substantially all of the Company's existing and hereafter acquired assets.
At December 31, 1997, retained earnings of approximately $1.4 million and
$1.0 million were available for dividends to holders of preferred and common
stock, respectively.
Aggregate minimum principal maturities on long-term debt as of December 31,
1997, were as follows (in thousands):
1998 $ 400
1999 8,593
2000 10,300
2001 11,165
2002 11,058
Thereafter 185,560
---------
$ 227,076
The Company made interest payments of approximately $21.3 million, $7.6
million, and $5.4 million during 1997, 1996 and 1995, respectively.
In the quarter ended September 30, 1996, the Company recorded an
extraordinary charge of $5.3 million ($3.2 million after taxes or $0.58 per
basic common share or $0.56 per diluted common share) in connection with the
early retirement of the Senior Note and the write-off of unamortized loan
acquisition costs of the Senior Note and the Old Credit Facility resulting from
the early extinguishment of debt.
F-18
<PAGE>
GRAY COMMUNICATIONS SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
E. Supplemental Employee Benefits and Other Agreements
The Company had an employment agreement with its former President, Ralph W.
Gabbard, which provided for an award of 122,034 shares of the Company's Class A
Common Stock if his employment with the Company continued until September 1999.
Mr. Gabbard died unexpectedly in September 1996. The Company awarded these
shares to the estate of Mr. Gabbard. Approximately $880,000 and $240,000 of
expense was recorded in 1996 and 1995, respectively.
In December 1995, the Company amended an existing employment agreement to
pay consulting fees to its former chief executive officer. The Company recorded
approximately $596,000 of corporate and administrative expenses during the year
ended December 31, 1995, in accordance with the terms of the amended employment
agreement. Additionally, in December 1995 the Company issued 150,000 shares of
the Company's Class A Common Stock to this former chief executive officer in
accordance with his employment agreement which was amended to remove certain
restrictions, including, among others, a time requirement for continued
employment. Compensation expense of approximately $2.1 million was recognized in
1995 for the 150,000 shares of Class A Common Stock issued pursuant to this
agreement.
The Company has entered into supplemental retirement benefit and other
agreements with certain key employees. These benefits are to be paid primarily
in equal monthly amounts over the employees' life for a period not to exceed 15
years after retirement. The Company charges against operations amounts
sufficient to fund the present value of the estimated lifetime supplemental
benefit over each employee's anticipated remaining period of employment.
The following summarizes activity relative to certain officers' agreements
and the supplemental employee benefits (in thousands):
December 31,
1997 1996 1995
Beginning liability $ 3,158 $ 2,938 $ 2,518
------- ------- -------
Provision 161 918 976
Forfeitures -0- -0- (169)
------- ------- -------
Net expense 161 918 807
Payments (1,793) (698) (387)
------- ------- -------
Net change (1,632) 220 420
------- ------- -------
Ending liability 1,526 3,158 2,938
Less current portion (365) (1,801) (725)
------- ------- -------
$ 1,161 $ 1,357 $ 2,213
======= ======= =======
F. Stockholders' Equity and Earnings Per Share
The Company amended its Articles of Incorporation to increase to 50,000,000
the number of shares of all classes of stock which the Company has the authority
to issue, of which, 15,000,000 shares are designated Class A Common Stock,
15,000,000 shares are designated Class B Common Stock, and 20,000,000 shares are
designated "blank check" preferred stock for which the Board of Directors has
the authority to determine the rights, powers, limitations and restrictions. The
rights of the Company's Class A and Class B Common Stock are identical, except
that the Class A Common Stock has 10 votes per share and the Class B Common
Stock has one vote per share. The Class A and Class B Common Stock
F-19
<PAGE>
GRAY COMMUNICATIONS SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
F. Stockholders' Equity and Earnings Per Share (Continued)
receive cash dividends on an equal per share basis. In September 1996, the
Company issued 1,000 shares each of Series A and Series B Preferred Stock
relating to the financing arrangements for the First American Acquisition.
As part of the financing for the Augusta Acquisition, funding was obtained
from the 8% Note, which included the issuance of detachable warrants to Bull Run
to purchase 487,500 shares of Class A Common Stock at $17.88 per share, 337,500
shares of which were vested at December 31, 1997. The remainder vests in four
equal annual installments of 37,500 through 2001. Approximately $2.6 million of
the $10.0 million of proceeds from the 8% Note was allocated to the warrants and
increased Class A Common Stock. This allocation of the proceeds was based on an
estimate of the relative fair values of the 8% Note and the warrants on the date
of issuance. The Company amortized the original issue discount on a ratable
basis in accordance with the original terms of the 8% Note through September 30,
1996. The Company recognized approximately $217,000 in amortization costs for
the $2.6 million original issue discount. In September 1996, the Company
exchanged the 8% Note with Bull Run for 1,000 shares of liquidation preference
Series A Preferred Stock yielding 8%. The warrants issued with the 8% Note were
retired and the warrants issued with the Series A Preferred Stock will vest in
accordance with the same schedule described above provided the Series A
Preferred Stock remains outstanding. The holder of the Series A Preferred Stock
will receive cash dividends at an annual rate of $800 per share. The liquidation
or redemption price of the Series A Preferred Stock is $10,000 per share.
As part of the financing for the First American Acquisition, the Company
also issued 1,000 shares of Series B Preferred Stock, with warrants to purchase
an aggregate of 500,000 shares of Class A Common Stock at an exercise price of
$24.00 per share. Of these warrants 300,000 vested upon issuance, with the
remaining warrants vesting in five equal annual installments commencing on the
first anniversary of the date of issuance. The shares of Series B Preferred
Stock were issued to Bull Run and to J. Mack Robinson, Chairman of the Board of
Bull Run and President and Chief Executive Officer of the Company, and certain
of his affiliates. The Company obtained a written opinion from an investment
banker as to the fairness of the terms of the sale of such Series B Preferred
Stock with warrants. The holders of the Series B Preferred Stock will receive
dividends at an annual rate of $600 per share, except the Company at its option
may pay these dividends in cash or in additional shares. The liquidation or
redemption price of the Series B Preferred Stock is $10,000 per share. In
September 1997, the Company issued 60 shares of Series B Preferred Stock as
payment of dividends to the holders of its then outstanding Series B Preferred
Stock.
On September 24, 1996, the Company completed a public offering of 3.5
million shares of its Class B Common Stock at an offering price of $20.50 per
share. The proceeds, net of expenses, from this public offering of approximately
$66.1 million were used in the financing of the First American Acquisition.
The Company has a Stock Purchase Plan which allows outside directors to
purchase up to 7,500 shares of the Company's Common Stock directly from the
Company before the end of January following each calendar year. The purchase
price per share approximates the market price of the Common Stock at the time of
the grant. During 1997, 1996 and 1995, certain directors purchased an aggregate
of 501, 22,500, and 23,500 shares of Class A Common Stock, respectively, under
this plan.
F-20
<PAGE>
GRAY COMMUNICATIONS SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
F. Stockholders' Equity and Earnings Per Share (Continued)
The Company's Board of Directors authorized the purchase of up to two
million shares of the Company's Class A or Class B Common Stock to either be
retired or reissued in connection with the Company's benefit plans, including
the Capital Accumulation Plan and the Incentive Plan. During 1997 and the fourth
quarter of 1996, the Company purchased 172,900 Class A Common Stock shares and
172,300 Class B Common Stock shares, respectively, under this authorization. The
1997 and 1996 treasury shares were purchased at prevailing market prices with an
average effective price of $19.99 and $15.90 per share, respectively, and were
funded from the Company's operating cash flow.
Statement of Financial Accounting Standards No. 128. "Earnings Per Share"
is effective for full-year 1997 and subsequent periods. Statement 128 modifies
the method for calculations of net income per share applicable to common
stockholders and also requires a reconciliation between basic and diluted per
share amounts.
The following table presents the effect of Statement 128 (in thousands,
except per common share data):
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Net income (loss) available to common stockholders $ (2,812) $ 2,143 $ 931
======== ======== ========
Basic average common shares outstanding 7,902 5,398 4,354
======== ======== ========
Basic net income (loss) per share available
to common stockholders $ (0.36) $ 0.40 $ 0.21
======== ======== ========
Basic average common shares outstanding 7,902 5,398 4,354
Stock compensation awards -0- 228 127
-------- -------- --------
Diluted average common shares outstanding 7,902 5,626 4,481
======== ======== ========
Diluted net income (loss) per share available
to common stockholders $ (0.36) $ 0.38 $ 0.21
======== ======== ========
</TABLE>
G. Long-term Incentive Plan and Stock Purchase Plan
The Company has elected to follow Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" (APB 25) and related
Interpretations in accounting for its employee stock options because, as
discussed below, the alternative fair value accounting provided for under SFAS
No. 123 "Accounting for Stock-Based Compensation" ("Statement 123") requires use
of option valuation models that were not developed for use in valuing employee
stock options. Under APB 25, because the exercise price of the Company's
employee stock options equals the market price of the underlying stock on the
date of the grant, no compensation expense is recognized.
The Company has a long-term incentive plan (the "Incentive Plan") under
which 200,000 shares of the Company's Class A Common Stock and 400,000 shares of
the Company's Class B Common Stock are reserved for grants to key personnel for
(i) incentive stock options, (ii) non-qualified stock options, (iii) stock
appreciation rights, (iv) restricted stock and (v) performance awards, as
defined by the Incentive Plan. Shares of Common Stock underlying outstanding
options or performance awards are counted against the Incentive Plan's maximum
shares while such options or awards are outstanding.
F-21
<PAGE>
GRAY COMMUNICATIONS SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Long-term Incentive Plan and Stock Purchase Plan (continued)
Under the Incentive Plan, the options granted typically vest after a two year
period and expire three years after full vesting. Options granted through
December 31, 1997, have been granted at a price which approximates fair market
value on the date of the grant.
The Company also has a Stock Purchase Plan which grants outside directors
up to 7,500 shares of the Company's Common Stock. Under this Stock Purchase
Plan, the options granted vest at the beginning of the upcoming calendar year
and expire at the end of January following that calendar year.
Prior to 1996, grants under the Incentive Plan and the Stock Purchase Plan
were made with the Company's Class A Common Stock. In 1996, the Company amended
its Incentive Plan and Stock Purchase Plan for grants to be made with Class B
Common Stock. Therefore, all options granted subsequent to 1995, were made with
Class B Common Stock.
Pro forma information regarding net income and earnings per share is
required by Statement 123, which also requires that the information be
determined as if the Company has accounted for its employee stock options
granted subsequent to December 31, 1994 under the fair value method of Statement
123. The fair value for these options was estimated at the date of grant using a
Black-Scholes option pricing model with the following weighted-average
assumptions for 1997, 1996 and 1995, respectively: risk-free interest rates of
5.82%, 5.43% and 6.06%; dividend yields of 0.32%, 0.50% and 0.53%; volatility
factors of the expected market price of the Company's Class A Common Stock of
0.28, 0.33 and 0.26; and a weighted-average expected life of the options of 4.5,
2.0 and 2.7 years.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and which are fully transferable. In addition, option valuation models require
the input of highly subjective assumptions including the expected stock price
volatility. Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The Company's
pro forma information follows (in thousands except per common share data):
1997 1996 1995
Pro forma income (loss) before extraordinary
charge available to common stockholders $ (3,174) $ 5,190 $ 792
Pro forma income (loss) before extraordinary
charge per common share:
Basic $ (0.40) $ 0.96 $ 0.18
Diluted $ (0.40) $ 0.92 $ 0.18
F-22
<PAGE>
GRAY COMMUNICATIONS SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Long-term Incentive Plan and Stock Purchase Plan (continued)
A summary of the Company's stock option activity for Class A Common Stock, and
related information for the years ended December 31 follows (in thousands,
except weighted average data):
<TABLE>
<CAPTION>
Year Ended December 31,
1997 1996 1995
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Options Price Options Price Options Price
<S> <C> <C> <C> <C> <C> <C>
Stock options outstanding B
beginning of year 198 $13.11 263 $12.39 199 $ 9.80
Options granted -0- -0- 111 16.14
Options exercised (85) 10.75 (52) 9.93 (29) 10.08
Options forfeited -0- (6) 12.44 (18) 10.45
Options expired (52) 19.25 (7) 10.17 -0-
--- --- ---
Stock options outstanding
B end of year 61 $11.15 198 $13.11 263 $12.39
=== === ===
Exercisable at end of year 61 $11.15 164 $13.06 86 $ 9.84
Weighted-average fair value of
options granted during the year $ 3.37
</TABLE>
Exercise prices for Class A Common Stock options outstanding as of December
31, 1997, ranged from $9.67 to $13.33 for the Incentive Plan. The
weighted-average remaining contractual life of the Class A Common Stock options
outstanding for the Incentive Plan is 1.4 years.
A summary of the Company's stock option activity for Class B Common Stock,
and related information for the years ended December 31 follows (in thousands,
except weighted average data):
<TABLE>
<CAPTION>
Year Ended December 31,
1997 1996
Weighted Weighted
Average Average
Exercise Exercise
Options Price Options Price
<S> <C> <C> <C> <C>
Stock options outstanding B beginning of year 68 $15.88 -0-
Options granted 352 25.20 68 $15.88
--- ---
Stock options outstanding B end of year 420 $23.70 68 $15.88
=== ===
Exercisable at end of year 53 $15.88 -0-
Weighted-average fair value of options granted during the
year $ 8.10 $ 3.22
</TABLE>
Exercise prices for Class B Common Stock options outstanding as of December 31,
1997, ranged
F-23
<PAGE>
GRAY COMMUNICATIONS SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Long-term Incentive Plan and Stock Purchase Plan (continued)
from $15.88 to $25.50 for the Incentive Plan and $15.88 to $24.19 for the Stock
Purchase Plan. The weighted-average remaining contractual life of the Class B
Common Stock options outstanding for the Incentive Plan and Stock Purchase Plan
is 4.7 and 0.5 years, respectively.
H. Income Taxes
The Company uses the liability method in accounting for income taxes. Under
this method, deferred tax assets and liabilities are determined based on
differences between financial reporting and tax bases of assets and liabilities
and are measured using the enacted tax rates and laws that will be in effect
when the differences are expected to reverse.
Federal and state income tax expense (benefit) included in the consolidated
financial statements are summarized as follows (in thousands):
Year Ended December 31,
1997 1996 1995
Current
Federal $(1,620) $ 1,462 $ (253)
State and local 577 841 24
Deferred 1,283 (44) 863
------- ------- -------
$ 240 $ 2,259 $ 634
======= ======= =======
The total provision for income taxes for 1996 included a tax benefit of
$2.2 million which related to an extraordinary charge on extinguishment of debt.
Significant components of the Company's deferred tax liabilities and assets
are as follows (in thousands):
1997 1996
Deferred tax liabilities:
Net book value of property and equipment $ 2,670 $ 1,165
Goodwill 6,281 2,370
Other 120 120
------- -------
Total deferred tax liabilities 9,071 3,655
Deferred tax assets:
Liability under supplemental retirement plan 526 1,241
Allowance for doubtful accounts 499 619
Difference in basis of assets held for sale 941 941
Federal operating loss carryforwards 4,412 -0-
State and local operating loss carryforwards 1,952 1,164
Other 290 511
------- -------
Total deferred tax assets 8,620 4,476
Valuation allowance for deferred tax assets (753) (753)
------- -------
Net deferred tax assets 7,867 3,723
------- -------
Deferred tax assets (liabilities) net $(1,204) $ 68
======= =======
F-24
<PAGE>
GRAY COMMUNICATIONS SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
H. Income Taxes (continued)
A substantial portion of the federal operating loss carryforwards will
expire in the year ended December 31, 2012.
A reconciliation of income tax expense at the statutory federal income tax
rate and income taxes as reflected in the consolidated financial statements is
as follows (in thousands):
Year Ended December 31,
1997 1996 1995
Statutory rate applied to income $ (395) $ 1,625 $ 532
State and local taxes, net of federal tax benefits 572 (7) 91
Permanent difference relating to sale of KTVE -0- 602 -0-
Other items, net 63 39 11
------- ------- -------
$ 240 $ 2,259 $ 634
======= ======= =======
The Company made income tax payments of approximately $275,000, $3.6
million and $742,000 during 1997, 1996 and 1995, respectively. At December 31,
1997, the Company had current recoverable income taxes of approximately $2.1
million.
I. Retirement Plans
Pension Plan
The Company has a retirement plan covering substantially all full-time
employees. Retirement benefits are based on years of service and the employees'
highest average compensation for five consecutive years during the last ten
years of employment. The Company's funding policy is to contribute annually the
minimum amounts deductible for federal income tax purposes.
The net pension expense includes the following (in thousands):
<TABLE>
<CAPTION>
Year Ended December 31,
1997 1996 1995
<S> <C> <C> <C>
Service costs B benefits earned during the year $ 429 $ 360 $ 221
Interest cost on projected benefit obligation 442 409 384
Actual return on plan assets (608) (574) (655)
Net amortization and deferral 121 126 187
----- ----- -----
Net pension expense $ 384 $ 321 $ 137
===== ===== =====
Assumptions:
Discount rate 7.0% 7.0% 8.0%
Expected long-term rate of return on assets 7.0% 7.0% 8.0%
Estimated rate of increase in compensation levels 5.0% 5.0% 6.0%
</TABLE>
F-25
<PAGE>
GRAY COMMUNICATIONS SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
I. Retirement Plans (continued)
Pension Plan (continued)
The following summarizes the plan's funded status and related assumption
(in thousands):
<TABLE>
<CAPTION>
December 31,
1997 1996
<S> <C> <C>
Actuarial present value of accumulated benefit obligation is as follows:
Vested $ 5,962 $ 5,675
Other 491 291
------- -------
$ 6,453 $ 5,966
======= =======
Plan assets at fair value, primarily mutual funds and an unallocated
insurance contract $ 6,919 $ 6,282
Projected benefit obligation (7,053) (6,483)
------- -------
Plan assets less than projected benefit obligation (134) (201)
Unrecognized net (gain) loss (58) 72
Unrecognized net asset (246) (300)
------- -------
Pension liability included in consolidated balance sheet $ (438) $ (429)
======= =======
Assumptions:
Discount rate 7.0% 7.0%
Estimated rate of increase in compensation levels 5.0% 5.0%
</TABLE>
Capital Accumulation Plan
Effective October 1, 1994, the Company adopted the Gray Communications
Systems, Inc. Capital Accumulation Plan (the "Capital Accumulation Plan") for
the purpose of providing additional retirement benefits for substantially all
employees. The Capital Accumulation Plan is intended to meet the requirements of
section 401(k) of the Internal Revenue Code.
On November 14, 1996, the Company amended its Capital Accumulation Plan to
allow an investment option in the Company's Class B Common Stock. The amendment
also allows for the Company's percentage match to be made by a contribution of
the Company's Class B Common Stock, effective in 1997. On December 13, 1996, the
Company reserved 200,000 shares of the Company's Class B Common Stock for
issuance under the Capital Accumulation Plan.
Employee contributions to the Capital Accumulation Plan, not to exceed 6%
of the employees' gross pay, are matched by Company contributions. Until 1997,
the Company's percentage match was made by a contribution of the Company's Class
A Common Stock. The Company's percentage match amount is declared by the
Company's Board of Directors before the beginning of each plan year. In 1997,
the Company's percentage match has been made by a contribution of the Company's
Class B Common Stock. The Company's percentage match was 50% for the three years
ended December 31, 1997. The Company contributions vest, based upon each
employee's number of years of service, over a period not to exceed five years.
Company matching contributions aggregating $419,670, $262,426 and $298,725
were charged to expense for 1997, 1996 and 1995, respectively, for the issuance
of 20,874 Class B shares; 13,225 and 18,354 Class A shares, respectively.
F-26
<PAGE>
GRAY COMMUNICATIONS SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
J. Commitments and Contingencies
The Company has various operating lease commitments for equipment, land and
office space. The Company has also entered into commitments for various
television film exhibition rights for which the license periods have not yet
commenced. Rent expense resulting from operating leases for the years ended
December 31, 1997, 1996 and 1995 were $1.4 million, $501,000, and $267,000,
respectively. Future minimum payments under operating leases with initial or
remaining noncancelable lease terms in excess of one year and obligations under
film exhibition rights for which the license period have not yet commenced are
as follows (in thousands):
Lease Film Total
1998 $ 1,434 $ 1,083 $ 2,517
1999 1,255 3,128 4,383
2000 674 2,693 3,367
2001 505 1,650 2,155
2002 290 920 1,210
Thereafter 732 -0- 732
------- ------- -------
$ 4,890 $ 9,474 $14,364
======= ======= =======
The Company is subject to legal proceedings and claims which arise in the
normal course of its business. In the opinion of management, the amount of
ultimate liability, if any, with respect to these actions will not materially
affect the Company's financial position.
F-27
<PAGE>
GRAY COMMUNICATIONS SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
K. Information on Business Segments
The Company operates in three business segments: broadcasting, publishing
and paging. The broadcasting segment operates eight television stations at
December 31, 1997. The publishing segment operates three daily newspapers in
three different markets, and two area weekly advertising only publications in
southwest Georgia and north Florida. The paging operations are located in
Florida, Georgia, and Alabama. The following tables present certain financial
information concerning the Company's three operating segments (in thousands):
<TABLE>
<CAPTION>
Year Ended December 31,
1997 1996 1995
(In thousands)
<S> <C> <C> <C>
Operating revenues:
Broadcasting $ 72,300 $ 54,981 $ 36,750
Publishing 24,536 22,845 21,866
Paging 6,712 1,479 -0-
--------- --------- ---------
$ 103,548 $ 79,305 $ 58,616
========= ========= =========
Operating profit:
Broadcasting $ 17,509 $ 14,106 $ 7,822
Publishing 2,206 1,980 (962)
Paging 1,015 (7) -0-
--------- --------- ---------
Total operating profit 20,730 16,079 6,860
Miscellaneous income and (expense), net (31) 5,704 144
Interest expense (21,861) (11,689) (5,439)
--------- --------- ---------
Income (loss) before income taxes $ (1,162) $ 10,094 $ 1,565
========= ========= =========
</TABLE>
Operating profit is total operating revenue less operating expenses,
excluding miscellaneous income and expense (net) and interest. Corporate and
administrative expenses are allocated to operating profit based on net segment
revenues.
F-28
<PAGE>
GRAY COMMUNICATIONS SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
K. Information on Business Segments (continued)
Year Ended December 31,
1997 1996 1995
(In thousands)
Depreciation and amortization expense:
Broadcasting $11,024 $ 5,554 $ 2,723
Publishing 1,973 1,730 1,190
Paging 1,480 329 -0-
------- ------- -------
14,477 7,613 3,913
Corporate 42 50 46
------- ------- -------
Total depreciation and amortization expense $14,519 $ 7,663 $ 3,959
======= ======= =======
Capital expenditures:
Broadcasting $ 5,000 $ 2,674 $ 2,285
Publishing 4,235 692 973
Paging 975 -0- -0-
------- ------- -------
10,210 3,366 3,258
Corporate 162 30 22
------- ------- -------
Total capital expenditures $10,372 $ 3,396 $ 3,280
======= ======= =======
December 31,
1997 1996 1995
(In thousands)
Identifiable assets:
Broadcasting $287,254 $245,614 $ 54,022
Publishing 19,818 16,301 18,170
Paging 23,950 23,764 -0-
-------- -------- --------
331,022 285,679 72,192
Corporate 14,029 12,985 6,048
-------- -------- --------
Total identifiable assets $345,051 $298,664 $ 78,240
======== ======== ========
F-29
<PAGE>
GRAY COMMUNICATIONS SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
L. Selected Quarterly Financial Data (Unaudited)
<TABLE>
<CAPTION>
Fiscal Quarters
First Second Third Fourth
Year Ended December 31, 1997 (In thousands, except for per share data)
<S> <C> <C> <C> <C>
Operating revenues $ 22,761 $ 25,499 $ 25,984 $ 29,304
Operating income 4,337 6,124 4,271 5,998
Net income (loss) (461) 622 (1,162) (401)
Net income (loss) available to common stockholders (811) 272 (1,513) (760)
Basic income (loss) per share $ (0.10) $ 0.03 $ (0.19) $ (0.10)
Diluted income (loss) per share $ (0.10) $ 0.03 $ (0.19) $ (0.10)
<CAPTION>
Fiscal Quarters
First Second Third Fourth
Year Ended December 31, 1996 (In thousands, except for per share data)
<S> <C> <C> <C> <C>
Operating revenues $ 17,027 $ 18,487 $ 16,699 $ 27,092
Operating income 2,678 4,633 2,381 6,387
Income before extraordinary charge 311 1,490 2,947 930
Extraordinary charge -0- -0- 3,159 -0-
Net income (loss) 311 1,490 (212) 930
Net income (loss) available to common stockholders 311 1,490 (239) 580
Basic income (loss) per share
Income before extraordinary charge available to $ 0.07 $ 0.33 $ 0.62 $ 0.07
common stockholders
Extraordinary charge 0.00 0.00 (0.67) 0.00
---------- ---------- ---------- ----------
Net income (loss) available to common stockholders $ 0.07 $ 0.33 $ (0.05) $ 0.07
========== ========== ========== ==========
Diluted income (loss) per share
Income before extraordinary charge available to $ 0.07 $ 0.32 $ 0.58 $ 0.07
common stockholders
Extraordinary charge 0.00 0.00 (0.63) 0.00
---------- ---------- ---------- ----------
Net income (loss) available to common stockholders $ 0.07 $ 0.32 $ (0.05) $ 0.07
========== ========== ========== ==========
</TABLE>
Because of the method used in calculating per share data, the quarterly per
share data will not necessarily add to the per share data as computed for the
year.
The third quarter of 1996 includes the KTVE Sale and an extraordinary
charge. As a result of the KTVE Sale, the Company recognized a pre-tax gain of
approximately $5.7 million and estimated income taxes of approximately $2.8
million (See Note B). The Company recorded an extraordinary charge on
extinguishment of debt of $5.3 million and an income tax benefit of $2.2 million
(See Note D).
F-30
<PAGE>
REPORT OF INDEPENDENT AUDITORS
We have audited the consolidated financial statements of Gray
Communications Systems, Inc. as of December 31, 1997 and 1996, and for each
of the three years in the period ended December 31, 1997, and have issued
our report thereon dated January 27, 1998 (except for the Pending Acquisition
of Note C, as to which the date is February 13, 1998). Our audits also included
the financial statement schedule of Gray Communications Systems, Inc. listed in
Item 14(a). This schedule is the responsibility of the Company's management.
Our responsibility is to express an opinion based on our audits.
In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
/s/ ERNST & YOUNG LLP
Atlanta, Georgia
January 27, 1998
F-31
<PAGE>
GRAY COMMUNICATIONS SYSTEMS, INC.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
Additions
--------------------------
Balance at Charged to Charged to Balance at
Beginning Costs and Other End of
Description Of Period Expenses Accounts** Deductions* Period
- ----------- ---------- ---------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1997
Allowance for doubtful accounts $1,450,000 $188,000 $31,000 $416,000 $1,253,000
Year ended December 31, 1996
Allowance for doubtful accounts $450,000 $894,000 $583,000 $477,000 $1,450,000
Year ended December 31, 1995
Allowance for doubtful accounts $694,000 $384,000 $33,000 $661,000 $450,000
</TABLE>
* "Deductions" represent write-offs of amounts not considered
collectible
** Represents amounts recorded in certain allocations of purchase prices
for the Company's acquisitions
F-32
<PAGE>
Independent Auditors' Report
The Board of Directors
Capital Sports Properties, Inc.:
We have audited the balance sheets of Capital Sports Properties, Inc. as of June
30, 1996 and December 31, 1995, and the related statements of earnings, changes
in stockholders' equity and cash flows for the six-months ended June 30, 1996
and the year ended December 31, 1995, not separately presented herein. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Capital Sports Properties, Inc.
as of June 30, 1996 and December 31, 1995, and the results of its operations and
its cash flows for the six-months ended June 30, 1996 and the year ended
December 31, 1995, in conformity with generally accepted accounting principles.
/s/ KPMG PEAT MARWICK LLP
Stamford, Connecticut
February 10, 1997
F-33
<PAGE>
KPMG Peat Marwick LLP
1600 PNC Center
201 East Fifth Street
Cincinnati, OH 45202
Dayton, OH
Independent Auditors' Report
The Board of Directors
Host Communications, Inc.:
We have audited the consolidated balance sheets of Host Communications, Inc. and
subsidiaries as of June 30, 1996 and 1995, and the related consolidated
statements of earnings, stockholders' equity, and cash flows for the years then
ended. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Host Communications,
Inc. and subsidiaries at June 30, 1996 and 1995, and the results of their
operations and their cash flows for the years then ended in conformity with
generally accepted accounting principles.
As discussed in notes 1 and 3 to the consolidated financial statements, the
Company changed its method of accounting for license fee revenues and
rights fee expenses.
/s/ KPMG PEAT MARWICK LLP
October 11, 1996
F-34
