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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, 1998
[ ] 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
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. [ 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 26, 1999 was $53,018,295, 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 26, 1999, was 22,268,267.
DOCUMENTS INCORPORATED BY REFERENCE
None
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BULL RUN CORPORATION
FORM 10-K INDEX
PART I
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PAGE
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ITEM 1. Business............................................................................ 3
ITEM 2. Properties.......................................................................... 9
ITEM 3. Legal Proceedings................................................................... 10
ITEM 4. Submission of Matters to a Vote of Security Holders................................. 10
PART II
ITEM 5. Market for Registrant's Common Equity and Related Stockholder
Matters........................................................................ 10
ITEM 6. Selected Financial Data............................................................. 12
ITEM 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.......................................................... 13
ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk.......................... 20
ITEM 8. Financial Statements and Supplementary Data......................................... 21
ITEM 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure........................................................... 41
PART III
ITEM 10. Directors and Executive Officers of the Registrant.................................. 41
ITEM 11. Executive Compensation.............................................................. 42
ITEM 12. Security Ownership of Certain Beneficial Owners and Management...................... 44
ITEM 13. Certain Relationships and Related Transactions...................................... 46
PART IV
ITEM 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.................... 47
Signatures.......................................................................... 50
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PART I
ITEM 1. BUSINESS
GENERAL
Bull Run Corporation (the "Company"), a Georgia corporation, was
originally incorporated in 1983 under the laws of the State of Washington. Its
principal executive offices are located at 4370 Peachtree Road, N.E., Atlanta,
Georgia 30319.
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.
The Company, through Datasouth, owns approximately 16.9% of the total
outstanding common stock of Gray Communications Systems, Inc. ("Gray"),
representing 27.4% of the voting interest in Gray, as of December 31, 1998. The
Company also owns shares of series A and series B preferred stock of Gray and
warrants to purchase additional shares of Gray's 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 13.9% of Gray's common stock as of December 31, 1998,
representing an additional 21.5% voting interest in Gray.
Gray is a communications company headquartered in Atlanta, Georgia
which currently operates: (i) three NBC-affiliated television stations - WEAU-TV
in Eau Claire-La Crosse, Wisconsin, which was acquired during 1998; WJHG-TV in
Panama City, Florida; and WITN-TV, in the Greenville-Washington-New Bern, North
Carolina market; (ii) seven CBS-affiliated television stations - WCTV-TV in
Tallahassee, Florida; WVLT-TV in Knoxville, Tennessee; WKYT-TV in Lexington,
Kentucky; WYMT-TV in Hazard, Kentucky; WRDW-TV in Augusta, Georgia; and two
stations acquired during 1998, KOLN-TV in Lincoln, Nebraska and KGIN-TV in Grand
Island, Nebraska; (iii) four daily newspapers, The Albany Herald in Albany,
Georgia; The Rockdale Citizen in Conyers, Georgia; The Gwinnett Daily Post in
Lawrenceville, Georgia; and, acquired in March 1999, The Goshen News in Goshen,
Indiana; (iv) an advertising weekly shopper in southwest Georgia; (v) Lynqx
Communications, a satellite transmission and production services business based
in the southeastern United States; and (vi) PortaPhone Paging, a communications
and paging business in the Southeast. During 1998, Gray disposed of its
NBC-affiliated television station in Albany, Georgia, fulfilling a Federal
Communications Commission divestiture order in March 1997 following Gray's
acquisition of WCTV-TV. Gray reported revenue of $128.9 million in 1998 and had
total assets of $470.3 million as of December 31, 1998. J. Mack Robinson, the
Company's Chairman of the Board, Hilton H. Howell, Jr., the Company's Vice
President, Secretary and a director, and Mr. Prather 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 of Gray. Frederick J. Erickson, the
Company's Vice President - Finance and chief financial officer, was the interim
chief financial officer of Gray from March 1998 until September 1998.
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
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through January 1998. Simultaneously with the execution of the Investment
Purchase Agreement, Rawlings and Host Communications, Inc. ("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, 1998 was $170.6
million and total assets were $132.5 million as of such date. Mr. Prather is a
member of Rawlings' Board of Directors.
In August 1998, the Company acquired series C preferred stock of Total
Sports, Inc. ("TSI"). Based in Raleigh, North Carolina, TSI is a sports content
Internet company, which owns and adds daily to its proprietary sports content on
its web site; powers America Online's Internet portal destination for sports
news; publishes, among other print and electronic publications, "Total
Baseball", "Total Football" and "Total Hockey", the official encyclopedias of
Major League Baseball, the National Football League and the National Hockey
League, respectively; and, in partnership with Associated Press, publishes the
sports section of the "Wall Street Journal Interactive Edition". In conjunction
with HCI and the National Collegiate Athletic Association ("NCAA"), TSI
"TotalCasts" (real-time event coverage) on the Internet many college sporting
events including the "Final Four" college basketball championship tournament, in
addition to its TotalCast coverage of Major League Baseball games. The Company
increased its investment in TSI from 7.7% of TSI's outstanding capital stock as
of December 31, 1998, to 9.0%, following an additional investment made in
January 1999. In addition to the Company's direct investment in TSI, HCI owns
approximately 8.3% of TSI's common stock, assuming conversion of all TSI
preferred stock. The shares owned by HCI are expected to be acquired by the
Company in connection with the HCI-USA Acquisition (discussed below). Mr.
Prather is a member of TSI's Board of Directors.
In January 1999, the Company acquired common stock of Sarkes Tarzian,
Inc. ("Tarzian"), representing 33.5% of the total outstanding common stock of
Tarzian both in terms of the number of shares of common stock outstanding and in
terms of voting rights, but such investment represents 73% of the equity of
Tarzian for purposes of dividends, as well as distributions in the event of any
liquidation, dissolution or other termination of Tarzian. Tarzian owns and
operates two television stations and four radio stations: WRCB-TV in
Chattanooga, Tennessee, an NBC affiliate; KTVN-TV in Reno, Nevada, a CBS
affiliate; WGCL-AM and WTTS-FM in Bloomington, Indiana; and WAJI-FM and WLDE-FM
in Fort Wayne, Indiana. In March 1999, the Company executed an option agreement
with Gray, whereby Gray has the option of acquiring the Tarzian investment from
the Company. In connection with the option agreement, the Company received
warrants to purchase additional class B common shares of Gray.
In February 1999, the Company entered into an agreement to acquire the
stock of HCI, Universal Sports America, Inc. ("USA") and Capital Sports
Properties, Inc. ("CSP") not currently owned, directly or indirectly, by the
Company (the "HCI-USA Acquisition"). The Company is currently HCI's largest
stockholder, owning directly or indirectly approximately 32.5% of HCI's
outstanding common stock and 51.5% of HCI's outstanding preferred stock. The
Company's indirect ownership of HCI's common stock and HCI's preferred stock is
owned by CSP, in which the Company owns 51.5% of the outstanding common stock.
The Company and HCI together are the largest stockholders of USA, with the
Company owning approximately 3% of USA's outstanding capital stock and HCI
owning approximately 33% of USA's outstanding capital stock. For their most
recent fiscal year ended June 30, 1998, HCI and USA together had revenues of
approximately $109 million. This transaction is subject to the terms and
conditions of the merger agreement, including approval of the stockholders of
each of the companies, and is expected to close during the second quarter of
1999. Following the closing of this transaction, the Company's revenues
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will be predominantly generated by HCI and USA, which will be wholly-owned
subsidiaries of the Company. Robert S. Prather, Jr., the Company's President,
chief executive officer and a director, is a director of HCI, CSP and USA.
Pursuant to the agreement, a new holding company for the Company will
be created immediately prior to the HCI-USA Acquisition whereby each outstanding
share of the Company's common stock will be converted into one share of a newly
formed Delaware company. The new holding company, which will be a publicly held
company, will be owned by the stockholders of the Company immediately prior to
such conversion and the Company and its subsidiaries will become subsidiaries of
such holding company.
HCI, based in Lexington, Kentucky, is a well established sports
marketing and association management company. It is the primary marketer for the
NCAA, a business relationship that is now in its 24th year. Additionally, HCI
has significant printing, publishing, broadcast and Internet operating
divisions. HCI also manages the National Tour Association, National Grocers
Association, Quest, J.D. Edwards Users Group, and other associations. HCI's
total revenue for its most recently completed fiscal year ended June 30, 1998
was $46.3 million and total assets were $32.5 million as of such date.
USA, based in Dallas, is a full-service, lifestyle and sports marketing
company that specializes in developing integrated marketing programs and events
on the professional, collegiate and high school level. USA's Streetball
International division oversees the management and production of more than 270
worldwide events in conjunction with NBC Sports, the National Basketball
Association, the National Football League, the National Hockey League, Major
League Baseball and the Professional Golfers' Association Tour. USA's collegiate
division is a marketing partner for many leading schools and conference athletic
programs, including the University of Tennessee, Florida State University and
the Big 12 Conference. USA's total revenue for its most recently completed
fiscal year ended June 30, 1998 was $62.9 million and total assets were $34.7
million as of such date.
As of December 31, 1998, Datasouth represented 22.4% of the Company's
total assets; investments in HCI, CSP and USA, collectively represented 14.4%;
investments in Gray represented 48.5%; investments in Rawlings represented
11.5%; and the investment in TSI represented 2.6%.
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. Although it has historically
targeted the heavy-duty, multipart forms segment of the serial matrix impact
printer market in industries such as transportation/travel, healthcare and
manufacturing/distribution, the Company recognizes that this market is
declining. Therefore, the Company has been recently involved in the industrial
thermal printer market through the development and acquisition of Automated
Ticket / Boarding Pass version 2 ("ATB2") printers for the travel industry, as
well as through the acquisition of portable and desktop thermal barcode label
printer product lines. The printer business is not seasonal to any significant
degree; however, short term revenue trends fluctuate due to variable ordering
patterns of large customers.
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
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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 that 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. The Company also has 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 for several years, including the 4-inch wide portable "FreeLiner", and
desktop version "FreeLiner DT", both of which take advantage of "liner-free"
label adaptations. "Liner-free" labels have 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. The
Company has filed a trademark application for "FreeLiner". In January 1998,
Datasouth acquired the CodeWriter product line of direct thermal and thermal
transfer desktop and portable bar code label printers (the "CodeWriter
Acquisition"). CodeWriter's product line includes the 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. "CodeWriter" 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 direct thermal printing technology, was designed to be compact, easy to
use, and durable, with features such as an easily accessible jam-free paper path
and a simpler method to load ticket stock. During the second quarter of 1999,
the Company plans to introduce the "Journey II" version of the printer which
adds features such as a second bin for invoice and receipt printing. In
September 1998, the Company purchased marketing rights for the Sigma-Data 7200
high speed ATB2 printer (the "SD7200"). The SD7200 product line prints up to 24
coupons per minute and allows for either direct thermal or thermal transfer
printing.
Additional information concerning the Company's printer products is set
forth under the caption "Sales and Distribution" below in this Item 1.
COMPETITION
The computer printer industry is very competitive 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.
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
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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 that 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.
The Company, in the ordinary course of its business, is subject to
various state and federal laws and regulations relating to the protection of the
environment. Compliance with these laws and regulations has not been material to
the Company's business.
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 web site.
The Company's warranty experience over the past three years has ranged
from approximately .4% to .6% of revenue. Total warranty expense for 1998, 1997
and 1996 was approximately $133,000, $124,000 and $104,000, 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 1998, finished product sales to distributors
represented 26% of total revenue, and finished product sales to major accounts
represented 50%, compared to 28% and 48% in 1997, 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.
The Company supplies Documax and Journey printers to The SABRE Group
under contracts that are 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 contracts. Sales to The
SABRE Group, which began in
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earnest in 1993, were approximately $9,200,000 in 1998, $7,200,000 in 1997 and
$7,200,000 in 1996, representing 31%, 33% and 30% of the Company's sales from
printer operations, respectively.
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, such as its
"Journey" products. Priced at less than $2,000, Journey products provide an
attractively priced alternative to traditional ATB2 printers and will be
affordable for even small travel agencies. The addition of the SD7200 product
line in 1998 strategically expands the Company's ATB2 product line to offer a
wide range of ticket printing solutions for airlines, customer reservation
systems ("CRSs") and remote locations, such as corporate offices and
hotels/motels.
In 1998, the Company established a sales office and distribution point
in the United Kingdom following the acquisition of a sales organization that
primarily sold the Documax and SD7200 printers to airlines and CRSs in Europe,
Asia and Africa. The Company intends to expand its sales to customers in these
areas of the world and continue to pursue new major account business in 1999,
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, 1998, the Company had unfilled cancelable purchase
orders with an aggregate selling price of approximately $1,603,000, compared
with $1,724,000 and $1,821,000 as of December 31, 1997 and 1996, 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 cooperative advertising arrangements with distributors.
It also advertises its products in publications serving the industrial markets
targeted by its products. Advertising costs were approximately $271,000,
$130,000, and $227,000 in 1998, 1997 and 1996, respectively.
RESEARCH AND DEVELOPMENT
The Company employs approximately 25 engineers, technicians and support
personnel to engage in basic and applied research. In 1998, the Company's
engineering team developed and released design enhancements to the CodeWriter
4500 series printer following the acquisition of the CodeWriter product line in
January 1998, and substantially completed the design of the "Journey II" product
currently expected to be released in the second quarter of 1999. In 1999, the
Company's primary product development focus will be on expanding the current
product lines with complementary products. 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.
Total research and development expense was $2,323,000, $2,418,000 and
$1,568,000 in 1998, 1997 and 1996, respectively.
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PATENTS, TRADEMARKS AND RELATED CONTRACTS
Although the Company holds certain patents, trademarks and related
contracts, none is considered to be material to its business.
EMPLOYEES
As of December 31, 1998, the Company had 134 full-time employees, of
which, 114 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 $2,823,000 in 1998, $2,497,000 in 1997, and
$2,954,000 in 1996.
EXECUTIVE OFFICERS
Set forth below is certain information with respect to the executive
officers of the Company:
J. Mack Robinson, age 75, has been Chairman of the Board since 1994 and
a director since 1992. He has been Chairman of the Board and President of Delta
Life Insurance Company since 1958, President of Atlantic American Corporation
from 1988 to 1995, and Chairman of the Board of Atlantic American since 1974.
Mr. Robinson has also been President and Chief Executive Officer of Gray since
1996, and is a director of Gray.
Robert S. Prather, Jr., age 54, has been President, Chief Executive
Officer and a director since 1992. He has been Executive Vice President of Gray
since 1996 and a director of Gray since 1993. Mr. Prather is a director of HCI,
CSP, USA, Rawlings and TSI. In addition, Mr. Prather is a director of The Morgan
Group, Inc.
Hilton H. Howell, Jr., age 37, has been Vice President and Secretary
since 1994 and a director since 1994. He has been President and Chief Executive
Officer of Atlantic American Corporation since 1995 and Executive Vice President
from 1992 to 1995, and Executive Vice President and General Counsel of Delta
Life Insurance Company and Delta Fire & Casualty Insurance Company since 1991.
Mr. Howell is also a director of Gray, and is married to Mr. Robinson's
daughter.
Frederick J. Erickson, age 40, has been Vice President - Finance,
Treasurer and Chief Financial Officer since 1994. He has been Executive Vice
President - Finance & Administration of Datasouth since 1997 and Vice President
- - Finance & Administration from 1993 to 1997.
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.
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Datasouth's main administrative and manufacturing facility is leased through
December 2001 and additional office and warehousing space is leased through
December 2000. Datasouth's west coast service and distribution center in Vista,
California operates in a 6,781 square foot fully-utilized facility leased
through April 2001. Datasouth's 608 square foot sales office in Northampton,
England is leased through September 2001.
ITEM 3. LEGAL PROCEEDINGS
The Company has been named as a co-defendant in a Complaint filed on
February 1, 1999 with the United States District Court in Indianapolis, Indiana
by Sarkes Tarzian, Inc., an Indiana corporation ("Tarzian"). The Company
acquired 301,119 shares of Sarkes Tarzian, Inc. common stock, $4.00 par value
(the "Tarzian Shares") from U.S. Trust Company of Florida Savings Bank as
Personal Representative of the Estate of Mary Tarzian (the "Estate"), the other
co-defendant, on January 28, 1999 for $10 million. Tarzian claims that it had a
binding and enforceable contract to purchase the Tarzian Shares from the Estate
prior to the Company's purchase of such shares, and requests judgment providing
that the Estate be required to sell the Tarzian Shares to Tarzian. The Company
believes that a binding contract between Tarzian and the Estate did not exist
prior to the Company's purchase of the Tarzian Shares from the Estate, and in
any case, the Company's purchase agreement with the Estate provides that in the
event that a court of competent jurisdiction awards title to a person or entity
other than the Company, the purchase agreement is rescinded, and the Estate is
required to pay the Company the full $10 million purchase price, plus interest.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company did not submit any matter to a vote of security holders
during the quarter ended December 31, 1998.
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.
<TABLE>
<CAPTION>
HIGH LOW
1997
<S> <C> <C>
First Quarter $3.06 $2.00
Second Quarter 2.75 2.13
Third Quarter 2.84 2.25
Fourth Quarter 3.84 2.56
1998
First Quarter $4.25 $2.88
Second Quarter 5.13 3.63
Third Quarter 5.00 3.44
Fourth Quarter 3.81 2.88
</TABLE>
HOLDERS
As of February 26, 1999, there were 2,592 holders of record of Common
Stock.
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DIVIDENDS
Since its inception, the Company has not declared or paid a cash
dividend on its Common Stock. 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's future dividend policy will depend upon its
earnings, capital requirements, financial condition and other relevant
circumstances existing at that time.
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ITEM 6. SELECTED FINANCIAL DATA
Set forth below is certain selected historical consolidated financial
data of the Company. This information should be read in conjunction with the
Audited Consolidated Financial Statements of the Company and related notes
thereto appearing elsewhere herein, as well as "Management's Discussion and
Analysis". The selected consolidated financial data as of and for each of the
years in the five-year period ended December 31, 1998 are derived from the
Audited Consolidated Financial Statements of the Company. Also refer to the pro
forma data for the CodeWriter Acquisition and the Company's investment in
Rawlings appearing in Note 4 to the Company's Audited Consolidated Financial
Statements included elsewhere herein.
SELECTED FINANCIAL DATA
(Dollars and shares in thousands, except per share amounts)
<TABLE>
<CAPTION>
OPERATING RESULTS FOR THE YEARS ENDED: 1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C>
Revenue from printer operations $ 29,848 $ 21,639 $ 23,810 $ 26,432 $ 2,751
Cost of goods sold (22,103) (15,967) (17,170) (18,649) (1,853)
------- ------- ------- ------- ------
Gross profit 7,745 5,672 6,640 7,783 898
Other operating revenue 1,618 681 844 721 323
Operating expenses (8,593) (6,852) (6,255) (6,764) (1,174)
------- ------- ------- ------- ------
Income (loss) from operations 770 (499) 1,229 1,740 47
Equity in earnings (losses) of affiliated companies 6,734 (599) 1,731 107 266
Gain on issuance of shares by affiliated company -- -- 8,179 -- --
Interest expense and other, net (3,290) (1,614) (1,250) (944) (11)
------- ------- ------- ------- ------
Income (loss) before income taxes, extraordinary
item and cumulative effect of accounting change 4,214 (2,712) 9,889 903 302
Income tax benefit (provision) (1,854) 939 (4,012) (180) (86)
------- ------- ------- ------- ------
Income (loss) before extraordinary item and
cumulative effect of accounting change 2,360 (1,773) 5,877 723 216
Extraordinary loss -- -- (295) -- --
Cumulative effect of accounting change -- -- (274) -- --
------- ------- ------- ------- ------
Net income (loss) $ 2,360 $ (1,773) $ 5,308 $ 723 $ 216
======= ======= ======= ======= ======
Earnings (loss) per share - Basic:
Income (loss) before extraordinary item and
cumulative effect of accounting change $ 0.11 $ (0.08) $ 0.26 $ 0.03 $ 0.02
Net income (loss) $ 0.11 $ (0.08) $ 0.24 $ 0.03 $ 0.02
Weighted average shares outstanding - Basic 22,189 21,302 22,013 22,127 13,350
Earnings (loss) per share - Diluted
Income (loss) before extraordinary item and
cumulative effect of accounting change $ 0.10 $ (0.08) $ 0.25 $ 0.03 $ 0.02
Net income (loss) $ 0.10 $ (0.08) $ 0.23 $ 0.03 $ 0.02
Weighted average shares outstanding - Diluted 23,182 21,302 22,945 23,236 13,534
</TABLE>
<TABLE>
<CAPTION>
FINANCIAL POSITION AS OF DECEMBER 31: 1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C>
Working capital $ 3,312 $ 2,513 $ 3,990 $ 3,739 $ 4,813
Investment in affiliated companies 73,346 61,551 53,752 29,246 15,709
Total assets 95,172 76,832 67,851 44,300 30,756
Long-term obligations 51,848 41,998 31,364 14,896 2,775
Stockholders' equity 29,791 25,056 28,318 24,079 23,584
Current ratio 1.4 1.4 2.1 1.9 2.6
Book value per share $ 1.34 $ 1.18 $ 1.30 $ 1.09 $ 1.07
</TABLE>
The changes from year to year are primarily a result of the following
transactions:
1998 - Equity in the earnings attributable to Gray's gain on disposal of a
television station; acquisition of a printer manufacturer; additional
investments in Rawlings; and investment in TSI.
1997 - Initial investments in Rawlings.
1996 - Increase in the investment in Gray of $8,179 resulting from Gray's public
offering of its class B common stock; and purchase of Gray preferred
stock for $15 million.
1995 - Investments in HCI and its affiliates, CSP and USA; merger with Datasouth
effective November 29, 1994.
No dividends were declared or paid during the periods presented.
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ITEM 7. 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.
PENDING HCI-USA ACQUISITION AND OTHER SUBSEQUENT EVENTS
On February 15, 1999, the Company entered into an agreement to acquire the stock
of Host Communications, Inc. ("HCI"), Universal Sports America, Inc. ("USA") and
Capital Sports Properties, Inc. ("CSP") not currently owned, directly or
indirectly, by the Company, for approximately $95 million, net of cash acquired
(the "HCI-USA Acquisition"). Pursuant to the agreement, a new holding company
for the Company will be created immediately prior to the HCI-USA Acquisition
whereby each outstanding share of the Company's common stock will be converted
into one share of a newly formed Delaware company. The new holding company,
which will be a publicly held company, will be owned by the stockholders of the
Company immediately prior to such conversion and the Company and its
subsidiaries will become subsidiaries of such holding company. Approximately $37
million of the HCI-USA Acquisition purchase price is expected to be paid to HCI,
USA and CSP stockholders in cash and the remainder is expected to be paid in
common stock of the new holding company. The Company is currently HCI's largest
stockholder, owning directly or indirectly approximately 32.5% of HCI's
outstanding common stock and 51.5% of HCI's outstanding preferred stock. The
Company's indirect ownership of HCI's common stock and HCI's preferred stock is
owned by CSP, in which the Company owns 51.5% of the outstanding common stock.
The Company and HCI together are the largest stockholders of USA, with the
Company owning approximately 3% of USA's outstanding capital stock and HCI
owning approximately 33% of USA's outstanding capital stock. For their most
recent fiscal year ended June 30, 1998, HCI and USA together had revenues of
approximately $109 million. This transaction is subject to the terms and
conditions of the merger agreement, including approval of the stockholders of
each of the companies, and is currently expected to close during the second
quarter of 1999.
On January 15, 1999, the Company invested an additional $1 million for shares of
Total Sports, Inc. ("TSI") series C1 preferred stock, increasing its investment
in TSI to 9.0% of TSI's total outstanding capital stock. The shares, like the
shares of TSI's series C preferred stock acquired by the Company in August 1998
for $2.5 million, are convertible to TSI's common stock. The Company will
acquire HCI's investment in an additional 8.3% of TSI's total outstanding
capital stock in connection with the HCI-USA Acquisition.
On January 28, 1999, the Company acquired shares of the outstanding common stock
of Sarkes Tarzian, Inc. ("Tarzian") from the estate of Mary Tarzian (the
"Estate") for $10 million. The acquired shares (the "Tarzian Shares") represent
33.5% of the total outstanding common stock of Tarzian both in terms of the
number of shares of common stock outstanding and in terms of voting rights, but
such investment represents 73% of the equity of Tarzian for purposes of
dividends, as well as distributions in the event of any liquidation, dissolution
or other termination of Tarzian. Tarzian has filed a complaint with the United
States District Court, claiming that it had a binding contract with the Estate
to purchase the Tarzian Shares from the Estate prior to the Company's purchase
of the shares, and requests judgment providing that the Estate be required to
sell the Tarzian Shares to Tarzian (see "Legal Proceedings" in Item 3 for
further discussion). Tarzian owns and operates two television stations and four
radio stations: WRCB-TV Channel 3 in Chattanooga, Tennessee, an NBC affiliate;
KTVN-TV Channel 2 in Reno, Nevada, a CBS affiliate; WGCL-AM and WTTS-FM in
Bloomington, Indiana; and WAJI-FM and WLDE-FM in Fort Wayne, Indiana. The
Company's investment in Tarzian was financed with a $10 million bank note
payable with interest at the bank's prime rate, expiring May 28, 1999. The
Company intends to refinance or extend the $10 million note prior to the note's
expiration date, if necessary. On March 1, 1999, the Company executed an option
agreement with Gray Communications Systems, Inc. ("Gray"), the Company's
16.9%-owned affiliate, whereby Gray has the option of acquiring the Tarzian
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<PAGE> 14
investment from the Company for $10 million plus related costs, expiring May 31,
1999. Gray has the ability to extend the option period in 30 day increments at a
fee of $66,700 per extension. The Company also received from Gray warrants to
acquire 100,000 shares of Gray's class B common stock at $13.625 per share, in
connection with the option agreement. The warrants will vest immediately upon
Gray's exercise of the option.
RESULTS OF OPERATIONS - 1998 AS COMPARED TO 1997
Total revenue for 1998, primarily from the printer manufacturing operations of
Datasouth, was $31,466,000 compared to $22,320,000 in 1997. Revenue from
Datasouth's printer operations (including the CodeWriter product line, which was
acquired on January 2, 1998 as discussed in "Liquidity and Capital Resources"
and in note 2 to the consolidated financial statements, referred to as the
"CodeWriter Acquisition"), was $29,848,000 in 1998, representing a 38% increase
from such revenue in 1997 of $21,639,000. CodeWriter products contributed
revenue of approximately $4,400,000 in 1998. Printer sales to the Company's
largest customer were approximately $9,200,000 in 1998 and $7,200,000 in 1997.
Short term revenue trends in the Company's printer business fluctuate due to
variable ordering patterns of large customers. The increase in 1998 revenue
compared to 1997 was also due in part to an increase in consulting fee income in
1998 compared to 1997.
Gross profit from printer operations of 25.9% for 1998 decreased slightly from
the 26.2% realized in 1997, primarily due to (a) a different mix of products
sold; (b) initial production costs associated with the introduction of a new
printer line; and (c) costs incurred by the Company immediately following the
CodeWriter Acquisition, prior to the integration of manufacturing operations
into the Company's existing product manufacturing facility, offset by (d) some
manufacturing overhead efficiencies gained as a result of higher unit volumes.
The Company provides consulting services to Gray in connection with Gray's
acquisitions and dispositions. 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 $1,618,000 was recognized in 1998
compared to $681,000 in 1997. 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 $8,593,000 in 1998 represented a 25% increase from 1997,
due primarily to (a) an increase in sales and marketing personnel attributable
to the Company's expanded printer line; (b) expenses associated with the
Company's European sales office opened in October 1998; (c) an increase in
advertising expenses relating to the introduction of new products in 1998; (d)
an increase in personnel as a result of the CodeWriter Acquisition; and (e)
goodwill amortization expense and certain nonrecurring post-acquisition
transition costs in 1998 associated with the CodeWriter Acquisition. Operating
expenses include non-cash goodwill amortization expense of $488,000 in 1998 and
$301,000 in 1997, associated with the acquisition of Datasouth and, in 1998
only, the CodeWriter Acquisition.
Equity in earnings (losses) of affiliated companies, totaling $6,734,000 in 1998
and ($599,000) in 1997, includes the Company's proportionate share of the
earnings of Gray, HCI, CSP, and in 1998 only, Rawlings Sporting Goods Company,
Inc. ("Rawlings"), net of goodwill amortization totaling $777,000 and $610,000,
respectively. In 1998, Gray disposed of WALB-TV, its NBC affiliate in Albany,
Georgia, fulfilling a Federal Communications Commission divestiture order. As a
result of the gain on the disposition of WALB-TV, the Company's equity in Gray's
earnings was favorably impacted by approximately $6,900,000 in 1998.
Interest and dividend income of $1,085,000 in 1998 and $1,102,000 in 1997 was
primarily derived from dividends accrued on the Company's investment in Gray's
series A and series B preferred stock. Interest expense, totaling $4,247,000 in
1998 and $2,716,000 in 1997, was incurred primarily in connection with bank term
loans, the proceeds of which were used
14
<PAGE> 15
to finance (a) the Company's investments in Gray, HCI, CSP and USA; (b) the
Company's investments in Rawlings from November 1997 through January 1998; (c)
the CodeWriter Acquisition in January 1998; and (d) the Company's investment in
TSI in August 1998.
As of December 31, 1998, the Company has a net operating loss carryforward for
tax purposes of approximately $1,500,000 to reduce Federal taxable income in the
future, an Alternative Minimum Tax ("AMT") credit carryforward of approximately
$500,000 and a business credit carryforward of approximately $115,000, to reduce
regular Federal tax liabilities in the future. Nondeductible goodwill
amortization increased the Company's tax provision in 1998 and reduced the
Company's tax benefit in 1997, resulting in an effective tax rate of 44.0% in
1998 and 34.5% in 1997.
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 of sales 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.
Consulting fee income on services provided to Gray in connection with Gray's
acquisitions and dispositions was $681,000 in 1997 compared to $844,000 in 1996.
Operating expenses of $6,852,000 in 1997 represented a 10% increase from 1996,
due primarily to (a) the cost of research and development efforts incurred for
the design of a new printer introduced in the fourth quarter of 1997 and (b)
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 totaled ($599,000) in 1997
and $1,731,000 in 1996, 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 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.
In 1996, Gray consummated a public offering of 3.5 million shares of its
newly-issued class B common stock, resulting in net proceeds to Gray of
$67,100,000. 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 $8,200,000 (approximately $5,000,000 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 or such gains of
a material nature will occur in the future.
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 (a) the Company's investments in
15
<PAGE> 16
Gray, HCI, CSP, USA and (b) the Company's investments in Rawlings beginning in
November 1997.
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 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 the change in
accounting policy, 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 the 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, 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, 1997, the Company had 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 had a business credit carryforward of
approximately $115,000 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 to 34.5% in 1997 from 40.6% in 1996. The valuation allowance
on deferred tax assets was reduced in 1996, thereby reducing the 1996 income tax
provision by approximately $47,000 and goodwill by approximately $131,000.
LIQUIDITY AND CAPITAL RESOURCES
The Company amended its long-term debt agreements with two banks in 1998, and
further amended the agreements in February and March 1999. Under an agreement
amended on March 20, 1998, and further amended February 24, 1999, March 22, 1999
and March 24, 1999, the Company has outstanding (a) four term notes payable to a
bank, requiring no principal payments prior to maturity on January 1, 2003,
bearing interest at the London Interbank Offered Rate ("LIBOR") plus 1.75%,
under which $42,312,000 was outstanding as of December 31, 1998; and (b) a
revolving bank credit facility for borrowings of up to $3,500,000 expiring May
1, 2000, bearing interest at the bank's prime rate, under which $2,536,000 was
outstanding as of December 31, 1998.
Under an agreement amended February 20, 1998 (the "February 1998 Agreement"),
the Company entered into (a) a $5,000,000 term note, payable to a bank in
quarterly installments of $250,000, under which $4,000,000 was outstanding as of
December 31, 1998, and (b) a revolving bank credit facility for borrowings of up
to $5,000,000, under which the Company had borrowed $5,000,000 as of December
31, 1998. The February 1998 Agreement was further modified on March 5, 1999 to
revise certain terms, resulting in (a) a $4,000,000 term note, payable to a bank
in quarterly installments of $250,000 through March 31, 2000, with the remainder
due June 30, 2000, and (b) a revolving bank credit facility for borrowings of up
to $5,000,000 until June 30, 1999, and $4,000,000 thereafter until expiration on
June 30, 2000. Borrowings under the February 1998 Agreement, as modified,
currently bear interest at
16
<PAGE> 17
either (a) the prime rate or (b) LIBOR plus 3%. The Company also had a demand
bank note 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 December 31, 1998. The
demand note expires June 30, 1999.
The Company's investment in Tarzian was financed with a $10,000,000 bank note
payable with interest at the bank's prime rate, expiring May 28, 1999. The
Company intends to refinance or extend the note prior to the note's expiration
date, if necessary.
The Company currently anticipates refinancing all existing notes payable and
long-term debt agreements in 1999 in connection with the bank financing of the
HCI-USA Acquisition.
In January 1998, the Company executed two interest rate swap agreements,
effectively modifying the interest characteristics of $24,000,000 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 $4,000,000 of floating rate debt to a fixed rate basis
under two separate agreements, one of which was modified in September 1998.
Under the first agreement, $20,000,000 of long-term debt is subject to a
one-year forward swap agreement, 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, $4,000,000 of long-term debt is subject to a fixed rate of no more
than 8.66% beginning September 30, 1998 through December 31, 2004, instead of
LIBOR plus 3%, the rate in effect until then. In aggregate, the estimated cost
of terminating the swap agreements, if the Company elected to do so, is
approximately $1,300,000 as of December 31, 1998.
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 CodeWriter's affiliate, CW Technologies, LLC ("CWT"), in
a transaction valued at approximately $6,200,000 (the "CodeWriter Acquisition"),
of which $5,000,000 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's and CWT's products and services
during each calendar quarter through December 31, 2001, but in no event will the
aggregate payments exceed $1,200,000.
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 or 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. Investments in Rawlings were financed with borrowings under the
$42,312,000 term loans previously described.
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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. During 1998, Gray
redeemed 435.94 shares of its series B preferred stock owned by the Company,
including 110.94 shares previously issued in-kind as dividends on the series B
preferred stock, for a total of $3,805,000. The Company anticipates that
dividends on the series B preferred stock will be paid in cash for the
foreseeable future.
Inventories increased to $5,167,000 as of December 31, 1998 from $3,757,000 at
December 31, 1997, as a result of (a) the CodeWriter Acquisition, which added
inventories of $538,000 at the acquisition date; (b) an increase in raw
materials on hand associated with the Company's new internally-developed Journey
Automated Ticket / Boarding Pass Version 2 ("ATB2") airline ticket printer
initially introduced in December 1997; and (c) the purchase of assets,
consisting primarily of inventories associated with the Sigma-Data 7200
high-speed ATB2 printer, from a Japanese company in September 1998, in a
transaction valued at approximately $750,000 (the "Sigma-Data 7200 Purchase").
As of December 31, 1998, the Company had open purchase commitments totaling
approximately $8,500,000, primarily for raw materials inventories.
The Company's total working capital increased to $3,312,000 as of December 31,
1998 from $2,513,000 as of December 31, 1997, primarily as a result of (a) the
CodeWriter Acquisition, which added $409,000 in working capital as of the
acquisition date; (b) the increase in raw materials for Journey, discussed
above; (c) the Sigma-Data 7200 Purchase, which added approximately $750,000 in
working capital as of the acquisition date; and (d) an increase in accounts
receivable due to the increase in product sales, net of (x) an increase in the
demand note payable; (y) an increase in the current portion of long-term debt
attributable to the CodeWriter Acquisition financing, as modified; and (z) an
increase in accounts payable attributable to an increase in raw materials
inventories.
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 1998, the Company repurchased 40,500 shares at a total cost of $150,000
under the Program, in addition to 50,956 shares valued at $217,000 acquired in a
private transaction in 1998.
Capital spending for 1999 is expected to be approximately $600,000, excluding
any impact of the HCI-USA Acquisition. The Company anticipates that its current
working capital, funds available under its revolving credit facilities,
quarterly cash dividends on the Gray preferred stock and Gray class A common
stock, anticipated redemption of some amount of Gray preferred 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 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.
INTEREST RATE RISK MANAGEMENT
The Company is exposed to changes in interest rates due to the Company's
financing of its acquisitions, investments and operations. Interest rate risk is
present with both fixed and floating rate debt. The Company uses interest rate
swap agreements (as detailed in "Liquidity and Capital Resources" above) to
manage its debt profile.
Interest rate swap agreements generally involve exchanges of underlying face
(notional) amounts of designated hedges. The Company continually evaluates the
credit quality of counterparties to interest rate swap agreements and does not
believe there is a significant risk of nonperformance by any of the
counterparties.
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Based on the Company's debt profile at December 31, 1998 and 1997, a 1% increase
in market interest rates would increase interest expense and decrease the income
before income taxes (or alternatively, increase interest expense and increase
the loss before income taxes) by $517,000 in 1998 and $353,000 in 1997. These
amounts were determined by calculating the effect of the hypothetical interest
rate on the Company's floating rate debt, after giving consideration to the
Company's interest rate swap agreements. These amounts do not include the
effects of certain potential results of increased interest rates, such as a
reduced level of overall economic activity or other actions management may take
to mitigate the risk. Furthermore, this sensitivity analysis does not assume
changes in the Company's financial structure that could occur if interest rates
were higher.
RECENTLY-ISSUED ACCOUNTING STANDARD
In June 1998, the Financial Accounting Standards Board issued Statement No. 133,
Accounting for Derivative Instruments and Hedging Activities. The Company
expects to adopt the new Statement effective January 1, 2000. The Statement will
require the Company to recognize all derivatives on the balance sheet at fair
value. The Company does not anticipate that the adoption of this Statement will
have a significant effect on its results of operations or financial position.
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.
During 1997, the Company 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 in 1998 related to Year 2000 upgrades and modifications was
approximately $100,000, 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 personal
computers and other computer hardware during 1999 which are not Year 2000
compliant, management does not expect the cost of these additional expenditures
to exceed $50,000, 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 mid-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 had communications with most of its major 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. These
communications include both oral communications, as well as the receipt of
written Year 2000 compliance statements, and focus on certain key vendors and
suppliers from whom the Company receives unique materials, products and
services. The Company expects to complete its assessment of its major vendors
and sole source suppliers by mid-1999. Most raw materials used in the
manufacture of the Company's computer printers are available from more than one
supplier;
19
<PAGE> 20
therefore, management's contingency plans include, but are not limited to,
evaluating alternative vendors who are Year 2000 compliant, as well as
evaluating the adequacy of inventory levels.
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 mid-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 Annual Report on Form 10-K 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. 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, (i) general economic conditions in the markets in which the Company
and its affiliates operate, (ii) competitive pressures in the markets in which
the Company and its affiliates operate, (iii) the effect of future legislation
or regulatory changes on the Company's and its affiliates' operations and (iv)
other factors described from time to time in the Company's filings with the
Securities and Exchange Commission. The forward-looking statements included in
this report are made only as of the date hereof. The Company undertakes no
obligation to update such forward-looking statements to reflect subsequent
events or circumstances.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
See "Interest Rate Risk Management" in Item 7 "Management's Discussion and
Analysis".
20
<PAGE> 21
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Audited Consolidated Financial Statements of Bull Run Corporation
Report of Independent Auditors 22
Consolidated Balance Sheets at December 31, 1998 and 1997 23
Consolidated Statements of Operations for the years ended
December 31, 1998, 1997 and 1996 24
Consolidated Statements of Stockholders' Equity for the years
ended December 31, 1998, 1997 and 1996 25
Consolidated Statements of Cash Flows for the years ended
December 31, 1998, 1997 and 1996 26
Notes to Consolidated Financial Statements 27
Selected Quarterly Financial Data (Unaudited) 40
Audited Consolidated Financial Statements of Gray Communications Systems, Inc.
Report of Independent Auditors F-1
Consolidated Balance Sheets at December 31, 1998 and 1997 F-2
Consolidated Statements of Operations for the years ended
December 31, 1998, 1997 and 1996 F-4
Consolidated Statements of Stockholders' Equity for the years
ended December 31, 1998, 1997 and 1996 F-5
Consolidated Statements of Cash Flows for the years ended
December 31, 1998, 1997 and 1996 F-7
Notes to Consolidated Financial Statements F-8
</TABLE>
21
<PAGE> 22
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, 1998 and 1997, and the related consolidated
statements of operations, stockholders' equity and cash flows for each of the
three years in the period ended December 31, 1998. 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 Rawlings Sporting Goods Company, Inc. ("Rawlings") as of
and for the year ended August 31, 1998, and 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 for the six months ended June 30, 1996
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 the method of recognizing certain revenue and related expenses. Our
opinion, insofar as it relates to data included for Rawlings, HCI and CSP for
their respective periods in 1998 and 1996, is based solely on the reports of the
other auditors. In the consolidated financial statements, the Company's
investment in Rawlings is stated at $11,001,000 at December 31, 1998 and 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 Rawlings is stated at $237,000
for the year ended December 31, 1998; and the Company's equity in the net income
of HCI and CSP is stated at $762,000 for the year ended December 31, 1996; and
the Company's cumulative effect of accounting change recognized by HCI 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 1998 and 1996, 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, 1998 and 1997, and the consolidated results of
its operations and its cash flows for each of the three years in the period
ended December 31, 1998, in conformity with generally accepted accounting
principles.
As discussed in Note 4 to the Consolidated Financial Statements, during 1996 HCI
changed its method of recognizing certain revenue and related expenses.
/s/ ERNST & YOUNG LLP
Atlanta, Georgia
February 9, 1999, except as to Notes 4 and 7,
as to which the date is March 24, 1999
22
<PAGE> 23
BULL RUN CORPORATION
CONSOLIDATED BALANCE SHEETS
(Dollars and shares in thousands)
<TABLE>
<CAPTION>
December 31
1998 1997
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 58 $ 142
Accounts receivable (includes $880 and $850 due
from Gray Communications Systems, Inc. as of
December 31, 1998 and 1997, respectively) 5,980 4,600
Inventories 5,167 3,757
Other 231 193
-------- --------
Total current assets 11,436 8,692
Property and equipment, net 2,623 2,638
Investment in affiliated companies 73,346 61,551
Goodwill 7,583 3,589
Other assets 184 362
-------- --------
$ 95,172 $ 76,832
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Note payable and current portion of long-term debt $ 4,000 $ 2,500
Accounts payable 2,781 2,462
Accrued and other liabilities:
Employee compensation and related taxes 571 430
Interest 396 553
Other 376 234
-------- --------
Total current liabilities 8,124 6,179
Long-term debt 51,848 41,998
Deferred income taxes 5,409 3,599
Stockholders' equity:
Common stock, $.01 par value (authorized 100,000
shares; issued 22,785 and 22,583 shares as of
December 31, 1998 and 1997, respectively) 228 226
Additional paid-in capital 21,378 20,800
Treasury stock, at cost (542 and 1,287 shares as of
December 31, 1998 and 1997, respectively) (1,393) (3,188)
Retained earnings 9,578 7,218
-------- --------
Total stockholders' equity 29,791 25,056
-------- --------
$ 95,172 $ 76,832
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
23
<PAGE> 24
BULL RUN CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars and shares in thousands, except per share amounts)
<TABLE>
<CAPTION>
Years Ended December 31
1998 1997 1996
<S> <C> <C> <C>
Revenue from printer operations $ 29,848 $ 21,639 $ 23,810
Cost of goods sold 22,103 15,967 17,170
-------- -------- --------
Gross profit 7,745 5,672 6,640
Consulting fee income 1,618 681 844
Operating expenses:
Research and development 2,323 2,418 1,568
Selling, general and administrative 6,270 4,434 4,687
-------- -------- --------
8,593 6,852 6,255
-------- -------- --------
Income (loss) from operations 770 (499) 1,229
Other income (expense):
Equity in earnings (losses) of affiliated companies 6,734 (599) 1,731
Gain on issuance of common shares by affiliated company -- -- 8,179
Interest and dividend income 1,085 1,102 874
Interest expense (4,247) (2,716) (2,124)
Other expense (128) -- --
-------- -------- --------
Income (loss) before income taxes, extraordinary
item and cumulative effect of accounting change 4,214 (2,712) 9,889
Income tax benefit (provision) (1,854) 939 (4,012)
-------- -------- --------
Income (loss) before extraordinary item and
cumulative effect of accounting change 2,360 (1,773) 5,877
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) $ 2,360 $ (1,773) $ 5,308
======== ======== ========
Earnings (loss) per share - Basic:
Income (loss) before extraordinary item and cumulative
effect of accounting change $ 0.11 $ (0.08) $ 0.26
Extraordinary loss -- -- (0.01)
Cumulative effect of accounting change -- -- (0.01)
-------- -------- --------
Net income (loss) $ 0.11 $ (0.08) $ 0.24
======== ======== ========
Earnings (loss) per share - Diluted:
Income (loss) before extraordinary item and cumulative
effect of accounting change $ 0.10 $ (0.08) $ 0.25
Extraordinary loss -- -- (0.01)
Cumulative effect of accounting change -- -- (0.01)
-------- -------- --------
Net income (loss) $ 0.10 $ (0.08) $ 0.23
======== ======== ========
Weighted average number of common shares outstanding:
Basic 22,189 21,302 22,013
Diluted 23,182 21,302 22,945
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
24
<PAGE> 25
BULL RUN CORPORATION
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>
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
Issuance of treasury stock 555 1,945 2,500
Purchase of treasury stock (150) (150)
Exercise of stock options 202 2 23 25
Net income 2,360 2,360
------ ------- ------- ------- ------ -------
Balances, December 31, 1998 22,785 $ 228 $21,378 $(1,393) $9,578 $29,791
====== ======= ======= ======= ====== =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
25
<PAGE> 26
BULL RUN CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
<TABLE>
<CAPTION>
Years Ended December 31
1998 1997 1996
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 2,360 $ (1,773) $ 5,308
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 22 27 1
Depreciation and amortization 1,122 1,001 950
Equity in (earnings) losses of affiliated companies (6,734) 599 (1,731)
Deferred income taxes 1,837 (892) 3,553
Accrued preferred stock dividend income (175) (300)
Loss on disposition of assets 128
Change in operating assets and liabilities:
Accounts receivable (1,100) (553) (166)
Inventories (161) (442) 440
Other current assets 47 (6) 74
Accounts payable and accrued expenses 30 512 122
------ ------ ------
Net cash provided by (used in) operating activities (2,624) (1,827) 1,267
------ ------ ------
Cash flows from investing activities:
Capital expenditures (352) (1,160) (366)
Investment in affiliated companies (8,812) (9,099) (5,566)
Acquisition of printer manufacturer and printer product rights,
net of cash acquired (2,916)
Note purchased from affiliated company (10,000)
Redemption of preferred stock investment 3,805
Dividends received from affiliated companies 121 1,002 73
------ ------ ------
Net cash used in investing activities (8,154) (9,257) (15,859)
------ ------ ------
Cash flows from financing activities:
Borrowings from notes payable 1,200 1,500
Borrowings from revolving lines of credit 17,598 15,232 11,339
Repayments on notes payable (700)
Repayments on revolving lines of credit (18,718) (9,941) (10,656)
Proceeds from long-term debt 12,975 5,843 15,000
Repayments on long-term debt (1,536)
Loan commitment fees (87)
Issuance of common stock 25 262 38
Repurchase of common stock (150) (1,751) (1,107)
------ ------ ------
Net cash provided by financing activities 10,694 11,145 14,527
------ ------ ------
Net increase (decrease) in cash and cash equivalents (84) 61 (65)
Cash and cash equivalents, beginning of year 142 81 146
------ ------ ------
Cash and cash equivalents, end of year $ 58 $ 142 $ 81
====== ====== ======
Supplemental cash flow disclosures:
Interest paid $ 4,404 $ 2,460 $ 1,917
Income taxes paid (recovered), net (25) (58) 612
Treasury stock issued in connection with acquisition of printer
manufacturer, a noncash investing and financing activity 2,500
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
26
<PAGE> 27
BULL RUN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
1. DESCRIPTION OF BUSINESS
Bull Run Corporation ("Bull Run"), based in Atlanta, Georgia, 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", and collectively, the "Company"), and makes
significant investments in sports and media companies, including Gray
Communications Systems, Inc. ("Gray"), an owner and operator of ten television
stations and four daily newspapers; Host Communications, Inc. ("HCI"), a sports
marketing and association management company; Rawlings Sporting Goods Company,
Inc. ("Rawlings"), a leading supplier of team sports equipment in North America;
Universal Sports America, Inc. ("USA"), a lifestyle and sports marketing
company; and Total Sports, Inc. ("TSI"), a sports content Internet company. In
January 1999, the Company made an investment in Sarkes Tarzian, Inc.
("Tarzian"), owner and operator of two television stations and four radio
stations.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION - The accompanying consolidated financial statements
include the accounts of Bull Run and its wholly-owned subsidiary, Datasouth,
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 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, an investee, for the performance of services
in connection with Gray's acquisitions and dispositions. The allowance for
doubtful accounts was $82 as of December 31, 1998 and $55 as of December 31,
1997.
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 $592 in 1998, $614 in 1997 and $590 in 1996.
INVESTMENT IN AFFILIATED COMPANIES - The Company has accounted for its
investments in Gray, HCI, Rawlings and Capital Sports Properties, Inc. ("CSP")
by the equity method, and its investments in USA and TSI by the cost method. The
excess of the Company's investment over the underlying equity of Gray, HCI and
Rawlings, totaling approximately $29,600 and $24,200 as of December 31, 1998 and
1997, respectively, is being amortized over 20 to 40
27
<PAGE> 28
years, with such amortization (totaling $777 in 1998, $610 in 1997 and $487 in
1996) 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. Effective January 15, 1998, the date on which a
representative of the Company was elected to Rawlings' Board of Directors, the
Company has accounted 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.
GOODWILL AND OTHER LONG-LIVED ASSETS - Goodwill associated with the Company's
acquisitions of printer manufacturing businesses is being amortized over 15 to
20 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 $488 in 1998, $301 in 1997 and $292 in
1996, and accumulated amortization was $1,416 and $928 as of December 31, 1998
and 1997, 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. Accrued warranty costs were $85 and $60 as of December 31, 1998 and 1997,
respectively.
RESEARCH AND DEVELOPMENT - Research and development costs of the printer
operations, including the costs of software developed internally and costs for
development services performed by third parties, 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 - Basic and diluted earnings (loss) per share are
determined in accordance with Financial Accounting Standards Board Statement No.
128, "Earnings Per Share", whereby basic earnings per share excludes any
dilutive effects of stock options. In periods where they are anti-dilutive,
dilutive effects of stock options are excluded from the calculation of dilutive
earnings (loss) per share.
RECENTLY-ISSUED ACCOUNTING STANDARD - In June 1998, the Financial Accounting
Standards Board issued Statement No. 133, "Accounting for Derivative Instruments
and Hedging Activities". The Company expects to adopt the new Statement
effective January 1, 2000. The Statement will require the Company to recognize
all derivatives on the balance sheet at fair value. The Company does not
anticipate that the adoption of this Statement will have a significant effect on
its results of operations or financial position.
28
<PAGE> 29
3. PENDING AND COMPLETED ACQUISITIONS
On February 15, 1999, the Company entered into an agreement to acquire the stock
of HCI, USA and CSP not currently owned, directly or indirectly, by the Company,
for approximately $95,000, net of cash acquired (the "HCI-USA Acquisition").
Pursuant to the agreement, a new holding company for the Company will be created
immediately prior to the HCI-USA Acquisition whereby each outstanding share of
the Company's common stock will be converted into one share of a newly formed
Delaware company. The new holding company, which will be a publicly held
company, will be owned by the stockholders of the Company immediately prior to
such conversion and the Company and its subsidiaries will become subsidiaries of
such holding company. Approximately $37,000 of the HCI-USA Acquisition purchase
price is expected to be paid to HCI, USA and CSP stockholders in cash and the
remainder is expected to be paid in common stock of the new holding company. The
Company is currently HCI's largest stockholder, owning directly or indirectly
approximately 32.5% of HCI's outstanding common stock and 51.5% of HCI's
outstanding preferred stock. The Company's indirect ownership of HCI's common
stock and HCI's preferred stock is owned by CSP, in which the Company owns 51.5%
of the outstanding common stock. The Company and HCI together are the largest
stockholders of USA, with the Company owning approximately 3% of USA's
outstanding capital stock and HCI owning approximately 33% of USA's outstanding
capital stock. For their most recent fiscal year ended June 30, 1998, HCI and
USA together had revenues of approximately $109,000. This transaction is subject
to the terms and conditions of the merger agreement, including approval of the
stockholders of each of the companies, and is currently expected to close during
the second quarter of 1999.
Effective January 2, 1998, the Company acquired all of the outstanding common
stock of CodeWriter Industries, Inc. and all of the outstanding membership
interests of its affiliate, CW Technologies, LLC (collectively referred to as
"CodeWriter"), in a transaction valued at approximately $6,200, including the
issuance of treasury stock valued at $2,500 and future consideration of $1,200,
payable quarterly through December 2001 based on the greater of (a) a percentage
of revenue generated by CodeWriter products, or (b) $50, but in no event will
the aggregate quarterly payments exceed $1,200. The future consideration
increases goodwill as incurred. CodeWriter designs and manufactures a line of
direct thermal and thermal transfer desktop and portable bar code label
printers. The acquisition has been accounted for under the purchase method of
accounting, whereby the results of operations of the acquired business are
included in the accompanying condensed consolidated financial statements as of
its acquisition date. The assets and liabilities of the acquired business are
included based on an allocation of the purchase price.
On September 25, 1998, the Company purchased the assets, consisting primarily of
inventories, associated with the Sigma-Data 7200 high speed Automated Ticket /
Boarding Pass Version 2 printer from a Japanese company, in a transaction valued
at approximately $750. Effective October 1, 1998, the Company purchased a United
Kingdom-based sales organization from its UK parent, for future consideration.
The UK organization, which has been selling the Company's printer products and
the Sigma-Data 7200 printer to computer reservation systems and airlines
throughout the world, serves as the Company's European sales office and stocking
facility. The future consideration is scheduled to be paid annually in arrears
through September 2003, at amounts determined as a percentage of revenue
generated by the Company's European sales office. This future consideration is
charged to Cost of Goods Sold as the associated revenue is recognized.
4. INVESTMENT IN AFFILIATED COMPANIES
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
29
<PAGE> 30
ownership in HCI, plus the Company's indirect common equity ownership in HCI
through its investment in CSP, was increased to 32.5% as of December 31, 1998.
Additionally, the Company owns indirectly, through CSP, 51.5% of HCI's 8% series
B preferred stock having a face value of $3,750. Unless previously acquired by
the Company as a result of the HCI-USA Acquisition, outstanding shares of series
B preferred stock, plus all accumulated and unpaid dividends thereon, are
scheduled to be redeemed and paid in cash on December 15, 1999. HCI, based in
Lexington, Kentucky, and HCI's 33.8%-owned affiliate, 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 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 charge against its earnings, representing the after-tax
cumulative effect of the accounting change. The Company reported 9.1% of such
charge, or $415, less a $141 deferred tax benefit, as a charge against its 1996
earnings.
During HCI's 1996 fiscal year, 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.
INVESTMENT IN GRAY AND GAIN ON ISSUANCE OF COMMON SHARES - In 1996, Gray
consummated a public offering of 3.5 million shares of class B common stock,
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 27.1% to 15.2%
(subsequently increasing to 16.9% as of December 31, 1998), resulting in a
pretax gain for the Company of $8,179 in 1996. This offering also reduced the
Company's common equity voting power in Gray from 27.1% to 25.1% (subsequently
increasing to 27.4% as of December 31, 1998. On July 31, 1998, Gray disposed of
a television station and recognized an after-tax gain of approximately $43
million in connection with the disposition. As a result, the Company's equity in
Gray's earnings was favorably impacted by approximately $4,000 in 1998. Gray is
a communications company, based in Atlanta, Georgia, that operates ten network
affiliated television stations (three of which were acquired in August 1998),
four daily newspapers (one of which was acquired in March 1999), an advertising
weekly shopper, 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).
The Company provides consulting services to Gray from time to time in connection
with Gray's acquisitions, dispositions 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 $1,618, $681 and $844 in
1998, 1997 and 1996, respectively, for services rendered in connection with
certain of Gray's acquisitions and dispositions. As of December 31, 1998 and
1997,
30
<PAGE> 31
income from additional consulting fees of $762 and $400, respectively, has been
deferred and will be recognized as Gray amortizes goodwill associated with its
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 731,250 shares of
Gray's class A common stock at $11.92 per share (as adjusted for a 3-for-2 stock
split announced by Gray effective September 30, 1998). 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. In connection with the
Company's acquisition of series B preferred stock, Gray issued to the Company
warrants to purchase up to 375,000 shares of Gray's class A common stock at
$16.00 per share (adjusted for the 3-for-2 stock split). Of the total warrants
owned by the Company to purchase 1,106,250 shares of Gray's class A common
stock, 847,500 are fully vested and exercisable as of December 31, 1998, with
the remaining warrants vesting periodically through 2001. The warrants expire in
2006. 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 $1,072, $1,100 and $293 was recognized by the Company in 1998, 1997
and 1996, respectively, on Gray series A and B preferred stock. In 1998, Gray
redeemed $3,805 of the series B preferred stock held by the Company. As a
result, the Company held 175 shares of Gray's series B preferred stock as of
December 31, 1998.
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 1996.
INVESTMENT IN TARZIAN - On January 28, 1999, the Company acquired shares of the
outstanding common stock of Tarzian from the Estate of Mary Tarzian (the
"Estate") for $10 million. The acquired shares (the "Tarzian Shares") represent
33.5% of the total outstanding common stock of Tarzian both in terms of the
number of shares of common stock outstanding and in terms of voting rights, but
such investment represents 73% of the equity of Tarzian for purposes of
dividends, as well as distributions in the event of any liquidation, dissolution
or other termination of Tarzian. Tarzian has filed a complaint with the United
States District Court, claiming that it had a binding contract with the Estate
to purchase the Tarzian Shares from the Estate prior to the Company's purchase
of the shares, and requests judgment providing that the Estate be required to
sell the Tarzian Shares to Tarzian. The Company believes that a binding contract
between Tarzian and the Estate did not exist prior to the Company's purchase of
the Tarzian Shares from the Estate, and in any case, the Company's purchase
agreement with the Estate provides that in the event that a court of competent
jurisdiction awards title to a person or entity other than the Company, the
purchase agreement is rescinded, and the Estate is required to pay the Company
the full $10 million purchase price, plus interest. Tarzian owns and operates
two television stations and four radio stations: WRCB-TV Channel 3 in
Chattanooga, Tennessee, an NBC affiliate; KTVN-TV Channel 2 in Reno, Nevada, a
CBS affiliate; WGCL-AM and WTTS-FM in Bloomington, Indiana; and WAJI-FM and
WLDE-FM in Fort Wayne, Indiana. The Company's investment in Tarzian was financed
with a $10 million bank note payable with interest at the bank's prime rate,
expiring May 28, 1999.
On March 1, 1999, the Company executed an option agreement with Gray
Communications Systems, Inc. ("Gray"), the Company's 16.9%-owned affiliate,
whereby Gray has the option of acquiring the Tarzian investment from the Company
for $10 million plus related costs, expiring May 31, 1999. Gray has the ability
to extend the option period in 30-day increments at a fee of $66,700 per
extension. The Company also received from Gray warrants to acquire
31
<PAGE> 32
up to 100,000 shares of Gray's class B common stock at $13.625 per share, in
connection with the option agreement. The warrants will vest immediately upon
Gray's exercise of the option.
INVESTMENT IN RAWLINGS - In November 1997, the Company entered into an
Investment Purchase Agreement with Rawlings, a supplier of team sports equipment
based near St. Louis, Missouri. Pursuant to this agreement, the Company acquired
warrants to purchase approximately 10% of Rawlings' common stock, and has the
right, under certain circumstances, to acquire 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 upon execution of the agreement in
November 1997. The remaining fifty percent, plus interest at 7% per annum from
November 21, 1997 until the date of payment, will be due on the earlier of the
exercise date and the expiration date of the warrants. In the event of a partial
exercise of 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 approximately 10.4% of Rawlings' outstanding common stock in the open
market from November 1997 through January 1998. 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 shares issuable upon the exercise of the warrants (and
the additional warrants, if any) registered under the Securities Act of 1933
under certain circumstances.
INVESTMENT IN TSI - In 1998, the Company acquired 351,815 shares of TSI series C
convertible preferred stock for $2,500. In January 1999, the Company invested an
additional $1,000 for 105,374 shares of series C1 convertible preferred stock.
TSI, based in Raleigh, North Carolina, is a website services provider for
amateur and professional sports organizations and conferences, college athletic
departments, and selected corporations. Assuming conversion of all TSI preferred
stock, the Company's investment equates to a 7.7% share of TSI's capital stock
as of December 31, 1998, increasing to 9.0% immediately following the additional
investment made by the Company in January 1999. Dividends on the series C and
series C1 convertible preferred stock are cumulative, and accrue at $.85 per
share per annum and $1.14 per share per annum, respectively, from the issue
date, and are payable quarterly at TSI's discretion. Any outstanding series C
and series C1 preferred stock, plus all accumulated and unpaid dividends
thereon, are scheduled to be redeemed and paid in cash on July 31, 2003. In
addition to the Company's direct investment in TSI, HCI owns approximately 8.3%
of TSI's common stock, assuming conversion of all TSI preferred stock. The
shares owned by HCI are expected to be acquired by the Company in connection
with the HCI-USA Acquisition.
32
<PAGE> 33
SUMMARIZED AGGREGATE FINANCIAL INFORMATION - The summarized aggregate financial
information of affiliated companies follows:
AGGREGATE FINANCIAL POSITION (REFLECTING GRAY AND CSP AS OF DECEMBER 31, 1998
AND 1997; COMBINED WITH HCI AS OF JUNE 30, 1998 AND 1997; COMBINED WITH RAWLINGS
AS OF NOVEMBER 30, 1998 AND 1997):
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Current assets $144,648 $126,302
Property and equipment 70,614 59,361
Total assets 644,568 503,667
Current liabilities 59,699 53,732
Long-term debt 339,677 288,144
Total liabilities 462,833 362,892
Stockholders' equity 181,735 140,775
</TABLE>
AGGREGATE OPERATING RESULTS (REFLECTING GRAY AND CSP FOR THE YEARS ENDED
DECEMBER 31, 1998, 1997 AND 1996; COMBINED WITH HCI FOR THE YEARS ENDED JUNE 30,
1998, 1997 AND 1996; COMBINED WITH RAWLINGS FOR THE YEARS ENDED NOVEMBER 30,
1998, 1997 AND 1996):
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Operating revenue $347,850 $294,583 $263,302
Income from operations 37,351 34,106 27,901
Net income 47,546 4,845 7,666
</TABLE>
Undistributed earnings of investments accounted for by the equity method amount
to approximately $3,950 as of December 31, 1998.
UNAUDITED PRO FORMA FINANCIAL INFORMATION - Unaudited pro forma results for the
years ended 1998 and 1997, assuming the acquisition of CodeWriter and the
investment in Rawlings had occurred on January 1, 1997, are presented below.
This unaudited pro forma data does not purport to represent the Company's actual
results of operations had the CodeWriter acquisition and the Rawlings'
investment occurred on January 1, 1997, and should not serve as a forecast of
the Company's operating results for any future periods. The pro forma
adjustments, including (a) the elimination of certain expenses pertaining to the
former owners and members of CodeWriter; (b) adjustments to the Company's equity
in earnings (losses) for the Company's proportionate share of Rawlings' net
income; (c) amortization of goodwill in connection with the CodeWriter
acquisition; (d) the increase in interest expense in connection with acquisition
debt incurred; (e) adjustments for the income tax effects of the pro forma
adjustments; and (f) the increase in the number of outstanding shares of the
Company's common stock to reflect the treasury shares issued to the former
shareholders and members of CodeWriter, are based solely upon certain
assumptions that management believes are reasonable under the circumstances at
this time.
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Revenue from printer operations $29,848 $ 26,908
Consulting fee income 1,618 681
Net income (loss) 2,380 (2,340)
Net income (loss) per share:
Basic $ 0.11 $ (0.11)
Diluted $ 0.10 $ (0.11)
</TABLE>
33
<PAGE> 34
5. INVENTORIES
Inventories related to the Company's printer operations consist of the following
as of December 31:
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Raw materials $3,200 $2,734
Work-in-process 729 711
Finished goods 1,238 312
------ ------
$5,167 $3,757
====== ======
</TABLE>
6. PROPERTY AND EQUIPMENT
The Company's property and equipment consist of the following as of December 31:
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Land $ 750 $ 750
Production equipment 2,993 2,797
Research and development equipment 638 534
Office furniture and equipment 666 568
------ ------
5,047 4,649
Accumulated depreciation and amortization 2,424 2,011
------ ------
$2,623 $2,638
====== ======
</TABLE>
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 December 2000, having a renewal option for
an additional three year period, and leases its west coast repair and
distribution center under an operating lease expiring in April 2001. The
Company's total rental expense was $481, $328 and $309 in 1998, 1997 and 1996,
respectively. The minimum annual rental commitments under these and other leases
with an original lease term exceeding one year are approximately $433 for each
of 1999 and 2000, $244 for 2001 and $17 for each of 2002 and 2003.
7. LONG-TERM DEBT AND NOTE PAYABLE
The Company amended its long-term debt agreements with two banks in 1998, and
further amended the agreements in February and March 1999. Under an agreement
amended March 20, 1998 and further amended February 24, 1999, March 22, 1999 and
March 24, 1999 (the "March 1998 Agreement"), the Company has outstanding (a)
four 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 and $34,343 was outstanding as
of December 31, 1998 and 1997, respectively, and (b) a revolving bank credit
facility for borrowings of up to $3,500 expiring May 1, 2000, bearing interest
at the bank's prime rate, under which $2,536 and $3,183 was outstanding as of
December 31, 1998 and 1997, respectively.
Under an agreement amended February 20, 1998 (the "February 1998 Agreement"),
the Company entered into (a) a $5,000 term note, payable to a bank in quarterly
installments of $250, and (b) a revolving bank credit facility for borrowings of
up to $5,000. The February 1998 Agreement was further modified on March 5, 1999
to revise certain terms, resulting in (a) a $4,000 term note, payable in
quarterly installments of $250 through March 31, 2000, with the remainder due on
June 30, 2000, and (b) a revolving bank credit facility for borrowings of up to
$5,000 until June 30, 1999, and $4,000 thereafter until expiration on
34
<PAGE> 35
June 30, 2000. Borrowings under the February 1998 Agreement, as modified,
currently bear interest at either (a) the prime rate or (b) LIBOR plus 3%. As of
December 31, 1998, $9,000 was outstanding under the February 1998 Agreement, and
$5,472 was outstanding as of December 31, 1997 under its predecessor agreement.
The Company also had a demand bank note for borrowings of up to $2,000, bearing
interest at the bank's prime rate, under which $2,000 and $1,500 was outstanding
as of December 31, 1998 and 1997, respectively.
The loans are collateralized by Datasouth's accounts receivable, inventories and
equipment; common stocks of Gray, HCI, CSP, Rawlings and TSI owned by the
Company; preferred stock of Gray owned by the Company; warrants to purchase
Gray's and Rawlings' common stocks held 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 debt service ratio, as defined, of 1.1 to 1.0.
In January 1998, the Company executed two interest rate swap agreements,
effectively modifying the interest characteristics of $24,000 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 and $4,000 of
floating rate debt to a fixed rate basis under two separate agreements, one of
which was modified in September 1998. Under the first agreement, $20,000 of
long-term debt is subject to a one-year forward swap agreement, 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, $4,000 of long-term debt is
subject to a fixed rate of no more than 8.66% beginning September 30, 1998
through December 31, 2004, instead of LIBOR plus 3%, the rate in effect until
then.
The bank's prime rate as of December 31, 1998 was 7.75%. The interest rate on
the Company's LIBOR-based debt of $31,912 for the 90-day period including
December 31, 1998 was 8.72%. The interest rate on the Company's LIBOR-based debt
of $10,400 for the 90-day period including December 31, 1998 was 8.73%. The
interest rate on the Company's LIBOR-based borrowings of $4,000 for the 30-day
period including December 31, 1998 was 8.38%.
8. INCOME TAXES
The Company's income tax benefit (provision) for the years ending December 31
consists of the following:
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Current:
Federal $ - $ 50 $ (67)
Foreign (14) - -
State (3) (3) (66)
------- ------- -------
(17) 47 (133)
Deferred (1,837) 892 (3,879)
------- ------- -------
$(1,854) $ 939 $(4,012)
======= ======= =======
</TABLE>
35
<PAGE> 36
The principal differences between the federal statutory tax rate and the
effective tax rate are as follows:
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Federal statutory rate 34.0% 34.0% 34.0%
Reduction in valuation allowance (0.5)
Goodwill amortization 3.1 (3.8) 1.0
State income taxes, net of
federal benefit 6.3 1.7 4.6
Other, net 0.6 2.6 1.5
---- ---- ----
Effective tax rate 44.0% 34.5% 40.6%
==== ==== ====
</TABLE>
Deferred tax liabilities (assets) are comprised of the following as of December
31:
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Investment in affiliated companies $ 6,971 $ 4,420
Property and equipment 165 204
Goodwill 32 -
------- -------
Gross deferred tax liabilities 7,168 4,624
------- -------
Deferred consulting fee income (263) (141)
Allowance for doubtful accounts (32) (21)
Inventory costs and reserves (232) (154)
Employee benefits (47) (40)
Warranty reserve (33) (23)
Net operating loss carryforward (535) -
Business credit carryforward (115) (129)
Alternative Minimum Tax credit carryforward (492) (503)
Other, net (10) (14)
------- -------
Gross deferred tax assets (1,759) (1,025)
------- -------
Total deferred taxes, net $ 5,409 $ 3,599
======= =======
</TABLE>
A valuation allowance was provided principally to offset a portion of the
deferred tax asset associated with an Alternative Minimum Tax ("AMT") credit
carryforward at 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.
As of December 31, 1998, the Company has a net operating loss carryforward for
tax purposes of approximately $1,500 expiring in 2018 to reduce Federal taxable
income in the future, and an Alternative Minimum Tax ("AMT") credit carryforward
of approximately $500, and a business credit carryforward of approximately $115,
to reduce regular Federal tax liabilities in the future.
9. STOCK OPTIONS
The Company's 1994 Long Term Incentive Plan (the "1994 Plan") reserves 3,500,000
shares of the Company's common stock for issuance of stock options, restricted
stock awards and stock appreciation rights. 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
36
<PAGE> 37
under the 1994 Plan as of December 31, 1998 and 1997 were 1,527,500 and 567,000,
respectively.
The Company's Non-Employee Directors' 1994 Stock Option Plan (the "1994
Directors' Plan") reserves 350,000 shares of the Company's common stock 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, 1998 and 1997 were 170,000 and 180,000,
respectively.
Information with respect to the Company's stock option plans follows:
<TABLE>
<CAPTION>
SHARES PRICE RANGE
<S> <C> <C>
Outstanding as of December 31, 1995 1,641,000 $0.75 - $1.66
Granted 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
Granted 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
Granted 50,000 $3.19 - $4.38
Exercised (254,000) $0.88 - $0.96
---------
OUTSTANDING AS OF DECEMBER 31, 1998 1,678,000 $0.75 - $4.38
=========
EXERCISABLE AS OF DECEMBER 31: 1996 1,120,000 $0.75 - $2.44
1997 1,287,000 $0.75 - $2.68
1998 1,387,000 $0.75 - $4.38
</TABLE>
The weighted average per share fair value of options granted was $1.59 in 1998
and $1.26 in 1997. As of December 31, 1998, 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 3.8 years; 613,000 exercisable shares at $.88 per
share, expiring in 4.5 years; 300,000 exercisable shares at $1.46 per share,
expiring in 4.5 years; 535,000 shares at $2.64 per share, expiring in 1.4 years
(360,000 shares of which are exercisable); 105,000 shares at $2.40 per share,
expiring in 7.2 years (29,000 shares of which are exercisable); and, 50,000
shares at $3.59 per share, expiring in 9.4 years (10,000 shares of which are
exercisable).
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 6.32%, dividend yield of 0.0%, a volatility factor of
.461, 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, 1998 net income would have been $2,224, or $.10 per share (basic) and
$.10 per share (diluted), 1997 net loss would have been $(1,900), or $(.09) per
share (basic and diluted), and 1996 net income 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
likely be representative of the effects on reported net income for future years.
37
<PAGE> 38
10. FAIR VALUE OF FINANCIAL INSTRUMENTS
The aggregate fair value of the Company's investment in affiliated companies was
approximately $88,000 as of December 31, 1998, compared to the carrying value of
$73,346, and approximately $73,000 as of December 31, 1997, compared to the
carrying value of $61,551. The estimate of fair value was based on, in the case
of public-traded Gray and Rawlings, quoted market prices on the New York Stock
Exchange and the Nasdaq Stock Market, respectively, as of December 31, 1998 and
1997; in the case of privately-held HCI, CSP and USA, for December 31, 1998, the
negotiated HCI-USA Acquisition per share purchase price for shares not currently
owned by the Company, and for December 31, 1997, recent transactions in the
capital stock of each company; in the case of TSI, recent transactions in its
capital stock; and management estimates.
The fair value of the interest rate swap agreements executed in 1998, having an
aggregate notional amount of $24,000 as of December 31, 1998 and $24,750 as of
December 31, 1997, 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 statement of operations coincident with the
extinguishment. In aggregate, the estimated cost of terminating the swap
agreements, if the Company elected to do so, was approximately $1.3 million as
of December 31, 1998.
All other financial instruments, including cash, cash equivalents, receivables,
payables and variable rate notes payable and long-term debt are estimated to
have a fair value which approximates its carrying value in the financial
statements.
11. EARNINGS (LOSS) PER SHARE
The following table sets forth the computation of basic and diluted earnings
(loss) per share:
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Income (loss) before extraordinary item and
cumulative effect of accounting change $ 2,360 $ (1,773) $ 5,877
======= ======== =======
Weighted average number of common shares
outstanding for basic earnings (loss) per share 22,189 21,302 22,013
Effect of dilutive employee stock options 993 - 932
------- -------- -------
Adjusted weighted average number of common
shares and assumed conversions for diluted
earnings (loss) per share 23,182 21,302 22,945
======= ======== =======
Basic earnings (loss) per share $ 0.11 $ (0.08) $ 0.26
Diluted earnings (loss) per share $ 0.10 $ (0.08) $ 0.25
</TABLE>
12. 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
$252 in 1998, $208 in 1997 and $243 in 1996.
38
<PAGE> 39
13. GEOGRAPHIC DATA AND SIGNIFICANT CUSTOMER
Sales to non-domestic customers, located primarily in Western Europe and South
America were $2,823 in 1998, $2,497 in 1997 and $2,954 in 1996.
A significant amount of revenue from printer operations is derived from one
customer. In 1998, 1997 and 1996, approximately 31%, 33% and 30% of the
Company's revenue from printer operations was attributable to this customer,
respectively.
39
<PAGE> 40
SUPPLEMENTARY DATA
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>
1998
Revenue from printer operations $ 6,614 $ 7,544 $ 7,220 $ 8,470
Gross profit 1,644 1,877 1,849 2,375
Consulting fee income 2 650 964 2
Net income (loss) (1,083) (199) 4,040 (398)
Earnings (loss) per share:
Basic $ (0.05) $ (0.01) $ 0.18 $ (0.02)
Diluted $ (0.05) $ (0.01) $ 0.17 $ (0.02)
Weighted average number of shares:
Basic 22,029 22,167 22,283 22,277
Diluted 22,029 22,167 23,285 22,277
1997
Revenue from printer operations $ 5,465 $ 5,102 $ 5,545 $ 5,527
Gross profit 1,528 1,313 1,566 1,265
Consulting fee income 598 9 72 2
Net income (loss) 20 (469) (374) (950)
Earnings (loss) per share:
Basic $ 0.00 $ (0.02) $ (0.02) $ (0.04)
Diluted $ 0.00 $ (0.02) $ (0.02) $ (0.04)
Weighted average number of shares:
Basic 21,363 21,260 21,290 21,294
Diluted 22,259 21,260 21,290 21,294
</TABLE>
40
<PAGE> 41
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
Information required by this item concerning Messrs. Robinson, Prather
and Howell, executive officers and directors of the Company, as well as Mr.
Erickson, an executive officer of the Company, is incorporated from PART I
herein. Information concerning non-employee directors of the registrant is set
forth below:
Gerald N. Agranoff, age 52, a director of the Company since 1990, is
General Counsel to and a general partner of Plaza Securities Company and Edelman
Securities Company, L.P., investment firms, having been affiliated with such
companies since 1982. He is Vice President, General Counsel and a director of
Datapoint Corporation, a hardware and software sales and service company. Mr.
Agranoff is also a director of Canal Capital Corporation, Atlantic Gulf
Communities Corporation and American Energy Group, Ltd.
James W. Busby, age 44, a director of the Company since 1994, is the
retired President of Datasouth Computer Corporation, a subsidiary of the
Company, having served in that capacity from 1984 to 1997. He was one of the
founders of Datasouth in 1977, serving as Secretary from 1977 to 1984.
SECTION 16(A) BENEFICIAL OWNERSHIP COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 requires the
Company's directors and executive officers, and persons who own more than 10
percent of the Company's common stock, to file with the Securities and Exchange
Commission initial reports of ownership (Form 3) and reports of changes in
ownership (Forms 4 and 5) of the Company's common stock. To the Company's
knowledge, based solely on review of the copies of such reports furnished to the
Company and representations that no other reports were required, during the year
ended December 31, 1998 all Section 16(a) filing requirements applicable to the
Company's officers, directors and greater than 10 percent beneficial owners were
met.
41
<PAGE> 42
ITEM 11. EXECUTIVE COMPENSATION
EXECUTIVE COMPENSATION
The following table summarizes the compensation earned by the Company's
President and Chief Executive Officer and the other executive officers earning
$100,000 or more for the year ended December 31, 1998 (the "named executive
officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM COMPENSATION
AWARDS
------
SECURITIES
ANNUAL COMPENSATION UNDERLYING
-------------------- RESTRICTED OPTIONS ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS STOCK AWARDS SARS(#) COMPENSATION
--------------------------- ---- ------ ----- ------------ ------- -------------
<S> <C> <C> <C> <C> <C> <C>
Robert S. Prather, Jr., President and 1998 $339,580 $125,000 - - $ 9,600 (1)
Chief Executive Officer of the 1997 $332,018 $100,000 - 300,000 shares $ 9,500 (1)
Company 1996 $299,240 $125,000 - - $ 9,000 (1)
Frederick J. Erickson, Vice President - 1998 $122,962 $22,450 - - $ 9,600 (1)
Finance of the Company and 1997 $112,831 $12,626 - - $ 7,854 (1)
Executive Vice President of Datasouth 1996 $100,005 $30,063 - - $ 7,385 (1)
</TABLE>
(1) Consists of employer contributions to the defined contribution
retirement plan.
There were no grants of options by the Company to a named executive
officer during the year ended December 31, 1998. In 1998, options for 50,000
shares were granted to all employees as a group.
The following table sets forth certain information concerning
unexercised options held by the named executive officers as of December 31,
1998. No stock options were exercised by the named executive officers during the
year ended December 31, 1998.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTIONS VALUES
<TABLE>
<CAPTION>
VALUE OF
UNEXERCISABLE EXERCISABLE
EXERCISABLE UNEXERCISABLE EXERCISE CLOSING PRICE IN-THE-MONEY IN-THE-MONEY
NAME OPTIONS OPTIONS PRICE @ 12/31/98 OPTIONS OPTIONS
---- ------- ------- ----- ---------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Robert S. Prather, Jr. 75,000 $ 0.75 $ 3.38 $ - $196,875
75,000 $ 1.48 $ 3.38 - 142,266
200,000 100,000 $ 2.68 $ 3.38 69,375 138,750
-------- -------- ------- --------
350,000 100,000 $69,375 $477,891
Frederick J. Erickson 72,000 $ 0.88 $ 3.38 $ - $180,000
</TABLE>
LONG TERM INCENTIVE PLANS
Under the Company's 1994 Long Term Incentive Plan (the "1994 Incentive
Plan"), 3,500,000 shares of Common Stock are currently reserved for issuance as
restricted stock awards and for issuance upon the exercise of stock options and
stock appreciation rights. As of December 31, 1998, options for a total of
1,423,000 shares were issued and outstanding under the 1994 Plan with prices
ranging from $.88 to $3.75 per share. Of the 1,423,000 shares issuable upon the
exercise of outstanding options, 748,000 vest in 20% annual increments beginning
one year following date of grant and are exercisable over a period not to exceed
five to 10 years; 525,000 vest in annual increments of 175,000 each,
42
<PAGE> 43
beginning one year following the date of grant, and expire in annual increments
of 175,000 beginning three years following the date of grant; and the remaining
150,000 were fully vested at the date of grant. Options to purchase 253,500
shares were exercised in 1998 and options for 500 shares were cancelled.
The Company's 1987 Non-Qualified Stock Option Plan terminated in 1992.
There are currently outstanding options to purchase 75,000 shares of Common
Stock at an exercise price of $.75 per share.
EMPLOYEE INCENTIVE PLANS
The Company's wholly-owned subsidiary, Datasouth, has employee
incentive plans covering substantially all Datasouth employees. Payments made to
individual employees pursuant to these plans, if any, will vary from year to
year as they will be based on "defined operating profits" (income before income
taxes, investment income, and interest income/expense) of Datasouth. The plans
include one for certain key employees (see "Summary Compensation Table") and one
for all other eligible employees. Total incentive plan compensation was
approximately $90,000 in 1998.
The incentive pool for the plan covering certain key employees is
calculated as a percentage (8.5% in 1998) of "defined operating profits" (as
defined above) less the incentive pool referred to above.
EMPLOYMENT ARRANGEMENTS
Robert S. Prather, Jr. is a party to an employment agreement with the
Company expiring in December 1999. Mr. Prather's agreement provides that he will
serve as President and Chief Executive Officer of the Company at an annual
salary of $325,000, subject to increase at the discretion of the Board of
Directors.
Datasouth has entered into an agreement dated March 31, 1997 with
Frederick J. Erickson, Datasouth's Executive Vice President - Finance &
Administration, Chief Financial Officer, Treasurer, and Secretary. The agreement
is for a term of three years and obligates Datasouth to pay Mr. Erickson 100% of
his annual base salary for a 12-month period in the event employment is
terminated within 12 months of a "Change in Control" of Datasouth, as defined in
the agreement. Furthermore, the agreement obligates Datasouth to continue to
provide medical and dental benefits and life insurance coverage to Mr. Erickson
for a period of one year following termination.
DIRECTORS' COMPENSATION
Robert S. Prather, Jr., a director who is also an employee of the
Company, receives no fees for his services as a director. Directors who are not
employees of the Company or its subsidiaries are paid a fee of $2,250 per
quarter for their services as directors and are reimbursed for their expenses
for each meeting attended. Directors who are not officers or employees of the
Company or its subsidiaries are eligible to receive stock options under the
Company's Non-Employee Directors' 1994 Stock Option Plan (the "1994 Non-Employee
Directors' Plan"). In 1998, each of Mr. Gerald N. Agranoff and Mr. James W.
Busby, directors of the Company, was granted an option to purchase up to 5,000
shares of Common Stock at an exercise price of $4.38 per share, (the market
value of the Common Stock on the date of grant) under the 1994 Non-Employee
Directors' Plan. In 1997, each of Mr. Alex C. Ritchie (a former director who
resigned June 30, 1997) and Mr. Agranoff was granted an option to purchase up to
5,000 shares of Common Stock at an exercise price of $2.38 per share, (the
market value of the Common Stock on the date of grant) under the 1994
Non-Employee Directors' Plan.
43
<PAGE> 44
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
J. Mack Robinson, Gerald N. Agranoff and James W. Busby are the members
of the Company's Compensation and Stock Option Committee. Mr. Robinson, Chairman
of the Company, is also President and Chief Executive Officer of Gray
Communications Systems, Inc., the Company's 16.9%-owned affiliate, and serves on
the Compensation Committee of Gray. Robert S. Prather, Jr., President, Chief
Executive Officer and a director of the Company, is also Executive Vice
President and a director of Gray. Hilton H. Howell, Jr., Vice President,
Secretary and a director of the Company, is also a director of Gray. Mr. Busby
was President of Datasouth Computer Corporation, the Company's wholly owned
subsidiary, from 1984 until his retirement in 1997.
The Company provides consulting services to Gray from time to time in
connection with Gray's acquisitions, dispositions and acquisition financing.
During 1998, the Company charged Gray fees totaling $1,980,000 for such
services.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information regarding persons or groups known by the Company to be the
beneficial owners of more than five percent of the outstanding shares of the
Common Stock as of February 26, 1999 is shown in the following table.
Information concerning such security holdings has been furnished by the holders
thereof to the Company.
<TABLE>
<CAPTION>
Amount and
Name and Address of Nature of
Beneficial Owner Beneficial Ownership Percent of Class
- -------------------- -------------------- ----------------
<S> <C> <C>
Robert S. Prather, Jr. (1) 3,010,598(2)(3) 13.3%
J. Mack Robinson (1) 6,531,656(3)(4) 29.6%
Robinson-Prather Partnership (1) 2,660,598(3) 11.9%
Harriett J. Robinson (1) 6,531,656(3)(4) 29.6%
Harriett J. Robinson, Trustee
Robin M. Robinson Trust (1) 3,085,598(3) 13.9%
Harriett J. Robinson, Trustee
Jill E. Robinson Trust (1) 3,158,598(3) 14.2%
Gulf Capital Services, Ltd. (1) 2,660,598(3) 11.9%
James W. Busby (5) 2,506,956(5) 11.3%
Samuel R. Shapiro (6) 3,620,300(6) 16.3%
Shapiro Capital Management Company, Inc. (6) 3,535,300(6) 15.9%
Hilton H. Howell, Jr. (1) 1,705,000(7) 7.6%
</TABLE>
(1) The address of each of these shareholders is 4370 Peachtree Road, N.E.,
Atlanta, Georgia 30319.
(2) Includes 350,000 shares which Mr. Prather has the right to acquire
through the exercise of currently exercisable options.
(3) Includes 2,660,598 shares owned by Robinson-Prather Partnership.
Robinson-Prather Partnership is a Georgia general partnership, the
general partners of which are Robert S. Prather, Jr., President, Chief
Executive Officer, and a director of the Company; J. Mack Robinson, a
director of the Company; Harriett J. Robinson (the wife of Mr.
Robinson); Harriett J. Robinson, as trustee for Robin M. Robinson Trust
(the "RMR Trust"); Harriett J. Robinson, as trustee for Jill E.
Robinson Trust (the "JER Trust"); and Gulf Capital Services, Ltd. The
partnership agreement for Robinson-Prather Partnership provides that
Messrs. Prather and Robinson have the exclusive control of the
day-to-day operations of the partnership, including the power to vote
or dispose of the shares of Common Stock
44
<PAGE> 45
owned by Robinson-Prather Partnership. Each general partner disclaims
beneficial ownership of the shares of Common Stock owned by
Robinson-Prather Partnership, except to the extent of his pecuniary
interest in such shares of Common Stock, which is less than the amount
disclosed.
(4) Includes as to each of J. Mack Robinson and his wife, Harriett J.
Robinson: 1,073,058 shares owned directly by Mr. Robinson; 295,500
shares owned directly by Mrs. Robinson; 100,000 shares which Mr.
Robinson has the right to acquire through the exercise of currently
exercisable options; 425,000 shares owned directly by the RMR Trust and
497,500 shares owned directly by the JER Trust, of each of which Mrs.
Robinson is the trustee; and an aggregate of 1,580,000 shares owned by
Delta Fire & Casualty Insurance Co. ("Delta Fire"), Delta Life
Insurance Company ("Delta Life"), Bankers Fidelity Life Insurance Co.
("Bankers Fidelity Life") and Georgia Casualty & Surety Co. ("Georgia
Casualty"), Georgia corporations of each of which Mr. Robinson is
Chairman of the Board, President and/or principal shareholder (or the
subsidiaries of the same). Each of Mr. and Mrs. Robinson disclaims
beneficial ownership of the shares of Common Stock owned by the RMR
Trust, the JER Trust, Delta Fire, Delta Life, Bankers Fidelity Life,
Georgia Casualty and each other.
(5) Includes an aggregate of 62,044 shares owned by Mr. Busby's two
children and 5,000 shares which Mr. Busby has the right to acquire
through the exercise of currently exercisable options. The address for
Mr. Busby is 1936 London Lane, Wilmington, North Carolina 28405.
(6) Based on Schedule 13G dated February 4, 1999, the address for Mr.
Shapiro and Shapiro Capital Management Company, Inc., a Georgia
corporation ("Shapiro Capital Management"), is 3060 Peachtree Road,
N.W., Atlanta, Georgia 30305. The Schedule 13G reports that Mr. Shapiro
is the president, a director and majority shareholder of Shapiro
Capital Management, which reported voting and depositive power for
3,013,800 shares of Common Stock. Additionally, the Schedule 13G
reported sole voting and depositive power for 521,500 shares owned by
The Kaleidoscope Fund, L.P., a Georgia limited partnership, and 85,000
shares owned by Mr. Shapiro's wife. Shapiro Capital Management is an
investment adviser under the Investment Advisers Act of 1940, having
the authority to direct investments of its advisory clients. Mr.
Shapiro disclaims beneficial ownership of all securities reported
herein by Shapiro Capital Management.
(7) Includes 125,000 shares which Mr. Howell has the right to acquire
through the exercise of currently exercisable options; and an aggregate
of 1,580,000 shares owned by Delta Fire, Delta Life, Bankers Fidelity
Life and Georgia Casualty, Georgia corporations of each of which Mr.
Howell is Executive Vice President. Mr. Howell is married to Robin R.
Howell, Mr. Robinson's daughter and a beneficiary of the RMR Trust,
which is a general partner of Robinson-Prather Partnership. Mr. Howell
disclaims beneficial ownership of the shares of Common Stock owned by
Delta Fire, Delta Life, Bankers Fidelity Life, Georgia Casualty,
Robinson-Prather Partnership and the RMR Trust.
Except as noted in the footnotes above, (i) none of such shares is
known by the Company to be shares with respect to which such beneficial owner
has the right to acquire beneficial ownership and (ii) the Company believes that
the beneficial owners above have sole voting and investment power regarding the
shares shown as being beneficially owned by them.
As of February 26, 1999, all directors and executive officers of the
Company as a group (six persons) owned 9,784,385 shares of Common Stock,
representing 42.5% of the outstanding shares (including 742,000 shares
purchasable on or within 60 days from such date pursuant to the exercise of
stock options).
45
<PAGE> 46
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company leases office space from Delta Life, a company of which J.
Mack Robinson, a director of the Company, is Chairman of the Board and principal
stockholder. The term of the lease is for 10 years beginning January 1, 1993 and
requires total basic rent payments of $164,976 over the 10-year term, plus a pro
rata share of expenses.
In 1998, the Company purchased under its previously announced Stock
Repurchase Program (the "Program"), 40,000 shares of Common Stock from Gerald N.
Agranoff, a director of the Company, for $3.69 per share, the market price of
the Common Stock on the date of the purchase. Also in 1998, James W. Busby, a
director of the Company, exercised an option to purchase 225,000 shares of
Common Stock at $.96 per share by exchanging 50,956 shares of Common Stock at
its then current market price of $4.25 per share. In 1997, the Company purchased
under the Program, 500,000 shares of Common Stock from Mr. Busby for $2.50 per
share, the market price of the Common Stock on the date of the purchase.
In connection with a commitment to lend up to $42.9 million to the
Company, Mr. J. Mack Robinson, the Company's Chairman of the Board, executed a
put agreement in favor of the bank, for which he received no compensation. Such
agreement provides that if the Company defaults on its bank loan, Mr. Robinson
will repay the amount of such loan to the bank. If Mr. Robinson is obligated to
pay such amount, he would have the right to any or all of the Company's
collateral under such loan as would be necessary for him to recoup his
obligation, with such collateral including the Company's investments in Gray
Communications Systems, Inc. ("Gray") class A common stock, warrants to purchase
Gray class A common stock, and Gray series A and series B preferred stocks; Host
Communications, Inc. common stock; Capital Sports Properties, Inc. common stock;
and, Rawlings Sporting Goods Company, Inc. ("Rawlings") common stock and
warrants to purchase Rawlings common stock. Mr. Robinson will be released from
the put agreement under certain conditions, which could include repayment of
some or all of the debt, and/or appreciation in the value of Gray and Rawlings
common stocks (which are publicly-traded securities) in order to achieve the
bank's required margin of loan balance to assigned collateral value.
46
<PAGE> 47
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 included in Item 8:
Report of Independent Auditors
Consolidated Balance Sheets at December 31, 1998 and
1997 Consolidated Statements of Operations for the
years ended
December 31, 1998, 1997 and 1996
Consolidated Statements of Stockholders' Equity for
the years ended December 31, 1998, 1997
and 1996
Consolidated Statements of Cash Flows for the years
ended December 31, 1998, 1997 and 1996
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-31 of this
report:
Report of Independent Auditors
Consolidated Balance Sheets at December 31, 1998 and
1997 Consolidated Statements of Operations for the
years ended
December 31, 1998, 1997 and 1996
Consolidated Statements of Stockholders' Equity for
the years ended December 31, 1998, 1997
and 1996
Consolidated Statements of Cash Flows for the years
ended December 31, 1998, 1997 and 1996
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. for the six months ended June
30, 1996, on page F-32 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, on page F-33 of this report
Report of Independent Public Accountants on the consolidated
financial statements of Rawlings Sporting Goods Company, Inc.
as of and for the year ended August 31, 1998, 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
47
<PAGE> 48
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.
(b) Reports on Form 8-K
None
(c) Exhibits
<TABLE>
<CAPTION>
Exhibit
Numbers Description
-------- -----------
<S> <C>
(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. (e)
(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) Lease Agreement between Delta Life Insurance Company and Bull
Run Corporation dated as of January 1, 1993 (a)
(10.7) Lease Agreements between Hans L. Lengers and Datasouth
Computer Corporation dated November 27, 1981 (d)
(10.8) $9,000,000 Amended and Restated Credit Agreement dated as of
March 5, 1999 between Datasouth Computer Corporation and
Wachovia Bank, N.A. (x)
(10.9) Amended and Restated Loan Agreement between Bull Run
Corporation and NationsBank, N.A. dated as of March 20, 1998
(h)
(10.10) First Amendment of Amended and Restated Loan Agreement between
Bull Run Corporation and NationsBank, N.A. dated as of
February 24, 1999 (x)
(10.11) $10,400,000 First Term Loan Note dated March 20, 1998 (h)
(10.12) $32,500,000 Second Term Loan Note dated March 20, 1998 (h)
(10.13) $4,000,000 Third Term Loan Note dated February 24, 1999 (x)
(10.14) $3,500,000 Revolving Credit Note dated March 20, 1998 (h)
(10.15) Gray Communications Systems, Inc. Warrant dated September 24,
1996 (731,250 shares) (e)
(10.16) Gray Communications Systems, Inc. Warrant dated September 24,
1996 (375,000 shares) (e)
(10.17) Investment Purchase Agreement dated November 21, 1997 by and
between Rawlings Sporting Goods Company, Inc. and Bull Run
Corporation (f)
(10.18) Common Stock Purchase Warrant dated November 21, 1997 issued
by Rawlings Sporting Goods Company, Inc. to Bull Run
Corporation (f)
(10.19) Standstill Agreement dated November 21, 1997 by and between
Rawlings Sporting Goods Company, Inc. and Bull Run Corporation
(f)
(10.20) Registration Rights Agreement dated November 21, 1997 by and
between Rawlings Sporting Goods Company, Inc. and Bull Run
Corporation (f)
</TABLE>
48
<PAGE> 49
<TABLE>
<CAPTION>
Exhibit
Numbers Description
------- -----------
<S> <C>
(10.21) Stock Purchase Agreement dated January 28, 1999 by and between
U.S. Trust Company of Florida Savings Bank, as Personal
Representative of the Estate of Mary Tarzian and Bull Run
Corporation (i)
(10.22) Secured Promissory Note dated January 28, 1999 by and between
NationsBank, N.A. and Bull Run Corporation (i)
(21) List of Subsidiaries of Registrant (x)
(23.1) Consent of Ernst & Young LLP - Bull Run Corporation (x)
(23.2) Consent of Ernst & Young LLP - Gray Communications Systems,
Inc. (x)
(23.3) Consent of KPMG LLP - Capital Sports Properties, Inc. (x)
(23.4) Consent of KPMG LLP - Host Communications, Inc. (x)
(23.5) Consent of Arthur Andersen LLP - Rawlings Sporting Goods
Company, Inc. (x)
(27) Financial Data Schedule (for SEC use only) - 1999(x)
(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, 1996 and incorporated by reference herein
(f) Filed as an exhibit to Form 8-K Current Report dated as of
November 21, 1997 and incorporated by reference herein
(g) Filed as an exhibit to Form 10-K Annual Report for the year
ended December 31, 1997 and incorporated by reference herein
(h) Filed as an exhibit to Form 10-Q Quarterly Report for the
quarterly period ended March 31, 1998 and incorporated by
reference herein
(i) Filed as an exhibit to Form 8-K Current Report dated as of
January 28, 1999 and incorporated by reference herein
(x) Filed herewith
</TABLE>
(d) Financial Statement Schedules
The response to this section is submitted as part of Item 14(a)(1) and
Item 14(a)(2).
49
<PAGE> 50
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 29, 1999.
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 29, 1999
- --------------------------------------
Robert S. Prather, Jr. Executive Officer and
Director
(Principal Executive
Officer)
/s/ GERALD N. AGRANOFF Director March 29, 1999
- --------------------------------------
Gerald N. Agranoff
/s/ JAMES W. BUSBY Director March 29, 1999
- --------------------------------------
James W. Busby
/s/ FREDERICK J. ERICKSON Vice President - Finance March 29, 1999
- -------------------------------------- and Treasurer
Frederick J. Erickson (Principal Accounting and
Financial Officer)
/s/ HILTON H. HOWELL, JR. Vice President, Secretary March 29, 1999
- -------------------------------------- and Director
Hilton H. Howell, Jr.
/s/ J. MACK ROBINSON Chairman of the Board March 29, 1999
- --------------------------------------
J. Mack Robinson
</TABLE>
50
<PAGE> 51
REPORT OF INDEPENDENT AUDITORS
We have audited the consolidated financial statements of Bull Run
Corporation as of December 31, 1998 and 1997, and for each of the three years
in the period ended December 31, 1998, and have issued our report thereon dated
February 9, 1999 (except for Notes 4 and 7, for which the date is March 24,
1999). 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 9, 1999
51
<PAGE> 52
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 (1) Deductions (2) Period
- ----------- --------- --------- ------------ -------------- ----------
<S> <C> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1998
Allowance for doubtful accounts $ 55,000 $ 22,000 $ 50,000 $ 45,000 $ 82,000
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
</TABLE>
(1) Represents amounts recorded in connection with the CodeWriter acquisition.
(2) "Deductions" represent write-offs of amounts not considered collectible.
52
<PAGE> 53
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, 1998 and 1997 and the related
consolidated statements of operations, stockholders' equity and cash flows for
each of the three years in the period ended December 31, 1998. 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, 1998 and 1997, and the
consolidated results of its operations and its cash flows for each of the three
years in the period ended December 31, 1998, in conformity with generally
accepted accounting principles.
Ernst & Young LLP
Atlanta, Georgia
January 26, 1999
F-1
<PAGE> 54
GRAY COMMUNICATIONS SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
---------------------------------
1998 1997
------------- -------------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 1,886,723 $ 2,367,300
Trade accounts receivable, less allowance for doubtful accounts
of $1,212,000 and $1,253,000, respectively 22,859,119 19,527,316
Recoverable income taxes 1,725,535 2,132,284
Inventories 1,191,284 846,891
Current portion of program broadcast rights 3,226,359 2,850,023
Other current assets 741,007 968,180
------------- -------------
Total current assets 31,630,027 28,691,994
Property and equipment (Notes B and C):
Land 2,196,021 889,696
Buildings and improvements 12,812,112 11,951,700
Equipment 65,226,835 52,899,547
------------- -------------
80,234,968 65,740,943
Allowance for depreciation (28,463,460) (23,635,256)
------------- -------------
51,771,508 42,105,687
Other assets:
Deferred loan costs (Note C) 8,235,432 8,521,356
Goodwill and other intangibles (Note B) 376,014,972 263,425,447
Other 1,322,483 2,306,143
------------- -------------
385,572,887 274,252,946
$ 468,974,422 $ 345,050,627
============= =============
</TABLE>
F-2
<PAGE> 55
GRAY COMMUNICATIONS SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS (Continued)
<TABLE>
<CAPTION>
December 31,
---------------------------------
1998 1997
------------- -------------
<S> <C> <C>
Liabilities and stockholders' equity
Current liabilities:
Trade accounts payable (includes $880,000 and $850,000 payable
to Bull Run Corporation, respectively) $ 2,540,770 $ 3,321,903
Employee compensation and benefits 5,195,777 3,239,694
Accrued expenses 1,903,226 2,265,725
Accrued interest 5,608,134 4,533,366
Current portion of program broadcast obligations 3,070,598 2,876,060
Deferred revenue 2,632,564 1,966,166
Current portion of long-term debt 430,000 400,000
------------- -------------
Total current liabilities 21,381,069 18,602,914
Long-term debt (Notes B and C) 270,225,255 226,676,377
Other long-term liabilities:
Program broadcast obligations, less current portion 735,594 617,107
Supplemental employee benefits (Note D) 1,128,204 1,161,218
Deferred income taxes (Note G) 44,147,642 1,203,847
Other acquisition related liabilities (Note B) 4,653,788 4,494,016
------------- -------------
50,665,228 7,476,188
Commitments and contingencies (Notes B, C and I)
Stockholders' equity (Notes B, C and E)
Serial Preferred Stock, no par value; authorized 20,000,000 shares;
issued and outstanding 1,350 and 2,060 shares, respectively
($13,500,000 and $20,600,000 aggregate liquidation value,
respectively) 13,500,000 20,600,000
Class A Common Stock, no par value; authorized 15,000,000
shares; issued 7,961,574 shares, respectively 10,683,709 10,358,031
Class B Common Stock, no par value; authorized 15,000,000
shares; issued 5,273,046 shares, respectively 66,792,385 66,397,804
Retained earnings 45,737,601 6,603,191
------------- -------------
136,713,695 103,959,026
Treasury Stock at cost, Class A Common, 1,129,532 and 1,172,882
shares, respectively (8,578,682) (9,011,369)
Treasury Stock at cost, Class B Common, 135,080 and 250,185
shares, respectively (1,432,143) (2,652,509)
------------- -------------
126,702,870 92,295,148
------------- -------------
$ 468,974,422 $ 345,050,627
============= =============
</TABLE>
See accompanying notes.
F-3
<PAGE> 56
GRAY COMMUNICATIONS SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------------
1998 1997 1996
------------- ------------- ------------
<S> <C> <C> <C>
Operating revenues:
Broadcasting (less agency commissions) $ 91,006,506 $ 72,300,105 $ 54,981,317
Publishing 29,330,080 24,536,348 22,845,274
Paging 8,552,936 6,711,426 1,478,608
------------- ------------- ------------
128,889,522 103,547,879 79,305,199
Expenses:
Broadcasting 52,967,142 41,966,493 32,438,405
Publishing 24,197,169 19,753,387 17,949,064
Paging 5,618,421 4,051,359 1,077,667
Corporate and administrative 3,062,995 2,528,461 3,218,610
Depreciation 9,690,757 7,800,217 4,077,696
Amortization of intangible assets 8,425,821 6,718,302 3,584,845
Non-cash compensation paid in common stock (Note D) -0- -0- 880,000
------------- ------------- ------------
103,962,305 82,818,219 63,226,287
------------- ------------- ------------
24,927,217 20,729,660 16,078,912
Gain on disposition of television stations (net of $780,000
paid to Bull Run Corporation in 1998) (Note B) 70,572,128 -0- 5,671,323
Miscellaneous income and (expense), net (241,522) (30,851) 33,259
------------- ------------- ------------
95,257,823 20,698,809 21,783,494
Interest expense 25,454,476 21,861,267 11,689,053
------------- ------------- ------------
INCOME (LOSS) BEFORE INCOME TAXES
AND EXTRAORDINARY CHARGE 69,803,347 (1,162,458) 10,094,441
Federal and state income taxes (Note G) 28,143,981 240,000 4,416,000
------------- ------------- ------------
INCOME (LOSS) BEFORE
EXTRAORDINARY CHARGE 41,659,366 (1,402,458) 5,678,441
Extraordinary charge on extinguishment of debt, net of
applicable income tax benefit of $2,157,000 (Note C) -0- -0- 3,158,960
------------- ------------- ------------
NET INCOME (LOSS) 41,659,366 (1,402,458) 2,519,481
Preferred dividends (Note E) 1,317,830 1,409,690 376,849
------------- ------------- ------------
NET INCOME (LOSS) AVAILABLE TO
COMMON STOCKHOLDERS $ 40,341,536 $ (2,812,148) $ 2,142,632
============= ============= ============
Average outstanding common shares-basic 11,922,852 11,852,546 8,097,654
Stock compensation awards 481,443 -0- 340,668
------------- ------------- ------------
Average outstanding common shares-diluted 12,404,295 11,852,546 8,438,322
============= ============= ============
Basic earnings per common share:
Income (loss) before extraordinary charge available to
common stockholders $ 3.38 $ (0.24) $ 0.65
Extraordinary charge -0- -0- (0.39)
------------- ------------- ------------
NET INCOME (LOSS) AVAILABLE TO
COMMON STOCKHOLDERS $ 3.38 $ (0.24) $ 0.26
============= ============= ============
Diluted earnings per common share:
Income (loss) before extraordinary charge available to
common stockholders $ 3.25 $ (0.24) $ 0.62
Extraordinary charge -0- -0- (0.37)
------------- ------------- ------------
NET INCOME (LOSS) AVAILABLE TO
COMMON STOCKHOLDERS $ 3.25 $ (0.24) $ 0.25
============= ============= ============
</TABLE>
See accompanying notes
F-4
<PAGE> 57
GRAY COMMUNICATIONS SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Class A Class B
Preferred Stock Common Stock Common Stock Retained
Shares Amount Shares Amount Shares Amount Earnings
--------- ----------- ---------- ---------- --------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1995 -0- $ -0- 7,624,134 $6,795,976 -0- $ -0- $ 8,827,906
Net Income -0- -0- -0- -0- -0- -0- 2,519,481
Common Stock Cash Dividends:
Class A ($0.05 per share) -0- -0- -0- -0- -0- -0- (357,598)
Class B ($0.01 per share) -0- -0- -0- -0- -0- -0- (69,000)
Purchase of Class B Common Stock
(Note E) -0- -0- -0- -0- -0- -0- -0-
Issuance of Class A Common Stock
(Notes E, F and H):
401(k) Plan -0- -0- 19,837 262,426 -0- -0- -0-
Directors' Stock Plan -0- -0- 33,750 228,749 -0- -0- -0-
Non-qualified Stock Plan -0- -0- 55,275 358,417 -0- -0- -0-
Preferred Stock Dividends -0- -0- -0- -0- -0- -0- (376,849)
Issuance of Class A Common Stock
Warrants (Notes B and E) -0- -0- -0- 2,600,000 -0- -0- -0-
Issuance of Series A Preferred
Stock in exchange for Subordinated
Note (Notes B and E) 1,000 10,000,000 -0- (2,383,333) -0- -0- -0-
Issuance of Series B Preferred
Stock (Notes B and E) 1,000 10,000,000 -0- -0- -0- -0- -0-
Issuance of Class B Common Stock,
net of expenses (Notes B and E) -0- -0- -0- -0- 5,250,000 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 7,732,996 7,994,235 5,250,000 66,065,762 10,543,940
Net Loss -0- -0- -0- -0- -0- -0- (1,402,458)
Common Stock Cash Dividends
($0.05) per share -0- -0- -0- -0- -0- -0- (628,045)
Preferred Stock Dividends -0- -0- -0- -0- -0- -0- (1,409,690)
Issuance of Class A Common Stock
(Notes E and F):
Directors' Stock Plan -0- 0- 752 9,645 -0- -0- -0-
Non-qualified Stock Plan -0- 0- 44,775 317,151 -0- -0- -0-
Stock Award Restricted Stock
Plan -0- 0- 183,051 1,200,000 -0- -0- -0-
Issuance of Class B Common Stock
(Notes E and H):
401(k) Plan -0- -0- -0- -0- 23,046 282,384 -0-
Issuance of Series B Preferred
Stock
(Note E) 60 600,000 -0- -0- -0- -0- -0-
Issuance of Treasury Stock
(Notes E, F, and H):
401(k) Plan -0- -0- -0- -0- -0- 49,658 -0-
Non-qualified Stock Plan -0- -0- -0- -0- -0- -0- (500,556)
Purchase of Class A Common Stock
(Note E) -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 7,961,574 $10,358,031 5,273,046 $66,397,804 $ 6,603,191
</TABLE>
<TABLE>
<CAPTION>
Class A Class B
Treasury Stock Treasury Stock
Shares Amount Shares Amount Total
--------- ----------- --------- ----------- ----------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1995 (994,770) $(6,638,284) -0- $ -0- $8,985,598
Net Income -0- -0- -0- -0- 2,519,481
Common Stock Cash Dividends:
Class A ($0.05 per share) -0- -0- -0- -0- (357,598)
Class B ($0.01 per share) -0- -0- -0- -0- (69,000)
Purchase of Class B Common Stock
(Note E) -0- -0- (258,450) (2,740,137) (2,740,137)
Issuance of Class A Common Stock
(Notes E, F and H):
401(k) Plan -0- -0- -0- -0- 262,426
Directors' Stock Plan -0- -0- -0- -0- 228,749
Non-qualified Stock Plan -0- -0- -0- -0- 358,417
Preferred Stock Dividends -0- -0- -0- -0- (376,849)
Issuance of Class A Common Stock
Warrants (Notes B and E) -0- -0- -0- -0- 2,600,000
Issuance of Series A Preferred
Stock in exchange for Subordinated
Note (Notes B and E) -0- -0- -0- -0- 7,616,667
Issuance of Series B Preferred
Stock (Notes B and E) -0- -0- -0- -0- 10,000,000
Issuance of Class B Common Stock,
net of expenses (Notes B and E) -0- -0- -0- -0- 66,065,762
Income tax benefits relating to
stock plans -0- -0- -0- -0- 132,000
---------- ---------- -------- ----------- -----------
Balance at December 31, 1996 (994,770) (6,638,284) (258,450) (2,740,137) 95,225,516
Net Loss -0- -0- -0- -0- (1,402,458)
Common Stock Cash Dividends
($0.05) per share -0- -0- -0- -0- (628,045)
Preferred Stock Dividends -0- -0- -0- -0- (1,409,690)
Issuance of Class A Common Stock
(Notes E and F):
Directors' Stock Plan -0- -0- -0- -0- 9,645
Non-qualified Stock Plan -0- -0- -0- -0- 317,151
Stock Award Restricted Stock
Plan -0- -0- -0- -0- 1,200,000
Issuance of Class B Common Stock
(Notes E and H):
401(k) Plan -0- -0- -0- -0- 282,384
Issuance of Series B Preferred
Stock
(Note E) -0- -0- -0- -0- 600,000
Issuance of Treasury Stock
(Notes E, F, and H):
401(k) Plan -0- -0- 8,265 87,628 137,286
Non-qualified Stock Plan 81,238 1,082,390 -0- -0- 581,834
Purchase of Class A Common Stock
(Note E) (259,350) (3,455,475) -0- -0- (3,455,475)
Income tax benefits relating to
stock plans -0- -0- -0- -0- 837,000
---------- ----------- -------- ----------- -----------
Balance at December 31, 1997 (1,172,882) $(9,011,369) (250,185) $(2,652,509) $92,295,148
</TABLE>
See accompanying notes
F-5
<PAGE> 58
GRAY COMMUNICATIONS SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (continued)
<TABLE>
<CAPTION>
Class A Class B
Preferred Stock Common Stock Common Stock
-------------------- ---------------------- ----------------------- Retained
Shares Amount Shares Amount Shares Amount Earnings
------- ----------- ---------- ---------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1997 2,060 $20,600,000 7,961,574 $10,358,031 5,273,046 $66,397,804 $ 6,603,191
Net Income -0- -0- -0- -0- -0- -0- 41,659,366
Common Stock Cash Dividends
($0.06) per share -0- -0- -0- -0- -0- -0- (715,209)
Preferred Stock Dividends -0- -0- -0- -0- -0- -0- (1,317,830)
Issuance of Treasury Stock
(Notes E, F, and H):
401(k) Plan -0- -0- -0- -0- -0- 180,821 -0-
Directors' Stock Plan -0- -0- -0- -0- -0- 30,652 -0-
Non-qualified Stock Plan -0- -0- -0- -0- -0- 9,597 (491,917)
Purchase of Class A Common Stock
(Note E) -0- -0- -0- -0- -0- -0- -0-
Issuance of Series B Preferred
Stock
(Note E) 51 509,384 -0- -0- -0- -0- -0-
Purchase of Series B Preferred
Stock
(Note E) (761) (7,609,384) -0- -0- -0- -0- -0-
Income tax benefits relating to
stock plans -0- -0- -0- 325,678 -0- 173,511 -0-
------- ----------- --------- ----------- --------- ----------- -----------
Balance at December 31, 1998 1,350 $13,500,000 7,961,574 $10,683,709 5,273,046 $66,792,385 $45,737,601
======= =========== ========= =========== ========= =========== ===========
</TABLE>
<TABLE>
<CAPTION>
Class A Class B
Treasury Stock Treasury Stock
------------------------ --------------------
Shares Amount Shares Amount Total
---------- ----------- -------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1997 (1,172,882) $(9,011,369) (250,185) $(2,652,509) $92,295,148
Net Income -0- -0- -0- -0- 41,659,366
Common Stock Cash Dividends
($0.06) per share -0- -0- -0- -0- (715,209)
Preferred Stock Dividends -0- -0- -0- -0- (1,317,830)
Issuance of Treasury Stock
(Notes E, F, and H):
401(k) Plan -0- -0- 29,305 310,703 491,524
Directors' Stock Plan -0- -0- 84,300 893,763 924,415
Non-qualified Stock Plan 74,100 1,015,254 1,500 15,900 548,834
Purchase of Class A Common Stock
(Note E) (30,750) (582,567) -0- -0- (582,567)
Issuance of Series B Preferred
Stock
(Note E) -0- -0- -0- -0- 509,384
Purchase of Series B Preferred
Stock
(Note E) -0- -0- -0- -0- (7,609,384)
Income tax benefits relating to
stock plans -0- -0- -0- -0- 499,189
---------- ----------- -------- ----------- ------------
Balance at December 31, 1998 (1,129,532) $(8,578,682) (135,080) $(1,432,143) $126,702,870
========== =========== ======== =========== ============
</TABLE>
See accompanying notes.
F-6
<PAGE> 59
GRAY COMMUNICATIONS SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------------
1998 1997 1996
------------- ------------ -------------
<S> <C> <C> <C>
Operating activities
Net income (loss) $ 41,659,366 $ (1,402,458) $ 2,519,481
Items which did not use (provide) cash:
Depreciation 9,690,757 7,800,217 4,077,696
Amortization of intangible assets 8,425,821 6,718,302 3,584,845
Amortization of deferred loan costs 1,097,952 1,083,303 270,813
Amortization of program broadcast rights 4,250,714 3,501,330 2,742,712
Amortization of original issue discount on 8%
subordinated note -0- -0- 216,667
Write-off of loan acquisition costs from early
extinguishment of debt -0- -0- 1,818,840
Gain on disposition of television stations (70,572,128) -0- (5,671,323)
Payments for program broadcast rights (4,209,811) (3,629,350) (2,877,128)
Compensation paid in Common Stock -0- -0- 880,000
Supplemental employee benefits (252,611) (196,057) (855,410)
Common Stock contributed to 401(K) Plan 491,524 419,670 262,426
Deferred income taxes 26,792,795 1,283,000 (44,000)
Loss on asset sales 332,042 108,998 201,792
Changes in operating assets and liabilities:
Trade accounts receivable (302,905) (369,675) (1,575,723)
Recoverable income taxes 406,749 (384,597) (400,680)
Inventories (344,393) (101,077) 254,952
Other current assets 342,674 (569,745) (21,248)
Trade accounts payable (797,447) (2,825,099) 2,256,795
Employee compensation and benefits 1,283,150 (2,848,092) 2,882,379
Accrued expenses 79,644 1,279,164 (2,936,155)
Accrued interest 1,074,768 (325,409) 3,794,284
Deferred revenue 625,149 201,657 710,286
------------- ------------ -------------
Net cash provided by operating activities 20,073,810 9,744,082 12,092,301
Investing activities
Acquisition of television businesses (122,455,774) (45,644,942) (210,944,547)
Disposition of television business 76,440,419 -0- 9,480,699
Purchases of property and equipment (9,270,623) (10,371,734) (3,395,635)
Proceeds from asset sales 318,697 24,885 174,401
Deferred acquisition costs -0- (89,056) -0-
Payments on purchase liabilities (551,917) (764,658) (243,985)
Other 220,390 (652,907) (139,029)
------------- ------------ -------------
Net cash used in investing activities (55,298,808) (57,498,412) (205,068,096)
Financing activities
Proceeds from borrowings on long-term debt 90,070,000 75,350,000 238,478,310
Repayments of borrowings on long-term debt (46,609,122) (22,678,127) (109,434,577)
Deferred loan costs (854,235) (463,397) (9,410,078)
Dividends paid (1,642,709) (1,428,045) (426,598)
Common Stock transactions 499,189 1,163,796 719,166
Proceeds from equity offering - Class B Common Stock, net of
expenses -0- -0- 66,065,762
Proceeds from offering of Series B Preferred Stock -0- -0- 10,000,000
Proceeds from settlement of interest rate swap agreement -0- -0- 215,000
Proceeds from sale of treasury shares 1,473,249 581,834 -0-
Purchase of Class A Common Stock (582,567) (3,455,475) -0-
Purchase of Class B Common Stock -0- -0- (2,740,137)
Redemption of Preferred Stock (7,609,384) -0- -0-
------------- ------------ -------------
Net cash provided by financing activities 34,744,421 49,070,586 193,466,848
------------- ------------ -------------
Increase (decrease) in cash and cash equivalents (480,577) 1,316,256 491,053
Cash and cash equivalents at beginning of year 2,367,300 1,051,044 559,991
------------- ------------ -------------
Cash and cash equivalents at end of year $ 1,886,723 $ 2,367,300 $ 1,051,044
============= ============ =============
</TABLE>
See accompanying notes.
F-7
<PAGE> 60
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 ten southeastern and
midwestern states, include ten television stations, a transportable satellite
uplink business, three daily newspapers, a weekly advertising only publication
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 $13,000 and $15,000 at
December 31, 1998 and 1997, 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. The capitalized costs of the rights are recorded at the
lower of unamortized costs or estimated net realizable value.
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,
F-8
<PAGE> 61
GRAY COMMUNICATIONS SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
A. Summary of Significant Accounting Policies (Continued)
Property and Equipment (Continued)
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 $21.2
million and $11.5 million as of December 31, 1998 and 1997, 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 20, 1998, the Board of Directors declared a 50% stock dividend,
payable on September 30, 1998, to stockholders of record of the Class A Common
Stock and Class B Common Stock on September 16, 1998. This stock dividend
effected a three for two stock split. All applicable share and per share data
have been adjusted to give effect to the stock split.
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.
F-9
<PAGE> 62
GRAY COMMUNICATIONS SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
A. Summary of Significant Accounting Policies (Continued)
Fair Value of Financial Instruments
The estimated fair value of long-term debt at December 31, 1998 and 1997
exceeded book value by $10.4 million and $13.2 million, respectively. The fair
value of the Preferred Stock at December 31, 1998 and 1997 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 1998 format.
B. Business Acquisitions and Dispositions
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.
Recent and Pending Acquisitions
On March 1, 1999, the Company acquired substantially all of the assets of
The Goshen News from News Printing Company, Inc. and affiliates thereof, for
aggregate cash consideration of approximately $16.7 million including a
non-compete agreement. The Goshen News is a 17,000 circulation afternoon
newspaper published Monday through Saturday and serves Goshen, Indiana and
surrounding areas. The Company financed the acquisition through its $200.0
million bank loan agreement (the "Senior Credit Facility").
On January 28, 1999, Bull Run Corporation ("Bull Run"), a principal
stockholder of the Company, acquired 301,119 shares of the outstanding common
stock of Sarkes Tarzian, Inc. ("Tarzian") from the Estate of Mary Tarzian (the
"Estate") for $10.0 million. The acquired shares (the "Tarzian Shares")
represent 33.5% of the total outstanding common stock of Tarzian (both in terms
of the number of shares of common stock outstanding and in terms of voting
rights), but such investment represents 73% of the equity of Tarzian for
purposes of dividends as well as distributions in the event of any liquidation,
dissolution or other termination of Tarzian. Tarzian has filed a complaint in
the United States District Court for the Southern District of Indiana, claiming
that it had a binding contract with the Estate to purchase the Tarzian Shares
from the Estate prior to Bull Run's purchase of the shares, and requests
judgment providing that the Estate be required to sell the Tarzian Shares to
Tarzian. Bull Run believes that a binding contract between Tarzian and the
Estate did not exist, prior to Bull Run's purchase of the Tarzian Shares from
the Estate, and in any case, Bull Run's purchase agreement with the Estate
provides that in the event that a court of competent jurisdiction awards title
to the Tarzian Shares to a person or entity other than Bull Run, the purchase
agreement is rescinded and the Estate is required to pay Bull Run the full $10.0
million purchase price, plus interest. Tarzian owns and operates two television
stations and four radio stations: WRCB-TV Channel 3 in Chattanooga, Tennessee,
an NBC affiliate; KTVN-TV Channel 2 in Reno, Nevada, a CBS affiliate; WGCL-AM
and WTTS-FM in Bloomington, Indiana; and WAJI-FM and WLDE-FM in Fort Wayne,
Indiana. The Chattanooga and Reno markets rank as the 87th and the 108th largest
television markets in the United States, respectively, as ranked by A. C.
Nielsen Company.
F-10
<PAGE> 63
GRAY COMMUNICATIONS SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
B. Business Acquisitions and Dispositions (Continued)
Recent and Pending Acquisitions (Continued)
The Company has executed an option agreement with Bull Run, whereby the
Company has the option of acquiring the Tarzian investment from Bull Run. Upon
exercise of the option, the Company will pay Bull Run an amount equal to Bull
Run's purchase price for the Tarzian investment and related costs. The option
agreement currently expires on May 31, 1999; however, the Company may extend the
option period at an established fee. In connection with the option agreement,
the Company granted to Bull Run warrants to purchase up to 100,000 shares of the
Company's Class B Common Stock at $13.625 per share. The warrants vest
immediately upon the Company's exercise of its option to purchase the Tarzian
investment. Neither Bull Run's investment nor the Company's potential investment
is presently attributable under the ownership rules of the Federal
Communications Commission ("FCC"). If the Company successfully exercises the
option agreement, the Company plans to fund the acquisition through its Senior
Credit Facility.
1998 Acquisitions and Disposition
On July 31, 1998, the Company completed the purchase of all of the
outstanding capital stock of Busse Broadcasting Corporation ("Busse"). The
purchase price was $120.5 million less the accreted value of Busse's 11 5/8%
Senior Secured Notes due 2000 ("Busse Senior Notes"). The purchase price of the
capital stock consisted of the contractual purchase price of $112.0 million,
associated transaction costs of $2.9 million and Busse's cash and cash
equivalents of $5.6 million. Immediately following the acquisition of Busse, the
Company exercised its right to satisfy and discharge the Busse Senior Notes,
effectively prefunding the Busse Senior Notes at the October 15, 1998 call price
of 106 plus accrued interest. The amount necessary to satisfy and discharge the
Busse Senior Notes was approximately $69.9 million. 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 $122.8 million.
Immediately prior to the Company's acquisition of Busse, Cosmos
Broadcasting Corporation acquired the assets of WEAU-TV ("WEAU") from Busse and
exchanged them for the assets of WALB-TV, Inc. ("WALB"), the Company's NBC
affiliate in Albany, Georgia. In exchange for the assets of WALB, the Company
received the assets of WEAU, which were valued at $66.0 million, and
approximately $12.0 million in cash for a total value of $78.0 million. The
Company recognized a pre-tax gain of approximately $70.6 million and estimated
deferred income taxes of approximately $27.5 million in connection with the
exchange of WALB. The Company funded the remaining costs of the acquisition of
Busse's capital stock through its Senior Credit Facility.
As a result of these transactions, the Company added the following
television stations to its existing broadcast group: KOLN-TV ("KOLN"), the CBS
affiliate serving the Lincoln-Hastings-Kearney, Nebraska market; its satellite
station KGIN-TV ("KGIN"), the CBS affiliate serving Grand Island, Nebraska; and
WEAU, an NBC affiliate serving the La Crosse-Eau Claire, Wisconsin market. These
transactions also satisfied the FCC's requirement for the Company to divest
itself of WALB. The transactions described above are referred to herein as the
"Busse-WALB Transactions."
The Company's Board of Directors has agreed to pay Bull Run a fee of
approximately $2.0 million for services performed in connection with the
Busse-WALB Transactions. Of this fee, $1.1 million had been paid to Bull Run and
$880,000 remained in accounts payable at December 31, 1998.
Unaudited pro forma operating data for the years ended December 31 , 1998
and 1997 are presented below and assumes that the Busse-WALB Transactions and
the 1997 Broadcasting Acquisitions (as
F-11
<PAGE> 64
GRAY COMMUNICATIONS SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
B. Business Acquisitions and Dispositions (Continued)
1998 Acquisitions and Disposition (Continued)
defined in 1997 Acquisitions) were completed on January 1, 1997. The above
described unaudited pro forma operating data excludes a pre-tax gain of
approximately $70.6 million and estimated deferred income taxes of approximately
$27.5 million in connection with the disposition of WALB.
This unaudited pro forma operating data does not purport to represent the
Company's actual results of operations had the Busse-WALB Transactions and the
1997 Broadcasting Acquisitions been completed on January 1, 1997, 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 years ended December 31, 1998 and
1997, are as follows (in thousands, except per common share data):
<TABLE>
<CAPTION>
December 31,
------------------------------
1998 1997
-------------- -----------
(Unaudited)
<S> <C> <C>
Revenues, net $ 133,661 $ 117,981
============== ===========
Net loss available to common stockholders $ (4,562) $ (6,647)
============== ===========
Loss per share available to common stockholders:
Basic $ (0.38) $ (0.56)
============== ===========
Diluted $ (0.38) $ (0.56)
============== ===========
</TABLE>
The pro forma results presented above include adjustments to reflect (i)
the incurrence of interest expense to fund the respective acquisitions, (ii)
depreciation and amortization of assets acquired, (iii) the elimination of the
corporate expense allocation net of additional accounting and administrative
expenses and (iv) the income tax effect of such pro forma adjustments.
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. 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. WITN operates on Channel 7 and is the NBC affiliate in the
Greenville-New Bern-Washington, North Carolina market. In connection with the
purchase of the assets of WITN ("WITN Acquisition"), the Company paid Bull Run a
fee of $400,000 for services performed.
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 included 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. 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
F-12
<PAGE> 65
GRAY COMMUNICATIONS SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
B. Business Acquisitions and Dispositions (Continued)
1997 Acquisitions (Continued)
$58,000 for services performed. The WITN Acquisition and the GulfLink
Acquisition are hereinafter referred to as the "1997 Broadcasting Acquisitions."
Unaudited pro forma operating data for the year ended December 31, 1997
and 1996 are presented below and assumes that the 1997 Broadcasting
Acquisitions, the First American Acquisition (as defined in 1996 Acquisitions
and Disposition) and the KTVE Sale (as defined in 1996 Acquisitions and
Disposition) occurred on January 1, 1996.
This unaudited pro forma operating data does not purport to represent the
Company's actual results of operations had these transactions 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 years
ended December 31, 1997 and 1996, are as follows (in thousands, except per
common share data):
<TABLE>
<CAPTION>
December 31,
------------------------------
1997 1996
-------------- -----------
(Unaudited)
<S> <C> <C>
Revenues, net $ 109,099 $ 108,908
============== ===========
Net loss available to common stockholders $ (3,769) $ (2,397)
============== ===========
Loss per share available to common stockholders:
Basic $ (0.32) $ (0.20)
============== ===========
Diluted $ (0.32) $ (0.20)
============== ===========
</TABLE>
The pro forma results presented above include adjustments to reflect (i)
the incurrence of interest expense to fund the 1997 Broadcasting Acquisitions,
and the First American Acquisition (as defined in 1996 Acquisitions and
Disposition), (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 5,250,000 Class B Common shares
issued in connection with the First American Acquisition.
1996 Acquisitions and Disposition
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"). 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 paid Bull Run, a fee equal to
approximately $1.7 million for services performed in
F-13
<PAGE> 66
GRAY COMMUNICATIONS SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
B. Business Acquisitions and Dispositions (Continued)
1996 Acquisitions and Disposition (Continued)
connection with this acquisition.
The First American Acquisition and the early retirement of the Company's
existing bank credit facility and other senior indebtedness, were funded as
follows: net proceeds of $66.1 million from the sale of 5,250,000 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 750,000 shares of the
Company's Class A Common Stock at $16 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 FCC ordered the
Company to divest itself of 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. On July 31, 1998, the assets of
WALB were exchanged for the assets of WEAU. This exchange transaction satisfied
the FCC's divestiture requirement for WALB.
Condensed unaudited balance sheets of WALB and WJHG are as follows (in
thousands):
<TABLE>
<CAPTION>
WJHG
WALB December 31,
December 31, ----------------
1997 1998 1997
------------ ------- ------
(Unaudited) (Unaudited)
<S> <C> <C> <C>
Current assets $2,379 $1,163 $1,053
Property and equipment 1,473 1,323 848
Other assets 471 148 346
----------- ------ ------
Total assets $4,323 $2,634 $2,247
=========== ====== ======
Current liabilities $ 994 $ 583 $ 350
Other liabilities 215 118 127
Stockholder's equity 3,114 1,933 1,770
----------- ------ ------
Total liabilities and stockholder's equity $4,323 $2,634 $2,247
=========== ====== ======
</TABLE>
F-14
<PAGE> 67
GRAY COMMUNICATIONS SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
B. Business Acquisitions and Dispositions (Continued)
1996 Acquisitions and Disposition (Continued)
Condensed unaudited income statement data of WALB and WJHG are as follows
(in thousands):
<TABLE>
<CAPTION>
WALB WJHG
----------------------------------------- ---------------------------------
Seven Months Year Ended December 31, Year Ended December 31,
Ended ------------------------ ---------------------------------
July 31, 1998 1997 1996 1998 1997 1996
------------- -------- ------- ------ ------ -------
(Unaudited)
<S> <C> <C> <C> <C> <C> <C>
Broadcasting revenues $6,773 $10,090 $10,611 $5,057 $4,896 $5,217
Expenses 3,130 4,770 5,070 4,038 3,757 4,131
------- ------- ------- ------ ------- ------
Operating income 3,643 5,320 5,541 1,019 1,139 1,086
Other income (expense) (33) 3 7 1 (5) 6
------- ------- ------- ------ ------ ------
Income before income taxes $ 3,610 $ 5,323 $ 5,548 $1,020 $1,134 $1,092
======= ======= ======= ====== ====== ======
Net income $ 2,238 $ 3,295 $ 3,465 $ 632 $ 737 $ 685
======= ======= ======= ====== ====== ======
</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 paid a fee of $360,000 to Bull Run for services
performed.
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 "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 731,250
shares of Class A Common Stock at $11.92 per share. Of these warrants, 450,000
vested upon issuance with the remaining warrants vesting in five equal annual
installments commencing on the first anniversary of the date of issuance.
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 $0.39 per basic common share and $0.37 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.
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
F-15
<PAGE> 68
GRAY COMMUNICATIONS SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
B. Business Acquisitions and Dispositions (Continued)
1996 Acquisitions and Disposition (Continued)
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.
Unaudited pro forma operating data for the years 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 years ended December 31, 1996 and
1995, are as follows (in thousands, except per common share data):
<TABLE>
<CAPTION>
December 31,
------------------------------
1996 1995
-------------- -----------
(Unaudited)
<S> <C> <C>
Revenues, net $ 97,540 $ 90,637
============== ===========
Net loss available to common stockholders $ (1,388) $ (6,073)
============== ===========
Loss per share available to common stockholders:
Basic $ (0.11) $ (0.51)
============== ===========
Diluted $ (0.11) $ (0.51)
============== ===========
</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 5,250,000 Class B Common shares issued in connection with
the First American Acquisition.
C. Long-term Debt
Long-term debt consists of the following (in thousands):
<TABLE>
<CAPTION>
December 31,
------------------------------
1998 1997
-------------- -----------
<S> <C> <C>
10 5/8% Senior Subordinated Notes due 2006 $ 160,000 $ 160,000
Senior Credit Facility 109,500 65,630
Other 1,155 1,446
-------------- -----------
270,655 227,076
Less current portion (430) (400)
-------------- -----------
$ 270,225 $ 226,676
============== ===========
</TABLE>
F-16
<PAGE> 69
GRAY COMMUNICATIONS SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
C. Long-term Debt (Continued)
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 Credit Facility included scheduled reductions in the $125.0
million credit limit which commenced on March 31, 1997, interest rates based
upon a spread over LIBOR and/or the lender's prime rate, an unused commitment
fee of 0.50% applied to available funds and a maturity date of June 30, 2003.
Effective September 17, 1997, the Senior Credit Facility was modified to
reinstate the original credit limit of $125.0 million which had been reduced by
the scheduled reductions. The modification also reduced the interest rate spread
over LIBOR and/or Prime. The modification also extended the maturity date from
June 30, 2003 to June 30, 2004. The modification required a one-time fee of
$250,000.
Effective July 31, 1998, the Senior Credit Facility was modified to
increase the committed credit limit from $125.0 million to $200.0 million. This
modification also allows for an additional uncommitted $100.0 million in
available credit which is in addition to the committed $200.0 million credit
limit. This $100.0 million in uncommitted available credit can be borrowed by
the Company only after approval of the bank consortium. The modification also
extended the maturity date from June 30, 2004 to June 30, 2005. The modification
required a one-time fee of approximately $750,000.
At December 31, 1998, the Company had approximately $109.5 million
borrowed under the Senior Credit Facility with approximately $90.5 million
available under the agreement. The interest rate on the outstanding balance was
based on the lender's prime rate and a spread over LIBOR of 1.75%. 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 0.50% or
LIBOR plus 2.25%. The effective interest rate on the Senior Credit Facility at
December 31, 1998 and 1997 was 7.1% and 7.9%, respectively. The Company is
charged a commitment fee on the excess of the aggregate average daily available
credit limit less the amount outstanding. At December 31, 1998, the commitment
fee was 0.50% per annum.
The Company's $200.0 million Senior Credit Facility, as amended, is
comprised of a term loan (the "Term Commitment") of $100.0 million and a
revolving credit facility (the "Revolving Commitment") of $100.0 million.
As of December 31, 1998, the Company had $9.5 million borrowed under the
Senior Credit Facility's Revolving Commitment. The Revolving Commitment will
automatically reduce as follows: 10% in 2000, 15% in 2001, 15% in 2002, 20% in
2003, 25% in 1994 and 15% in 2005.
As of December 31, 1998, the Company had $100.0 million borrowed under the
Senior Credit Facility's Term Commitment. The amount outstanding under the Term
Commitment will become fixed as of December 30, 1999 and it will be reduced as
follows: 2.5% in 1999, 10.0% in 2000, 10.0% in 2001, 17.5% in 2002, 17.5% in
2003, 21.2% in 2004 and 21.3% in 2005.
The agreement pursuant to which the Senior Credit Facility was issued
contains certain restrictive provisions, which, among other things, limit
additional indebtedness and require minimum levels of cash flows. The Senior
Subordinated Notes also contained similar restrictive provisions as well as
limitations on restricted payments.
F-17
<PAGE> 70
GRAY COMMUNICATIONS SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
C. Long-term Debt (Continued)
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 are full,
unconditional and joint and several. All of the current and future direct and
indirect subsidiaries of the Company will be guarantors of the Senior
Subordinated 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 Senior
Subordinated Notes and the Senior Credit Facility are secured by substantially
all of the Company's existing and hereafter acquired assets.
Aggregate minimum principal maturities on long-term debt as of December
31, 1998, were as follows (in thousands):
<TABLE>
<CAPTION>
Minimum Principal
Year Maturities
------------------- -----------------
<S> <C>
1999 $ 430
2000 330
2001 209
2002 62
2003 27,067
Thereafter 242,557
$ 270,655
</TABLE>
The Company made interest payments of approximately $22.9 million, $21.3
million, and $7.6 million during 1998, 1997 and 1996, respectively.
In the year ended December 31, 1996, the Company recorded an extraordinary
charge of $5.3 million ($3.2 million after taxes or $0.39 per basic common share
or $0.37 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.
D. 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 183,051 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 of expense was
recorded in 1996.
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
F-18
<PAGE> 71
GRAY COMMUNICATIONS SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
D. Supplemental Employee Benefits and Other Agreements (Continued)
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):
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
Beginning liability $ 1,526 $ 3,158 $ 2,938
------- ------- -------
Provision 180 161 918
Forfeitures (61) -0- -0-
------- ------- -------
Net expense 119 161 918
Payments (202) (1,793) (698)
------- ------- -------
Net change (83) (1,632) 220
------- ------- -------
Ending liability 1,443 1,526 3,158
Less current portion (315) (365) (1,801)
------- ------- -------
$ 1,128 $ 1,161 $ 1,357
======= ======= =======
</TABLE>
E. Stockholders' Equity
During 1996, 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 receive cash dividends on an equal per share basis.
As part of the financing for the Augusta Acquisition in 1996, funding was
obtained from the 8% Note, which included the issuance of detachable warrants to
Bull Run to purchase 731,250 shares of Class A Common Stock at $11.92 per share.
Of these warrants 450,000 vested upon issuance, with the remaining warrants
vesting in five equal annual installments commencing on the first anniversary of
the date of issuance. 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 in 1996, the
Company also issued 1,000 shares of Series B Preferred Stock, with warrants to
purchase an aggregate of 750,000 shares of Class A Common Stock at an exercise
price of $16.00 per share. Of these warrants 450,000 vested upon issuance, with
the remaining warrants vesting in five equal annual installments commencing on
the first anniversary
F-19
<PAGE> 72
GRAY COMMUNICATIONS SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
E. Stockholders' Equity (Continued)
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 August 1998 and
September 1997, the Company issued 50.9 shares and 60.0 shares of Series B
Preferred Stock, respectively, as payment of dividends to the holders of its
then outstanding Series B Preferred Stock. During 1998, the Company redeemed
760.9 shares of Series B Preferred Stock at a cost of $7.6 million.
On September 24, 1996, the Company completed a public offering of 5.25
million shares of its Class B Common Stock at an offering price of $13.67 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 is authorized by its Board of Directors to purchase 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 1998, 1997 and
1996, the Company purchased 30,750 Class A Common Stock Shares, 259,350 Class A
Common Stock shares and 258,450 Class B Common Stock shares, respectively, under
this authorization. The 1998, 1997 and 1996 treasury shares were purchased at
prevailing market prices with an average effective price of $18.95, $13.33 and
$10.60 per share, respectively, and were funded from the Company's operating
cash flow.
F. 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 300,000 shares of the Company's Class A Common Stock and 600,000 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. 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, 1998, have been
granted at a price which approximates fair market value on the date of the
grant. On December 11, 1998, the Company repriced certain Class B Common Stock
grants made under the Incentive Plan, at a price which approximated the market
price of the Class B Common Stock on that day.
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.
F-20
<PAGE> 73
GRAY COMMUNICATIONS SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
F. Long-term Incentive Plan and Stock Purchase Plan (Continued)
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 A or
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 1998, 1997 and 1996, respectively: risk-free interest rates of
4.57%, 5.82% and 5.43%; dividend yields of 0.55%, 0.32% and 0.50%; volatility
factors of the expected market price of the Company's Class A Common Stock of
0.28, 0.28 and 0.33; and a weighted-average expected life of the options of 4.0,
4.5 and 2.0 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):
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Pro forma income (loss) before extraordinary charge available to common
stockholders $39,523 $ (3,174) $ 5,190
Pro forma income (loss) before extraordinary charge per common share:
Basic $ 3.31 $ (0.27) $ 0.64
Diluted $ 3.20 $ (0.27) $ 0.62
</TABLE>
F-21
<PAGE> 74
GRAY COMMUNICATIONS SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
F. 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, 1998, 1997, and 1996 is
as follows (in thousands, except weighted average data):
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------------------------------------
1998 1997 1996
---------------------- ---------------------- ----------------------
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 -
beginning of year 92 $7.43 297 $ 8.74 394 $ 8.26
Options granted 19 17.81 -0- -0-
Options exercised (74) 7.08 (127) 7.17 (78) 6.62
Options forfeited (1) 8.89 -0- (9) 8.29
Options expired -0- (78) 12.83 (10) 6.78
---------- -------- -------
Stock options outstanding - 36 $13.71 92 $ 7.43 297 $ 8.74
end of year ========== ======== -------
Exercisable at end of year 16 $8.89 92 $ 7.43 246 $ 8.71
Weighted-average fair value of
options granted during the year $5.59
</TABLE>
Exercise prices for Class A Common Stock options outstanding as of
December 31, 1998, ranged from $8.89 to $17.81 for the Incentive Plan. The
weighted-average remaining contractual life of the Class A Common Stock options
outstanding for the Incentive Plan is 3.2 years.
A summary of the Company's stock option activity for Class B Common Stock,
and related information for the years ended December 31, 1998, 1997, and 1996 is
as follows (in thousands, except weighted average data):
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------------------------------------
1998 1997 1996
--------------------- -------------------- ----------------------
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 -
beginning of year 630 $15.80 102 $10.58 -0-
Options granted 589 14.43 528 16.80 102 $ 10.58
Options exercised (86) 11.05 -0- -0-
Options forfeited (474) 16.95 -0- -0-
------- --- ---
Stock options outstanding -
end of year 659 $14.36 630 $15.80 102 $ 10.58
======= ===== ===
Exercisable at end of year 84 $14.65 79 $10.58 -0-
Weighted-average fair value of
options granted during the year $ 3.95 $ 5.40 $ 2.15
</TABLE>
F-22
<PAGE> 75
GRAY COMMUNICATIONS SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
F. Long-term Incentive Plan and Stock Purchase Plan (Continued)
Exercise prices for Class B Common Stock options outstanding as of
December 31, 1998, ranged from $10.58 to $14.50 for the Incentive Plan and
$14.00 to $16.13 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 4.0 and 0.5 years, respectively.
G. 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):
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
Current
Federal $ 414 $(1,620) $ 1,462
State and local 937 577 841
Deferred 26,793 1,283 (44)
------- ------- -------
$28,144 $ 240 $ 2,259
======= ======= =======
</TABLE>
The total provision for income taxes for 1998 included a deferred tax
charge of $27.5 million which related to the exchange of WALB's assets for the
assets of WEAU. For income tax purposes, the gain on the exchange of WALB
qualified for deferred capital gains treatment under the "like-kind exchange"
provision of Section 1031 of the Internal Revenue Code of 1986. 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.
F-23
<PAGE> 76
GRAY COMMUNICATIONS SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
G. Income Taxes (Continued)
Significant components of the Company's deferred tax liabilities and
assets are as follows (in thousands):
<TABLE>
<CAPTION>
December 31,
------------------------------
1998 1997
------------ -----------
<S> <C> <C>
Deferred tax liabilities:
Net book value of property and equipment $ 6,597 $ 2,670
Goodwill and other intangibles 45,546 6,281
Other 122 120
------------ -----------
Total deferred tax liabilities 52,265 9,071
Deferred tax assets:
Liability under supplemental retirement plan 528 526
Allowance for doubtful accounts 465 499
Difference in basis of assets held for sale 1,106 941
Federal operating loss carryforwards 3,825 4,412
State and local operating loss carryforwards 2,534 1,952
Other 457 290
------------ -----------
Total deferred tax assets 8,915 8,620
Valuation allowance for deferred tax assets (798) (753)
------------ -----------
Net deferred tax assets 8,117 7,867
------------ -----------
Deferred tax liabilities, net $ 44,148 $ 1,204
============ ===========
</TABLE>
Approximately $11.3 million in federal operating loss carryforwards will
expire by the year ended December 31, 2012. Additionally, the Company has
approximately $56.0 million in state operating loss carryforwards.
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):
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Statutory rate applied to income (loss) $ 24,431 $ (395) $ 1,625
State and local taxes, net of federal tax benefits 3,472 572 (7)
Permanent difference relating to sale of KTVE -0- -0- 602
Other items, net 241 63 39
---------- ----------- ---------
$ 28,144 $240 $2,259
========== =========== =========
</TABLE>
The Company made income tax payments of approximately $1.5 million,
$275,000 and $3.6 million during 1998, 1997 and 1996, respectively. At December
31, 1998 and 1997, the Company had current recoverable income taxes of
approximately $1.7 million and $2.1 million, respectively.
H. 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
F-24
<PAGE> 77
GRAY COMMUNICATIONS SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
H. Retirement Plans (Continued)
Pension Plan (Continued)
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 following summarizes the plan's funded status and related assumptions
(dollars in thousands):
<TABLE>
<CAPTION>
December 31,
----------------------
1998 1997
--------- ---------
<S> <C> <C>
Change in benefit obligation
Benefit obligation at beginning of year $ 7,053 $ 6,483
Service cost 616 429
Interest cost 496 443
Actuarial losses 203 31
Change in benefit obligation due to change in discount rate 303 -0-
Benefits paid (349) (333)
------- -------
Benefit obligation at end of year $ 8,322 $ 7,053
======= =======
Change in plan assets
Fair value of plan assets at beginning of year $ 6,926 $ 6,241
Actual return on plan assets 618 644
Company contributions 212 374
Benefits paid (349) (333)
------- -------
Fair value of plan assets at end of year $ 7,407 $ 6,926
======= =======
Components of accrued benefit costs
Underfunded status of the plan $ (915) $ (134)
Unrecognized net actuarial (gain) loss 297 (58)
Unrecognized net transition amount (188) (242)
Unrecognized prior service cost (3) (4)
------- -------
Accrued benefit cost $ (809) $ (438)
======= =======
Weighted-average assumptions as of December 31
Discount rate 6.8% 7.0%
Expected long-term rate of return on plan assets 6.8% 7.0%
Estimated rate of increase in compensation levels 5.0% 5.0%
</TABLE>
The net periodic pension cost includes the following components (in
thousands):
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------
1998 1997 1996
---------- ----------- --------
<S> <C> <C> <C>
Components of net periodic pension cost
Service cost $ 616 $ 429 $360
Interest cost 496 443 409
Expected return on plan assets (475) (433) (393)
Amortization of prior service cost (1) (1) (1)
Amortization of transition (asset) or obligation (54) (54) (54)
----- ----- ----
Pension cost $ 582 $ 384 $321
===== ===== ====
</TABLE>
F-25
<PAGE> 78
GRAY COMMUNICATIONS SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
H. Retirement Plans (Continued)
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 of 1986.
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 allowed 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 300,000 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. Since 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 amount is declared by the Company's Board of Directors before the
beginning of each plan year. The Company's percentage match was 50% for the
three years ended December 31, 1998. 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 $491,524, $419,670 and $262,426
were charged to expense for 1998, 1997 and 1996, respectively, for the issuance
of 29,305 and 31,311 Class B shares and 19,837 Class A shares, respectively.
I. 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, 1998, 1997 and 1996 were $1.8 million, $1.4 million and $501,000,
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):
<TABLE>
<CAPTION>
Lease Film Total
-------- --------- --------
<S> <C> <C> <C>
1999 $1,411 $1,550 $ 2,961
2000 877 3,656 4,533
2001 661 2,428 3,089
2002 344 1,535 1,879
2003 137 302 439
Thereafter 714 421 1,135
-------- -------- --------
$4,144 $9,892 $14,036
======== ======== =======
</TABLE>
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-26
<PAGE> 79
GRAY COMMUNICATIONS SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
J. Information on Business Segments
The Company operates in three business segments: broadcasting, publishing
and paging. The broadcasting segment operates ten television stations located in
the southeastern and midwestern United States at December 31, 1998. The
publishing segment operates three daily newspapers in three different markets,
and an area weekly advertising only publication in Georgia. 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,
-------------------------------------
1998 1997 1996
--------- --------- ---------
(In thousands)
<S> <C> <C> <C>
Operating revenues:
Broadcasting $ 91,007 $ 72,300 $ 54,981
Publishing 29,330 24,536 22,845
Paging 8,553 6,712 1,479
--------- --------- --------
$ 128,890 $ 103,548 $ 79,305
========= ========= ========
Operating income:
Broadcasting (1) $ 21,113 $ 17,509 $ 14,106
Publishing 2,867 2,206 1,980
Paging 947 1,015 (7)
--------- --------- --------
Total operating income (1) 24,927 20,730 16,079
Gain on disposition of television stations 70,572 -0- 5,671
Miscellaneous income and (expense), net (242) (31) 33
Interest expense (25,454) (21,861) (11,689)
--------- --------- --------
Income (loss) before income taxes $ 69,803 $ (1,162) $ 10,094
========= ========= ========
</TABLE>
Operating income is total operating revenue less operating expenses,
excluding gain on disposition of television stations, miscellaneous income and
expense (net) and interest. Corporate and administrative expenses are allocated
to operating income based on net segment revenues.
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------
1998 1997 1996
------- ------- ------
(In thousands)
<S> <C> <C> <C>
Depreciation and amortization expense:
Broadcasting $14,713 $11,024 $5,554
Publishing 1,554 1,973 1,730
Paging 1,773 1,480 329
------- ------- ------
18,040 14,477 7,613
Corporate 77 42 50
------- ------- ------
Total depreciation and amortization expense $18,117 $14,519 $7,663
======= ======= ======
</TABLE>
F-27
<PAGE> 80
GRAY COMMUNICATIONS SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
J. Information on Business Segments (Continued)
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------
1998 1997 1996
-------- -------- --------
(In thousands)
<S> <C> <C> <C>
Media cash flow:
Broadcasting $ 38,446 $ 30,519 $ 22,594
Publishing 5,214 4,856 4,957
Paging 2,964 2,686 401
-------- -------- --------
$ 46,624 $ 38,061 $ 27,952
======== ======== ========
Media cash flow reconciliation:
Operating income (1) $ 24,927 $ 20,730 $ 16,079
Add:
Amortization of program license rights 4,251 3,501 2,743
Depreciation and amortization 18,117 14,519 7,663
Corporate overhead 3,063 2,528 3,219
Non-cash compensation and contribution to 401(k)
Plan, paid in Common Stock 476 412 1,125
Less:
Payments for program license liabilities (4,210) (3,629) (2,877)
-------- -------- --------
$ 46,624 $ 38,061 $ 27,952
======== ======== ========
Capital expenditures:
Broadcasting $ 6,718 $ 5,000 $ 2,674
Publishing 934 4,235 692
Paging 1,461 975 -0-
-------- -------- --------
9,113 10,210 3,366
Corporate 158 162 30
-------- -------- --------
Total capital expenditures $ 9,271 $ 10,372 $ 3,396
======== ======== ========
<CAPTION>
December 31,
----------------------------------
1998 1997 1996
-------- -------- --------
(In thousands)
<S> <C> <C> <C>
Identifiable assets:
Broadcasting $410,039 $287,254 $245,614
Publishing 17,196 19,818 16,301
Paging 25,563 23,950 23,764
-------- -------- --------
452,798 331,022 285,679
Corporate 16,176 14,029 12,985
-------- -------- --------
Total identifiable assets $468,974 $345,051 $298,664
======== ======== ========
</TABLE>
(1) Operating income excludes gain on disposition of television stations of
$70.6 million recognized for the exchange of WALB in 1998 and $5.7 million
recognized for the KTVE Sale in 1996.
F-28
<PAGE> 81
GRAY COMMUNICATIONS SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
K. Selected Quarterly Financial Data (Unaudited)
<TABLE>
<CAPTION>
Fiscal Quarters
------------------------------------------
First Second Third Fourth
-------- ------- -------- --------
(In thousands, except for per share data)
<S> <C> <C> <C> <C>
Year Ended December 31, 1998:
Operating revenues $ 27,982 $32,061 $ 31,845 $ 37,002
Operating income (1) 4,868 7,210 5,020 7,829
Net income (loss) (1,483) 837 41,830 475
Net income (loss) available to common stockholders (1,842) 478 41,484 221
Basic income (loss) per share (0.16) 0.04 3.48 0.02
Diluted income (loss) per share $ (0.16) $ 0.04 $ 3.31 $ 0.02
Year Ended December 31, 1997:
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 (0.07) 0.02 (0.13) (0.06)
Diluted income (loss) per share $ (0.07) $ 0.02 $ (0.13) $ (0.06)
</TABLE>
(1) Operating income excludes $70.6 million gain on exchange of television
station recognized from the disposition of WALB.
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 1998 includes the Busse-WALB Transactions. As a
result of the exchange of WALB for WEAU, the Company recognized a pre-tax gain
of approximately $70.6 million and estimated deferred income taxes of
approximately $27.5 million (See Note B).
On August 20, 1998, the Board of Directors declared a 50% stock dividend,
payable on September 30, 1998, to stockholders of record of the Class A Common
Stock and Class B Common Stock on September 16, 1998. This stock dividend
effected a three for two stock split. All applicable share and per share data
have been adjusted to give effect to the stock.
F-29
<PAGE> 82
REPORT OF INDEPENDENT AUDITORS
We have audited the consolidated financial statements of Gray
Communications Systems, Inc. as of December 31, 1998 and 1997, and for each of
the three years in the period ended December 31, 1998, and have issued our
report thereon dated January 26, 1999. 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 26, 1999
F-30
<PAGE> 83
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 (1) Deductions (2) Period
- ----------- ---------- ---------- ------------ -------------- ----------
<S> <C> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1998
Allowance for doubtful accounts $1,253,000 $831,000 $ 61,000 $933,000 $1,212,000
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
</TABLE>
(1) Represents amounts recorded in connection with acquisitions.
(2) Deductions are write-offs of amounts not considered collectible.
F-31
<PAGE> 84
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Capital Sports Properties, Inc.:
We have audited the statements of earnings, changes in stockholders' equity and
cash flows of Capital Sports Properties, Inc. for the six-months ended June 30,
1996, 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 audit.
We conducted our audit 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 audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the results of operations and cash flows of Capital
Sports Properties, Inc. for the six-months ended June 30, 1996, in conformity
with generally accepted accounting principles.
/s/ KPMG LLP
Stamford, Connecticut
February 10, 1997
F-32
<PAGE> 85
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Host Communications, Inc.:
We have audited the consolidated balance sheet of Host Communications, Inc. and
subsidiaries as of June 30, 1996, and the related consolidated statements of
earnings, stockholders' equity, and cash flows for the year then ended, not
separately presented herein. 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 audit.
We conducted our audit 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 audit provides 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 the results of
their operations and their cash flows for the year 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 LLP
Cincinnati, Ohio
October 11, 1996
F-33
<PAGE> 86
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To The Stockholders of Rawlings Sporting Goods Company, Inc.:
We have audited the consolidated balance sheets of Rawlings Sporting Goods
Company, Inc. (a Delaware corporation) and subsidiaries (the Company) as of
August 31, 1998 and 1997, and the related consolidated statements of income,
stockholders' equity and cash flows for each of the three years in the period
ended August 31, 1998, not presented separately herein. These financial
statements are the responsibility of Rawlings' 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 Rawlings Sporting Goods
Company, Inc. and subsidiaries as of August 31, 1998 and 1997, and the results
of their operations and their cash flows for each of the three years in the
period ended August 31, 1998, in conformity with generally accepted accounting
principles.
/s/ ARTHUR ANDERSEN LLP
St. Louis, Missouri
October 7, 1998
F-34
<PAGE> 1
EXHIBIT 10.8
$9,000,000 AMENDED AND RESTATED CREDIT AGREEMENT DATED AS OF MARCH 5, 1999
BETWEEN DATASOUTH COMPUTER CORPORATION AND WACHOVIA BANK, N.A.
<PAGE> 2
$9,000,000.00
AMENDED AND RESTATED CREDIT AGREEMENT
DATED AS OF
MARCH 5, 1999
BETWEEN
DATASOUTH COMPUTER CORPORATION
AND
WACHOVIA BANK, N.A.
<PAGE> 3
TABLE OF CONTENTS
[Not a part of the Agreement]
<TABLE>
<S> <C>
ARTICLE I. DEFINITIONS.........................................................................................1
SECTION 1.01. Definitions...............................................................................1
SECTION 1.02. Accounting Terms and Determinations......................................................13
SECTION 1.03. References...............................................................................13
ARTICLE II. THE CREDITS........................................................................................13
SECTION 2.01. Commitment to Lend.......................................................................13
SECTION 2.02 Method of Borrowing......................................................................14
SECTION 2.03. Letters of Credit........................................................................15
SECTION 2.04 Notes....................................................................................17
SECTION 2.05. Maturity of Advances.....................................................................18
SECTION 2.06. Interest Rates...........................................................................18
SECTION 2.07. Commitment Fee...........................................................................20
SECTION 2.08. Optional Termination or Reduction of Facility B Commitment...............................20
SECTION 2.09. Mandatory Reduction and Termination of Commitments.......................................20
SECTION 2.10. Optional Prepayments.....................................................................20
SECTION 2.11. Mandatory Prepayments....................................................................21
SECTION 2.12. General Provisions Concerning Payments...................................................21
SECTION 2.13. Computation of Interest and Fees.........................................................21
ARTICLE III. CHANGE IN CIRCUMSTANCES; COMPENSATION..............................................................21
SECTION 3.01. Basis for Determining Interest Rate Inadequate or Unfair.................................21
SECTION 3.02. Illegality...............................................................................22
SECTION 3.03. Increased Cost and Reduced Return........................................................22
SECTION 3.04. Base Rate Loans Substituted for Affected Euro-Dollar Loans...............................23
SECTION 3.05. Compensation.............................................................................24
ARTICLE IV. CONDITIONS TO BORROWINGS...........................................................................24
SECTION 4.01. Conditions to First Borrowing............................................................24
SECTION 4.02. Conditions to All Borrowings.............................................................25
ARTICLE V. REPRESENTATIONS AND WARRANTIES.....................................................................26
SECTION 5.01. Corporate Existence and Power............................................................26
SECTION 5.02. Corporate and Governmental Authorization; Contravention..................................26
SECTION 5.03. Binding Effect...........................................................................26
SECTION 5.04. Financial Information....................................................................27
SECTION 5.05. Litigation...............................................................................27
SECTION 5.06. Compliance with ERISA....................................................................27
SECTION 5.07. Taxes....................................................................................27
SECTION 5.08. Subsidiaries.............................................................................27
SECTION 5.09. Not an Investment Company................................................................28
</TABLE>
ii
<PAGE> 4
<TABLE>
<S> <C>
SECTION 5.10. Ownership of Property; Liens.............................................................28
SECTION 5.11. No Default...............................................................................28
SECTION 5.12. Full Disclosure..........................................................................28
SECTION 5.13. Environmental Matters....................................................................28
SECTION 5.14. Compliance with Laws.....................................................................29
ARTICLE VI. COVENANTS..........................................................................................29
SECTION 6.01. Information..............................................................................29
SECTION 6.02. Inspection of Property, Books and Records................................................31
SECTION 6.03. Ratio of Consolidated Funded Debt to EBITDA..............................................31
SECTION 6.04. Minimum Stockholders' Equity.............................................................31
SECTION 6.05. Fixed Charges Coverage...................................................................31
SECTION 6.06. Investments..............................................................................32
SECTION 6.07. Negative Pledge..........................................................................32
SECTION 6.08. Maintenance of Existence.................................................................32
SECTION 6.09. Dissolution..............................................................................32
SECTION 6.10. Consolidations, Mergers and Sales of Assets..............................................32
SECTION 6.11. Use of Proceeds..........................................................................33
SECTION 6.12. Compliance with Laws; Payment of Taxes...................................................33
SECTION 6.13. Insurance................................................................................33
SECTION 6.14. Change in Fiscal Year....................................................................33
SECTION 6.15. Maintenance of Property..................................................................33
SECTION 6.16. Environmental Notices....................................................................33
SECTION 6.17. Environmental Matters....................................................................33
SECTION 6.18. Environmental Release....................................................................34
SECTION 6.19. Debt.....................................................................................34
SECTION 6.20. Collateral Maintenance...................................................................34
SECTION 6.21 Interest Rate Protection.................................................................34
SECTION 6.22 Interest Coverage........................................................................34
ARTICLE VII. DEFAULTS...........................................................................................35
SECTION 7.01. Events of Default........................................................................35
SECTION 7.02. Remedies on Default......................................................................37
SECTION 7.03. Security.................................................................................37
ARTICLE VIII. MISCELLANEOUS......................................................................................38
SECTION 8.01. Notices..................................................................................38
SECTION 8.02. No Waivers...............................................................................38
SECTION 8.03. Expenses; Documentary Taxes..............................................................38
SECTION 8.04. Amendments and Waivers...................................................................39
SECTION 8.05. Successors and Assigns...................................................................39
SECTION 8.06. Confidentiality..........................................................................40
SECTION 8.07. Interest Limitation......................................................................41
SECTION 8.08. Governing Law............................................................................41
SECTION 8.09. Counterparts.............................................................................41
SECTION 8.10. Consent to Jurisdiction..................................................................41
SECTION 8.11. Severability.............................................................................41
SECTION 8.12. Captions.................................................................................42
</TABLE>
iii
<PAGE> 5
<TABLE>
<S> <C>
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
</TABLE>
iv
<PAGE> 6
AMENDED AND RESTATED CREDIT AGREEMENT
THIS AMENDED AND RESTATED CREDIT AGREEMENT, made as of the
5th day of March, 1999, 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 February 20, 1998 (the "1998 Credit
Agreement") pursuant to which the Bank agreed to provide to the Borrower
revolving loans of up to $5,000,000.00 from time to time outstanding and a term
loan in the principal amount of $5,000,000.00, all as therein provided. The
Borrower and the Bank desire to amend and restate the 1998 Credit Agreement in
order, among other things, to rearrange the existing revolving loan facility
and to rearrange and decrease the existing term loan to the principal amount of
$4,000,000.00, 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 I.1. 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.
<PAGE> 7
"Applicable Margin" means (x) for any Base Rate Loan, for any
day a number equal to one-fourth of one percent (0.25%), and (y) for any
Euro-Dollar Loan, the applicable percentage determined in accordance with
Section 2.06(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.
"Authority" has the meaning set forth in Section 3.02.
"Bank Guarantee" means a Guarantee for Payment of Sums Due to
the Commissioners of H.M. Customs and Excise, or similar agreement in form and
substance satisfactory to the Bank.
"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 March 5, 1999.
"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.
2
<PAGE> 8
"Commitment Fee Payment Date" means the first day of each
June, September, December and March, commencing June 1, 1999; 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" means one half of one-percent (0.500%)
per annum.
"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
scheduled principal payments on Consolidated Debt for such period, excluding,
however, the $1,000,000.00 principal payment required on Facility B on the
Facility B Commitment Reduction Date.
"Consolidated Funded Debt" means Funded Debt of the Borrower
and its Consolidated Subsidiaries in accordance with GAAP applied on a
consistent basis.
"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;
provided, however, that Consolidated Interested Expense shall not include any
interest or similar expenses relating to any lease transaction in which the
Borrower or any of its Consolidated Subsidiaries is a party.
"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
3
<PAGE> 9
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 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.
4
<PAGE> 10
"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.
"Existing Letters of Credit" means collectively, (i) the
Guarantee for Payment of Sums Due to the Commissioners of H.M. Customs and
Excise dated December 14, 1998, executed by Wachovia Bank, N.A., London Branch
for the account of the Borrower, as applicant, under which Wachovia Bank, N.A.,
London Branch guaranteed payment of certain duties, taxes, levies, charges,
amounts and deposits in respect of the same, with liability limited to 60,000
pounds sterling; (ii) Documentary Letter of Credit number 968-107242 dated
December 17, 1998, in the original face amount of 4,500,000 Japanese yen,
issued for the benefit of OKI Electric Industry Co. Ltd., having an expiration
date of August 27, 1999; (iii) Documentary Letter of Credit number 968-106365
dated November 4, 1998, in the original face amount of 2,253,000 Japanese yen
issued for the benefit of OKI Customer Adtech Co., Ltd. (OCA), having an
expiration date of July 16, 1999; and (iv) Documentary Letter of Credit number
968-107241 dated December 17, 1998, in the original face amount of 2,080,000
Japanese yen issued for the benefit of OKI Electric Industry Co. Ltd., having
an expiration date of August 5, 1999.
5
<PAGE> 11
"Facility A Commitment" shall have the meaning assigned to it
in Section 2.01(a).
"Facility A Commitment Reduction Date" shall mean the last
day of each March, June, September and December commencing March 31, 1999 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 September 5, 2000.
"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 June 30,
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 September 5, 2000.
"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
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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 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 Coverage Ratio" has the meaning set forth in
Section 6.22(b).
"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;
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(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 Borrower.
"Letter of Credit" means collectively, the Existing Letters
of Credit and any irrevocable stand-by letter of credit or irrevocable sight
documentary letter of credit or Bank Guarantee (and all amendments thereto)
issued by the Bank, or in the case of Bank Guarantees, issued by the Bank or an
affiliate of the Bank, for the account of the Borrower, in each case as issued
pursuant to Section 2.03.
"Letter of Credit Availability Period" means the period from
and including the Closing Date to but excluding the Facility B Termination
Date.
"Letter of Credit Commitment" has the meaning set forth in
Section 2.03(a).
"Letter of Credit Exposure" means at any time the sum of (a)
the aggregate undrawn amount of all outstanding Letters of Credit, plus (b) the
aggregate amount of all Letter of Credit disbursements not yet reimbursed by
the Borrower as provided in Section 2.03.
"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 March 5, 1999 between
the Borrower and the Bank, together with all amendments and supplements
thereto.
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"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 "3750" 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
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.
"Permitted Encumbrances" means:
(a) Liens existing on the date of this Agreement;
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<PAGE> 15
(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.
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"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.
"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 2.06(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 sum of (a) the aggregate outstanding principal
amount of the Advances made pursuant to the Facility B Commitment, plus (b) the
Letter of Credit Exposure.
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"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 I.2. 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 audited consolidating and consolidated financial statements of Bull
Run and its Consolidated Subsidiaries delivered to the Bank.
SECTION I.3. 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 II.1. 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 $4,000,000.00 (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) plus the Letter of
Credit Exposure 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 2.10, 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.
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(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 II.2 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 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 2.12, 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 II.3. Letters of Credit. (a) The Borrower may request
the issuance of Letters of Credit, in form and substance reasonably acceptable
to Wachovia, for the account of the Borrower, at any time and from time to time
during the Letter of Credit Availability Period; provided that any Letter of
Credit shall
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be issued only if, and each request by the Borrower for the issuance of any
Letter of Credit shall be deemed a representation and warranty of the Borrower
that, immediately following the issuance of such Letter of Credit, (i) the
Letter of Credit Exposure shall not exceed $1,000,000.00 (the "Letter of Credit
Commitment") and (ii) the sum of the Letter of Credit Exposure and the
aggregate principal amount of outstanding Facility B Loans shall not exceed the
Facility B Commitment at the time.
(b) Each Letter of Credit shall expire at 5:00 p.m.,
Charlotte, North Carolina time, on the last day of the Letter of Credit
Availability Period, unless such Letter of Credit expires by its terms (or is
required by Section 2.03(c) to expire) on an earlier date.
(c) Each issuance of any Letter of Credit shall be made
on at least two Business Days' prior irrevocable written or telecopy notice
(such notice to be delivered by 10:00 a.m., Charlotte, North Carolina time)
from the Borrower (or such shorter notice as shall be acceptable to Wachovia)
to Wachovia, specifying whether such Letter of Credit is to be a standby letter
of credit, a documentary letter of credit or a Bank Guarantee, the date of
issuance, the date on which such Letter of Credit is to expire (which shall not
be later than the earlier of the last day of the Letter of Credit Availability
Period or, in the case of documentary letters of credit, 180 days after the
date of issuance), the amount of such Letter of Credit, the name and address of
the beneficiary of such Letter of Credit, and such other information as may be
necessary or desirable to complete such Letter of Credit. Each Letter of Credit
issued hereunder will be subject to the Uniform Customs and Practices for
Documentary Credits, as in effect from time to time.
(d) The Borrower shall pay to Wachovia on the date of
each issuance of a Letter of Credit, Wachovia's usual and customary issuance
fee then in effect for each Letter of Credit issued on such day. In addition,
the Borrower shall pay to Wachovia from time to time in connection with each
Letter of Credit issued hereunder the usual and customary fees charged by
Wachovia and as in effect from time to time for document examination services,
courier services, amendment fees and other customary fees and charges imposed
by Wachovia for letter of credit services. The Borrower shall also pay to the
Bank on the last day of each March, June, September and December in each year
and on the Facility B Termination Date a fee on the average daily aggregate
amount available to be drawn under all standby letters of credit during the
preceding quarter (or shorter period commencing with the Closing Date or ending
on the Facility B Termination Date) at a rate per annum equal to the Applicable
Margin for Euro-Dollar Loans from time to time in effect during such period
pursuant to Section 2.06, which fees shall be computed on the basis of the
actual number of days elapsed in a year of 360 days and shall accrue from the
Closing Date to but excluding the last day of the Letter of Credit Availability
Period.
(e) The Borrower hereby agrees to reimburse Wachovia for
any payment or disbursement made by Wachovia under any Letter of Credit, by
making payment in immediately available funds to Wachovia within one Business
Day after receipt of notice of such payment or disbursement, in an amount equal
to the amount of such payment or disbursement, plus interest on the amount so
paid or disbursed by Wachovia, to the extent not reimbursed prior to 3:00 p.m.
(Charlotte, North Carolina time) on the date of such payment or disbursement,
from and including the date paid or disbursed to but excluding the date
Wachovia is reimbursed by the Borrower therefor, at a rate per annum equal to
the rate applicable to Base Rate Loans during such period pursuant to Section
2.06. Wachovia shall give the Borrower prompt notice of each drawing under any
Letter of Credit, provided that the failure to give any such notice shall in no
way affect, impair or diminish the Borrower's obligations hereunder.
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(f) The Borrower's obligations to reimburse Letter of
Credit disbursements as provided in Section 2.03(e) shall be absolute,
unconditional and irrevocable and shall be performed strictly in accordance
with the terms of this Agreement under any and all circumstances, including the
following:
(i) any lack of validity or enforceability of any Letter
of Credit or any other Loan Document;
(ii) The existence of any claim, setoff, defense or other
right which the Borrower, any Subsidiary or any other person may at
any time have against the beneficiary under any Letter of Credit,
Wachovia or any other person in connection with this Agreement, any
other Loan Document or any other related or unrelated agreement or
transaction;
(iii) any draft or other document presented under a Letter
of Credit proving to be forged, fraudulent, invalid or insufficient in
any respect or failing to comply with the Uniform Customs and
Practices for Documentary Credits, as in effect from time to time, or
any statement therein being untrue or inaccurate in any respect;
provided that any payment under a Letter of Credit by Wachovia was not
wrongfully made as a result of the gross negligence or willful
misconduct of Wachovia;
(iv) payment by Wachovia under a Letter of Credit against
presentation of a draft or other document which does not comply with
the terms of such Letter of Credit; provided that such payment was not
wrongfully made as a result of the gross negligence or willful
misconduct of Wachovia;
(v) any amendment, waiver or consent in respect of this
Agreement or any other Loan Document; and
(vi) any other act or omission or delay of any kind or
any other circumstance or event whatsoever, whether or nor similar to
any of the foregoing and whether or not foreseeable, that might, but
for the provisions of this Section 2.03(f), constitute a legal or
equitable discharge of the Borrower's obligations hereunder; provided
that any payment under a Letter of Credit by Wachovia was not
wrongfully made as a result of the gross negligence or willful
misconduct of Wachovia.
(g) It is expressly understood and agreed that, for
purposes of determining whether a wrongful payment under a Letter of Credit
resulted from Wachovia's gross negligence or willful misconduct, (i) Wachovia's
acceptance of documents that are in strict compliance with the terms of the
applicable Letter of Credit, without responsibility for further investigation,
regardless of any notice or information to the contrary, and (ii) Wachovia's
exclusive reliance on the documents presented to it under such Letter of Credit
as to any and all matters set forth therein, including the amount of any draft
presented under such Letter of Credit, whether or not the amount due to the
beneficiary thereunder equals the amount of such draft and whether or not any
document presented pursuant to such Letter of Credit proves to be insufficient
in any respect (so long as such document is in strict compliance with the terms
of the applicable Letter of Credit), and whether or not any other statement or
any other document presented pursuant to such Letter of Credit proves to be
forged or invalid or any statement therein proves to be inaccurate or untrue in
any respect whatsoever shall, in each case, be deemed not to constitute willful
misconduct or gross negligence of Wachovia. It is further understood and agreed
that, notwithstanding the proviso to clause (iv) of Section 2.03(f), the
Borrower's obligation hereunder to reimburse Letter of Credit disbursements
will not be excused by the gross negligence or willful misconduct of Wachovia
to the extent that such Letter of Credit disbursement actually discharged
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a liability of, or otherwise benefitted, or was recovered by, the Borrower;
provided that the foregoing shall not be construed to excuse Wachovia from
liability to the Borrower to the extent of any direct damages suffered by the
Borrower that are caused by Wachovia's gross negligence or willful misconduct
in determining whether drafts and other documents presented under a Letter of
Credit comply with the terms thereof.
(h) Wachovia shall, promptly following its receipt
thereof, examine all documents purporting to represent a demand for payment
under a Letter of Credit. Wachovia shall as promptly as possible give
telephonic notification, confirmed by telex or telecopy, to the Borrower of
such demand for payment and whether Wachovia has made or will make a Letter of
Credit disbursement thereunder; provided that the failure to give such notice
shall not relieve the Borrower of its obligation to reimburse any such Letter
of Credit disbursement in accordance with this Section 2.03.
(i) For purposes of calculating the Letter of Credit
Exposure, all Letters of Credit issued in a foreign currency shall be counted
in U.S. Dollars at current exchange rates from time to time in effect. If the
aggregate Letter of Credit Exposure and the outstanding Facility B Loans ever
exceed the Facility B Commitment as in effect from time to time, the Borrower
shall immediately prepay a portion of the Facility B Loans then outstanding
sufficient to reduce the aggregate Letter of Credit Exposure plus the
outstanding Facility B Loans to an amount less than or equal to the Facility B
Commitment then in effect.
SECTION II.4 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 II.5. Maturity of Advances. 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.
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SECTION II.6. 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 4.00 to 1.00, then the Applicable Margin
for Euro-Dollar Loans shall be 3.00% per annum;
(ii) if the ratio of Consolidated Funded Debt to EBITDA
is less than 4.00 to 1.00 but greater than 3.00 to 1.00, then the
Applicable Margin for Euro-Dollar Loans shall be 2.75% per annum;
(iii) if the ratio of Consolidated Funded Debt to EBITDA
is less than 3.00 to 1.00 but greater than 2.00 to 1.00, then the
Applicable Margin for Euro-Dollar Loans shall be 2.50% per annum; and
(iv) if the ratio of Consolidated Funded Debt to EBITDA
is less than or equal to 2.00 to 1.00, then the Applicable Margin for
Euro-Dollar Loans shall be 2.25% per annum.
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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
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 three percent (3.00%) 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 three percent (3.00%) 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 II.7. Commitment Fee. 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 (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 2.08 or Section 2.09,
refinancing of the Advances or otherwise), the entire accrued and unpaid
Commitment Fee shall be paid on the date of such termination.
SECTION II.8. 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 2.07. If the Facility B
Commitment is so terminated in its entirety, all accrued fees (as provided
under Section 2.07) 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 II.9. Mandatory Reduction and Termination of
Commitments.
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(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 II.10. 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 II.11. Mandatory Prepayments. On each date on which
the Commitments are reduced or terminated pursuant to Section 2.08 and 2.09,
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 II.12. 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 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
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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 II.13. 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 III.1. 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 III.2. 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 III.3. 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
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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 III.4. Base Rate Loans Substituted for Affected
Euro-Dollar Loans. If (i) the 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 III.5. 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.
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ARTICLE IV. CONDITIONS TO BORROWINGS
SECTION IV.1. 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;
(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;
(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; and
(g) all indebtedness of the Borrower to the Bank under
the 1998 Credit Agreement shall have been repaid in full (or shall be
repaid in full with proceeds from the initial Advances hereunder).
SECTION IV.2. 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:
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(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 V.1. 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.
SECTION V.2. 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 V.3. 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.
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SECTION V.4. Financial Information. (a) The consolidating and
consolidated balance sheet of Bull Run and its Consolidated Subsidiaries as of
December 31, 1997 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, 1998,
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, 1998 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 V.5. 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 V.6. 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 V.7. 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 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, 1997.
SECTION V.8. 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.
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SECTION V.9. Not an Investment Company. The Borrower is not
an "investment company" within the meaning of the Investment Company Act of
1940, as amended.
SECTION V.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 V.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 V.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 V.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. ss. 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 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 V.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
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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 VI.1. 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) as soon as available and in any event within thirty
days after the end of each calendar month, a balance sheet of the
Borrower as of the end of such month and the related statement of
income and statement of cash flows for such month and for the portion
of the fiscal year ended at the end of such month, 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 the Borrower.
(d) simultaneously with the delivery of each set of
financial statements referred to in clauses (a), (b) and (c) 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
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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;
(e) 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;
(f) 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;
(g) 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;
(h) 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
(i) 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 VI.2. 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 VI.3. Ratio of Consolidated Funded Debt to EBITDA.
(a) At the end of each Fiscal Quarter, commencing with the Fiscal Quarter
ending June 30, 1999, the ratio of Consolidated Funded Debt to EBITDA will not
at any time exceed the following limits:
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(i) from June 30, 1999 through December 31, 1999, the
ratio of Consolidated Funded Debt to EBITDA will not
exceed 4.00 to 1.00; and
(ii) from January 1, 2000 through December 31, 2000, the
ratio of Consolidated Funded Debt to EBITDA will not
exceed 2.50 to 1.00.
(b) The ratio of Consolidated Funded Debt to EBITDA
shall be determined at the end of each Fiscal Quarter, commencing with the
Fiscal Quarter ending June 30, 1999, and shall be the ratio of Consolidated
Funded Debt as at the end of the applicable Fiscal Quarter to EBITDA for the
twelve months then ended.
SECTION VI.4. Minimum Stockholders' Equity. Stockholders'
Equity will at no time be less than $28,000,000.00 plus the sum of 50% of the
cumulative Reported Net Income of the Borrower and its Consolidated
Subsidiaries during any period after December 31, 1998 (taken as one accounting
period), calculated monthly beginning January 31, 1999 and monthly thereafter
but excluding from such calculations any month in which the Net Income of the
Borrower and its Consolidated Subsidiaries is negative.
SECTION VI.5. Fixed Charges Coverage. (a) At the end of each
Fiscal Quarter, commencing with the Fiscal Quarter ending June 30, 1999, the
Fixed Charges Coverage Ratio, as determined in accordance with Section 6.05(b),
shall not be less than the following limits:
(i) from June 30, 1999 through December 31, 1999, the
Fixed Charges Coverage Ratio shall not be less than
1.00 to 1.00; and
(ii) from January 1, 2000 through December 31, 2000, the
Fixed Charges Coverage Ratio shall not be less than
2.00 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 June 30,
1999, 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 VI.6. 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 VI.7. 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.
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SECTION VI.8. 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 VI.9. 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 VI.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 VI.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 VI.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 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 VI.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 VI.14. Change in Fiscal Year. The Borrower will not
change its Fiscal Year without the consent of the Bank.
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SECTION VI.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 VI.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 VI.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 VI.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.
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.
SECTION 6.22 Interest Coverage. (a) At the end of each Fiscal
Quarter, commencing with the Fiscal Quarter ending March 31, 1999, the Interest
Coverage Ratio, as determined in accordance with Section 6.22(b), shall not be
less than the following limits:
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(i) at March 31, 1999, the Interest Coverage Ratio shall
not be less than 1.60 to 1.00;
(ii) from June 30, 1999 through December 31, 1999, the
Interest Coverage Ratio shall not be less than 1.85
to 1.00; and
(iii) from January 1, 2000 through December 31, 2000, the
Interest Coverage Ratio shall not be less than 2.75
to 1.00.
(b) The Interest Coverage Ratio shall be determined at the end of
each Fiscal Quarter, commencing with the Fiscal Quarter ending March 31, 1999,
and shall be the ratio of EBITDA for the twelve months then ended to
Consolidated Interest Expense for the twelve months then ended.
ARTICLE VII. DEFAULTS
SECTION VII.1. 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
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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 (and its right to declare an Event of Default)
arising by reason of this subsection (ii).
(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
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(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 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.
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ARTICLE VIII. MISCELLANEOUS
SECTION VIII.1. 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, 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 VIII.2. 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 VIII.3. 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,
35
<PAGE> 41
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 VIII.4. 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 VIII.5. 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 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
36
<PAGE> 42
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.
SECTION VIII.6. 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 VIII.7. 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
37
<PAGE> 43
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. ss.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 VIII.8. 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 VIII.9. 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 VIII.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 VIII.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.
38
<PAGE> 44
SECTION VIII.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.
IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be executed as of the year and day first above written.
<TABLE>
<S> <C>
BORROWER:
DATASOUTH COMPUTER CORPORATION
ATTEST:
/s/ K. NICK WALLER
By: /s/ FREDERICK J. ERICKSON
---------------------------------------
Assistant 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/ CHRISTOPHER L. FINCHER
----------------------------------------
Title: Senior Vice President
----------------------------------------
</TABLE>
<PAGE> 1
EXHIBIT 10.10
FIRST AMENDMENT OF AMENDED AND RESTATED
LOAN AGREEMENT BETWEEN BULL RUN CORPORATION AND
NATIONSBANK, N.A., DATED AS OF FEBRUARY 24, 1999
<PAGE> 2
FIRST AMENDMENT OF AMENDED AND RESTATED LOAN AGREEMENT
THIS AMENDMENT is made as of this 24th day of February, 1999, by and
between BULL RUN CORPORATION, a Georgia corporation ("Borrower"), and
NATIONSBANK, N.A. ("Lender").
RECITALS
WHEREAS, Lender and Borrower are parties to that certain Amended and
Restated Loan Agreement, dated as of March 20, 1998 (the "Loan Agreement"),
pursuant to which Lender has agreed to make one or more loans from time to time
to the Borrower in accordance with the terms and conditions thereof; and
WHEREAS, Borrower has requested and Lender has agreed to provide an
additional term loan (the "Third Term Loan") to finance the acquisition of
shares of common and preferred stock of Total Sports, Inc., a Delaware
corporation ("Total Sports"), and Lender and Borrower desire to modify the Loan
Agreement in order to provide for the Third Term Loan, and in certain other
respects in accordance with the terms and conditions set forth herein.
NOW, THEREFORE, in consideration of the premises, the covenants and
agreements contained herein, and other good and valuable consideration, the
receipt and adequacy of which are hereby acknowledged, Borrower and Lender do
hereby agree that all capitalized terms used herein shall have the meanings
ascribed thereto in the Loan Agreement as amended hereby (except as otherwise
expressly defined or limited herein) and do hereby further agree as follows:
1. AMENDMENTS OF LOAN AGREEMENT. Subject to the fulfillment of
the conditions precedent to the effectiveness of this Modification which are set
forth below, the Loan Agreement shall be amended as follows:
(a) Section 1.01 of the Loan Agreement is hereby amended
by adding to Section 1.01 the following new definitions in the
appropriate alphabetical order:
"First Amendment" shall mean that certain First
Amendment of Loan Agreement dated as of February 24, 1999, by
and between Borrower and Lender.
"Third Term Loan" shall mean any and all advances
made by Lender to Borrower under the Third Term Loan Facility.
"Third Term Loan Facility" shall mean the term loan
facility provided by Lender to Borrower under Section 3.2A
hereof.
"Third Term Loan Facility Expiration Date" shall mean
May 28, 1999 (as such date may be extended, accelerated or
amended from time to time pursuant to this Agreement).
"Third Term Loan Maturity Date" shall mean August 23,
1999.
"Third Term Loan Maximum Availability" shall mean
$4,000,000.
"Third Term Loan Note" shall mean the Third Term Loan
Note executed by the Borrower and payable to the order of the
Lender as evidence of the Third Term Loan, and any extension,
renewal, modification or replacement thereof or therefor.
<PAGE> 3
"Third Term Loan Obligations" shall mean,
collectively, any and all Obligations of Borrower to pay
Lender the principal of, interest or fees on, collection costs
for, or any other sums owing in respect of the Third Term
Loans or the Third Term Loan Notes.
"Total Sports" shall mean Total Sports, Inc., a
Delaware corporation.
"Total Sports Shares" shall mean all shares of common
and preferred stock of Total Sports now owned or hereafter
acquired by Borrower and all cash and non-cash proceeds
thereof.
(b) Section 1.1 of the Loan Agreement is hereby further
amended by deleting from Section 1.1 the terms "Term Loan Facilities,"
"Term Loan Notes," and "Term Loans" and by substituting in lieu thereof
the following new definitions of such terms:
"Term Loan Facilities" shall mean, collectively, the
First Term Loan Facility, the Second Term Loan Facility and
the Third Term Loan Facility.
"Term Loan Notes" shall mean, collectively, the First
Term Loan Note, the Second Term Loan Note and the Third Term
Loan Note.
"Term Loans" shall mean, collectively, the First Term
Loan, the Second Term Loan and the Third Term Loan.
(c) The Loan Agreement is hereby further amended by
adding the following new Section 3.2A after the existing Section 3.2
and before the existing Section 3.3:
"SECTION 3.2A. THIRD TERM LOAN FACILITY.
(a) Subject to the terms and conditions of this
Agreement, including, without limitation, the conditions
precedent set forth in Section 5.3 hereof, the Lender agrees
to advance to the Borrower, from time to time on or prior to
the Third Term Loan Facility Expiration Date and upon the
Borrower's request therefor, a Third Term Loan in the
principal amount of the Third Term Loan Maximum Availability.
The Third Term Loan Facility may be disbursed in one or more
advances but the Lender's commitment under the Third Term Loan
Facility shall be reduced by each advance thereunder and any
sums advanced under the Third Term Loan Facility may not be
repaid and then re-borrowed thereunder.
(b) The proceeds of the Third Term Loan shall
be used to purchase shares of common and preferred stock of
Total Sports."
(d) The Loan Agreement is hereby further amended by
adding a new Section 3.4(b-1) immediately following the existing
Section 3.4(b):
"(b-1) The Borrower's obligation to pay the Lender
the principal of and interest on the Third Term Loan
shall be evidenced by the records of the Lender
(subject to Section 4.5 hereof) and by the Third Term
Loan Note. The principal balance of the Third Term
Loan shall be payable on the Third Term Loan Maturity
Date in an amount equal to the entire remaining
unpaid balance of the Third Term Loan."
2
<PAGE> 4
(e) The Loan Agreement is hereby further amended by
deleting Section 3.3(a) in its entirety and by substituting in lieu
thereof, the following new Section 3.3(a):
"(a) The unpaid principal balance of each of the Term
Loans shall bear interest from time to time at a rate per
annum equal to the Prime Rate plus the Applicable Term Loan
Margin therefor as then in effect; provided, however, that
Borrower may, by written notice (or by telephonic notice
promptly confirmed in writing) delivered to the Lender not
later than 10:00 a.m. (Atlanta time) on the second Business
day prior to any Interest Period designated by the Borrower in
such notice, direct that interest accrue on the unpaid
principal balance of any Term Loan other than the Third Term
Loan (or any portion of any Term Loan (other than the Third
Term Loan) which when added to all other LIBOR Advances then
outstanding under any of the Loans and which have the same
Interest Period totals an amount of not less than $100,000 or
any greater integral multiple thereof) outstanding from time
to time during such Interest Period at a rate per annum equal
to the sum of the Adjusted LIBOR for such Interest Period plus
the Applicable Term Loan Margin therefor as then in effect;
provided, further, however, that (i) upon the occurrence and
during the continuation of any Event of Default under Section
9.1(i), (ii) or (iii) hereof, the Lender may, upon notice to
the Borrower, suspend Borrower's right to use the aforesaid
Adjusted LIBOR option, (ii) Borrower may not have more than
six (6) Adjusted LIBOR-based interest rates in effect under
this Section at any one time, and (iii) the interest rate
applicable to the Term Loans shall be subject to adjustment as
provided in paragraph (b) below."
(f) The Loan Agreement is hereby further amended by
deleting Section 4.4(a) in its entirety and by substituting in lieu
thereof the following new Section 4.4(a), the purpose of which is to
add a reference to the Total Sport Shares and to reflect the
appropriate number of shares of Class A Common Stock of Gray pledged to
the Lender under the Subsidiary Pledge Agreement after a three-to-two
stock split effected in September of 1998:
"(a) The Obligations shall be secured by (i) the
Borrower's first priority and perfected pledge to the
Lender of (A) one hundred percent of the outstanding
capital stock of Datasouth, (B) 51.5 shares of common
stock of Capital Sports Properties, Inc., (C) the
Host Shares (other than 4,682 shares of common stock
of Host Communications which secure the Second Term
Loan Obligations), and (D) the Total Sports Shares,
all pursuant to the Borrower Pledge Agreement, and
(ii) the Partnership's first priority and perfected
pledge to the Lender of 1,284,000 shares of common
stock of the Borrower pursuant to the Partnership
Pledge Agreement. The Obligations (other than the
Third Term Loan Obligations) shall also be secured by
Datasouth's first priority and perfected pledge to
the Lender of 457,944 shares of Class A Common Stock
of Gray pursuant to the Subsidiary Pledge Agreement."
(g) The Loan Agreement is hereby further amended by
deleting the number "906,924" from the second line of Section 4.4(b)
and inserting in lieu thereof, the number "1,359,441", the purpose of
which is to reflect the appropriate number of shares of Class A Common
Stock of Gray pledged to the Lender under Purpose Credit Subsidiary
Pledge Agreement after a three-to-two stock split effected in September
of 1998.
(h) the Loan Agreement is hereby further amended by
deleting Section 7.5(c) in its entirety and by substituting in lieu
thereof, the following new Section 7.5(c):
3
<PAGE> 5
"(c) As of the last day of each calendar quarter
ending on or after December 31, 1998, Borrower's Debt
Service Ratio for the four quarter period then ended
shall not be less than 1.1 to 1.0; provided, however,
for the purpose of calculating such Debt Service
Ratio for the calendar quarters ending December 31,
1998, March 31, 1999 and June 30, 1999, the Cash Flow
component of such Debt Service Ratio shall include
proceeds received by Borrower during the four quarter
period then ended from the redemption of shares of
preferred stock of Gray."
(i) The Loan Agreement is hereby further amended by
deleting Sections 9.1(xiv) and 9.1(xv) in their entireties and by
substituting in lieu thereof, the following new Sections 9.1(xiv) and
9.1(xv):
"(xiv) the aggregate value of all of J. Mack
Robinson's unpledged and non-affiliated Marketable
Securities shall be less than $35,000,000; or
(xv) the aggregate value of J. Mack Robinson's
unpledged and non-affiliated Marketable Securities
which constitute capital stock of Wachovia Bank shall
be less than $20,000,000."
2. NO OTHER AMENDMENTS. Except for the amendments expressly set
forth and referred to in Section 1 above, the Loan Agreement shall remain
unchanged and in full force and effect. Nothing in this Amendment or any of the
other Supplemental Credit Documents (as defined below) is intended, or shall be
construed, to constitute a novation or an accord and satisfaction of any of the
Obligations or to modify, affect or impair the perfection or continuity of
Lender's security interests in, security titles to or other Liens on any
Collateral for the Obligations.
3. REPRESENTATIONS AND WARRANTIES. To induce Lender to enter into
this Amendment, the Borrower does hereby warrant, represent and covenant to
Lender that: (a) each representation or warranty of the Borrower set forth in
the Loan Agreement is hereby restated and reaffirmed as true and correct on and
as of the date hereof as if such representation or warranty were made on and as
of the date hereof (except to the extent that any such representation or
warranty expressly relates to a prior specific date or period), and no Default
or Event of Default has occurred and is continuing as of this date under the
Loan Agreement as amended by this Amendment; and (b) each of the Borrower, the
Guarantor and the Partnership has the power and is duly authorized to enter
into, deliver and perform the Supplemental Credit Documents to which it is a
party, and each of the Supplemental Credit Documents is the legal, valid and
binding obligation of each Credit Party enforceable against such Credit Party in
accordance with its terms.
4. REIMBURSEMENT OF COSTS AND EXPENSES. The Borrower hereby
agrees to reimburse Lender on demand for all costs (including reasonable
attorneys' fees) incurred by Lender in negotiating, documenting and consummating
this Amendment, the other documents referred to herein, and the transactions
contemplated hereby and thereby.
5. CONDITIONS PRECEDENT TO EFFECTIVENESS OF THIS AMENDMENT. The
effectiveness of this Amendment and the amendments provided in Section 1 above
are subject to the truth and accuracy in all material respects of the
representations and warranties of the Borrower contained in Section 3 above and
to the fulfillment of the following additional conditions precedent (all
documents described below shall be in form and substance satisfactory to Lender,
and are herein collectively called the "Supplemental Credit Documents"):
4
<PAGE> 6
(a) Lender shall have received one or more duly executed
counterparts of this Amendment, a Third Term Loan Note, the First
Amendment of Borrower Pledge Agreement, the First Amendment of
Subsidiary Stock Pledge Agreement, the First Amendment of Purpose
Credit Subsidiary Stock Pledge Agreement and the First Amendment of
Option Agreement;
(b) Lender shall have received stock certificates
evidencing all Total Sports Shares, together with undated blank stock
transfer powers for the same duly executed by the appropriate Credit
Parties;
(c) Lender shall have received a duly executed Datasouth
Reaffirmation and Consent to First Amendment of Loan Agreement from
Datasouth, a duly executed Purchaser Reaffirmation and Consent to First
Amendment of Loan Agreement from the Purchaser and a duly executed
Partnership Reaffirmation and Consent to First Amendment of Loan
Agreement from the Partnership; and
(d) Lender shall have received a duly executed and
completed Federal Reserve Form U-1 relating to the Third Term Loan.
6. REFERENCE TO AND EFFECT ON THE CREDIT DOCUMENTS. Upon the
effectiveness of this Amendment, each reference in the Loan Agreement to "this
Agreement," "hereunder," "hereof" or words of like import referring to the Loan
Agreement, and each reference in the other Credit Documents to "the Loan
Agreement," "thereunder," "thereof" or words of like import referring to the
Loan Agreement, shall mean and be a reference to the Loan Agreement as amended
hereby.
7. COUNTERPARTS. This Amendment may be executed in multiple
counterparts, each of which shall be deemed to be an original and all of which
when taken together shall constitute one and the same instrument.
8. GOVERNING LAW. This Amendment shall be governed by, and
construed in accordance with, the internal laws of the State of Georgia
applicable to contracts made and performed in such state.
5
<PAGE> 7
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
duly executed and delivered as of the day and year specified at the beginning
hereof.
BORROWER:
BULL RUN CORPORATION
By: /s/ FREDERICK J. ERICKSON
Name: Frederick J. Erickson
Title: VP-Finance
LENDER:
NATIONSBANK, N.A.
By: /s/ DAVID B. JACKSON
Name: David B. Jackson
Title: Senior Vice President
<PAGE> 1
EXHIBIT 10.13
$4,000,000 THIRD TERM LOAN NOTE DATED AS OF FEBRUARY 24, 1999
<PAGE> 2
THIRD TERM LOAN NOTE
$4,000,000 FEBRUARY 24, 1999
FOR VALUE RECEIVED, the undersigned, BULL RUN CORPORATION, a Georgia
corporation (the "Borrower"), hereby promises to pay to the order of
NATIONSBANK, N.A., (herein, together with any subsequent holder hereof, called
the "Lender"), the principal sum of FOUR MILLION AND NO/100 DOLLARS
($4,000,000), or the outstanding principal amount of the Third Term Loan made to
the Borrower by the Lender pursuant to the Loan Agreement referred to below,
which principal sum shall be payable (i) in installments on the due dates and in
the amounts set forth in the Loan Agreement or (ii) on any earlier date on which
all amounts outstanding under this Third Term Loan Note (this "Note") have
become due and payable pursuant to the provisions of Section 9.2 of the Loan
Agreement. The Borrower likewise promises to pay interest on the outstanding
principal balance of the Third Term Loan made by the Lender to the Borrower, at
such interest rates, payable at such times, and computed in such manner, as are
specified in the Loan Agreement in strict accordance with the terms thereof.
This Note is issued pursuant to, and is the Third Term Loan Note
referred to in the Amended and Restated Loan Agreement dated as of March 20,
1998, between the Borrower and the Lender (as the same may be amended or
supplemented from time to time, the "Loan Agreement"), and the Lender is and
shall be entitled to all benefits thereof and of all the other Credit Documents
executed and delivered to the Lender in connection therewith. Terms defined in
the Loan Agreement are used herein with the same meaning. The Loan Agreement,
among other things, contains provisions for acceleration of the maturity hereof
upon the happening of certain Events of Default, provisions relating to
prepayments on account of principal hereof prior to the maturity hereof, and
provisions for post-default interest rates.
The Borrower agrees to make payments of principal and interest hereon
on the dates and in the amounts specified in the Loan Agreement in strict
accordance with the terms thereof.
In case an Event of Default shall occur and be continuing, the
principal and all accrued interest of this Note may automatically become, or may
be declared, immediately due and payable in the manner and with the effect
provided in the Loan Agreement. The Borrower agrees to pay, and save the Lender
harmless against any liability for the payment of, all costs and expenses,
including actual and reasonable attorneys' fees, arising in connection with the
enforcement by the Lender of any of its rights or remedies under this Note or
the Loan Agreement.
This Note has been delivered in Atlanta, Georgia, and the rights and
obligations of the Lender and the Borrower hereunder shall be construed in
accordance with and governed by the laws of the State of Georgia (without giving
effect to its conflicts of law rules).
The Borrower expressly waives any presentment, demand, protest or
notice in connection with this Note, whether now or hereafter required by
applicable law. This Note is intended to be an instrument under seal.
<PAGE> 3
IN WITNESS WHEREOF, the Borrower has caused this Note to be executed,
sealed and delivered by its duly authorized officer as of the date first above
written.
BULL RUN CORPORATION
(CORPORATE SEAL)
By: /s/ FREDERICK J. ERICKSON
Name: Frederick J. Erickson
Title: VP-Finance
<PAGE> 1
EXHIBIT 21
LIST OF SUBSIDIARIES OF REGISTRANT
Datasouth Computer Corporation,
a Delaware corporation
Datasouth International Sales Corporation,
a U.S. Virgin Islands corporation,
and a subsidiary of Datasouth Computer Corporation
Datasouth International, Limited,
a corporation organized under the laws of England,
and a subsidiary of Datasouth Computer Corporation
<PAGE> 1
EXHIBIT 23.1
We consent to the incorporation by reference in the Registration Statements
(Form S-8 No.33-91296 and Form S-8 No. 333-56125) 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 9, 1999, except as to Notes
4 and 7 to the financial statements, for which the date is March 24, 1999, 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, 1998, filed
with the Securities and Exchange Commission.
/s/ ERNST & YOUNG LLP
Atlanta, Georgia
March 26, 1999
<PAGE> 1
EXHIBIT 23.2
We consent to the incorporation by reference of our reports dated January 26,
1999, 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 Statements (Form S-8 No. 33-91296 and Form
S-8 No. 333-56125) 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 26, 1999
<PAGE> 1
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, 33-91298 and 333-56125) on Form S-8 of Bull Run Corporation of
our report dated February 10, 1997 with respect to the statements of earnings,
changes in stockholders' equity, and cash flows of Capital Sports Properties,
Inc. for the six-months ended June 30, 1996, which report appears in the
December 31, 1998 annual report on Form 10-K of Bull Run Corporation.
/s/ KPMG LLP
Stamford, Connecticut
March 26, 1999
<PAGE> 1
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, 33-91298 and 333-56125) on Form S-8 of Bull Run Corporation of
our report dated October 11, 1996 with respect to the consolidated balance sheet
of Host Communications, Inc. and subsidiaries as of June 30, 1996, and the
related consolidated statements of earnings, stockholders' equity, and cash
flows for the year then ended, which report appears in the December 31, 1998
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 LLP
Cincinnati, Ohio
March 26, 1999
<PAGE> 1
EXHIBIT 23.5
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of our
report dated October 7, 1998, to the Stockholders of Rawlings Sporting Goods
Company, Inc. included in this Form 10-K, into Bull Run Corporation's previously
filed Form S-8 Registration Statement File No. 33-91296, 33-91298 and 333-56125.
/s/ ARTHUR ANDERSEN LLP
St. Louis, Missouri
March 26, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF BULL RUN CORPORATION FOR THE YEAR ENDED DECEMBER 31,
1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 57,579
<SECURITIES> 0
<RECEIVABLES> 6,062,351
<ALLOWANCES> 82,000
<INVENTORY> 5,166,925
<CURRENT-ASSETS> 11,436,363
<PP&E> 5,046,515
<DEPRECIATION> 2,423,612
<TOTAL-ASSETS> 95,171,531
<CURRENT-LIABILITIES> 8,123,580
<BONDS> 51,848,547
0
0
<COMMON> 228,362
<OTHER-SE> 29,562,381
<TOTAL-LIABILITY-AND-EQUITY> 95,171,531
<SALES> 29,848,101
<TOTAL-REVENUES> 31,466,021
<CGS> 22,102,544
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 2,323,289
<LOSS-PROVISION> 21,941
<INTEREST-EXPENSE> 4,246,693
<INCOME-PRETAX> (2,520,123)
<INCOME-TAX> 1,854,204
<INCOME-CONTINUING> 2,359,558
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,359,558
<EPS-PRIMARY> .11
<EPS-DILUTED> .11
</TABLE>
