<PAGE> 1
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 1999
------------------
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from to .
----------------- -----------------
Commission file number 0-9385
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Bull Run Corporation
(Exact name of registrant as specified in its charter)
Georgia 91-1117599
(State of incorporation (I.R.S. Employer
or organization) Identification No.)
4370 Peachtree Road, N.E., Atlanta, GA 30319
(Address of principal executive offices) (Zip Code)
(404) 266-8333
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
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. Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date: 22,516,267 shares of Common
Stock, par value $.01 per share, were outstanding as of October 31, 1999.
<PAGE> 2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
BULL RUN CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
September 30, June 30,
1999 1999
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 156,529 $ 323,202
Accounts receivable 6,111,300 3,927,085
Inventories 5,241,968 5,504,597
Other 125,707 160,041
------------- -------------
Total current assets 11,635,504 9,914,925
Property and equipment, net 2,542,351 2,620,345
Investment in affiliated companies 85,615,926 85,311,175
Goodwill 7,338,401 7,417,146
Deferred acquisition costs 963,297 673,605
Other assets 143,698 160,967
------------- -------------
$ 108,239,177 $ 106,098,163
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable and current portion of long-term debt $ 66,814,672 $ 67,360,921
Accounts payable 3,267,740 1,951,357
Accrued and other liabilities:
Employee compensation and related taxes 467,749 417,492
Interest 594,846 578,698
Deferred acquisition costs 888,647 608,344
Other 738,151 593,675
------------- -------------
Total current liabilities 72,771,805 71,510,487
Deferred income taxes 4,525,711 4,408,711
Other liabilities 2,349,024 2,185,433
Stockholders' equity:
Common stock, $.01 par value (authorized 100,000,000
shares; issued 23,058,271 and 22,983,271 shares as of
September 30, 1999 and June 30, 1999, respectively) 230,583 229,773
Additional paid-in capital 21,954,929 21,839,630
Treasury stock, at cost (542,004 shares) (1,392,430) (1,392,430)
Retained earnings 7,799,555 7,316,559
------------- -------------
Total stockholders' equity 28,592,637 27,993,532
------------- -------------
$ 108,239,177 $ 106,098,163
============= =============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
<PAGE> 3
BULL RUN CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
AND RETAINED EARNINGS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
September 30,
1999 1998
<S> <C> <C>
Revenue from printer operations $ 8,367,213 $ 7,219,825
Cost of goods sold 5,865,699 5,371,280
----------- -----------
Gross profit 2,501,514 1,848,545
Consulting fee income 670,409 964,130
Operating expenses:
Research and development 484,781 608,612
Selling, general and administrative 1,630,050 1,526,911
----------- -----------
2,114,831 2,135,523
----------- -----------
Income from operations 1,057,092 677,152
Other income (expense):
Equity in earnings of affiliated companies 629,512 6,825,956
Interest and dividend income 226,378 288,628
Interest expense (1,316,989) (1,079,751)
Other income, net 104,001 140
----------- -----------
Income before income taxes 699,994 6,712,125
Income tax expense (216,998) (2,672,482)
----------- -----------
Net income 482,996 4,039,643
Retained earnings, beginning of period 7,316,559 5,935,487
----------- -----------
Retained earnings, end of period $ 7,799,555 $ 9,975,130
=========== ===========
Earnings per share:
Basic $ 0.02 $ 0.18
Diluted $ 0.02 $ 0.17
</TABLE>
See accompanying notes to condensed consolidated financial statements.
<PAGE> 4
BULL RUN CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
September 30,
1999 1998
<S> <C> <C>
Cash flows from operating activities:
Net income $ 482,996 $ 4,039,643
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Provision for bad debts 32,791 5,097
Depreciation and amortization 270,743 279,437
Loss on disposition of investments 63,764
Equity in earnings of affiliated companies (629,512) (6,825,956)
Deferred income taxes 117,000 2,580,000
Accrued preferred stock dividend income (24,692)
Change in operating assets and liabilities:
Accounts receivable (2,217,006) 201,699
Inventories 262,629 (171,363)
Other current assets (18,009) (37,278)
Accounts payable and accrued expenses 1,733,809 (381,506)
----------- -----------
Net cash provided by (used in) operating activities 99,205 (334,919)
----------- -----------
Cash flows from investing activities:
Capital expenditures (40,113) (92,063)
Investment in affiliated companies (27,738) (3,652,643)
Proceeds on sale of investment 288,736
Acquisition of businesses and product rights, net
of cash acquired (56,623) (707,728)
Redemption of preferred stock investment 1,304,692
Dividends received from affiliated company 53,604
----------- -----------
Net cash provided by (used in) investing activities 164,262 (3,094,138)
----------- -----------
Cash flows from financing activities:
Borrowings from notes payable 700,000
Borrowings from revolving lines of credit 2,830,346 5,796,000
Repayments on revolving lines of credit (3,126,595) (6,141,000)
Proceeds from long-term debt 2,850,000
Repayments on long-term debt (250,000) (166,667)
Issuance of common stock 116,109 7,437
----------- -----------
Net cash provided by (used in) financing activities (430,140) 3,045,770
----------- -----------
Net decrease in cash and cash equivalents (166,673) (383,287)
Cash and cash equivalents, beginning of period 323,202 587,965
----------- -----------
Cash and cash equivalents, end of period $ 156,529 $ 204,678
=========== ===========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
<PAGE> 5
BULL RUN CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
In management's opinion, the accompanying unaudited condensed consolidated
financial statements reflect all adjustments (consisting solely of normal,
recurring adjustments) necessary to present fairly the financial position and
results of operations for the interim periods reported. These condensed
consolidated financial statements should be read in conjunction with the
consolidated financial statements contained in the Transition Report on Form
10-K of Bull Run Corporation for the period January 1, 1999 to June 30, 1999.
The accompanying condensed consolidated financial statements include the
accounts of Bull Run Corporation and its wholly-owned subsidiary, Datasouth
Computer Corporation (collectively, unless the context otherwise requires, the
"Company"), after elimination of intercompany accounts and transactions.
2. PENDING TRANSACTION
The Company has previously announced, and the Company's shareholders have
approved, the acquisition of the stock of Host Communications, Inc. ("Host"),
Universal Sports America, Inc. ("Universal") and Capital Sports Properties, Inc.
("Capital") not currently owned, directly or indirectly, by the Company (the
"Host-Universal Acquisition"). Pursuant to the agreement, a new holding company
for the Company will be created immediately prior to the Host-Universal
Acquisition, whereby each outstanding share of the Company's common stock will
be converted into one share of a newly formed Georgia corporation. The new
holding company, which will be renamed Bull Run Corporation, will be owned by
the stockholders of the Company. The former Bull Run Corporation and its
subsidiaries will become subsidiaries of the holding company. The Company is
currently negotiating with its bank lenders with respect to a new credit
agreement in order to obtain the funds necessary to consummate the proposed
acquisition of Host, Capital and Universal. The Company is also negotiating with
Host and Universal with respect to an amendment to the merger agreement relating
to the acquisition of Host, Capital and Universal. Under the terms of the
amendment being negotiated, it is expected that the shareholders of Host,
Capital and Universal would receive for their securities in such companies, a
combination of cash (in the aggregate amount of approximately $54.2 million),
the Company's common stock (approximately 11,327,000 shares in the aggregate,
plus options to purchase approximately 3,158,000 shares), and the Company's
subordinated promissory notes (in the aggregate principal amount of
approximately $18.7 million), bearing interest at a rate of approximately eight
per cent per annum and maturing three years after the date of issuance. If the
Company, Host, Capital and Universal enter into such an amendment, it will be
subject to the approval of Host's, Capital's and Universal's shareholders. Prior
to the Host-Universal Acquisition, the Company accounts for its investment in
Host and Capital under the equity method, and for its investment in Universal
under the cost method. Following the closing of the Host-Universal Acquisition,
the financial results of Host, Capital and Universal will be consolidated with
those of the Company. The acquisition will be accounted for under the purchase
method of accounting, whereby the results of operations of the acquired business
will be included in the
<PAGE> 6
consolidated financial statements as of its acquisition date. The assets and
liabilities of the acquired businesses will be included based on an allocation
of the purchase price.
Host, based in Lexington, Kentucky, and Universal, based in Dallas, Texas,
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. Capital's assets consist solely
of investments in Host outstanding common stock and 51.5% of Host's 8% series B
preferred stock having a face value of $3,750,000 as of June 30, 1999. The
Company is effectively Host's largest stockholder, owning directly or indirectly
approximately 32.5% of Host's outstanding common stock and 51.5% of Host's
preferred stock. The Company's indirect ownership of Host's common stock and
Host's preferred stock is owned by Capital, in which the Company owned 51.5% of
the outstanding common stock. The Company and Host together are the largest
stockholders of Universal, with the Company owning approximately 3% of
Universal's outstanding capital stock and Host owning approximately 33.8% of
Universal's outstanding capital stock.
3. INVESTMENT IN AFFILIATED COMPANIES
The Company accounts for its investments in Gray Communications Systems, Inc.
("Gray"), Host, Capital and Rawlings Sporting Goods Company, Inc. ("Rawlings")
using the equity method. The excess of the Company's investments in Gray, Host,
Capital and Rawlings over the underlying equity thereof is being amortized over
20 to 40 years, with such amortization (totaling $275,000 and $194,000 in the
three months ended September 30, 1999 and 1998, respectively) reported as a
reduction in the Company's equity in earnings of affiliated companies.
The Company provides consulting services to Gray from time to time in connection
with Gray's acquisitions and dispositions. Income on a portion of such fees is
deferred and recognized over 40 years as a result of the Company's 16.9% equity
investment position in Gray as of September 30, 1999, with such position
representing a 27.5% voting interest in Gray.
The Company accounts for its investment in Host by the equity method on a
six-month lag basis. The Company accounts for its investment in Rawlings by the
equity method on a one month lag basis, in order to align Rawlings' fiscal
quarters ending November 30, February 28, May 31 and August 31 with the
Company's fiscal quarters.
In January 1999, Universal sold its investment in broadcast.com, inc.,
recognizing an after-tax gain of approximately $40,000,000. As a result of
Host's equity investment in Universal and the Company's equity investment in
Host reported on a six-month lag basis, the Company recognized approximately
$1,900,000 in equity in earnings of affiliates in the three months ended
September 30, 1999 pertaining to Universal's gain on the sale of its investment
in broadcast.com, inc.
In July 1998, Gray disposed of a television station and recognized an after-tax
gain of approximately $43,000,000 in connection with the disposition. As a
result, the Company's equity in Gray's earnings was favorably impacted by
approximately $6,900,000 in the three months ended September 30, 1998.
<PAGE> 7
Aggregate operating results of affiliated companies (reflecting, for 1999: (i)
Gray and Capital for the three months ended September 30, 1999; (ii) Host for
the three months ended March 31, 1999; and (iii) Rawlings for the three months
ended August 31, 1999; and reflecting, for 1998: (i) Gray and Capital for the
three months ended September 30, 1998; (ii) Host for the three months ended
March 31, 1998; and (iii) Rawlings for the three months ended August 31, 1998)
were as follows:
Three Months Ended
September 30,
1999 1998
Operating revenue $ 83,592,000 $ 81,793,000
Income (loss) from operations (2,051,000) 6,247,000
Net income (loss) (999,000) 42,033,000
4. INVENTORIES
Inventories related to the Company's printer operations consist of the
following:
September 30, June 30,
1999 1999
Raw materials $ 3,298,519 $ 3,423,468
Work-in-process 754,170 742,465
Finished goods 1,189,279 1,338,664
----------- -----------
$ 5,241,968 $ 5,504,597
=========== ===========
5. NOTES PAYABLE AND LONG-TERM DEBT
The Company currently has long-term debt agreements providing for (a) two term
notes payable to a bank, bearing interest at the London Interbank Offered Rate
("LIBOR") plus 1.75%, requiring no principal payments prior to maturity on
January 1, 2003, under which $42,312,494 was outstanding as of September 30,
1999 and June 30, 1999 (classified as a current liability as of September 30,
1999 and June 30, 1999 until such time as the amount is refinanced); (b) two
term notes payable to a bank, bearing interest at the LIBOR plus 1.75%, due
November 24, 1999, under which $1,352,500 was outstanding as of September 30,
1999 and June 30, 1999; (c) a revolving credit facility for borrowings of up to
$3,500,000 expiring May 1, 2000, bearing interest at the bank's prime rate,
under which $3,262,772 and $3,392,927 was outstanding as of September 30, 1999
and June 30, 1999, respectively; (d) a term note bearing interest at LIBOR plus
3%, paid in quarterly installments of $250,000 until maturity on September 5,
2000, under which $3,250,000 and $3,500,000 was outstanding on September 30,
1999 and June 30, 1999, respectively; and (e) a revolving bank credit facility
for borrowings of up to $5,000,000 expiring September 5, 2000, bearing interest
at the prime rate plus .25%, under which $4,636,906 and $4,803,000 was
outstanding as of September 30, 1999 and June 30, 1999, respectively.
<PAGE> 8
The Company also has (a) a bank note in the amount of $10,000,000 (outstanding
at September 30, 1999 and June 30, 1999) due November 24, 1999 with interest at
the bank's prime rate, and (b) a demand bank note due December 31, 1999 for
borrowings of up to $2,000,000 bearing interest at the bank's prime rate, under
which $2,000,000 was outstanding as of September 30, 1999 and June 30, 1999.
As a result of the potential for future debt covenant violations under the
existing credit facilities at measurement dates up to and including September
30, 2000, the Company has classified all of its long-term debt as current as of
September 30, 1999 and June 30, 1999. The Company expects to refinance all of
its existing notes and credit facilities in connection with the financing of the
Host-Universal Acquisition. If the Host-Universal Acquisition is not
consummated, the Company expects to refinance all existing notes payable and
long-term debt agreements.
The Company is a party to an interest rate swap agreement, which effectively
modifies the interest characteristics of $20,000,000 of its outstanding
long-term debt. The agreement involves the exchange of amounts based currently
on a fixed interest rate of 7.83% for amounts currently based on a variable
interest rate of LIBOR plus 1.75% through December 31, 2007, without an exchange
of the notional amount upon which the payments are based. The differential to be
paid or received as interest rates change is accrued and recognized as an
adjustment of interest expense related to the debt. The estimated amount to be
received on terminating the swap agreement, if the Company elected to do so, was
approximately $675,000 and $432,000 as of September 30, 1999 and June 30, 1999,
respectively.
6. INCOME TAXES
The principal differences between the federal statutory tax rate of 34% and the
effective tax rates are nondeductible goodwill amortization and state income
taxes.
7. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per
share:
<TABLE>
<CAPTION>
Three Months Ended Three Months Ended
September 30, 1999 September 30, 1998
<S> <C> <C>
Net income $ 482,996 $ 4,039,643
=========== ===========
Weighted average number of common shares
outstanding for basic earnings per share 22,466,539 22,282,528
Effect of dilutive employee stock options 843,831 1,002,717
----------- -----------
Adjusted weighted average number of common
shares and assumed conversions for diluted
earnings per share 23,310,370 23,285,245
=========== ===========
Basic earnings per share $ 0.02 $ 0.18
Diluted earnings per share $ 0.02 $ 0.17
</TABLE>
<PAGE> 9
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Overview
Bull Run Corporation (the "Company"), based in Atlanta, Georgia, currently sells
computer printers and provides service worldwide to distributors, value-added
resellers and large volume end users through its wholly-owned subsidiary,
Datasouth Computer Corporation ("Datasouth"). The Company also makes significant
investments in sports and media companies, including Gray Communications
Systems, Inc. ("Gray"), the owner and operator of, among other businesses, 13
television stations and four daily newspapers; Host Communications, Inc.
("Host"), a sports marketing and association management company; Rawlings
Sporting Goods Company, Inc. ("Rawlings"), a supplier of team sports equipment;
Universal Sports America, Inc. ("Universal"), a sports marketing company; Total
Sports, Inc. ("Total Sports"), a sports content Internet company; and Sarkes
Tarzian, Inc. ("Tarzian"), the owner and operator of two television stations and
four radio stations. For information with respect to the Company's proposed
acquisition (the "Host-Universal Acquisition") of Host, Universal and Capital
Sports Properties, Inc. ("Capital"), reference is made to Note 2 of the
Company's financial statements included in Item 1 hereof. For their most recent
fiscal year ended June 30, 1999, Host and Universal together had revenues of
approximately $120 million.
In addition, the Company provides consulting services to Gray in connection with
Gray's acquisitions and dispositions.
Effective June 30, 1999, the Company changed its fiscal year end from December
31 to June 30.
Results of Operations - Three Months Ended September 30, 1999 Compared To Three
Months Ended September 30, 1998
Total revenue for the three months ended September 30, 1999, primarily from the
printer manufacturing operations of Datasouth, was $9,037,000 compared to
$8,184,000 for the same period in 1998. Revenue from printer operations was
$8,367,000 for the three months ended September 30, 1999, representing a 16%
increase from such revenue for the same period in 1998. Short term revenue
trends in the Company's printer business fluctuate due to variable ordering
patterns of large customers. The increase in 1999 revenue compared to 1998 was
due to a $738,000 increase in sales of an airline ticket/boarding pass printer,
the marketing rights for which were acquired in September 1998. Printer sales to
The Sabre Group, Inc., the Company's largest customer, were approximately $1.8
million for the three months ended September 30, 1999, compared to approximately
$2.3 million for the same period last year.
Gross profit from printer operations of 29.9% for the three months ended
September 30, 1999 increased from the 25.6% realized for the same period in
1998, primarily due to (a) a different mix of products sold, which accounted for
approximately 2.0% of the 4.3% increase in the gross profit percentage over the
same period last year and (b) labor and overhead efficiencies, which accounted
for approximately 0.9% of the increase.
<PAGE> 10
A portion of the income from consulting fees for services provided to Gray is
deferred and recognized over 40 years as a result of the Company's equity
investment in Gray. As of September 30, 1999, consulting fees of $849,000 were
deferred for future revenue recognition. Consulting fee income of $670,000 was
recognized in the three months ended September 30, 1999 compared to $964,000 in
the same period in 1998. There can be no assurance that the Company will
recognize any consulting fees in the future, other than recognition of currently
deferred fees.
Operating expenses of $2,115,000 for the three months ended September 30, 1999
represented a 1% decrease from the same period in 1998, due primarily to (a) a
$124,000 decrease in research and development costs, which vary depending on the
nature and status of various development projects, net of (b) an increase in
general and administrative costs of $115,000 resulting from higher professional
fees, an increase in bad debt expense and higher amortization charges in the
quarter ended September 30, 1999 compared to the same period in 1998. Operating
expenses include non-cash goodwill amortization expense of $135,000 for the
three months ended September 30, 1999 and $122,000 for the same period in 1998.
Equity in earnings of affiliated companies, totaling $630,000 and $6,826,000 for
the three months ended September 30, 1999 and 1998, respectively, included the
Company's proportionate share of the earnings or losses of Gray, Host, Capital
and Rawlings, net of goodwill amortization totaling $275,000 and $194,000,
respectively. In January 1999, Universal sold its investment in broadcast.com,
inc., recognizing an after-tax gain of approximately $40,000,000. As a result of
Host's equity investment in Universal and the Company's equity investment in
Host reported on a six-month lag basis, the Company recognized approximately
$1,900,000 in equity in earnings of affiliates in the three months ended
September 30, 1999 due to Universal's gain on the sale of its investment in
broadcast.com, inc. In July 1998, Gray disposed of a television station and
recognized an after-tax gain of approximately $43,000,000 in connection with the
disposition. As a result, the Company's equity in Gray's earnings was favorably
impacted by approximately $6,900,000 in the three months ended September 30,
1998. There is no assurance that such sales or such gains of a material nature
will occur in the future.
As a result of Gray's issuance of shares of its class B common stock on October
1, 1999 in connection with consideration paid in the acquisition of three
television stations, the Company's common equity ownership of Gray was reduced
from 16.9% to 13.2%, resulting in a pretax gain for the Company of approximately
$2,000,000 to be recognized by the Company in October 1999. This offering also
reduced the Company's common equity voting power in Gray from 27.5% to 26.2%.
There is no assurance that such gains of a material nature will occur in the
future.
Interest and dividend income of $226,000 and $289,000 for the three months ended
September 30, 1999 and 1998, respectively, was primarily derived from dividends
accrued on the Company's investment in Gray's series A and series B preferred
stock. The reduction in interest and dividend income from the prior year was due
to Gray's redemption of some of its series A preferred stock during 1998.
Interest expense, totaling $1,317,000 and $1,080,000 for the three months ended
September 30, 1999 and 1998, respectively, was incurred primarily in connection
with bank term loans and notes payable, the proceeds of which were used to
finance (a) the Company's investments in Gray, Host, Capital, Universal,
Rawlings and Total Sports, and (b) the acquisition of a printer company
<PAGE> 11
in January 1998; and, for the three months ended September 30, 1999, the
Company's investment in Tarzian in January 1999.
Other income for the three months ended September 30, 1999 consisted of income
on an option agreement with Gray, net of a loss on the disposal of 30,000 shares
of Rawlings common stock, which the Company was required to sell under an
amended Standstill Agreement with Rawlings. Under the option agreement, whereby
Gray has the option until December 31, 1999 to acquire the Company's investment
in Tarzian for $10,000,000 plus related costs, the Company received $200,100 in
the three months ended September 30, 1999. The option agreement provides that
Gray may extend the expiration date of the option in 30-day increments at a fee
of $66,700 per extension. The Company currently anticipates that Gray will
continue to extend its option for the foreseeable future. A portion of the
option income from Gray is deferred and recognized over 40 years as a result of
the Company's equity investment in Gray. As of September 30, 1999, option income
of $79,000 was deferred for future revenue recognition.
Nondeductible goodwill amortization reduced the Company's tax benefit for the
three month periods ended September 30, 1999 and 1998, resulting in an effective
tax rate of 31.0% for the three months ended September 30, 1999 and 39.8% for
the same period in 1998.
Liquidity and Capital Resources
Cash provided by operating activities was $99,000 for the three months ended
September 30, 1999, compared to cash used in operating activities of $335,000
for the same period in 1998. In the three months ended September 30, 1999,
receivables increased $2,217,000, due to a 16% increase in revenue from printer
operations in the three months ended September 1999 compared to the three months
ended June 30, 1999; inventories decreased by $263,000 due to increased sales
volume near the end of the 1999 period, net of an increase in the amount of
inventory purchased; and accounts payable and accrued expenses increased
$1,734,000, due in part to an increase in accrued interest and an increase in
inventory purchases. In the three months ended September 30, 1998, receivables
decreased by $202,000, whereas inventories increased by $171,000 and accounts
payable and accrued expenses decreased $381,000.
Cash provided by investing activities was $164,000 for the three months ended
September 30, 1999, compared to cash used in investing activities of $3,094,000
for the same period in 1998. In the three months ended September 30, 1999, the
Company recognized proceeds of $289,000 on the sale of 30,000 shares of Rawlings
common stock owned by the Company. In the three months ended September 30, 1998,
the Company invested $2,500,000 in Total Sports series C preferred stock,
acquired shares of Host common stock for $1,153,000, invested approximately
$650,000 for the marketing rights of an airline ticket printer, and received
$1,305,000 from the redemption of Gray series A preferred stock.
Cash used in financing activities was $430,000 for the three months ended
September 30, 1999 compared to cash provided by financing activities of
$3,046,000 for the three months ended September 30, 1998. In the three months
ended September 30, 1998, the Company financed its investments in Total Sports,
Host and the product marketing rights with bank debt.
<PAGE> 12
The Company is a party to an interest rate swap agreement, effectively modifying
the interest characteristics of $20,000,000 of the Company's outstanding
long-term debt. The agreement involves the exchange of amounts based currently
on a fixed interest rate of 7.83% for amounts based currently on a variable
interest rate of LIBOR plus 1.75% through December 31, 2007, without an exchange
of the notional amount upon which the payments are based. The differential to be
paid or received as interest rates change is accrued and recognized as an
adjustment of interest expense related to the debt. As of September 30, 1999,
the estimated market value of the Company's $20,000,000 swap agreement was
approximately $675,000.
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 be paid in cash
for the foreseeable future.
In order to obtain sufficient additional funds to complete the Host-Universal
Acquisition (approximately $20 million), refinance existing indebtedness of the
Company, Host and Universal (approximately $70 million) and provide for the
combined companies' cash needs after the Host-Universal Acquisition, the Company
expects to enter into a new credit agreement. The credit agreement is expected
to provide for total credit of up to $128 million and an interest rate based
upon either (1) LIBOR plus an applicable margin or (2) an alternate base rate,
defined as the higher of the bank's prime rate and the Federal funds rate, plus
an applicable margin. Other than a $30 million principal payment due within 18
months after the date of closing, of which at least $10 million will be due
within 12 months after such closing date, amounts due under the new credit
agreement are expected to mature and will be due and payable in full three years
after the closing date of the credit agreement. The Company expects to
collateralize the credit facilities with all present and future assets of the
Company and its subsidiaries, as well as a pledge of the shares in both public
and private companies owned by the Company. The Company also expects that the
new credit facilities will contain normal and customary debt covenants, such as
debt service coverage ratios and minimum net worth requirements. In addition to
the negotiating and executing an amendment to the merger agreement among the
Company, Host, Universal and Capital, and to the approval of Host's, Universal's
and Capital's shareholders, the Company anticipates issuing subordinated notes
(approximately $18.7 million) to Host, Universal and Capital shareholders in
connection with the Host-Universal Acquisition. The notes are expected to be
payable three years from the date of issuance and bear interest at 8%.
All of the Company's long-term debt has been classified as current as of
September 30, 1999 and June 30, 1999. The Company currently anticipates
refinancing all outstanding debt under a new credit facility in connection with
the Host-Universal Acquisition. If the Host-Universal Acquisition is not
consummated, the Company still expects to refinance all existing notes payable
and long-term debt agreements. As a result, the Company anticipates that its
current working capital, funds available under its current credit facilities,
quarterly cash dividends on the Gray preferred stock and common stock,
anticipated extension fees on the option agreement with Gray 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 12 months.
Any capital to consummate the Host-Universal Acquisition, to meet Host's and
Universal's cash needs subsequent thereto or to make other acquisitions, would
have to be funded by issuing additional securities or by
<PAGE> 13
entering into other financial arrangements (including the proposed new credit
agreement). The $10 million principal payment due within 12 months after the
date of the closing of the proposed new credit agreement would require the sale
of certain investments and/or the redemption of some or all of the Gray
preferred stock.
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 (i.e., the "Year 2000 Issue"). 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 determined (a) that its printer
products did not contain time-sensitive software that make them susceptible to
the Year 2000 Issue; however, (b) there were portions of the Company's internal
systems software and some hardware that would have to be modified or replaced so
that its computer systems would function properly with respect to dates in the
year 2000 and thereafter. The most significant computer systems, which pertain
to the Company's manufacturing and financial accounting systems, were upgraded
in 1998 and are currently Year 2000 compliant. Expense incurred related to Year
2000 upgrades and modifications was approximately $50,000 in 1999 through
September 30, 1999 and $100,000 in 1998, including equipment lease rent expense.
Future equipment rent expense will not differ materially from depreciation
expense attributed to the replaced equipment. Although management expects to
replace some additional personal computers and other computer hardware and
upgrade some additional software programs prior to December 31, 1999 which are
not Year 2000 compliant, management does not expect the cost of these additional
expenditures to exceed $20,000, nor does it expect that any of the necessary
modifications or replacements will have a material impact on the results of any
future financial reporting period. The remaining modifications and replacements
are expected to be completed by December 31, 1999, prior to any anticipated
impact on its operating systems. The Company believes that with the completed
and anticipated modifications to existing software and conversions to new
software, the Year 2000 Issue will not pose significant operational problems for
its computer systems.
The Company has completed an assessment of Datasouth's major parts and materials
vendors and sole source suppliers to determine the extent to which the Company
may be vulnerable to those third parties' failure to remedy their own Year 2000
issues. This assessment consisted of oral communications, and/or the receipt of
written Year 2000 compliance statements, and focused on certain key vendors and
suppliers from whom the Company receives unique materials, products and
services. Most raw materials used in the manufacture of the Company's computer
printers are available from more than one supplier.
The Company is also assessing Year 2000 readiness of alternative vendors through
written and oral communications, as part of management's contingency planning
for the assurance of inventory availability. In addition, the Company is
evaluating the need to increase inventories of raw materials and finished goods
prior to December 31, 1999 to assure timely fulfillment of customer orders and
decrease its reliance on the availability
<PAGE> 14
of parts and product, particularly from sole source suppliers. None of the
Company's machinery used in the assembly of computer printers has been found to
contain time-sensitive software. However, the Company is evaluating the need to
increase its inventories of assemblies and sub-assemblies used in its products.
Likewise, the Company is assessing the need to have available back-up power
sources, such as electricity generators, to compensate for the risk of
unavailable power. If, due to the Year 2000 Issue, certain sole source suppliers
were unable to provide products, parts or vital manufacturing supplies for more
than a few weeks, or if electricity was unavailable for more than a few weeks,
timely fulfillment of customer orders could be jeopardized, and product sales
could be unfavorably impacted. Also, if customers are unable to remit payments
to the Company, or if the Company can not generate customer invoices as a result
of the Year 2000 Issue, the Company's operating cash flow could be negatively
impacted.
The Company expects that Host and Universal will continue to utilize their
existing computer systems, and that no significant changes will be required to
be made to the Company's systems as a result of the Host-Universal Acquisition
for at least the next 12 months.
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 availability of
suitable replacement hardware, the ability to locate and correct all relevant
computer codes, and similar uncertainties. Furthermore, it is too early to
determine to what extent, if any, contingency plans will have to be implemented.
Although the Company expects to be Year 2000 compliant by December 31, 1999 and
does not expect to be materially impacted by the external environment, such
future events cannot be known with certainty.
Forward-Looking Statements
This Quarterly Report on Form 10-Q contains "forward-looking statements" within
the meaning of the Private Securities Litigation Reform Act of 1995. When used
in this report, the words "believes," "expects," "anticipates," "estimates" and
similar words and expressions are generally intended to identify forward-looking
statements. Statements that describe the Company's future strategic plans, goals
or objectives are also forward-looking statements. Readers of this Report are
cautioned that any forward-looking statements, including those regarding the
intent, belief or current expectations of the Company or management, are not
guarantees of future performance, results or events, and involve risks and
uncertainties. The Company undertakes no obligation to update such
forward-looking statements to reflect subsequent events or circumstances. Actual
results and events may differ materially from those in the forward-looking
statements as a result of various factors including, but not limited to the
following: (i) the Company's and Gray's leverage may adversely affect their
ability to obtain financing, thereby impairing their ability to withstand
economic downturns or competitive pressures; (ii) Gray's business depends on its
relationships with, and success of, its national network affiliates; (iii)
Rawlings', HCI's and USA's businesses are seasonal; (iv) adverse events
<PAGE> 15
affecting baseball, such as negative publicity or strikes, may adversely affect
Rawlings' business; (v) Rawlings', HCI's and USA's businesses depend on short
term contracts and the inability to renew or extend these contracts could
adversely affect their businesses; (vi) HCI and USA may lose money on some of
their contracts, because they guarantee certain payments thereunder; and (vii)
if the HCI-USA Acquisition is completed and if the Company cannot successfully
integrate this acquisition, the Company's business will be adversely affected.
<PAGE> 16
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
An annual meeting of the Company's shareholders was held in Atlanta, Georgia on
September 14, 1999. All of the proposals considered by shareholders were
approved, as follows:
(1) Proposal to create a holding company structure for Bull Run Corporation
pursuant to an Agreement and Plan of Merger, dated as of August 5, 1999, by
and among BR Holding, Inc., a Georgia corporation, Bull Run Corporation and
a wholly-owned subsidiary of BR Holding, Inc.:
For: 14,713,666
Against: 160,002
Abstain: 16,545
(2) Proposal to approve the issuance of shares of common stock of BR Holding,
Inc. in accordance with the Agreement and Plan of Merger, dated as of
February 15, 1999, by and among Bull Run Corporation, BR Holding, Inc.,
Capital Sports Properties, Inc., Host Communications, Inc., Universal
Sports America, Inc. and three wholly owned subsidiaries of BR Holding,
Inc.:
For: 14,811,649
Against: 60,514
Abstain: 18,050
(3) Proposal to approve the amendment of the 1994 Long-Term Incentive Plan to
increase the number of shares issuable thereunder:
For: 14,640,481
Against: 358,110
Abstain: 26,145
(4) Proposal to elect J. Mack Robinson, Gerald N. Agranoff, James W. Busby,
Hilton H. Howell,Jr. and Robert S. Prather, Jr. as directors:
For: 17,661,949
Withhold: 51,260
(5) Proposal to confirm the appointment of Ernst & Young LLP as the independent
auditors:
For: 17,661,419
Against: 25,270
Abstain: 26,520
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 27 - Financial Data Schedule (for SEC use only)
(b) Reports on Form 8-K
Form 8-K dated August 13, 1999 filed to report a change in the
Company's fiscal year end to a new fiscal year end of June 30.
<PAGE> 17
SIGNATURES
Pursuant to the requirements 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.
BULL RUN CORPORATION
Date: November 12, 1999 By: /s/ FREDERICK J. ERICKSON
----------------------------------------
Frederick J. Erickson
Vice President-Finance, Treasurer
and Assistant Secretary
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