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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[ ] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934 for the fiscal year ended
[X] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from JANUARY 1, 1999 TO
JUNE 30, 1999
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. [X]
The aggregate market value of the voting and non-voting common equity
held by non-affiliates as of October 31, 1999 was $48,470,073 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 October 31, 1999, was 22,516,267.
DOCUMENTS INCORPORATED BY REFERENCE
None
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BULL RUN CORPORATION
FORM 10-K INDEX
PART I
PAGE
ITEM 1. Business.......................................................... 3
ITEM 2. Properties........................................................ 15
ITEM 3. Legal Proceedings................................................. 15
ITEM 4. Submission of Matters to a Vote of Security Holders............... 16
PART II
ITEM 5. Market for Registrant's Common Equity and Related Stockholder
Matters...................................................... 17
ITEM 6. Selected Financial Data........................................... 17
ITEM 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations........................................ 19
ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk........ 29
ITEM 8. Financial Statements and Supplementary Data....................... 30
ITEM 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure......................................... 52
PART III
ITEM 10. Directors and Executive Officers of the Registrant................ 52
ITEM 11. Executive Compensation............................................ 53
ITEM 12. Security Ownership of Certain Beneficial Owners and Management.... 55
ITEM 13. Certain Relationships and Related Transactions.................... 57
PART IV
ITEM 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.. 59
Signatures........................................................ 63
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PART I
ITEM 1. BUSINESS
BUSINESS OF BULL RUN CORPORATION
GENERAL
Bull Run Corporation (the "Company"), a Georgia corporation, was originally
incorporated in 1983 under the laws of the State of Washington. Effective June
30, 1999, the Company changed its fiscal year end from December 31 to June 30.
The Company owns, directly and indirectly, approximately 32.5% of the
outstanding common stock and approximately 51.5% of the outstanding preferred
stock of Host Communications, Inc. ("HCI"). The Company's indirect ownership in
HCI common stock and preferred stock is owned by Capital Sports Properties, Inc.
("CSP"), a holding company in which the Company owns 51.5% of the outstanding
common stock, representing 48.5% of the voting power. Based in Lexington,
Kentucky, HCI is a sports marketing and association management company and is
the primary marketer for the National Collegiate Athletic Association ("NCAA")
and has significant printing, publishing, broadcast and Internet operating
divisions. See "Business of Host Communications, Inc." for more detailed
information concerning HCI.
The Company owns approximately 3% of the outstanding capital stock of
Universal Sports America, Inc. ("USA"). Based in Dallas, Texas, USA is a sports
marketing company that specializes in developing integrated marketing programs
and events on the professional, collegiate and high school level. See "Business
of Universal Sports America, Inc." for more detailed information concerning USA.
The Company previously announced, and its shareholders have approved, the
acquisition of the remaining common and preferred shares of HCI, CSP and USA it
does not own. The Company is currently negotiating with its bank lenders with
respect to a new credit agreement in order to obtain the funds necessary to
consummate the proposed acquisition of HCI, CSP and USA. The Company is also
negotiating with HCI and USA with respect to an amendment to the merger
agreement relating to the acquisition of HCI, CSP and USA. Under the terms of
the amendment being negotiated, it is expected that the shareholders of HCI, CSP
and USA would receive for their securities in such companies, a combination of
cash (in the aggregate amount of approximately $54.2 million), the Company's
common stock ("Common Stock") (approximately 11,327,000 shares in the aggregate,
plus options to purchase approximately 3,158,000 shares), and the Company's
subordinated promissory notes (in the aggregate amount of approximately $18.7
million), bearing interest at a rate of approximately eight per cent per annum
and maturing three years after the date of issuance. If the Company, HCI, CSP
and USA enter into such an amendment, it will be subject to the approval of
HCI's, CSP's and USA's shareholders. Subject to the execution of a new credit
agreement and the execution and approval of an amendment to the merger
agreement, the acquisition is expected to close during the quarter ending
December 31, 1999.
Datasouth Computer Corporation ("Datasouth"), a wholly owned subsidiary of
the Company since 1994 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.
The Company, through Datasouth, currently owns approximately 13.2% of the
total outstanding common stock (representing approximately 26.2% of the voting
power) of Gray Communications Systems, Inc. ("Gray"). The Company's equity
ownership and voting power was diluted from 16.9% and 27.5%, respectively, on
October 1, 1999 in connection with the issuance by Gray of class B common stock
as part of the consideration paid in Gray's
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acquisition of three television stations. 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
stockholders and/or executive officers, currently own approximately an
additional 11.0% of Gray's common stock (representing approximately an
additional 20.8% of the voting power in Gray).
Gray is a communications company headquartered in Atlanta, Georgia, which
currently operates:
(a) 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;
(b) ten 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; two stations acquired
during 1998, KOLN-TV in Lincoln, Nebraska and KGIN-TV in Grand Island, Nebraska;
and three stations acquired on October 1, 1999, KWTX-TV in Waco, Texas; KBTX-TV,
a satellite station of KWTX-TV located in Bryan, Texas; and KXII-TV serving the
Sherman, Texas / Ada, Oklahoma market.
(c) four daily newspapers, The Albany Herald in Albany, Georgia; The
Rockdale Citizen in Conyers, Georgia; The Gwinnett Daily Post in Lawrenceville,
Georgia; and The Goshen News in Goshen, Indiana, acquired in March 1999;
(d) an advertising weekly shopper in southwest Georgia;
(e) Lynqx Communications, a satellite transmission and production services
business based in the southeastern United States; and
(f) PortaPhone Paging, a communications and paging business in the
Southeast.
J. Mack Robinson, the Company's Chairman of the Board, Hilton H. Howell,
Jr., the Company's Vice President, Secretary and a director, and Robert S.
Prather, Jr., the Company's President and Chief Executive Officer and a
director, are members of Gray's board of directors. Mr. Robinson is President
and the Chief Executive Officer of Gray, and Mr. Prather is Executive Vice
President of Gray.
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, from November 1997 through January
1998, the Company purchased shares of Rawlings' common stock in the open market,
and such shares currently represent 10.5% of Rawlings' outstanding common stock.
Simultaneously with the execution of the Investment Purchase Agreement, Rawlings
and HCI entered into a five year strategic marketing alliance, under which HCI
and Rawlings agreed jointly to market and sell Rawlings' products primarily
through corporate promotions, local events and international programs. The
Company and Rawlings are parties to a standstill agreement, which restricts the
Company from acquiring additional shares of Rawlings' common stock or
participating in corporate events relating to Rawlings, including proxy contests
and tender offers, subject to specified exceptions. Rawlings, headquartered near
St. Louis, Missouri is a supplier of team sports equipment in North America, and
operates eight manufacturing facilities throughout the United States, Canada and
Latin America, as well as distribution centers in the United States and Canada.
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In August 1998, the Company acquired series C preferred stock of Total
Sports, Inc. ("TSI"). On January 15, 1999, the Company purchased additional
shares of TSI series C1 preferred stock. The Company currently owns
approximately 7.6% of TSI's total outstanding capital stock. Each share of TSI
preferred stock owned by the Company is convertible into one share of TSI common
stock. HCI currently owns 7.0% of the capital stock of TSI, which the Company
will acquire upon closing the acquisition of HCI. HCI's investment in TSI is in
the form of common stock. 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; and, in partnership with Associated Press, publishes the sports section
of The Wall Street Journal Interactive Edition. In conjunction with HCI and the
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.
In January 1999, the Company acquired approximately 34% of the outstanding
common stock of Sarkes Tarzian, Inc. ("Tarzian"), which 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 was
granted an option to purchase the Company's investment in Tarzian for an amount
equal to the Company's purchase price for the Tarzian investment, plus related
costs. In connection with the option agreement, Gray granted to the Company
warrants to purchase additional shares of Gray's class B common stock.
As of June 30, 1999, Datasouth represented approximately 19% of the
Company's total assets; investments in Gray represented approximately 43% of the
Company's total assets; investments in HCI, Capital and USA, collectively,
represented approximately 13% of the Company's total assets; the investment in
Rawlings represented approximately 12% of the Company's total assets; the
investment in TSI represented approximately 3% of the Company's total assets;
and the investment in Tarzian represented approximately 9% of the Company's
total assets.
PRINCIPAL PRODUCTS AND MARKETS
The Company, through Datasouth, designs, manufactures and markets
heavy-duty dot matrix and thermal printers for industrial applications,
generally selling under the "Datasouth" name. It has historically targeted the
heavy-duty, multipart forms segment of the serial matrix impact printer market
in industries such as transportation/travel, healthcare and
manufacturing/distribution. Recently, the Company has been involved in the
industrial thermal printer market through the development and acquisition of
Automated Ticket/Boarding Pass ("ATB") 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) serial impact dot matrix printer markets.
Datasouth's dot matrix products distinguish themselves from many lower priced
printers in their ability to print forms and reports as thick as nine parts and
to withstand rugged duty cycles. These printers are used primarily for forms
such as invoices, purchase orders, bills of lading, customs documents, insurance
documents, travel documents and patient admission forms. Datasouth currently
manufactures two dot matrix product families: Documax and the XL line. A third
line, Performax, was discontinued in 1997. Documax, a heavy-duty dot matrix
printer designed to
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provide maximum forms printing capabilities in a minimum amount of space, is a
narrow carriage printer intended for printing on demand industry specific
documents such as hotel bills, patient admissions/discharge forms, airline
tickets, packing slips and invoices. A multipath printer for multipart forms,
Documax offers a dual-tractor feature which allows the operator to switch
automatically from one form to another. The original Documax versions print at
speeds up to 333 characters per second 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 characters per second.
The Company also has provided a line of portable and desktop thermal
printers for several years, including the 4-inch wide portable "FreeLiner" and
the 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. 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, Inc. ("Sabre") in
February 1997 to develop and manufacture a new ATB airline ticket printer. In
December 1997, the Company began shipping 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. The "Journey II" version of the printer
which adds features such as a second bin for invoice and receipt printing, was
introduced in June 1999. In September 1998, the Company purchased marketing
rights for the Sigma-Data 7200 high speed ATB printer. The SD7200 product line
prints up to 24 coupons per minute and allows for either direct thermal or
thermal transfer printing.
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 foreign 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 maintaining low finished goods inventories.
Product configurations are scheduled daily based on customer orders. Raw
materials and manufactured assemblies, including circuit 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
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scheduling. After configuration, the units are burned-in and are available for
shipment within 24 hours. As a result, the product mix can be altered within
hours, allowing the Company to deliver its products more quickly than many of
its competitors.
The Company assembles products in accordance with the Company's designs and
specifications. The Company utilizes components and sub-assemblies procured from
outside suppliers, some of which produce parts from tooling designed and owned
by the Company. Most of the materials, components and subassemblies are
available from a variety of sources and are generally not subject to significant
price volatility. Although the Company has not experienced any significant
problems in obtaining materials, components or subassemblies, future shortages
could result in production delays, which would adversely affect its business.
Product design reflects an awareness of the practical aspects of
manufacturing high quality products. Commonality of components and subassemblies
across product lines provides efficiencies in quality control, productivity,
material cost and inventory control. The Company utilizes automated component
insertion, wave soldering and automated test equipment to reduce labor costs
while maintaining high quality. The Company verifies the quality of its products
by thorough testing at various stages of the assembly process.
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 Datasouth's Internet web site.
The Company's warranty expense has ranged from approximately .4% to .6% of
revenue from printer operations since 1996. Total warranty expense was $49,000
for the six months ended June 30, 1999, and $133,000, $124,000 and $104,000 for
the years ended December 31, 1998, 1997 and 1996, 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. 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. Of the total revenue from printer operations, 34% represented finished
product sales to distributors and 41% represented finished product sales to
major accounts for the six months ended June 30, 1999, compared to 26% to
distributors and 50% to major accounts for the year ended December 31, 1998, and
28% to distributors and 48% to major accounts for the year ended December 31,
1997.
The Company supplies Documax and Journey printers to Sabre under contracts
that are cancelable at any time by Sabre. Moreover, Sabre is under no
contractual obligation to purchase any minimum number of printers from Datasouth
during the term of the contracts. Sales to Sabre were approximately $2,800,000
for the six months ended June 30, 1999, $9,200,000 for the year ended December
31, 1998, $7,200,000 in 1997 and $7,200,000 in
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1996, representing 21%, 31%, 33% and 30% of the Company's revenue 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 and airlines will require more cost-effective equipment, such as
its Journey and SD7200 ATB printer products. The addition of the SD7200 product
line in 1998 strategically expanded the Company's ATB product line to offer a
wide range of ticket printing solutions for airlines, customer reservation
systems 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 customer
reservation systems 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 the future, while maintaining and strengthening
relationships with distributors. Sales to foreign customers, located principally
in Western Europe and South America, totaled $2,939,000 for the six months ended
June 30, 1999, $2,823,000 in 1998, $2,497,000 in 1997, and $2,954,000 in 1996.
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 June 30, 1999, the Company had unfilled cancelable purchase orders
with an aggregate selling price of approximately $1,806,000, compared with
$1,603,000 and $1,724,000 as of December 31, 1998 and 1997, 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 $143,000 for the
six months ended June 30, 1999, and $271,000, $130,000 and $227,000 for the
years ended December 31, 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 1999, the Company's
engineering team completed the design of the Journey II product and the
"TP2000," a new generation teleprinter replacement for particularly the
telecommunications industry. In the year ending June 30, 2000, 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. Research and development expense was $1,335,000 for the six months ended
June 30, 1999, and $2,323,000, $2,418,000 and $1,568,000 in 1998, 1997 and 1996,
respectively.
Although the Company holds certain trademarks, patents and related
contracts, none is considered to be material to its business.
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EMPLOYEES
As of June 30, 1999, the Company had 139 full-time employees, of which 122
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.
EXECUTIVE OFFICERS
Set forth below is certain information with respect to the executive
officers of the Company:
J. Mack Robinson, age 76, 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 55, 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 also a director of
Rawlings, TSI and 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 41, 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.
Set forth below is certain information concerning HCI and USA. See also
"General" above in this Item 1.
BUSINESS OF HOST COMMUNICATIONS, INC.
GENERAL
HCI provides specialized marketing and management services to corporate
clients focusing primarily on sports-related affinity groups. HCI also provides
professional marketing and other management services to the NCAA and other
groups and associations such as the National Tour Association, which is a
premier package travel association, Quest (the J.D. Edwards user group
association) and the International Spa and Fitness Association. Among other
things, HCI's responsibilities under these relationships may include the sale of
"official sponsorship" rights to corporations, advertising space in game-day or
other programs and advertising in television and radio broadcasts of games. HCI
also produces a broad array of electronic and print media through their
broadcasting, printing and publishing divisions and maintains minority
investments in service companies which provide marketing and production support
to their corporate clients and associations.
HCI identifies and reaches consumer segments with attractive demographic
characteristics and designs and implements marketing programs and sports-based
events to target these specific affinity groups. HCI's corporate clients include
large corporations with significant sales and marketing budgets that are facing
competitive pressure to retain or expand market
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share. HCI has provided marketing services to numerous corporate clients,
including American Express, Compaq, Gillette, General Motors, GTE, Hershey,
Nabisco, Pepsi and Sears. HCI derives revenue primarily from the sale of
advertising and sponsorship rights and other sources, including management fees
and merchandise sales.
NCAA MARKETING SERVICES
A significant portion of HCI's revenue is derived from its relationship
with the NCAA. In 1999 and 1998, approximately 46% of HCI's net revenues arose
from sub-licensing NCAA corporate sponsor rights to corporations. HCI designed
and implemented and has primary responsibility for administering the NCAA's
corporate partner program pursuant to which HCI provides marketing services for
the NCAA, including the exclusive licensing of the NCAA logo. Only 20
corporations are permitted to participate in the program each year, which
enhances the marketing position and brand recognition for the corporations
admitted to the program. Pursuant to its relationship with the NCAA, HCI pays a
set fee and shares 70% of revenues in excess of benchmark revenue to the NCAA in
exchange for the right to market and sell "official corporate partnerships" of
the NCAA and sponsorships and advertising for many NCAA events including the
men's and women's Final Four basketball championships, the College World Series,
NCAA websites and radio shows for the foregoing championships, printed programs
and other specialty publications. In addition, HCI also administers radio
network broadcasts of the Final Four, the College World Series and "Game of the
Week" NCAA football and basketball games in association with CBS Radio/Westwood
One.
A substantial portion of HCI's accounts receivable is also derived from its
relationship with the NCAA. As of June 30, 1999 and 1998, accounts receivables
relating to NCAA corporate sponsors constituted approximately 52% and 35%,
respectively, of HCI's total billed accounts receivable.
HCI's current agreement with the NCAA is scheduled to expire on August 31,
2002.
PUBLISHING, PRINTING, ELECTRONIC MEDIA AND INTERNET
HCI produces more than 600 sports related publications annually for a
variety of clients including the NCAA, college athletic conferences,
universities, the Basketball Hall of Fame and other sports related entities.
HCI's publications range from magazines with hundreds of pages to two-sided
schedule cards. Publications include game programs, media guides, posters and
marketing brochures, including programs for 21 NCAA championships such as the
men's and women's Final Four, the College World Series, conference championships
and college football bowl games. HCI also provides high-quality printing
services for corporations and not-for-profit organizations nationwide as well as
to universities, conferences and other associations that HCI represents.
Printing projects for HCI's clientele include directories, annual reports,
brochures, posters, programs and catalogs.
HCI produces television programs, videos, radio broadcasts, commercial
audio and Internet related services in the Electronic Media Division. The
Mainstreet Productions Division has digital recording studios in Lexington,
Kentucky capable of handling network quality soundtracks for radio, television
and multi-image presentations. HCI contracts with advertising agencies,
marketing experts and independent producers as well as using these services to
support other HCI marketing divisions. The Host Broadcast Center creates,
produces, syndicates and distributes large and small radio networks nationwide
and across the Internet.
The HCI Internet group has been developing college sports Internet sites
since 1995 in partnership with TSI. The companies administer the daily web site
responsibilities for contracts that HCI and USA have negotiated with the NCAA
and its corporate partners. More than 400 sporting events have been broadcast
over the Internet in the past two years, creating a leading on-line college
sports network which include on-line sites for Duke
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University, the University of Michigan, the U.S. Naval Academy, the University
of Tennessee and the Southeastern Conference.
HCI and USA have collaborated with the NCAA on www.finalfour.net, the
official site for the NCAA Division I Men's and Women's Basketball
Championships. Over the three weeks of the 1999 tournament, www.finalfour.net
attracted 154 million hits and 82 million page views, substantially increasing
from 34 million total hits registered during the 1997 tournament, the year the
site was created. Additionally, HCI , USA and the NCAA have collaborated on the
official NCAA College World Series web site, which registered 31 million hits
and 17 million page views during the 1998 tournament.
MANAGEMENT SERVICES
HCI provides management services to a number of associations including the
National Tour Association, Quest (the JD Edwards users group), the International
Spa and Fitness Association, and the Tour and Travel Research Association. HCI
administers marketing, publishing, government lobbying, business, education,
events management and membership growth of these associations.
MINORITY INVESTMENTS
HCI currently has minority investment interests of approximately 7% of TSI
and 42.5% of Corporate Marketing Associates, a corporate marketing and promotion
agency.
CLIENTS
HCI provides sponsorship opportunities to a variety of corporate clients
ranging from consumer products companies to financial services companies and
currently has sponsorship contracts with some of the largest companies in the
United States. Corporate sponsorship contracts have historically been three
years in length. HCI has recently signed several sponsors to five-year contracts
and intends to continue to seek longer-term sponsorship agreements.
SALES AND MARKETING
HCI employs a full-time national sales and marketing staff, and has
dedicated a senior group of sales and marketing executives to identify potential
client relationship opportunities and promote HCI's expertise and range of
services. HCI solicits prospective clients through its managers responsible for
business development and through personal contacts by members of HCI's senior
management. When a new account is established, HCI immediately assigns a sales
executive to the client to ensure that the client's needs are met and to seek
out further opportunities to expand the relationship. Generally, account
managers are assigned several different clients.
COMPETITION
As a provider of marketing services, HCI competes with suppliers of
traditional advertising in broadcast and print media as well as with other
marketing service producers and internal marketing programs. The competition for
brand marketing expenditures is very competitive and highly fragmented. HCI
believes that certain of its competitors have capabilities and resources
comparable to and in several respects greater than those of HCI. HCI's success
will depend on its ability to create unique value-added marketing opportunities
that attract corporate sponsorship.
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<PAGE> 12
EMPLOYEES
HCI has approximately 275 employees. HCI is not a party to any collective
bargaining agreements and believes good relations exist with its employees.
BUSINESS OF UNIVERSAL SPORTS AMERICA, INC.
GENERAL
USA is a leading provider of specialized marketing and management services
to corporate clients focusing primarily on sports-related affinity groups. USA
also produces and manages grass roots participatory sporting events and provides
professional marketing and other management services to university athletic
departments, athletic conferences and high school associations.
USA identifies and reaches consumer segments with attractive demographic
characteristics and designs and implements marketing programs and sports-based
events to target these specific affinity groups. USA's corporate clients include
large corporations with significant sales and marketing budgets that are facing
competitive pressure to retain or expand market share. USA has provided
marketing services to numerous corporate clients, including AT&T, Coca-Cola,
Exxon, Gatorade, McDonald's, Nike, Procter & Gamble, Southwest Airlines and
Toyota. USA derives revenue primarily from the sale of advertising and
sponsorship rights, participant entry fees and other sources, including
management fees and merchandise sales.
USA has created unique marketing distribution channels that enable
corporate clients to target and reach sports-related affinity groups on a
national and international basis. Events produced and managed by USA include
Hoop-It-Up 3-on-3 basketball tournaments, NFL Air-It-Out 4-on-4 football
tournaments, NHL Breakout 5-on-5 in-line street hockey tournaments, Golf Skills
Challenge tournaments and Spike-It-Up volleyball tournaments. USA has formed
strategic alliances with the National Basketball Association, the National
Football League, the National Hockey League and Major League Baseball to manage
events promoting their respective sports. In addition, USA provides marketing
services to universities, colleges, athletic conferences and high school
associations, including Florida State University, the University of Tennessee,
the University of Texas, the University of Kentucky, the Big 12 Conference and
the Southeastern Conference. USA's responsibilities under these relationships
may include the sale of "official sponsorship" rights to corporations,
advertising space in game-day or other programs, advertising in television and
radio broadcasts of games, arena signage rights, advertising during "coaches'
shows," coaches' endorsements and pay-per-view telecasts.
GRASS ROOTS SPORTING EVENTS
USA produces and manages large participatory sporting events throughout the
United States and internationally. The events are offered on a seasonal touring
basis and generally occur in a different city every weekend. Prior to the event,
promotional materials and entry forms are disseminated throughout the market and
mailed to participants in USA's data base. Participants in the event form teams
and pay entry fees to participate. The events generally last two days and are
managed by USA's personnel who are assisted by independent contractors and local
volunteers. Revenues are derived primarily form national sponsorship contracts
with major corporations, local sponsorship contracts with regionally focused
companies and, to a lesser extent, event registration fees, management fees and
merchandise
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sales. The following table summarizes USA's principal events in 1999:
<TABLE>
<CAPTION>
APPROXIMATE
NUMBER OF PAID
EVENT DESCRIPTION PARTICIPANTS
- ----- -------------- ------------
<S> <C> <C>
Hoop-It-Up 59 3-on-3 basketball tournaments
in 47 U.S. cities, 6 Canadian cities
and 4 Mexican cities 164,800
USA International 17 NBA sponsored basketball events
in 7 foreign countries 36,332
NFL Air-It-Out 22 NFL sponsored 4-on-4 football
tournaments in 20 U.S. cities 52,415
NHL Breakout 25 NHL sponsored in-line street hockey
tournaments in 21 U.S. cities and
4 Canadian cities 17,010
Golf Skills Challenge 25 golf skills tournaments in 24 U.S. cities 15,242
MLBI Fan Fest 6 MLBI sponsored baseball fan festivals
in 4 foreign countries 68,000
Yard Ball 15 MLB sponsored whiffle ball tournaments
In 15 U.S. cities 6,263
</TABLE>
COLLEGIATE MARKETING SERVICES
USA also provides sports marketing services for several NCAA Division I
universities. USA's rights and responsibilities vary by contract but may include
the production of television and radio broadcasts of certain athletic events and
coaches' shows, the sale of "official sponsor" rights to corporations,
advertising space in game-day or other programs and advertising during
television and radio broadcasts. Often times, USA secures broadcast, publication
and advertising sales services from HCI relative to these contracts. A
significant number of the agreements between USA and the universities require
USA to guarantee the university a rights fee for the right to provide marketing
and production services. Most of the agreements involve a sharing of revenues
between USA and the university. The agreements are typically three to five years
in length. Set forth below is a list of the NCAA Division I universities to
which Universal provided sports marketing or publication services in fiscal
1999:
University of Notre Dame University of Texas
Florida State University University of Tennessee
University of Kentucky Mississippi State University
Southern Methodist University St. John's University
Texas Tech University University of South Carolina
Cornell University San Jose State University
Seton Hall University University of Georgia
Boston College
USA also has contracts with four athletic conferences: the Southeastern
Conference, the Big 12 Conference, the Western Athletic Conference and Metro
Atlantic Athletic Conference, as well as with the Historically Black Collegiate
Coalition, which oversees the nationally televised Heritage Bowl and Bayou
Classic. USA's activities under these contracts include the management of
marketing services for conference championship games, the production of
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<PAGE> 14
gameday programs for championship games, and the granting of certain
broadcasting, logo, product sampling and "official sponsor" rights. Often times,
USA secures broadcast and publication services from HCI. Many of these contracts
require USA to pay the conference a rights fee for the right to provide
marketing and production services.
OTHER EVENT MANAGEMENT
USA produces and manages a number of events for professional athletic
leagues such as the NFL Experience "On Tour" which is the National Football
League's interactive theme park, NFL Lineman Challenge which is a made for
television, National Football League Lineman skills event, Major League
Baseball's "Yard Ball" which is a four on four touring baseball competition, the
National Hockey League's "Cup Crazy" promotion which consists of interactive
hockey events during the NHL Stanley Cup Playoffs and Major League Baseball's
International FanFest which was produced in six foreign countries. USA also
produces and manages events for corporate clients. These events have included
the NCAA Football Campus Tour, which consist of NCAA Football interactive
events; G.A.M.E., which is a multi-sport interactive program for middle school
students for Champion Paper; the Southwestern Bell Football Fan Festival, which
is a SBC interactive football event; ESPN Zone grand openings, which are
multi-sport interactive events; and Ocean Spray/Final Four promotions, which
consist of basketball interactive and sampling programs at the NCAA Final Four
Tournament. In addition, USA markets a number of annual collegiate events
including major football rivalry games such as the Red River Shootout between
the University of Texas and the University of Oklahoma and the Lone Star
Showdown between the University of Texas and Texas A & M University. USA also
markets the Texas high school championship events such as the Texas Bowl high
school football championship. In connection with these events, USA typically
receives either a predetermined management fee or shares in event revenues or
profits.
CLIENTS
USA provides sponsorship opportunities to a variety of corporate clients
ranging from consumer products companies to financial services companies and
currently has sponsorship contracts with some of the largest companies in the
United States and abroad. Corporate sponsorship contracts have historically been
three years in length. USA intends to continue to seek longer-term sponsorship
agreements.
SALES AND MARKETING
USA employs a full-time national sales and marketing staff, and has
dedicated a senior group of sales and marketing executives to identify potential
client relationship opportunities and promote USA's expertise and range of
services. USA solicits prospective clients through its managers responsible for
business development and through personal contacts by members of USA's senior
management. When a new account is established, USA immediately assigns a sales
executive to the client to ensure that the client's needs are met and to seek
out further opportunities to expand the relationship. Generally, account
managers are assigned several different clients, which may be comprised of a
number of businesses or divisions, departments or groups within the same
business. In addition, the personnel that staff USA offices on university
campuses and at athletic conference locations are responsible for soliciting
local sponsors and advertisers.
COMPETITION
As a provider of marketing services, USA competes with suppliers of
traditional advertising in broadcast and print media as well as with other
marketing service producers and internal marketing programs. The competition for
brand marketing expenditures is very competitive and highly fragmented. USA
believes that certain of its competitors have capabilities and resources
comparable to and in several respects greater than those of USA.
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<PAGE> 15
USA's success will depend on its ability to create unique value-added marketing
opportunities that attract corporate sponsorship.
EMPLOYEES
USA has approximately 230 employees. USA is not a party to any collective
bargaining agreements and believes good relations exist with its employees.
ITEM 2. PROPERTIES
The Company's executive offices are located in Atlanta, Georgia in
approximately 2,000 square feet of office space leased from Delta Life Insurance
Company, an affiliate of J. Mack Robinson, the Company's Chairman of the Board.
The lease expires in December 2002, subject to several renewal options on the
part of the Company.
Datasouth's administrative offices and operations are located in Charlotte,
North Carolina in approximately 74,000 square feet of fully-utilized leased
facilities. Although present facilities are suitable and adequate for its
current needs, the Company owns approximately eight acres of land contiguous to
its Charlotte facility for future expansion, if necessary. Datasouth's main
administrative and manufacturing facility is leased through December 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.
HCI owns six acres of land and a building with approximately 25,000 square
feet of production, office and storage space in Lexington, Kentucky for HCI's
Printing and Publishing Divisions. HCI also has approximately 50,500 square feet
of office space under three leases in Lexington expiring beginning in June 2002;
and approximately 41,500 square feet of office space for HCI and USA under lease
in Dallas, Texas through December 2005.
USA currently has approximately 30,000 square feet of office space under
lease in Dallas, Texas through December 1999, at which time the lease will be
terminated and employees relocated to the Dallas office space discussed above.
USA also has approximately 34,000 square feet of warehouse space under lease in
Dallas, Texas through November 2001 and approximately 4,500 square feet of
office space under lease in Rutherford, New Jersey through July 2002. USA also
has small regional and local field offices primarily located close to the
universities and conferences with which it has contracts.
ITEM 3. LEGAL PROCEEDINGS
On February 12, 1999, Sarkes Tarzian, Inc. ("Tarzian"), an Indiana
corporation, filed a complaint in the United States District Court for the
Southern District of Indiana against the Company and U.S. Trust Company of
Florida Savings Bank as Personal Representative of the Estate of Mary Tarzian
(the "Estate"). On May 3, 1999, the action was dismissed without prejudice
against the Company, leaving the Estate as the sole defendant. The suit involves
the Company's acquisition of 301,119 shares of Tarzian common stock, $4.00 par
value, from the Estate for $10 million on January 28, 1999. 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 contract be enforced. The Company contends 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. The Company does not believe
that a judgment in favor of Tarzian in this litigation would materially
adversely affect the Company, since the Company's purchase agreement with the
Estate provides that if a court of competent jurisdiction awards title to the
shares to a person or entity other than the
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<PAGE> 16
Company, the purchase agreement will be rescinded and the Estate will be
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 June 30, 1999.
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<PAGE> 17
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
---- ---
<S> <C> <C>
YEAR ENDED DECEMBER 31, 1997
First Quarter $ 3.06 $ 2.00
Second Quarter 2.75 2.13
Third Quarter 2.84 2.25
Fourth Quarter 3.84 2.56
YEAR ENDED DECEMBER 31, 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
SIX MONTHS ENDED JUNE 30, 1999
First Quarter $ 5.50 $ 3.25
Second Quarter 4.63 3.50
</TABLE>
HOLDERS
As of October 31, 1999, there were 2,512 holders of record of Common Stock.
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. The Company's bank credit agreement also
contains restrictions on the Company's ability to declare and pay dividends on
the Common Stock.
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 the six months
ended June 30, 1999, 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. The selected consolidated financial data as of and for the six
months ended June 30, 1998 are derived from unaudited condensed consolidated
financial statements of the Company.
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<PAGE> 18
SELECTED FINANCIAL DATA
(Dollars and shares in thousands, except per share amounts)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30, YEARS ENDED DECEMBER 31,
OPERATING RESULTS: 1999 1998 1998 1997 1996 1995 1994
(Unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
Revenue from printer operations $ 13,636 $ 14,157 $ 29,848 $ 21,639 $ 23,810 $ 26,432 $ 2,751
Cost of goods sold (10,010) (10,636) (22,103) (15,967) (17,170) (18,649) (1,853)
-------- -------- -------- -------- -------- -------- --------
Gross profit 3,626 3,521 7,745 5,672 6,640 7,783 898
Other operating revenue 609 652 1,618 681 844 721 323
Operating expenses (4,656) (4,268) (8,593) (6,852) (6,255) (6,764) (1,174)
-------- -------- -------- -------- -------- -------- --------
Income (loss) from operations (421) (95) 770 (499) 1,229 1,740 47
Equity in earnings (losses) of
affiliated companies (997) (146) 6,734 (599) 1,731 107 266
Gain on issuance of shares by
affiliated company 8,179
Interest expense and other, net (1,858) (1,547) (3,290) (1,614) (1,250) (944) (11)
-------- -------- -------- -------- -------- -------- --------
Income (loss) before income taxes,
extraordinary item and cumulative
effect of accounting change (3,276) (1,788) 4,214 (2,712) 9,889 903 302
Income tax benefit (provision) 1,015 506 (1,854) 939 (4,012) (180) (86)
-------- -------- -------- -------- -------- -------- --------
Income (loss) before extraordinary
item and cumulative effect of
accounting change (2,261) (1,282) 2,360 (1,773) 5,877 723 216
Extraordinary loss (295)
Cumulative effect of accounting
change (274)
-------- -------- -------- -------- -------- -------- --------
Net income (loss) $ (2,261) $ (1,282) $ 2,360 $ (1,773) $ 5,308 $ 723 $ 216
Earnings (loss) per share - Basic:
Income (loss) before extraordinary
item and cumulative effect of
accounting change $ (0.10) $ (0.06) $ 0.11 $ (0.08) $ 0.26 $ 0.03 $ 0.02
Net income (loss) $ (0.10) $ (0.06) $ 0.11 $ (0.08) $ 0.24 $ 0.03 $ 0.02
Weighted average shares
outstanding - Basic 22,330 22,098 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) $ (0.06) $ 0.10 $ (0.08) $ 0.25 $ 0.03 $ 0.02
Net income (loss) $ (0.10) $ (0.06) $ 0.10 $ (0.08) $ 0.23 $ 0.03 $ 0.02
Weighted average shares
outstanding - Diluted 22,330 22,098 23,182 21,302 22,945 23,236 13,534
FINANCIAL POSITION: JUNE 30, DECEMBER 31,
1999 1998 1997 1996 1995 1994
Working capital $(61,595) $ 4,074 $ 2,913 $ 4,262 $ 4,005 $ 4,813
Investment in affiliated companies 85,311 74,767 62,972 53,752 29,246 15,709
Total assets 106,098 97,355 78,653 68,123 44,566 30,756
Long-term obligations -- 51,848 41,998 31,364 14,896 2,775
Stockholders' equity 27,994 29,791 25,056 28,318 24,079 23,584
Current ratio 0.1 1.5 1.5 2.2 1.9 2.6
Book value per share $ 1.25 $ 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:
1999 - Investment in Tarzian, financed with short-term debt; all amounts
outstanding under long-term debt agreements have been classified as current
liabilities until such time as such obligations are refinanced.
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.
Certain reclassifications have been made in the financial position as of
December 31, 1998 and 1997 to conform to the June 30, 1999 presentation.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS
OVERVIEW
The Company's business currently consists of the sales and service of computer
printers to and for distributors, value-added resellers and large volume end
users through its wholly-owned subsidiary, Datasouth. The Company previously
announced, and its shareholders have approved, the acquisition of 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. HCI is a sports marketing and association management
company, USA is a sports marketing company and CSP is solely an investor in HCI
and has no operating business.
The Company also has significant investments in other sports and media
companies, including Gray, the owner and operator of 13 television stations and
four newspapers; Rawlings, a supplier of team sports equipment; TSI, a sports
content Internet company; and Tarzian, the owner and operator of two television
stations and four radio stations. The Company also provides consulting services
to Gray, in connection with Gray's acquisitions and dispositions.
As of June 30, 1999, the Company owned approximately 16.9% of the outstanding
common stock of Gray (representing 27.5% of the voting rights), in addition to
non-voting preferred stock and warrants to purchase additional Gray common
stock; 10.6% of the outstanding common stock of Rawlings, in addition to
warrants for the purchase of additional shares of Rawlings common stock; 7.6% of
the outstanding capital stock of TSI (expected to increase to 14.6% upon closing
the acquisition of HCI); and 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 (representing 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). The Company's investment in Gray
was diluted to 13.2% of the outstanding common stock (representing 26.2% of the
voting rights) on October 1, 1999 following Gray's issuance of class B common
stock as part of the consideration paid for Gray's acquisition of three
television stations.
PENDING TRANSACTION
The Company previously announced, and its shareholders have approved, the
acquisition of the remaining common and preferred shares of HCI, CSP and USA it
does not own. The Company is currently negotiating with its bank lenders with
respect to a new credit agreement in order to obtain the funds necessary to
consummate the proposed acquisition of HCI, CSP and USA. The Company is also
negotiating with HCI and USA with respect to an amendment to the merger
agreement relating to the acquisition of HCI, CSP and USA. Under the terms of
the amendment being negotiated, it is expected that the shareholders of HCI, CSP
and USA would receive for their securities in such companies, a combination of
cash (in the aggregate amount of approximately $54.2 million), the Company's
common stock ("Common Stock") (approximately 11,327,000 shares in the aggregate,
plus options to purchase approximately 3,158,000 shares of Common Stock), and
the Company's subordinated promissory notes (in the aggregate amount of
approximately $18.7 million), bearing interest at a rate of approximately eight
per cent per annum and maturing three years after the date of issuance. If the
Company, HCI, CSP and USA enter into such an amendment, it will be subject to
the approval of HCI's, CSP's and USA's shareholders. Subject to the execution of
a new credit agreement and the execution and approval of an amendment to the
merger agreement, the acquisition is expected to close during the quarter ending
December 31, 1999. For their most recent fiscal year ended June 30, 1999, HCI
and USA together had revenues of approximately $120 million. Until the closing
of the HCI-USA Acquisition, the Company accounts for its investment in HCI and
CSP under the equity method, and for its investment in USA under the
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<PAGE> 20
cost method. Following closing, the financial results of HCI, USA and CSP will
be consolidated with those of the Company.
RESULTS OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1999 COMPARED TO SIX MONTHS ENDED JUNE 30, 1998
Total revenue for the six months ended June 30, 1999, primarily from the printer
manufacturing operations of Datasouth, was $14,245,000 compared to $14,809,000
for the same period in 1998. Revenue from printer operations was $13,636,000 for
the six months ended June 30, 1999, compared to $14,158,000 for the same period
in 1998. Short term revenue trends in the Company's printer business fluctuate
due to variable ordering patterns of large customers. The decrease in revenue
for the six months ended June 30, 1999 compared to the same period in 1998 was
due to a decrease in printer sales to The Sabre Group, Inc. ("Sabre"), the
Company's largest customer. Printer sales to this customer were $2.8 million for
the six months ended June 30, 1999, compared to $4.3 million for the six months
ended June 30, 1998.
Gross profit from printer operations of 26.6% for the six months ended June 30,
1999 increased from the 24.9% realized for the same period in 1998, primarily
due to a different mix of products sold and initial production costs associated
with the introduction of a new printer line in 1998, which collectively
increased gross profit 2.8% of revenue; offset by product cost reduction in 1998
favorably impacting 1998 gross profit by 0.7% of revenue.
Income on a portion of consulting fees charged to Gray is deferred and
recognized over 40 years as a result of the Company's equity investment in Gray.
Consulting fee income of $609,000 was recognized in the six months ended June
30, 1999 compared to $652,000 in the same period in 1998. There can be no
assurance that the Company will recognize any consulting fees in the future,
other than recognition of currently deferred fees.
Operating expenses of $4,656,000 for the six months ended June 30, 1999
represented a 9.1% increase from the same period in 1998, due primarily to (a) a
$181,000 increase in research and development costs attributable to software
development activities for the airline ticket/boarding pass printer (the
marketing rights for which were acquired in September 1998) and (b) expenses of
$244,000 associated with the Company's European sales office established in
October 1998. Operating expenses include non-cash goodwill amortization expense
of $266,000 for the six months ended June 30, 1999 and $241,000 for the same
period in 1998.
Equity in losses of affiliated companies, totaling $(997,000) and $(146,000) for
the six months ended June 30, 1999 and 1998, respectively, included the
Company's proportionate share of the earnings or losses of Gray, HCI, CSP and
Rawlings, and included goodwill amortization totaling $549,000 and $389,000,
respectively. In January 1999, USA sold its investment in broadcast.com, inc., a
marketable security, recognizing an after-tax gain of approximately $39,971,000.
As a result of HCI's equity investment in USA and the Company's equity
investment in HCI reported on a six-month lag basis, the Company will recognize
approximately $1,900,000 in equity in earnings of affiliates in July 1999 due to
USA's gain on the disposal of broadcast.com, inc. As a result of Gray's issuance
of shares of its class B common stock on October 1, 1999 in connection with
consideration paid in an acquisition of three television stations, the Company's
common equity ownership of Gray was reduced from 16.9% to 13.2%, resulting in a
pretax gain for the Company of approximately $2,000,000 that will be recognized
by the Company in October 1999. This offering also reduced the Company's common
equity voting power in Gray from 27.5% to 26.2%. There can be no assurance that
such sales or such gains of a material nature will occur in the future.
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Interest and dividend income of $453,000 and $562,000 for the six months ended
June 30, 1999 and 1998, respectively, was primarily derived from dividends paid
on the Company's investment in Gray's series A and series B preferred stock.
Interest expense, totaling $2,529,000 and $2,101,000 for the six months ended
June 30, 1999 and 1998, respectively, was incurred primarily in connection with
bank term loans and notes payable, the proceeds of which were used to finance
(a) the Company's investments in Gray, HCI, CSP, USA and Rawlings, and (b) the
CodeWriter acquisition in January 1998; and, for the six months ended June 30,
1999, (x) the Company's investments in TSI in August 1998 and January 1999, and
(y) the Company's investment in Tarzian in January 1999.
Nondeductible goodwill amortization reduced the Company's tax benefit for the
six month periods ended June 30, 1999 and 1998, resulting in an effective tax
rate of 31.0% for the six months ended June 30, 1999 and 28.3% for the same
period in 1998.
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 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 3 to the Company's consolidated financial statements), 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 Sabre 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 to $1,618,000 in 1998 from $681,000 in 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 which increased gross profit 1.8% of revenue; less (b) the impact of 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, which decreased gross profit by 0.1% of revenue;
and (c) an increase in freight costs and increases in inventory reserves, offset
by some manufacturing overhead efficiencies gained as a result of higher unit
volumes, which collectively reduced gross profit by 2.3% of revenue.
Operating expenses of $8,593,000 in 1998 represented a 25% increase from 1997,
due primarily to (a) expenses of $245,000 associated with an increase in sales
and marketing personnel attributable to the Company's expanded printer line; (b)
expenses of $75,000 associated with the Company's European sales office opened
in October 1998; (c) a $175,000 increase in advertising expenses relating to the
introduction of new products in 1998; (d) an increase in personnel and
administrative costs of $560,000 resulting from the CodeWriter acquisition; and
(e) goodwill amortization expense and certain nonrecurring post-acquisition
transition costs of $225,000 in 1998 associated with the CodeWriter acquisition.
Operating expenses included 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, included the Company's proportionate share of the
earnings of Gray, HCI, CSP, and in 1998 only, 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.
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Interest and dividend income of $1,085,000 in 1998 and $1,102,000 in 1997 was
primarily derived from dividends paid 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 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 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.
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 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 Sabre 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) a different mix of products sold and
initial production costs associated with the introduction of a new printer line,
which collectively reduced gross profit 0.5% of revenue; and (b) greater
manufacturing overhead efficiencies gained in 1996 as a result of higher unit
volumes, representing 0.7% of the 1.7% decrease in the gross profit percentage
from 1996.
Consulting fee income on services provided to Gray in connection with Gray's
acquisitions and dispositions was $681,000 in 1997, as compared to $844,000 in
1996.
Operating expenses of $6,852,000 in 1997 represented a 10% increase from 1996,
due primarily to (a) an increase in research and development expenses of
$850,000 incurred primarily for the design of a new printer introduced in the
fourth quarter of 1997 and (b) an increase in certain general and administrative
expenses, such as compensation costs and professional fees, of $130,000, offset
by (c) a decrease in sales and marketing expense of $230,000. 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 were
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
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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, or $5,000,000 after tax. This offering also reduced the Company's
common equity voting power in Gray from 27.1% to 25.1%.
Interest and dividend income in 1997 of $1,102,000 was primarily derived from
dividends accrued on the Company's investment in Gray's series A and series B
preferred stock. Interest expense, totaling $2,716,000 in 1997, was incurred
primarily in connection with bank term loans, the proceeds of which were used to
finance the Company's investments in Gray, HCI, CSP and USA, and the Company's
investments in Rawlings which the Company began making 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. As a result of this adoption,
HCI recognized a $4,559,000 charge against its earnings, representing the
after-tax cumulative effect of the accounting change. The Company reported 9.1%
of 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 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 previous long-term debt agreements with two banks in
1998, and further amended the agreements in 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) two 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
$42,313,000 was outstanding as of June 30, 1999 (classified as a current
liability as of June 30, 1999 until such time as the amount is refinanced -- see
Note 7 to the Company's consolidated financial statements); (b) two term notes
payable to a bank, due November 24, 1999, bearing interest at the bank's prime
rate, under which $1,353,000 was outstanding as of June 30, 1999; and (c) 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 $3,392,000 was
outstanding as of June 30, 1999. Under an agreement amended on February 20, 1998
and further amended on March 5, 1999 and June 30, 1999, the Company has
outstanding a $4,000,000 term note bearing interest at LIBOR plus 3%, paid in
quarterly installments of $250,000 each, under which $3,500,000 was outstanding
as of June 30, 1999; and (b) a revolving bank credit facility for borrowings of
up to $5,000,000 bearing interest at prime plus .25%, under which $4,803,000
was outstanding as of June 30, 1999.
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All amounts outstanding under the $4,000,000 term note and $5,000,000 revolving
credit facility were payable on demand at June 30, 1999.
The Company also has a bank note in the amount of $10,000,000 due November 24,
1999 with interest at the bank's prime rate, and 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 June 30, 1999. The $10,000,000 note was
issued in connection with the Company's investment in Tarzian on January 28,
1999.
The Company currently anticipates refinancing all existing notes payable and
long-term debt agreements in connection with the bank financing of the HCI-USA
Acquisition. In order to obtain sufficient additional funds to complete the
HCI-USA Acquisition (approximately $20 million), refinance existing indebtedness
of the Company, HCI and USA (approximately $70 million) and provide for the
combined companies' cash needs after the HCI-USA Acquisition, the Company
expects to enter into a new credit agreement. The credit agreement is expected
to provide for total credit of up to $128 million and an interest rate based
upon either (1) LIBOR plus an applicable margin or (2) an alternate base rate,
defined as the higher of the bank's prime rate and the Federal funds rate, plus
an applicable margin. Other than a $30 million principal payment due within 18
months after the date of closing, of which at least $10 million will be due
within 12 months after such closing date, amounts due under the new credit
agreement are expected to mature and will be due and payable in full three years
after the closing date of the credit agreement. The Company expects to
collateralize the credit facilities with all present and future assets of the
Company and its subsidiaries, as well as a pledge of the shares in both public
and private companies owned by the Company. The Company also expects that the
new credit facilities will contain normal and customary debt covenants, such as
debt service coverage ratios and minimum net worth requirements. In addition to
the negotiating and executing an amendment to the merger agreement among the
Company, HCI, USA and CSP, and to the approval of HCI's, USA's and CSP's
shareholders, the Company anticipates issuing subordinated notes (approximately
$18.7 million) to HCI, USA and CSP shareholders in connection with the HCI-USA
Acquisition. The notes are expected to be payable three years from the date of
issuance and bear interest at 8%. Interest rates on the credit facilities are
expected to range from LIBOR plus 2.0% to LIBOR plus 2.5%. The $10 million
minimum principal payment due within 12 months of closing and the $30 million
aggregate principal payment due within 18 months of closing contemplates the
Company's liquidation of certain of its investments, including but not limited
to, the Company's investment in Tarzian, and/or the redemption of some or all of
the Company's investment in Gray preferred stock prior to those maturity dates.
The Company is a party to an interest rate swap agreement, effectively modifying
the interest characteristics of $20,000,000 of the Company's outstanding
long-term debt. The agreement involves the exchange of amounts based on a fixed
interest rate for amounts based on variable interest rates over the life of the
agreement, 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 of floating rate debt to a
fixed rate of 7.83% under the agreement, which took effect on January 1, 1999
and expires December 31, 2008. Under a second interest rate swap agreement which
was terminated at no cost to the Company on June 30, 1999, $4,000,000 of
long-term debt was subject to a fixed rate of 8.66% beginning September 30,
1998, instead of a variable rate of LIBOR plus 3%. As of June 30, 1999, the
estimated market value of the Company's $20,000,000 swap agreement was
approximately $430,000.
Cash provided by operating activities was $838,000 for the six months ended June
30, 1999 and cash used in operating activities was $1,876,000 for the same
period in 1998. In 1999, receivables decreased $2,801,000, due in part to a
reduction in the receivable from Gray of $880,000, as well as a reduction in
the average trade receivables days outstanding. For the
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six months ended June 30, 1998, excluding the impact of the CodeWriter
acquisition, which added working capital of $409,000, inventories increased
$719,000 due to the stocking of raw materials associated with a newly-introduced
airline ticket/boarding pass printer, receivables increased $612,000 and other
current liabilities increased $596,000. As of June 30, 1999, the Company had
open purchase commitments totaling approximately $8,300,000, primarily for raw
materials inventories.
Cash used in operating activities was $2,624,000 and $1,827,000 for the years
ended December 31, 1998 and 1997, and cash provided by operating activities was
$1,267,000 for the year ended December 31, 1996. In 1998, excluding the impact
of the CodeWriter acquisition, which included receivables of $303,000,
receivables increased $1,462,000 due in part to a 37.9% increase in revenue from
printer operations compared to 1997. Inventories increased $161,000 in 1998, net
of (a) CodeWriter inventories acquired totaling $538,000 and (b) the purchase of
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 September 1998, in a transaction valued at approximately $750,000.
Interest payments increased $1,944,000 over 1997 due to an increase in long-term
debt. In 1997, accounts receivable and inventories increased $681,000 and
$442,000, respectively, and accounts payable and accrued expenses increased
$512,000. Operating cash flow was negatively impacted in 1997 as a result of a
loss from operations of $499,000 compared to income from operations of
$1,229,000 in 1996.
Cash used in investing activities was $12,549,000 and $7,274,000 for the six
months ended June 30, 1999 and 1998, respectively. In 1999, the Company acquired
shares of TSI series C1 preferred stock for $1,000,000, acquired shares of the
outstanding common stock of Tarzian for $10,000,000 and invested an additional
$421,000 in Rawlings. In addition, the Company incurred $674,000 in deferred
acquisition costs in connection with the HCI-USA Acquisition. In the six months
ended June 30, 1998, the Company acquired shares of Rawlings for $4,961,000 and
acquired CodeWriter for cash of $2,008,000, net of cash acquired, and shares of
the Company's common stock valued at $2,500,000.
In February 1999, Tarzian filed a complaint with the United States District
Court for the Southern District of Indiana, claiming that it had a binding and
enforceable contract to purchase the Tarzian shares from the seller prior to the
Company's purchase of the shares, and requested judgment providing that the
contract be enforced. The Company does not believe that a judgment in favor of
Tarzian in this litigation would materially adversely affect the Company. (See
"Legal Proceedings" in Item 3 for further discussion). On March 1, 1999, the
Company executed an option agreement with Gray, whereby Gray has the option of
acquiring the Tarzian investment from the Company for $10,000,000 plus related
costs. Gray has the ability to extend the option period in 30 day increments at
a fee of $66,700 per extension and has extended this option period through
December 31, 1999. The Company 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. The warrants expire 10 years following the date on which Gray
exercises its option.
In January 1998, the Company acquired all of the outstanding common stock of
CodeWriter Industries, Inc. and all of the outstanding membership interests of
CodeWriter's affiliate, CW Technologies, LLC (collectively referred to as
"CodeWriter"), in a transaction valued at approximately $6,200,000, 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 a specified percentage of revenue generated by the Company from
CodeWriter's products and services during each calendar quarter through December
31, 2001, but in no event will the aggregate payments exceed $1,200,000. As of
June 30, 1999, these additional payments have totaled $250,000.
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Cash used in investing activities was $8,154,000, $9,257,000 and $15,859,000
for the years ended December 31, 1998, 1997 and 1996, respectively. In 1998, the
Company invested $4,961,000 in Rawlings common stock, $1,263,000 in Host common
stock and $2,500,000 in Total Sports series C preferred stock. Additionally, the
Company acquired CodeWriter and acquired the Sigma Data 7200 assets in 1998,
resulting in an aggregate cash investment of $2,916,000 in 1998. In 1997, the
Company invested $5,803,000 in Rawlings and 3,107,000 in Gray. Also in 1997, the
Company received a dividend from CSP of $878,000. In 1996, the Company invested
$15,000,000 in Gray series A and series B preferred stock (of which, $10,000,000
was originally a note purchased from Gray that was later exchanged for Gray
preferred stock).
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.
In 1997, 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
(excluding the additional warrants) was $2,842,000. Fifty percent of the
purchase price, or $1,421,000, was paid to Rawlings as part of the Company's
$5,803,000 investment in 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.
Cash provided by financing activities was $11,976,000 and $9,596,000 for the six
months ended June 30, 1999 and 1998, respectively, as a result of the Company's
financing of its investments in TSI, Tarzian and Rawlings in 1999, and its
investment in Rawlings and acquisition of CodeWriter in the six months ended
June 30, 1998. Cash provided by financing activities was $10,694,000,
$11,145,000 and $14,527,000 in the years ended December 31, 1998, 1997 and 1996,
respectively, primarily in order to finance various investments and acquisitions
discussed above.
During 1998, the Company repurchased 40,500 shares of Common Stock for $150,000
under a stock repurchase program authorized by its board of directors for the
repurchase of up to 2,000,000 shares. During 1997 and 1996, 706,010 and 458,000
shares were repurchased, respectively, for a total cost of $1,751,000 and
$1,107,000, respectively. Of the 40,500 shares repurchased in 1998, 40,000
shares were repurchased in a private transaction. Of the 706,010 shares
repurchased in 1997, 500,000 shares were repurchased in a private transaction.
The Company's capital expenditures are expected to total approximately $300,000
for the year ending June 30, 2000. All of the Company's long-term debt has been
classified as current as of June 30, 1999. The Company currently anticipates
refinancing all existing notes payable and long-term debt agreements in
connection with the bank financing of the HCI-USA Acquisition. If the HCI-USA
Acquisition is not consummated, the Company still expects to refinance all
existing notes payable and long-term agreements. As a result, the Company
anticipates that its current working capital, funds available under its current
credit facilities, quarterly cash dividends on the Gray preferred stock and
common stock, anticipated
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extension fees on the option agreement with Gray and cash flow from operations
will be sufficient to fund its debt service, working capital requirements and
capital spending requirements for at least the next 12 months. Any capital to
consummate the HCI-USA Acquisition, to meet HCI's and USA's cash needs
subsequent thereto or to make other acquisitions, would have to be funded by
issuing additional securities or by entering into other financial arrangements
(including the proposed new credit agreement).
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.
Based on the Company's debt profile at June 30, 1999 and 1998, and 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 $216,000 and
$254,000 for the six months ended June 30, 1999 and 1998, respectively, and
$517,000 and $353,000 for the years ended December 31, 1998 and 1997,
respectively. 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 July 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 (i.e., the "Year 2000 Issue"). This could
cause a system failure or miscalculations causing disruptions of operations,
including, among other things, a temporary inability to process transactions,
send invoices, or engage in similar normal business activities.
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
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systems, were upgraded in 1998 and are currently Year 2000 compliant. Expense
incurred related to Year 2000 upgrades and modifications was approximately
$40,000 for the six months ended June 30, 1999 and $100,000 for the year ended
December 31, 1998, including equipment lease rent expense. Future equipment rent
expense will not differ materially from depreciation expense attributed to the
replaced equipment. Although management expects to replace some additional
personal computers and other computer hardware and upgrade some additional
software programs prior to December 31, 1999 which are not Year 2000 compliant,
management does not expect the cost of these additional expenditures to exceed
$30,000, nor does it expect that any of the necessary modifications or
replacements will have a material impact on the results of any future financial
reporting period. The remaining modifications and replacements are expected to
be completed by December 31, 1999, prior to any anticipated impact on its
operating systems. The Company believes that with the completed and anticipated
modifications to existing software and conversions to new software, the Year
2000 Issue will not pose significant operational problems for its computer
systems.
The Company has completed an assessment of Datasouth's major parts and materials
vendors and sole source suppliers to determine the extent to which the Company
may be vulnerable to those third parties' failure to remedy their own Year 2000
issues. This assessment consisted of oral communications, and/or the receipt of
written Year 2000 compliance statements, and focused on certain key vendors and
suppliers from whom the Company receives unique materials, products and
services. Most raw materials used in the manufacture of the Company's computer
printers are available from more than one supplier.
The Company is also assessing Year 2000 readiness of alternative vendors through
written and oral communications, as part of management's contingency planning
for the assurance of inventory availability. In addition, the Company is
evaluating the need to increase inventories of raw materials and finished goods
prior to December 31, 1999 to assure timely fulfillment of customer orders and
decrease its reliance on the availability of parts and product, particularly
from sole source suppliers. None of the Company's machinery used in the assembly
of computer printers has been found to contain time-sensitive software. However,
the Company is evaluating the need to increase its inventories of assemblies and
sub-assemblies used in its products. Likewise, the Company is assessing the need
to have available back-up power sources, such as electricity generators, to
compensate for the risk of unavailable power. If, due to the Year 2000 Issue,
certain sole source suppliers were unable to provide products, parts or vital
manufacturing supplies for more than a few weeks, or if electricity was
unavailable for more than a few weeks, timely fulfillment of customer orders
could be jeopardized, and product sales could be unfavorably impacted. Also, if
customers are unable to remit payments to the Company, or if the Company can not
generate customer invoices as a result of the Year 2000 Issue, the Company's
operating cash flow could be negatively impacted.
The Company expects that HCI and USA will continue to utilize their existing
computer systems, and that no significant changes will be required to be made to
the Company's systems as a result of the HCI-USA Acquisition for at least the
next 12 months.
The costs of the project and the date on which the Company believes it will
complete the Year 2000 modifications are based on management's best estimates,
which were derived utilizing numerous assumptions of future events, including
the continued availability of certain resources and other factors. However,
there can be no guarantee that these estimates will be achieved and actual
results could differ materially from those anticipated. Specific factors that
might cause such material differences include, but are not limited to, the
availability and cost of personnel trained in this area, the availability of
suitable replacement hardware, the ability to locate and correct all relevant
computer codes, and similar uncertainties. Furthermore, it is too early to
determine to what extent, if any, contingency plans will have to be implemented.
Although the Company expects to be Year 2000 compliant by December 31, 1999 and
does
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not expect to be materially impacted by the external environment, such
future events cannot be known with certainty.
FORWARD-LOOKING STATEMENTS
This Transition 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. 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. Actual
results and events may differ materially from those in the forward-looking
statements as a result of various factors including, but not limited to the
following: (i) the Company's and Gray's leverage may adversely affect their
ability to obtain financing, thereby impairing their ability to withstand
economic downturns or competitive pressures; (ii) Gray's business depends on its
relationships with, and success of, its national network affiliates; (iii)
Rawlings', HCI's and USA's businesses are seasonal; (iv) adverse events
affecting baseball, such as negative publicity or strikes, may adversely affect
Rawlings' business; (v) Rawlings', HCI's and USA's businesses depend on short
term contracts and the inability to renew or extend these contracts could
adversely affect their businesses; (vi) HCI and USA may lose money on some of
their contracts, because they guarantee certain payments thereunder; and (vii)
if the HCI-USA Acquisition is completed and if the Company cannot successfully
integrate this acquisition, the Company's business will be adversely affected.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
See "Interest Rate Risk Management" in Item 7 "Management's Discussion and
Analysis".
29
<PAGE> 30
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Audited Consolidated Financial Statements of Bull Run Corporation:
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Auditors 31
Consolidated Balance Sheets at June 30, 1999, December 31, 1998 and 1997 32
Consolidated Statements of Operations for the six months ended June 30,
1999, June 30, 1998 (unaudited), and the years ended December 31, 1998,
1997 and 1996 33
Consolidated Statements of Stockholders' Equity for the six months ended
June 30, 1999 and the years ended December 31, 1998, 1997 and 1996 34
Consolidated Statements of Cash Flows for the six months ended June 30,
1999, June 30, 1998 (unaudited), and the years ended December 31,
1998, 1997 and 1996 35
Notes to Consolidated Financial Statements 36
Selected Quarterly Financial Data (Unaudited) 51
</TABLE>
The audited 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 are incorporated by reference into this Item 8
from the Bull Run Corporation Form 10-K Annual Report for the year ended
December 31, 1998.
Condensed Consolidated Financial Statements of Gray Communications Systems,
Inc.:
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Condensed Consolidated Balance Sheets at June 30, 1999 and December 31,
1998 (Unaudited) F-1
Condensed Consolidated Statements of Operations for the six months ended
June 30, 1999 and 1998 (Unaudited) F-3
Condensed Consolidated Statement of Stockholders' Equity for the six months
ended June 30, 1999 (Unaudited) F-4
Condensed Consolidated Statements of Cash Flows for the six months ended
June 30, 1999 and 1998 (Unaudited) F-5
Notes to Condensed Consolidated Financial Statements (Unaudited) F-6
</TABLE>
30
<PAGE> 31
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 June 30,1999, December 31, 1998 and 1997, and the related
consolidated statements of operations, stockholders' equity and cash flows for
the six months ended June 30, 1999 and 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 certain
equity investees, Rawlings Sporting Goods Company, Inc. ("Rawlings") for the
year ended August 31, 1998, Host Communications, Inc. ("HCI") for the year ended
June 30, 1996, and Capital Sports Properties, Inc. ("CSP") 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 $12,422,000 at December 31, 1998;
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 June 30, 1999, December 31, 1998 and 1997, and the
consolidated results of its operations and its cash flows for the six months
ended June 30, 1999 and 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
Charlotte, North Carolina
August 17, 1999, except as to Note 9,
for which the date is September 14, 1999
31
<PAGE> 32
BULL RUN CORPORATION
CONSOLIDATED BALANCE SHEETS
(Dollars and shares in thousands)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1999 1998 1997
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 323 $ 58 $ 142
Accounts receivable (includes $880 and $850 due
from Gray Communications Systems, Inc. as of
December 31, 1998 and 1997 respectively) 3,927 6,742 5,000
Inventories 5,505 5,167 3,757
Other 160 231 193
--------- --------- ---------
Total current assets 9,915 12,198 9,092
Property and equipment, net 2,620 2,623 2,638
Investment in affiliated companies 85,311 74,767 62,972
Goodwill 7,417 7,583 3,589
Deferred acquisition costs 674
Other assets 161 184 362
--------- --------- ---------
$ 106,098 $ 97,355 $ 78,653
========= ========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable and current portion of long-term debt $ 67,361 $ 4,000 $ 2,500
Accounts payable 1,951 2,781 2,462
Accrued and other liabilities:
Employee compensation and related taxes 417 571 430
Interest 579 396 553
Deferred acquisition costs 608
Other 594 376 234
--------- --------- ---------
Total current liabilities 71,510 8,124 6,179
Long-term debt 51,848 41,998
Deferred income taxes 4,409 5,409 3,599
Other liabilities 2,185 2,183 1,821
Stockholders' equity:
Common stock, $.01 par value (authorized 100,000
shares; issued 22,983, 22,785 and 22,583 shares
as of June 30, 1999 and December 31, 1998 and
1997, respectively) 230 228 226
Additional paid-in capital 21,840 21,378 20,800
Treasury stock, at cost (542 as of June 30, 1999
and 542 and 1,287 shares as of December 31,
1998 and 1997, respectively) (1,393) (1,393) (3,188)
Retained earnings 7,317 9,578 7,218
--------- --------- ---------
Total stockholders' equity 27,994 29,791 25,056
--------- --------- ---------
$ 106,098 $ 97,355 $ 78,653
========= ========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
32
<PAGE> 33
BULL RUN CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars and shares in thousands, except per share amounts)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30, YEARS ENDED DECEMBER 31,
1999 1998 1998 1997 1996
(unaudited)
<S> <C> <C> <C> <C> <C>
Revenue from printer operations $ 13,636 $ 14,157 $ 29,848 $ 21,639 $ 23,810
Cost of goods sold 10,010 10,636 22,103 15,967 17,170
-------- -------- -------- -------- --------
Gross profit 3,626 3,521 7,745 5,672 6,640
Consulting fee income 609 652 1,618 681 844
Operating expenses:
Research and development 1,335 1,154 2,323 2,418 1,568
Selling, general and administrative 3,321 3,114 6,270 4,434 4,687
-------- -------- -------- -------- --------
4,656 4,268 8,593 6,852 6,255
-------- -------- -------- -------- --------
Income (loss) from operations (421) (95) 770 (499) 1,229
Other income (expense):
Equity in earnings (losses) of affiliated companies (997) (146) 6,734 (599) 1,731
Gain on issuance of common shares by affiliated
company 8,179
Interest and dividend income 453 562 1,085 1,102 874
Interest expense (2,529) (2,101) (4,247) (2,716) (2,124)
Other income (expense) 218 (8) (128)
-------- -------- -------- -------- --------
Income (loss) before income taxes, extraordinary
item and cumulative effect of accounting change (3,276) (1,788) 4,214 (2,712) 9,889
Income tax benefit (provision) 1,015 506 (1,854) 939 (4,012)
-------- -------- -------- -------- --------
Income (loss) before extraordinary item and
cumulative effect of accounting change (2,261) (1,282) 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) $ (2,261) $ (1,282) $ 2,360 $ (1,773) $ 5,308
======== ======== ======== ======== ========
Earnings (loss) per share - Basic:
Income (loss) before extraordinary item and
cumulative effect of accounting change $ (0.10) $ (0.06) $ 0.11 $ (0.08) $ 0.26
Extraordinary loss (0.01)
Cumulative effect of accounting change (0.01)
-------- -------- -------- -------- --------
Net income (loss) $ (0.10) $ (0.06) $ 0.11 $ (0.08) $ 0.24
======== ======== ======== ======== ========
Earnings (loss) per share - Diluted:
Income (loss) before extraordinary item and
cumulative effect of accounting change $ (0.10) $ (0.06) $ 0.10 $ (0.08) $ 0.25
Extraordinary loss (0.01)
Cumulative effect of accounting change (0.01)
-------- -------- -------- -------- --------
Net income (loss) $ (0.10) $ (0.06) $ 0.10 $ (0.08) $ 0.23
======== ======== ======== ======== ========
Weighted average number of common shares outstanding:
Basic 22,330 22,098 22,189 21,302 22,013
Diluted 22,330 22,098 23,182 21,302 22,945
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
33
<PAGE> 34
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, January 1, 1996 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
Exercise of stock options 198 2 462 464
Net loss (2,261) (2,261)
------- ------- ------- ------- ------- -------
BALANCES, JUNE 30, 1999 22,983 $ 230 $21,840 $(1,393) $ 7,317 $27,994
======= ======= ======= ======= ======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
34
<PAGE> 35
BULL RUN CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30, YEARS ENDED DECEMBER 31,
1999 1998 1998 1997 1996
(unaudited)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (2,261) $ (1,282) $ 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 14 11 22 27 1
Depreciation and amortization 524 629 1,122 1,001 950
Equity in (earnings) losses of affiliated companies 997 146 (6,734) 599 (1,731)
Deferred income taxes (1,000) (502) 1,837 (892) 3,553
Accrued preferred stock dividend income (150) (175) (300)
Loss on disposition of assets 128
Change in operating assets and liabilities:
Accounts receivable 2,801 (612) (1,462) (681) (172)
Inventories (338) (719) (161) (442) 440
Other current assets 74 (121) 47 (6) 74
Accounts payable and accrued expenses 25 596 30 512 122
Deferred income 2 128 362 128 6
-------- -------- -------- -------- --------
Net cash provided by (used in) operating activities 838 (1,876) (2,624) (1,827) 1,267
-------- -------- -------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (233) (223) (352) (1,160) (366)
Investment in affiliated companies (11,623) (5,071) (8,812) (9,099) (5,566)
Acquisition of businesses and product rights, net
of cash acquired (774) (2,008) (2,916)
Note purchased from affiliated company (10,000)
Redemption of preferred stock investment 3,805
Dividends received from affiliated companies 81 28 121 1,002 73
-------- -------- -------- -------- --------
Net cash used in investing activities (12,549) (7,274) (8,154) (9,257) (15,859)
-------- -------- -------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings from notes payable 10,000 500 1,200 1,500
Borrowings from revolving lines of credit 8,648 7,966 17,598 15,232 11,339
Repayments on notes payable (700)
Repayments on revolving lines of credit (7,988) (8,146) (18,718) (9,941) (10,743)
Proceeds from long-term debt 1,352 10,125 12,975 5,843 15,000
Repayments on long-term debt (500) (864) (1,536)
Issuance of common stock 464 17 25 262 38
Repurchase of common stock (2) (150) (1,751) (1,107)
-------- -------- -------- -------- --------
Net cash provided by financing activities 11,976 9,596 10,694 11,145 14,527
-------- -------- -------- -------- --------
Net increase (decrease) in cash and cash equivalents 265 446 (84) 61 (65)
Cash and cash equivalents, beginning of year 58 142 142 81 146
-------- -------- -------- -------- --------
Cash and cash equivalents, end of year $ 323 $ 588 $ 58 $ 142 $ 81
======== ======== ======== ======== ========
SUPPLEMENTAL CASH FLOW DISCLOSURES:
Interest paid $ 2,346 $ 2,050 $ 4,404 $ 2,460 $ 1,917
Income taxes paid (recovered), net 3 (25) (58) 612
Noncash investing and financing activities:
Treasury stock issued in business acquisition $ 2,500 $ 2,500
Deferred payment on investment in stock warrant $ 1,421
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
35
<PAGE> 36
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 thirteen
television stations and four daily newspapers; Host Communications, Inc.
("HCI"), a sports marketing and association management company; Capital Sports
Properties, Inc. ("CSP"), a holding company owning an interest in HCI; 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; Total Sports, Inc. ("TSI"), a sports content
Internet company; and Sarkes Tarzian, Inc. ("Tarzian"), owner and operator of
two television stations and four radio stations.
Effective June 30, 1999, Bull Run changed its fiscal year end from December 31
to June 30. All amounts appearing in the consolidated financial statements and
accompanying notes for the six months ended June 30, 1998 are unaudited.
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.
REVENUE RECOGNITION - Revenue from the sale of products, which include printers,
consumables, accessories, and parts, are recognized when goods are shipped to
customers. Service repair revenue is recognized when the repaired units are
shipped to customers. Revenue from service contracts is recognized monthly over
the contract lives, which are generally one year. Sales returns and allowances
are reflected as a reduction in revenue from printer operations and reflected in
inventory at the lower of cost or expected net realizable value. The Company
generally charges a restocking fee for sales returns. Products that are
defective upon arrival are handled under the Company's warranty policy.
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 $70 as of June 30, 1999, $82 as of December 31, 1998 and
$55 as of December 31, 1997.
36
<PAGE> 37
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 $221 and $334 in the six months ended June 30, 1999 and 1998,
respectively, and $592, $614 and $590 in the years ended December 31, 1998, 1997
and 1996, respectively.
INVESTMENT IN AFFILIATED COMPANIES - The Company has accounted for its
investments in Gray, HCI, Rawlings and CSP by the equity method, and its
investments in USA, TSI and Tarzian by the cost method. The excess of the
Company's investment over the underlying equity of Gray, HCI and Rawlings,
totaling approximately $31,750 as of June 30, 1999, and $29,600 and $24,200 as
of December 31, 1998 and 1997, respectively, is being amortized over 20 to 40
years, with such amortization (totaling $549 and $389 in the six months ended
June 30, 1999 and 1998, respectively, and $777, $610 and $487 in the years ended
December 31, 1998, 1997 and 1996, respectively) reported as a reduction in the
Company's equity in earnings of affiliated companies. The equity in earnings of
HCI is recognized by the Company on a six month lag basis. Effective January 15,
1998, the date on which a Company representative was elected as a member of
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 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. Goodwill amortization was $266 and $241 for the six months ended June
30, 1999 and 1998, respectively, and $488, $301 and $292 in the years ended
December 31, 1998, 1997 and 1996, respectively. Accumulated amortization was
1,682 as of June 30, 1999, and $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 as of June 30, 1999 and December 31, 1998,
and $60 as of December 31, 1997.
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 if it is more likely than not that
some or all of these deferred tax assets will not be realized.
37
<PAGE> 38
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.
RECLASSIFICATIONS - At June 30, 1999, Bull Run reclassified its deferred
consulting fee income as a noncurrent liability instead of a reduction of
accounts receivable, and its liability for the unpaid consideration for a stock
warrant as a noncurrent liability instead of a reduction in its investment in an
affiliated company, as previously presented in the balance sheets at December
31, 1998 and 1997. Certain other reclassifications have also been made in the
1998, 1997 and 1996 financial statements to conform to the June 30, 1999
presentation.
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 July 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.
3. PENDING AND COMPLETED ACQUISITIONS
The Company has previously announced, and its shareholders have approved, the
acquisition of the stock of HCI, USA and CSP not currently owned, directly or
indirectly, by the Company (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
Georgia corporation. The new holding company, which will be renamed Bull Run
Corporation, will be owned by the stockholders of the Company. The former Bull
Run Corporation and its subsidiaries will become subsidiaries of the holding
company. The Company is currently negotiating with its bank lenders with respect
to a new credit agreement in order to obtain the funds necessary to consummate
the proposed acquisition of HCI, CSP and USA. The Company is also negotiating
with HCI and USA with respect to an amendment to the merger agreement relating
to the acquisition of HCI, CSP and USA. Under the terms of the amendment being
negotiated, it is expected that the shareholders of HCI, CSP and USA would
receive for their securities in such companies, a combination of cash (in the
aggregate amount of approximately $54,200), the Company's common stock ("Common
Stock") (approximately 11,327 shares in the aggregate, plus options to purchase
approximately 3,158 shares), and the Company's subordinated promissory notes (in
the aggregate amount of approximately $18,700), bearing interest at a rate of
approximately eight per cent per annum and maturing three years after the date
of issuance. If the Company, HCI, CSP and USA enter into such an amendment, it
will be subject to the approval of HCI's, CSP's and USA's shareholders. Prior to
the HCI-USA Acquisition, the Company accounts for its investment in HCI and CSP
under the equity method, and for its investment in USA under the cost method.
Following the closing of the HCI-USA Acquisition, the financial results of HCI,
CSP and USA will be consolidated with those of the Company. The acquisition will
be accounted for under the purchase method of accounting, whereby the results of
operations of the acquired business will be included in the consolidated
financial statements as of its acquisition date. The assets and liabilities of
the acquired businesses will be included based on an allocation of the purchase
price.
38
<PAGE> 39
In January 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
785,000 shares of Bull Run's 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 it is incurred. As of June 30, 1999
the aggregate additional consideration was $300. CodeWriter designed and
manufactured a line of direct thermal and thermal transfer desktop and portable
bar code label printers. The Company continues to manufacture and sell the
products. The acquisition has been accounted for under the purchase method of
accounting, whereby the results of operations of the acquired business has been
included in the consolidated financial statements since the acquisition date.
The assets and liabilities of the acquired business has been included based on
an allocation of the purchase price.
In September 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. In October 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. As of
June 30, 1999, the aggregate additional consideration was $32.
4. INVESTMENT IN AFFILIATED COMPANIES
The Company's investment in affiliated companies consists of the following:
<TABLE>
<CAPTION>
JUNE 30, 1999 DECEMBER 31, 1998 DECEMBER 31, 1997
AFFILIATE AMOUNT VOTING % AMOUNT VOTING % AMOUNT VOTING %
- --------- ------- -------- ------- -------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
HCI $ 2,747 7.7% $ 2,896 7.7% $ 1,509 5.0%
CSP 9,893 48.5% 10,148 48.5% 9,901 48.5%
USA 650 3.0% 650 3.0% 650 3.0%
Gray 45,513 27.5% 46,151 27.4% 43,688 27.6%
Rawlings 13,008 10.6% 12,422 10.3% 7,224 5.0%
TSI 3,500 7.6% 2,500 7.7% n/a
Tarzian 10,000 33.5% n/a n/a
------- ------- -------
Total $85,311 $74,767 $62,972
======= ======= =======
</TABLE>
39
<PAGE> 40
Equity in earnings (losses) consists of the following:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30, YEARS ENDED DECEMBER 31,
AFFILIATE 1999 1998 1998 1997 1996
- --------- ------ ------ ------ ------ ------
(unaudited)
<S> <C> <C> <C> <C> <C>
HCI $ (149) $ (53) $ 124 $ 25 $ 353
CSP (255) (139) 246 220 409
USA n/a n/a n/a n/a n/a
Gray (757) (455) 6,127 (844) 969
Rawlings 164 501 237 n/a n/a
TSI n/a n/a n/a n/a n/a
Tarzian n/a n/a n/a n/a n/a
------ ------ ------ ------ ------
Total $ (997) $ (146) $6,734 $ (599) $1,731
====== ====== ====== ====== ======
</TABLE>
INVESTMENTS IN HCI, CSP AND USA - HCI, based in Lexington, Kentucky, and USA,
based in Dallas, Texas, provide media and marketing services to universities,
athletic conferences and various associations representing collegiate sports
and, in addition, market and operate amateur participatory sporting events.
CSP's assets consist solely of investments in HCI outstanding common stock and
51.5% of HCI's 8% series B preferred stock having a face value of $3,750 as of
June 30, 1999. The Company is effectively HCI's largest stockholder, owning
directly or indirectly approximately 32.5% of HCI's outstanding common stock and
51.5% of HCI's 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 owned
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 33.8% of USA's
outstanding capital stock.
The Company recognizes its equity in earnings of HCI on a six month lag basis.
In January 1999, USA sold its investment in broadcast.com, inc., a marketable
security, recognizing an after-tax gain of approximately $39,971. As a result of
HCI's equity investment in USA and the Company's equity investment in HCI
reported on a six-month lag basis, the Company will recognize approximately
$1,900 in equity in earnings of affiliates in July 1999 due to USA's gain on the
disposal of broadcast.com, inc. 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. 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.
INVESTMENT IN GRAY AND GAIN ON ISSUANCE OF COMMON SHARES - As of June 30, 1999,
the Company owned approximately 16.9% of Gray's outstanding common stock, shares
of series A and series B preferred stock having an aggregate face value of
$11,750 and warrants to purchase additional shares of Gray's class A and class B
common stock. Gray is a communications company, based in Atlanta, Georgia, that
operates thirteen network affiliated television stations (three of which were
acquired on October 1, 1999), four daily newspapers (one of which was acquired
in March 1999), an advertising weekly shopper, a satellite broadcasting
operation and a paging business.
40
<PAGE> 41
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% (and the Company's voting power from 27.1% to 25.1%), resulting in a
pretax gain for the Company of $8,179 in 1996. In July 1998, Gray disposed of a
television station and recognized an after-tax gain of approximately $43,000 in
connection with the disposition. As a result, the Company's equity in Gray's
earnings was favorably impacted by approximately $6,900 in 1998.
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 $609 and $652 for the six
months ended June 30, 1999 and 1998, respectively, and $1,618, $681 and $844 for
the years ended December 31, 1998, 1997 and 1996, respectively, for services
rendered in connection with certain of Gray's acquisitions and dispositions. As
of June 30, 1999, December 31, 1998 and December 31, 1997, income from
additional consulting fees of $608, $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, 903,750 are fully vested and exercisable as of June 30, 1999, 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 on Gray series A and B preferred stock of $452 and $550 was recognized by
the Company for the six months ended June 30, 1999 and 1998, respectively, and
$1,072, $1,100 and $293 was recognized for the years ended December 31, 1998,
1997 and 1996, respectively. In 1998, Gray redeemed $3,805 of the series B
preferred stock held by the Company, reducing the Company's investment in Gray's
series B preferred stock to 175 shares.
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.
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 aggregate market value of
Gray common stock owned by the Company was $40,519 on June 30, 1999 and $36,903
and $35,178 on December 31, 1998 and 1997, respectively.
INVESTMENT IN TARZIAN - On January 28, 1999, the Company acquired shares of the
outstanding common stock of Tarzian for $10,000. The acquired shares represent
33.5% of
41
<PAGE> 42
the total outstanding common stock of Tarzian as of June 30, 1999, 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 filed a complaint with the
United States District Court for the Southern District of Indiana, claiming that
it had a binding contract with the seller to purchase the shares from the seller
prior to the Company's purchase of the shares, and requests judgment providing
that the seller be required to sell the shares to Tarzian. The Company believes
that a binding contract between Tarzian and the seller did not exist prior to
the Company's purchase of the shares, and in any case, the Company's purchase
agreement with the seller 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 seller is required to pay the Company
the full $10,000 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.
On March 1, 1999, the Company executed an option agreement with Gray, whereby
Gray has the option of acquiring the Tarzian investment from the Company for
$10,000 plus related costs. Gray has the ability to extend the option period in
30-day increments at a fee of $66,700 per extension and has extended this option
period through December 31, 1999. The Company 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. The warrants expire 10 years following the date
on which Gray exercises its 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
date of exercise or the date of expiration 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.
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 Rawlings,
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.
Rawlings' common stock is publicly traded on the Nasdaq Stock Market (symbol:
RAWL). The aggregate market value of Rawlings common stock owned by the Company
was $8,260 on June 30, 1999 and $9,124 and $4,602 on December 31, 1998 and 1997,
respectively.
42
<PAGE> 43
INVESTMENT IN TSI - In 1998, the Company acquired shares of TSI series C
convertible preferred stock for $2,500. In January 1999, the Company invested an
additional $1,000 for 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 approximately a 7.6% share of TSI's capital
stock as of June 30, 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. Accumulated and unpaid dividends on outstanding
series C and series C1 preferred stock are to be paid in cash on July 31, 2003.
Due to the speculative nature of the Company's investment in TSI, and due to the
preference of Series A and Series B preferred shareholders with respect to TSI
dividend rights, the Company has not recognized dividend income on its preferred
stock investment in TSI. Upon completion of the HCI-USA Acquisition, the Company
would own approximately 14.6% of TSI's capital stock, assuming conversion of all
outstanding preferred shares, as a result of the Company's acquisition of TSI
common stock currently owned by HCI.
SUMMARIZED AGGREGATE FINANCIAL INFORMATION - The summarized aggregate financial
information of affiliated companies follows:
Aggregate financial position (reflecting Gray and CSP as of June 30, 1999,
December 31, 1998 and December 31, 1997; combined with HCI as of December 31,
1998, June 30, 1998 and June 30, 1997; combined with Rawlings as of May 31,
1999, November 30, 1998 and November 30, 1997):
JUNE 30, DECEMBER 31,
1999 1998 1997
Current assets $148,446 $144,648 $126,302
Property and equipment 71,665 70,614 59,361
Total assets 658,364 644,568 503,667
Current liabilities 64,514 59,699 53,732
Long-term debt 352,090 339,677 288,144
Total liabilities 477,219 462,833 362,892
Stockholders' equity 181,145 181,735 140,775
Aggregate operating results (reflecting Gray and CSP for the six months ended
June 30, 1999 and 1998, and the years ended December 31, 1998, 1997 and 1996;
combined with HCI for the six months ended December 31, 1998 and 1997, and for
the years ended June 30, 1998, 1997 and 1996; combined with Rawlings for the six
months ended May 31, 1999 and 1998, and the years ended November 30, 1998, 1997
and 1996):
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30, YEARS ENDED DECEMBER 31,
1999 1998 1998 1997 1996
(unaudited)
<S> <C> <C> <C> <C> <C>
Operating revenue $ 190,094 $ 185,708 $ 347,850 $ 294,583 $ 263,302
Income from operations 15,284 24,047 37,351 34,106 27,901
Net income (loss) (938) 5,062 47,546 4,845 7,666
</TABLE>
Undistributed earnings of investments accounted for by the equity method amount
to approximately $3,270 as of June 30, 1999.
43
<PAGE> 44
5. INVENTORIES
Inventories related to the Company's printer operations consist of the
following:
JUNE 30, DECEMBER 31,
1999 1998 1997
Raw materials $3,424 $3,200 $2,734
Work-in-process 742 729 711
Finished goods 1,339 1,238 312
------ ------ ------
$5,505 $5,167 $3,757
====== ====== ======
6. PROPERTY AND EQUIPMENT
The Company's property and equipment consist of the following:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1999 1998 1997
<S> <C> <C> <C>
Land $ 750 $ 750 $ 750
Production equipment 3,138 2,993 2,797
Research and development equipment 660 638 534
Office furniture and equipment 714 666 568
------ ------ ------
5,262 5,047 4,649
Accumulated depreciation and amortization 2,642 2,424 2,011
------ ------ ------
$2,620 $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 $226 and $263 for the six months ended June
30, 1999 and 1998, respectively, and $481, $328 and $309 for the years ended
December 31, 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, $349, $120 and $9 for the years ending June 30,
2000, 2001, 2002 and 2003, respectively.
7. LONG-TERM DEBT AND NOTES PAYABLE
The Company amended its long-term debt agreements with two banks in 1998, and
further amended the agreements in 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 had outstanding (a) two term notes
payable to a bank, bearing interest at the London Interbank Offered Rate
("LIBOR") plus 1.75%, requiring no principal payments prior to maturity on
January 1, 2003, under which $42,313 was outstanding on June 30, 1999
(classified as current - see dicussion below) and December 31, 1998, and $34,343
was outstanding as of December 31, 1997; (b) two term notes payable to a bank
issued in 1999, bearing interest at the bank's prime rate, due November 24,
1999, under which $1,353 was outstanding on June 30, 1999; and (c) 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 $3,392 was outstanding on
June 30, 1999, and $2,536 and $3,183 was outstanding as of December 31, 1998 and
1997, respectively.
44
<PAGE> 45
Under an agreement amended February 20, 1998 and further amended March 5, 1999
and June 30, 1999 (the "February 1998 Agreement"), the Company had outstanding
(a) a $4,000 term note, bearing interest at LIBOR plus 3%, paid to a bank in
quarterly installments of $250, under which $3,500 was outstanding on June 30,
1999 and $4,000 was outstanding on December 31, 1998; and (b) a revolving bank
credit facility for borrowings of up to $5,000, bearing interest at the prime
rate plus .25%, under which $4,803 was outstanding on June 30, 1999 and $5,000
was outstanding on December 31, 1998. All amounts due under the February 1998
Agreement are payable on demand. As of December 31, 1997, $5,472 was outstanding
under a predecessor revolving bank credit facility.
The Company also has a bank note in the amount of $10,000 due November 24, 1999
with interest at the bank's prime rate, and a demand bank note for borrowings of
up to $2,000, bearing interest at the bank's prime rate, under which $2,000 was
outstanding as of June 30, 1999 and December 31, 1998, and $1,500 was
outstanding as of December 31, 1997. The $10,000 note was issued in connection
with the Company's investment in Tarzian on January 28, 1999.
The bank's prime rate as of June 30, 1999 was 7.75%. The interest rate on the
Company's LIBOR-based debt of $42,313 for the 90-day period including June 30,
1999 was 6.76%. The interest rate on the Company's LIBOR-based borrowings of
$3,500 for the 90-day period including June 30, 1999 was 8.37%.
Long-term debt is collateralized by the Company's accounts receivable,
inventories and equipment; common stocks of Gray, Rawlings and Tarzian owned by
the Company; preferred stocks of Gray and TSI 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
existing credit facilities contain certain financial covenants, some of which
have been waived or modified during 1999, the most restrictive of which requires
maintenance of a debt service ratio, as defined, of 1.1 to 1.0. As a result of
the potential for future convenant violations under the existing credit
facilities at measurement dates up to and including June 30, 2000, the Company
has classified all of its long-term debt as current as of June 30, 1999.
The Company currently anticipates refinancing all existing notes payable and
long-term debt agreements in connection with the bank financing of the HCI-USA
Acquisition. If the HCI-USA Acquisition is not consummated, the Company expects
to refinance all existing notes payable and long-term debt agreements.
In connection with certain of the Company's bank credit facilities (under which
approximately $57.1 million was outstanding as of June 30, 1999), the Company's
chairman of the board entered into a put agreement in favor of the bank for up
to $52.9 million, for which he received no compensation. Such agreement provides
that if the Company defaults on its bank loan, the chairman will repay the
amount of such loan to the bank. If he 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, HCI, CSP, Tarzian, Rawlings and
TSI.
The Company is a party to an interest rate swap agreement, effectively modifying
the interest characteristics of $20,000 of the Company's outstanding long-term
debt. The agreement involves the exchange of amounts based on a fixed interest
rate for amounts based on variable interest rates over the life of the
agreement, without an exchange of the notional amount upon which the payments
are based. The differential paid or received as interest rates change is accrued
and recognized as an adjustment of interest expense related to the debt. The
Company effectively converted $20,000 of debt bearing interest at LIBOR
45
<PAGE> 46
plus 1.75% to a fixed rate of 7.83% under the agreement, which took effect
January 1, 1999 and expires December 31, 2008. Under a second interest rate swap
agreement, which was terminated at no cost to the Company on June 30, 1999,
$4,000 of long-term debt was subject to a fixed rate of 8.66% beginning
September 30, 1998, instead of LIBOR plus 3%.
8. INCOME TAXES
The Company's income tax benefit (provision) consists of the following:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30, YEARS ENDED DECEMBER 31,
1999 1998 1998 1997 1996
(unaudited)
<S> <C> <C> <C> <C> <C>
Current:
Federal $ $ $ $ 50 $ (67)
Foreign (7) (14)
State 22 4 (3) (3) (66)
------- ------- ------- ------- -------
15 4 (17) 47 (133)
Deferred 1,000 502 (1,837) 892 (3,879)
------- ------- ------- ------- -------
$ 1,015 $ 506 $(1,854) $ 939 $(4,012)
======= ======= ======= ======= =======
</TABLE>
The principal differences between the federal statutory tax rate and the
effective tax rate are as follows:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30, YEARS ENDED DECEMBER 31,
1999 1998 1998 1997 1996
(unaudited)
<S> <C> <C> <C> <C> <C>
Federal statutory tax rate 34.0 % 34.0 % 34.0 % 34.0 % 34.0 %
Reduction in valuation allowance (0.5)
Goodwill amortization (2.1) (3.7) 3.1 (3.8) 1.0
State income taxes, net of federal
benefit 1.3 0.2 6.3 1.7 4.6
Other, net (2.2) (2.2) 0.6 2.6 1.5
---- ---- ---- ---- ----
Effective tax rate 31.0 % 28.3 % 44.0 % 34.5 % 40.6 %
==== ==== ==== ==== ====
</TABLE>
46
<PAGE> 47
Deferred tax liabilities (assets) are comprised of the following:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1999 1998 1997
<S> <C> <C> <C>
Investment in affiliated companies $ 6,578 $ 6,971 $ 4,420
Property and equipment 148 165 204
Goodwill 40 32
Other, net 39
------- ------- -------
Gross deferred tax liabilities 6,805 7,168 4,624
Deferred income (262) (263) (141)
Allowance for doubtful accounts (27) (32) (21)
Inventory costs and reserves (250) (232) (154)
Employee benefits (56) (47) (40)
Warranty reserve (33) (33) (23)
Net operating loss carryforward (1,161) (535) --
Business credit carryforward (115) (115) (129)
Alternative Minimum Tax credit carryforward (492) (492) (503)
Other, net (10) (14)
------- ------- -------
Gross deferred tax assets (2,396) (1,759) (1,025)
Total deferred taxes, net $ 4,409 $ 5,409 $ 3,599
======= ======= =======
</TABLE>
As of June 30, 1999, the Company has a net operating loss carryforward for tax
purposes of approximately $3,400 expiring beginning in 2018 to reduce Federal
taxable income in the future, and an Alternative Minimum Tax ("AMT") credit
carryforward of approximately $492, 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 7,200,000
shares of the Company's common stock for issuance of stock options, restricted
stock awards and stock appreciation rights, following shareholder approval on
September 14, 1999 of an increase in the number of shares available for grant
under the 1994 Plan. Certain options granted under the 1994 Plan are fully
vested at the date of grant, and others vest over three to five year periods.
Options granted under the 1994 Plan have terms ranging from three to ten years.
In connection with the HCI-USA Acquisition, options for an aggregate of
3,158,475 exercisable shares are expected to be granted to former holders of
options for HCI and USA shares, at exercise prices ranging from $.34 to $4.06
per share.
Considering the increase in the number of shares available approved on September
14, 1999, and considering the number of option shares expected to be issued in
connection with the HCI-USA Acquisition, there will be 2,019,125 shares
available for future option grants. Shares available for future option grants
under the 1994 Plan were 1,477,500 as of June 30, 1999, 1,527,500 as of December
31, 1998 and 567,000 as of December 31, 1997.
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 were 170,000 as of June 30, 1999 and December 31, 1998, and
180,000 as of December 31, 1997.
47
<PAGE> 48
Information with respect to the Company's stock option plans follows:
<TABLE>
<CAPTION>
OPTION OPTION
SHARES PRICE RANGE
<S> <C> <C>
Outstanding as of December 31, 1995 1,641,000 $0.75 - $1.66
Grants 535,000 $2.44 - $2.68
Exercised (45,000) $0.88
Forfeited (96,000) $0.88
---------
OUTSTANDING AS OF DECEMBER 31, 1996 2,035,000 $0.75 - $2.68
Grants 135,000 $2.31 - $2.44
Exercised (258,000) $0.75 - $1.48
Forfeited (30,000) $2.44
---------
OUTSTANDING AS OF DECEMBER 31, 1997 1,882,000 $0.75 - $2.68
Grants 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
Grants 50,000 $3.69
Exercised (198,000) $0.88 - $2.68
---------
OUTSTANDING AS OF JUNE 30, 1999 1,530,000 $0.75 - $4.38
=========
EXERCISABLE AS OF:
DECEMBER 31, 1996 1,120,000 $0.75 - $2.44
DECEMBER 31, 1997 1,287,000 $0.75 - $2.68
DECEMBER 31, 1998 1,387,000 $0.75 - $4.38
JUNE 30, 1999 1,363,000 $0.75 - $4.38
</TABLE>
The weighted average per share fair value of options granted was $1.98 for the
six months ended June 30, 1999, and $1.59 and $1.26 for the years ended December
31, 1998 and 1997. As of June 30, 1999, 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 3.3 years; 581,000 exercisable shares at $.88 per share,
expiring in 4.0 years; 300,000 exercisable shares at $1.46 per share, expiring
in 4.0 years; 385,000 shares at $2.63 per share, expiring in 2.9 years (360,000
shares of which are exercisable); 89,000 shares at $2.38 per share, expiring in
6.7 years (32,000 shares of which are exercisable); 50,000 shares at $3.59 per
share, expiring in 8.9 years (15,000 shares of which are exercisable); and
50,000 non-exercisable shares at $3.69 per share expiring in 9.6 years.
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
.453, 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, the net loss for the six months ended June 30, 1999 would have been
$(2,303), or $(.10) per share (basic and diluted); net income for the year ended
December 31, 1998 would have been $2,224, or $.10 per share (basic and diluted);
the net loss for the year ended December 31, 1997 would have been $(1,900), or
$(.09) per share (basic and diluted); and net income for the year ended December
31, 1996 would have been $5,225, or $.24 per share (basic) and $.23 per share
(diluted). These pro forma results are provided for comparative purposes only
and do not purport to be indicative of what would
48
<PAGE> 49
have occurred had compensation cost been measured under FAS 123 or
of results which may occur in the future. Since FAS 123 is applicable only to
options granted subsequent to December 31, 1994, its pro forma effect will not
be fully reflected until 2000.
10. FAIR VALUE OF FINANCIAL INSTRUMENTS
The aggregate fair value of the Company's investment in affiliated companies was
approximately $105,000 as of June 30, 1999, compared to the carrying value of
$85,311; approximately $88,000 as of December 31, 1998, compared to the carrying
value of $74,767, and approximately $73,000 as of December 31, 1997, compared to
the carrying value of $62,972. The estimate of fair value was based on, in the
case of publicly-traded Gray and Rawlings, quoted market prices on the New York
Stock Exchange and the Nasdaq Stock Market, respectively, as of June 30, 1999,
December 31, 1998 and December 31, 1997; in the case of privately-held HCI, CSP
and USA, for June 30, 1999 and 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; in
the case of Tarzian, acquisition cost; and management estimates.
The fair value of the interest rate swap agreements executed in 1998, having an
aggregate notional amount of $20,000 as of June 30, 1999, $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 initial 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. The estimated amount to be
received (paid) on terminating the swap agreements, if the Company elected to do
so, was approximately $432,000 and $(1,300,000) as of June 30, 1999 and December
31, 1998, respectively.
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.
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<PAGE> 50
11. EARNINGS (LOSS) PER SHARE
The following table sets forth the computation of basic and diluted earnings
(loss) per share:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30, YEARS ENDED DECEMBER 31,
1999 1998 1998 1997 1996
(unaudited)
<S> <C> <C> <C> <C> <C>
Income (loss) before extraordinary item
and cumulative effect of accounting
change $ (2,261) $ (1,282) $ 2,360 $ (1,773) $ 5,877
Extraordinary item (295)
Cumulative effect of accounting change (274)
-------- -------- -------- -------- --------
Net income (loss) $ (2,261) $ (1,282) $ 2,360 $ (1,773) $ 5,308
======== ======== ======== ======== ========
Weighted average number of common
shares outstanding for basic earnings
(loss) per share 22,330 22,098 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 22,330 22,098 23,182 21,302 22,945
======== ======== ======== ======== ========
Basic earnings (loss) per share:
Income (loss) before extraordinary
item and cumulative effect of
accounting change $ (0.10) $ (0.06) $ 0.11 $ (0.08) $ 0.26
Extraordinary item (0.01)
Cumulative effect of accounting change (0.01)
-------- -------- -------- -------- --------
Net income (loss) $ (0.10) $ (0.06) $ 0.11 $ (0.08) $ 0.24
======== ======== ======== ======== ========
Diluted earnings (loss) per share:
Income (loss) before extraordinary
item and cumulative effect of
accounting change $ (0.10) $ (0.06) $ 0.10 $ (0.08) $ 0.25
Extraordinary item (0.01)
Cumulative effect of accounting change (0.01)
-------- -------- -------- -------- --------
Net income (loss) $ (0.10) $ (0.06) $ 0.10 $ (0.08) $ 0.23
======== ======== ======== ======== ========
</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
$163 and $140 for the six months ended June 30, 1999 and 1998, respectively, and
$252, $208 and $243 for the years ended December 31, 1998, 1997 and 1996,
respectively.
13. GEOGRAPHIC DATA AND SIGNIFICANT CUSTOMER
Sales to non-domestic customers, located primarily in Western Europe and South
America were $2,939 and $1,982 for the six months ended June 30, 1999 and 1998,
respectively and $2,823, $2,497 and $2,954 for the years ended December 31,
1998, 1997 and 1996, respectively.
A significant amount of revenue from printer operations is derived from one
customer. Approximately 21% and 31% of the Company's revenue from printer
operations was attributable to this customer for the six months ended June 30,
1999 and 1998, respectively. Approximately 31%, 33% and 30% of such revenue was
attributable to this customer for the years ended December 31, 1998, 1997 and
1996, respectively.
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<PAGE> 51
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>
1999
Revenue from printer operations $ 7,533 $ 6,103
Gross profit 2,158 1,468
Consulting fee income 195 414
Net loss (1,057) (1,204)
Loss per share:
Basic $ (0.05) $ (0.05)
Diluted $ (0.05) $ (0.05)
Weighted average number of shares:
Basic 22,264 22,396
Diluted 22,264 22,396
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>
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<PAGE> 52
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 set forth in Item 1 hereof
under "Executive Officers" and incorporated by reference herein. Information
concerning the Company's non-employee directors 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 45, 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 six
months ended June 30, 1999 all Section 16(a) filing requirements applicable to
the Company's officers, directors and greater than 10 percent beneficial owners
were met.
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<PAGE> 53
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
$50,000 or more during the six months ended June 30, 1999 (the "named executive
officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Long Term Compensation
Awards
----------------------
Annual Compensation Securities
Name and ------------------- Restricted Underlying All Other
Principal Position Year Salary Bonus Stock Awards Options (#) Compensation
------------------ ---- ------ ----- ------------ ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Robert S. Prather, Jr., 1999 (6 mos.) $176,346 - - - $ 9,600 (1)
President and Chief 1998 $339,580 $125,000 - - $ 9,600 (1)
Executive Officer of 1997 $332,018 $100,000 - 300,000 shares $ 9,500 (1)
the Company 1996 $299,240 $125,000 - - $ 9,000 (1)
Frederick J. Erickson, 1999 (6 mos.) $ 65,846 - - 50,000 shares $ 5,298 (1)
Vice President - Finance 1998 $122,962 $ 22,450 - - $ 9,600 (1)
of the Company and 1997 $112,831 $ 12,626 - - $ 7,854 (1)
Executive Vice President 1996 $100,005 $ 30,063 - - $ 7,385 (1)
of Datasouth
</TABLE>
(1) Consists of employer contributions to the Company's defined contribution
retirement plan.
The following table sets forth information concerning stock options granted
during the most recent fiscal period to the named executive officers. The
options were granted pursuant to the Company's 1994 Long Term Incentive Plan.
OPTION GRANTS IN LAST FISCAL PERIOD
<TABLE>
<CAPTION>
Potential Realizable
Value At Assumed
Number of % of Total Annual Rates of Stock
Securities Options Price Appreciation for
Underlying Granted to Exercise Option Term (3)
Options Employees in or Base Expiration ---------------
Name Granted (#) Fiscal Period Price Date 5% ($) 10% ($)
---- ----------- ------------- ----- ---- ------ -------
<S> <C> <C> <C> <C> <C> <C>
Frederick J. Erickson 50,000 (1) 100% (2) $ 3.69 February 1, 2009 $ 115,952 $ 293,846
</TABLE>
(1) All options were granted at an exercise price equal to the market value of
the underlying shares on the date of the grant.
(2) Options for a total of 50,000 shares were granted to employees during the
six months ended June 30, 1999.
(3) Represents the potential appreciation of the options over their stated term
of 10 years, based upon assumed compounded rates of appreciation of 5% per year
and 10% per year. The amounts set forth in these columns are not intended as
forecasts of future appreciation, which is dependent upon the actual increase,
if any, in the market price of the underlying shares, and there is no assurance
that the amounts of appreciation shown in the table actually will be realized.
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<PAGE> 54
The following table sets forth certain information concerning exercise of
stock options by each named executive officer during the six months ended June
30, 1999 and unexercised options held by the named executive officers as of June
30, 1999.
AGGREGATED OPTION EXERCISES IN LAST FISCAL PERIOD
AND FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
Number of Securities Value of Unexercised
Underlying Unexercised In-the-Money Options
Shares Acquired Value Options at Fiscal Year-End (#) at Fiscal Year-End ($)
Name on Exercise (#) Realized Exercisable/Unexercisable Exercisable/Unexercisable
---- --------------- -------- ------------------------------ -------------------------
<S> <C> <C> <C> <C>
Robert S. Prather, Jr. 100,000 $144,375(1) 275,000 / 0 $ 504,403 / $ 0 (2)
Frederick J. Erickson - - 72,000 / 50,000 $ 238,500 / $ 190,625 (2)
</TABLE>
(1) Based on the difference between the closing market price per share on the
exercise date of $4.13 and the exercise price.
(2) Based on the difference between the closing market price per share on June
30, 1999 of $4.19 and the exercise price.
LONG TERM INCENTIVE PLANS
Under the Company's 1994 Long Term Incentive Plan (the "1994 Plan"),
7,200,000 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 June 30, 1999, options for a total of 1,455,000
shares were issued and outstanding under the 1994 Plan with prices ranging from
$.88 to $4.38 per share. Of the 1,455,000 shares issuable upon the exercise of
outstanding options, 700,000 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; 300,000 vest in annual increments of 150,000 each, beginning one year
following the date of grant, and are exercisable over a period not to exceed
five years; 75,000 vest in annual increments of 25,000 each, beginning one year
following the date of grant, and are exercisable over a period not to exceed ten
years; 50,000 vest in increments of 10,000, 20,000 and 20,000 on the first,
second and third anniversary date of the grant, respectively, and are
exercisable over a period not to exceed 10 years; and the remaining 330,000 were
fully vested at the date of grant. Options to purchase 198,000 shares were
exercised during the six months ended June 30, 1999 and no options for shares
were cancelled during the same period.
The Company's 1987 Non-Qualified Stock Option Plan terminated in 1992.
There are currently outstanding under such plan, 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. No incentive plan compensation was earned
during the six months ended June 30, 1999.
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.
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<PAGE> 55
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 $2,500 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"). No stock options under the 1994 Non-Employee Directors' Plan
were granted in the six months ended June 30, 1999. In the year ended December
31, 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.
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. The
Company charged Gray fees totaling $567,000 during the six months ended June 30,
1999, and $1,980,000 for the year ended December 31, 1998 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 August 31, 1999 is shown in the following table. Information
concerning such security holdings has been furnished by the holders thereof to
the Company.
55
<PAGE> 56
<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) 3,110,598(2)(3) 13.6%
J. Mack Robinson (1) 6,941,706(3)(4) 30.7%
Robinson-Prather Partnership (1) 2,660,598(3) 11.8%
Harriett J. Robinson (1) 6,941,706(3)(4) 30.7%
Harriett J. Robinson, Trustee
Robin M. Robinson Trust (1) 3,085,598(3) 13.7%
Harriett J. Robinson, Trustee
Jill E. Robinson Trust (1) 3,168,598(3) 14.1%
Gulf Capital Services, Ltd. (1) 2,660,598(3) 11.8%
James W. Busby (5) 2,295,906(5) 10.2%
Samuel R. Shapiro (6) 3,620,300(6) 16.1%
Shapiro Capital Management Company, Inc. (6) 3,535,300(6) 15.7%
Hilton H. Howell, Jr. (1) 1,916,050(7) 8.6%
</TABLE>
- --------------
(1) The address of each of these shareholders is 4370 Peachtree Road, N.E.,
Atlanta, Georgia 30319.
(2) Includes 275,000 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, the
general partners of which are Robert S. Prather, Jr., President, Chief
Executive Officer, and a director of the Company; J. Mack Robinson,
Chairman of the Board 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 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,
which is less than the amount disclosed.
(4) Includes as to each of J. Mack Robinson and his wife, Harriett J. Robinson:
1,146,358 shares owned directly by Mr. Robinson; 310,500 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 507,500 shares owned directly by
the JER Trust, of each of which Mrs. Robinson is the trustee; and an
aggregate of 1,791,050 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 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.
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<PAGE> 57
(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 as to those shares in which
Shapiro Capital Management, Inc. has voting and depositive power.
(7) Includes 150,000 shares which Mr. Howell has the right to acquire through
the exercise of currently exercisable options; and an aggregate of
1,791,050 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 August 31, 1999, all directors and executive officers of the Company
as a group (six persons) owned 10,007,841 shares of Common Stock, representing
43.1% of the outstanding shares (including 692,000 shares purchasable on or
within 60 days from such date pursuant to the exercise of stock options).
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company leases office space from Delta Life, a company of which J. Mack
Robinson is Chairman of the Board and principal stockholder. Mr. Robinson is the
Chairman of the Board of the Company. 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 a 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 certain of the Company's bank credit facilities (under
which approximately $57.1 million was outstanding as of June 30, 1999), J. Mack
Robinson, the Company's chairman of the board, executed a put agreement in favor
of the bank for up to $52.9 million, 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
57
<PAGE> 58
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, HCI, CSP, Tarzian, Rawlings and TSI. 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.
On March 1, 1999, the Company executed an option agreement with Gray,
whereby Gray has the option to acquire the Tarzian investment from the Company
for $10 million plus related costs. Gray has the ability to extend the option
period in 30-day increments at a fee of $66,700 per extension, and has extended
this option through December 31, 1999. Option payments totaling $266,700 were
paid to the Company by Gray during the six months ended June 30, 1999. In
connection with the option agreement, the Company received from Gray warrants to
acquire 100,000 shares of Gray's class B common stock at $13.625 per share. The
warrants will vest immediately upon Gray's exercise of the option. The warrants
expire 10 years from the date on which Gray exercises the option.
58
<PAGE> 59
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 June 30, 1999, December 31,
1998 and December 31, 1997
Consolidated Statements of Operations for the six months
ended June 30, 1999 and 1998 (unaudited), and the
years ended December 31, 1998, 1997 and 1996
Consolidated Statements of Stockholders' Equity for the
six months ended June 30, 1999 and the years ended
December 31, 1998, 1997 and 1996
Consolidated Statements of Cash Flows for the six months
ended June 30, 1999 and 1998 (unaudited) and the years ended
December 31, 1998, 1997 and 1996
Notes to Consolidated Financial Statements
Supplementary Data, Selected Quarterly Financial Data (Unaudited)
The consolidated financial statements of Gray Communications Systems,
Inc. and Gray's "Schedule II - Valuation and qualifying accounts" and
the independent auditors reports thereon dated January 26, 1999 are
incorporated by reference into this Item 14(a) from the Company's
Annual Report on Form 10-K for the year ended December 31, 1998.
The condensed consolidated financial statements of Gray Communications
Systems, Inc. as of June 30, 1999 and for the six months ended June
30, 1999 and 1998, on pages F-1 through F-8 of this report
Independent Auditors' Report on the financial statements of Capital
Sports Properties, Inc. for the six months ended June 30, 1996, on
page F-9 of this report
Independent Auditors' Report on the consolidated financial statements
of Host Communications, Inc. for the year ended June 30, 1996, on page
F-10 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-11 of this report
(2) The following consolidated financial statement schedule of Bull Run
Corporation is included in Item 14(d):
Schedule II - Valuation and qualifying accounts
All other schedules for which provision is made in the applicable
accounting regulation of the Securities and Exchange Commission are
not required under the related instructions or are inapplicable and
therefore have been omitted.
59
<PAGE> 60
(b) Reports on Form 8-K
Form 8-K dated April 23, 1999 filed to report an amendment to the
Standstill Agreement between the Company and Rawlings Sporting Goods
Company, Inc.
Form 8-K dated June 30, 1999 filed to report a change in a specific
provision of the amendment to the Standstill Agreement dated April 23, 1999
between the Company and Rawlings Sporting Goods Company, Inc.
(c) Exhibits
Exhibit
Numbers Description
------- -----------
(2.1) Restated Agreement and Plan of Merger, dated as of February
15, 1999, by and among BR Holding, Inc., Bull Run Corporation,
Capital Sports Properties, Inc., Host Communications, Inc.,
Universal Sports America, Inc., Capital Merger Sub, Inc., Host
Merger Sub, Inc., and USA Merger Sub, Inc. (m)
(2.2) Form of Agreement and Plan of Merger, by and among BR Holding,
Inc., Bull Run Corporation and a wholly owned subsidiary of BR
Holding, Inc. (m)
(3.1) Articles of Incorporation (b)
(3.2) Certificate of Amendment to Articles of Incorporation, filed
November 29, 1994 (b)
(3.3) Bylaws of the Registrant (b)
(3.4) Articles of Incorporation of BR Holding, Inc. (m)
(3.5) Bylaws of BR Holding, Inc. (m)
(10.1) Employment Agreement - Robert S. Prather, Jr. (e)
(10.2) Employee Agreement - Frederick J. Erickson (d)
(10.3) Amended and Restated 1994 Long Term Incentive Plan (m)
(10.4) Non-Employee Directors' 1994 Stock Option Plan (b)
(10.5) 1987 Non-Qualified Stock Option Plan (c)
(10.6) Form of Stockholders' Agreement, by and among Hilton H.
Howell, Jr., Douglas L. Jarvie, Robinson-Prather Partnership,
W. James Host and Charles L. Jarvie (m)
(10.7) Lease Agreement between Delta Life Insurance Company and Bull
Run Corporation dated as of January 1, 1993 (a)
(10.8) Lease Agreements between Hans L. Lengers and Datasouth
Computer Corporation dated November 27, 1981 (d)
(10.9) $9,000,000 Amended and Restated Credit Agreement dated as of
March 5, 1999 between Datasouth Computer Corporation and
Wachovia Bank, N.A. (i)
(10.10) First Amendment to Amended and Restated Credit Agreement
between Datasouth Computer Corporation and Wachovia Bank, N.A.
dated June 30, 1999 (x)
(10.11) Amended and Restated Loan Agreement between Bull Run
Corporation and NationsBank, N.A. dated as of March 20, 1998
(h)
(10.12) First Amendment of Amended and Restated Loan Agreement between
Bull Run Corporation and NationsBank, N.A. dated as of
February 24, 1999 (i)
60
<PAGE> 61
Exhibit
Numbers Description
------- -----------
(10.13) Second Amendment of Amended and Restated Loan Agreement
between Bull Run Corporation and NationsBank, N.A. dated as of
March 22, 1999 (k)
(10.14) Third Amendment of Amended and Restated Loan Agreement between
Bull Run Corporation and NationsBank, N.A. dated as of March
24, 1999 (k)
(10.15) Fourth Amendment of Amended and Restated Loan Agreement
between Bull Run Corporation and Bank of America, N.A. (f/k/a
NationsBank, N.A.) dated as of August 23, 1999 (x)
(10.16) $10,400,000 First Term Loan Note dated March 20, 1998 (h)
(10.17) $32,500,000 Second Term Loan Note dated March 20, 1998 (h)
(10.18) $4,000,000 Third Term Loan Note dated February 24, 1999 (i)
(10.19) $675,754 Fourth Term Loan Note dated March 22, 1999 (k)
(10.20) $3,500,000 Revolving Credit Note dated March 20, 1998 (h)
(10.21) Gray Communications Systems, Inc. Warrant dated September 24,
1996 (731,250 shares of Gray class A common stock) (e)
(10.22) Gray Communications Systems, Inc. Warrant dated September 24,
1996 (375,000 shares of Gray class A common stock) (e)
(10.23) Investment Purchase Agreement dated November 21, 1997 by and
between Rawlings Sporting Goods Company, Inc. and Bull Run
Corporation (f)
(10.24) Common Stock Purchase Warrant dated November 21, 1997 issued
by Rawlings Sporting Goods Company, Inc. to Bull Run
Corporation (f)
(10.25) Standstill Agreement dated November 21, 1997 by and between
Rawlings Sporting Goods Company, Inc. and Bull Run Corporation
(f)
(10.26) Amendment Number One to Standstill Agreement dated April 23,
1999 by and between Rawlings Sporting Goods Company, Inc. and
Bull Run Corporation (l)
(10.27) Registration Rights Agreement dated November 21, 1997 by and
between Rawlings Sporting Goods Company, Inc. and Bull Run
Corporation (f)
(10.28) 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 (j)
(10.29) Replacement Secured Promissory Note by and between Bank of
America, N.A. (f/k/a NationsBank, N.A.) and Bull Run
Corporation dated August 23, 1999 (x)
(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 (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
61
<PAGE> 62
(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 10-K Annual Report for the year ended
December 31, 1998 and incorporated by reference herein
(j) Filed as an exhibit to Form 8-K Current Report dated as of January 28,
1999 and incorporated by reference herein
(k) Filed as an exhibit to Form 10-Q Quarterly Report for the quarterly
period ended March 31, 1999 and incorporated by reference herein
(l) Filed as an exhibit to Form 8-K Current Report dated as of April 23,
1999 and incorporated by reference herein
(m) Filed as an exhibit to Registration Statement on Form S-4 (Registration
No. 333-84833), effective August 11, 1999 and incorporated by
reference herein
(x) Filed herewith
(d) Financial Statement Schedules
The response to this section is submitted as part of Item 14(a)(1) and
Item 14(a)(2).
62
<PAGE> 63
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 November 8, 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 November 8, 1999
- -------------------------------------- Executive Officer and
Robert S. Prather, Jr. Director
(Principal Executive
Officer)
/s/ GERALD N. AGRANOFF Director November 8, 1999
- --------------------------------------
Gerald N. Agranoff
/s/ JAMES W. BUSBY Director November 8, 1999
- --------------------------------------
James W. Busby
/s/ FREDERICK J. ERICKSON Vice President - Finance November 8, 1999
- -------------------------------------- and
Frederick J. Erickson Treasurer
(Principal Accounting and
Financial Officer)
/s/ HILTON H. HOWELL, JR. Vice President, Secretary November 8, 1999
- -------------------------------------- and Director
Hilton H. Howell, Jr.
/s/ J. MACK ROBINSON Chairman of the Board November 8, 1999
- --------------------------------------
J. Mack Robinson
</TABLE>
63
<PAGE> 64
REPORT OF INDEPENDENT AUDITORS
We have audited the consolidated financial statements of Bull Run
Corporation as of June 30, 1999, December 31, 1998 and 1997, and for the six
months ended June 30, 1999 and for each of the three years in the period ended
December 31, 1998, and have issued our report thereon dated August 17, 1999
(except for Note 9, for which the date is September 14, 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
Charlotte, North Carolina
August 17, 1999
64
<PAGE> 65
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>
SIX MONTHS ENDED JUNE 30, 1999
Allowance for doubtful accounts $ 82,000 $ 22,000 $ 0 $ 34,000 $ 70,000
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.
65
<PAGE> 66
GRAY COMMUNICATIONS SYSTEMS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30,
1999
-------------
(UNAUDITED)
<S> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 5,084,986
Trade accounts receivable, less allowance for doubtful
accounts of $1,239,000 and $1,212,000, respectively 22,794,918
Recoverable income taxes 1,586,515
Inventories 877,689
Current portion of program broadcast rights 1,206,179
Other current assets 1,013,609
-------------
Total current assets 32,563,896
PROPERTY AND EQUIPMENT:
Land 2,456,020
Buildings and improvements 13,555,417
Equipment 70,878,159
-------------
86,889,596
Allowance for depreciation (34,005,075)
-------------
52,884,521
OTHER ASSETS:
Deferred loan costs 7,691,525
Goodwill and other intangibles:
Licenses and network affiliation agreements 342,021,586
Goodwill 40,836,795
Consulting and noncompete agreements 2,116,783
Other 2,712,607
-------------
395,379,296
-------------
$ 480,827,713
=============
</TABLE>
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
F-1
<PAGE> 67
GRAY COMMUNICATIONS SYSTEMS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (CONTINUED)
<TABLE>
<CAPTION>
JUNE 30,
1999
-------------
(UNAUDITED)
<S> <C>
CURRENT LIABILITIES:
Trade accounts payable (includes $0 and $880,000 payable
to Bull Run Corporation, respectively) $ 804,580
Employee compensation and benefits 4,717,646
Accrued expenses 2,310,503
Accrued interest 5,049,157
Current portion of program broadcast obligations 1,027,539
Deferred revenue 3,247,597
Current portion of long-term debt 385,000
-------------
Total current liabilities 17,542,022
LONG-TERM DEBT 291,286,715
OTHER LONG-TERM LIABILITIES:
Program broadcast obligations, less current portion 416,685
Supplemental employee benefits 1,052,384
Deferred income taxes 43,119,641
Other acquisition related liabilities 4,227,595
-------------
48,816,305
Commitments and contingencies
STOCKHOLDERS' EQUITY:
Serial Preferred Stock, no par value; authorized 20,000,000 shares;
issued and outstanding 1,350 shares, respectively ($13,500,000
aggregate liquidation value, respectively) 13,500,000
Class A Common Stock, no par value; authorized 15,000,000
shares; issued 7,961,574 shares, respectively 10,683,709
Class B Common Stock, no par value; authorized 15,000,000
shares; issued 5,273,046 shares, respectively 66,866,468
Retained earnings 42,112,478
-------------
133,162,655
Treasury Stock at cost, Class A Common Stock, 1,129,532 shares,
respectively (8,578,682)
Treasury Stock at cost, Class B Common Stock, 128,653 and 135,080
shares, respectively (1,401,302)
-------------
123,182,671
-------------
$ 480,827,713
=============
</TABLE>
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
F-2
<PAGE> 68
GRAY COMMUNICATIONS SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
---------------------------------
1999 1998
------------ ------------
<S> <C> <C>
OPERATING REVENUES
Broadcasting (net of agency commissions) $ 44,305,992 $ 42,201,054
Publishing 17,557,661 13,916,449
Paging 4,557,586 3,924,873
------------ ------------
66,421,239 60,042,376
EXPENSES
Broadcasting 26,673,047 24,779,408
Publishing 13,710,070 11,440,940
Paging 3,238,128 2,583,100
Corporate and administrative 1,687,150 1,316,929
Depreciation and amortization 11,119,364 7,843,307
------------ ------------
56,427,759 47,963,684
------------ ------------
9,993,480 12,078,692
Miscellaneous income (expense), net 456,361 (314,276)
------------ ------------
10,449,841 11,764,416
Interest expense 13,774,671 11,966,739
------------ ------------
INCOME (LOSS) BEFORE INCOME TAXES (3,324,830) (202,323)
Income tax expense (benefit) (684,000) 443,377
------------ ------------
NET INCOME (LOSS) (2,640,830) (645,700)
Preferred Dividends 505,002 717,996
------------ ------------
NET INCOME (LOSS) AVAILABLE TO
COMMON STOCKHOLDERS $ (3,145,832) $ (1,363,696)
============ ============
AVERAGE OUTSTANDING COMMON SHARES:
Basic 11,960,572 11,898,798
Stock compensation awards -0- -0-
------------ ------------
Diluted 11,960,572 11,898,798
============ ============
BASIC EARNINGS (LOSS) PER COMMON
SHARE:
Net income (loss) available to common
Stockholders $ (0.26) $ (0.11)
============ ============
DILUTED EARNINGS (LOSS) PER COMMON SHARE:
Net income (loss) available to common
stockholders $ (0.26) $ (0.11)
============ ============
</TABLE>
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
F-3
<PAGE> 69
GRAY COMMUNICATIONS SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (UNAUDITED)
<TABLE>
<CAPTION>
Preferred Class A Class B
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, 1998 1,350 $13,500,000 7,961,574 $10,683,709 5,273,046 $66,792,385 $45,737,601
Net loss for the
six months ended
June 30, 1999 (2,640,830)
Common stock dividends ($.04
per share) (479,291)
Preferred stock dividends (505,002)
Issuance of treasury stock:
401 (k) plan 74,083
Purchase of Class B
Common Stock
------ ----------- --------- ----------- --------- ----------- ------------
Balance at June 30, 1999 1,350 $13,500,000 7,961,574 $10,683,709 5,273,046 $66,866,468 $42,112,478
====== =========== ========= ============ ========= =========== ============
</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, 1998 (1,129,532) $(8,578,682) (135,080) $(1,432,143) $126,702,870
Net loss for the
six months ended
June 30, 1999 (2,640,830)
Common stock dividends ($.04
per share) (479,291)
Preferred stock dividends (505,002)
Issuance of treasury stock:
401 (k) plan 26,427 287,845 361,928
Purchase of Class B
Common Stock (20,000) (257,004) (257,004)
----------- ------------ -------- ----------- ------------
Balance at June 30, 1999 (1,129,532) $(8,578,682) (128,653) $(1,401,302) $123,182,671
=========== =================================== ==============
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
F-4
<PAGE> 70
GRAY COMMUNICATIONS SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
-------------------------------
1999 1998
------------ ------------
<S> <C> <C>
OPERATING ACTIVITIES
Net loss $ (2,640,830) $ (645,700)
Items which did not use (provide) cash:
Depreciation 5,772,877 4,175,981
Amortization of intangible assets 5,346,487 3,667,326
Amortization of deferred loan costs 574,282 541,723
Amortization of program broadcast rights 2,400,745 1,899,189
Payments for program broadcast rights (2,430,524) (1,954,588)
Supplemental employee benefits (75,820) (154,657)
Common Stock contributed to 401(k) Plan 361,928 241,761
Deferred income taxes (1,028,001) 68,686
(Gain) loss on disposal of assets (331,157) 348,310
Changes in operating assets and liabilities:
Receivables, inventories and other current assets 715,870 (1,012,774)
Accounts payable and other current liabilities (2,199,854) 1,260,198
------------ ------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 6,466,003 8,435,455
INVESTING ACTIVITIES
Purchase of newspaper business (16,512,231) -0-
Purchase of FCC license -0- (829,600)
Purchases of property and equipment (4,499,224) (5,766,160)
Deferred acquisition costs (1,190,978) (200,745)
Payments on purchase liabilities (584,098) (269,018)
Deferred costs associated with the exchange of television station -0- (859,534)
Proceeds from asset sales -0- 182,421
Other 41,504 (241,707)
------------ ------------
NET CASH USED IN INVESTING ACTIVITIES (22,745,027) (7,984,343)
FINANCING ACTIVITIES
Dividends paid (1,251,794) (717,400)
Class A Common Stock transactions -0- 27,564
Class B Common Stock transactions -0- 26,326
Purchase of treasury stock (257,004) (311,063)
Sale of treasury stock -0- 1,070,272
Proceeds from borrowings of long-term debt 36,200,000 10,200,000
Payments on long-term debt (15,183,540) (10,374,923)
Deferred loan costs (30,375) -0-
------------ ------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 19,477,287 (79,224)
------------ ------------
INCREASE IN CASH AND CASH EQUIVALENTS 3,198,263 371,888
Cash and cash equivalents at beginning of period 1,886,723 2,367,300
------------ ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 5,084,986 $ 2,739,188
============ ============
</TABLE>
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
F-5
<PAGE> 71
NOTE A--BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements of
Gray Communications Systems, Inc. (the "Company") have been prepared in
accordance with generally accepted accounting principles for interim financial
information. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the six month period ended June 30, 1999
are not necessarily indicative of the results that may be expected for the year
ending December 31, 1999. For further information, refer to the consolidated
financial statements and footnotes thereto incorporated by reference to an
exhibit to Bull Run Corporation's Annual Report on Form 10-K for the year ended
December 31, 1998.
NOTE B--BUSINESS ACQUISITIONS
On April 14, 1999, the Company announced that it had entered into
agreements to acquire the CBS affiliates KWTX-TV ("KWTX") located in Waco, Texas
and KBTX-TV ("KBTX"), a satellite station of KWTX located in Bryan, Texas, each
serving the Waco-Temple-Bryan, Texas television market. In addition, the Company
has agreed to acquire KXII-TV ("KXII"), which is the CBS affiliate serving
Sherman, Texas and Ada, Oklahoma. These transactions are referred to herein as
the "Texas Acquisition." Aggregate consideration for the Texas Acquisition will
be approximately $139 million before payment for certain net working capital
amounts and other fees and expenses. The Company will acquire the assets of KWTX
and KBTX in merger transactions with the KWTX and KBTX shareholders receiving a
combination of cash and the Company's Class B Common Stock for their shares. The
Company will acquire KXII in an all cash transaction. The Texas Acquisition is
subject to a number of conditions, including the approval by the shareholders of
the Company. Approval for the Texas Transaction was granted by the Federal
Communications Commission (the "FCC") during the second quarter of 1999. The
Company currently believes that the Texas Transaction will close on October 1,
1999.
NOTE C--LONG-TERM DEBT
The Company's bank loan agreement (the "Senior Credit Facility") provides
for $200.0 million of committed credit and $100.0 million of uncommitted credit.
The Company can borrow the $100.0 million in uncommitted available credit only
after approval of the bank consortium. At June 30, 1999, the balance outstanding
and the balance available under the $200.0 million committed portion of the
Senior Credit Facility were $130.7 million and $69.3 million, respectively, and
the interest rate on the balance outstanding was 7.01%. At June 30, 1999, the
bank consortium had not committed, nor had the Company borrowed, any funds under
the uncommitted $100.0 million portion of the Senior Credit Facility.
NOTE D--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 mid-western United States at June 30, 1999. The publishing
segment operates four 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:
F-6
<PAGE> 72
NOTE D--INFORMATION ON BUSINESS SEGMENTS (CONTINUED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
-----------------------
1999 1998
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Operating revenues:
Broadcasting $ 44,306 $ 42,201
Publishing 17,558 13,916
Paging 4,557 3,925
-------- --------
$ 66,421 $ 60,042
======== ========
Operating income:
Broadcasting $ 7,389 $ 10,181
Publishing 2,323 1,486
Paging 282 412
-------- --------
Total operating income 9,994 12,079
Miscellaneous income and (expense), net 456 (314)
Interest expense 13,775 11,967
-------- --------
Income loss before income taxes $ (3,325) $ (202)
======== ========
</TABLE>
Operating income is total operating revenues less operating expenses,
excluding miscellaneous income and expense (net) and interest. Corporate and
administrative expenses are allocated to operating income based on net segment
revenues.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
-----------------------
1999 1998
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Media Cash Flow:
Broadcasting $ 17,881 $ 17,546
Publishing 3,901 2,513
Paging 1,336 1,357
-------- --------
$ 23,118 $ 21,416
======== ========
Media Cash Flow reconciliation:
Operating income $ 9,994 $ 12,079
Add:
Amortization of program broadcast rights
2,401 1,899
Depreciation and amortization 11,119 7,843
Corporate overhead 1,687 1,317
Non-cash compensation and contributions
to the Company's 401(k) plan, paid in
common stock 348 233
Less:
Payments for program broadcast
obligations (2,431) (1,955)
-------- --------
Media Cash Flow $ 23,118 $ 21,416
======== ========
</TABLE>
F-7
<PAGE> 73
NOTE D--INFORMATION ON BUSINESS SEGMENTS (CONTINUED)
"Media Cash Flow" is defined as operating income, plus depreciation and
amortization (including amortization of program broadcast rights), non-cash
compensation and corporate overhead, less payments for program broadcast
obligations. The Company has included Media Cash Flow data because such data are
commonly used as a measure of performance for media companies and are also used
by investors to measure a company's ability to service debt. Media Cash Flow is
not, and should not be used as, an indicator or alternative to operating income,
net income or cash flow as reflected in the Company's financial statements.
Media Cash Flow is not a measure of financial performance under generally
accepted accounting principles and should not be considered in isolation or as a
substitute for measures of performance prepared in accordance with generally
accepted accounting principles.
F-8
<PAGE> 74
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-9
<PAGE> 75
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Host Communications, Inc.:
We have audited the consolidated statements of income, stockholders' equity, and
cash flows of Host Communications, Inc. and subsidiaries for the year ended June
30, 1996, 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 results of operations and cash flows of
Host Communications, Inc. and subsidiaries for the year ended June 30, 1996, 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-10
<PAGE> 76
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-11
<PAGE> 1
EXHIBIT 10.10
FIRST AMENDMENT TO AMENDED AND RESTATED CREDIT AGREEMENT BETWEEN
DATASOUTH COMPUTER CORPORATION AND WACHOVIA BANK, N.A. DATED AS OF JUNE 30, 1999
<PAGE> 2
FIRST AMENDMENT TO AMENDED AND RESTATED CREDIT AGREEMENT
THIS FIRST AMENDMENT TO AMENDED AND RESTATED CREDIT AGREEMENT
(this "Amendment") is made as of the 30th day of June, 1999, between DATASOUTH
COMPUTER CORPORATION (the "Borrower") and WACHOVIA BANK, N.A. (the "Bank").
Background:
The Borrower and the Bank have entered into a $9,000,000
Amended and Restated Credit Agreement dated as of March 5, 1999 (the "Credit
Agreement", which term shall include all subsequent amendments, extensions and
modifications thereto).
The Borrower and the Bank wish to amend the Credit Agreement
in certain respects as hereinafter provided.
NOW, THEREFORE, the Borrower and the Bank agree as follows:
SECTION 1. Definitions. Capitalized terms used herein which
are not otherwise defined herein shall have the respective meanings assigned to
them in the Credit Agreement.
SECTION 2. Amendments to Credit Agreement. The Credit
Agreement is hereby amended as follows:
(a) Section 1.01 of the Credit Agreement is hereby
amended by adding the following definitions in
appropriate alphabetical order:
"Deed of Trust" means the Deed of Trust, Assignment
of Rents, Security Agreement and Financing Statement
dated as of June 30, 1999 executed by the Borrower to
New Salem, Inc. for the benefit of the Bank, covering
the Borrower=s real property located in Charlotte,
Mecklenburg County, North Carolina.
"Guaranty" means the Guaranty Agreement dated as of
June 30, 1999 executed by Bull Run for the benefit of
the Bank.
(b) Section 1.01 of the Credit Agreement is hereby
amended by restating the definition of "Facility B
Commitment Reduction Date" in its entirety as
follows:
"Facility B Commitment Reduction Date" shall mean
September 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.
(c) Section 1.01 of the Credit Agreement is hereby
amended by restating the definition of "Loan
Documents" in its entirety as follows:
"Loan Documents" means this Agreement, the Notes, the
Security Agreement, the Pledge Agreement, the Deed of
Trust, the Guaranty and any other document evidencing
or securing the Advances.
<PAGE> 3
(d) Section 6.03(a) of the Credit Agreement is hereby
amended by deleting both references to the date "June
30, 1999" and substituting therefor the date
"September 30, 1999."
(e) Section 6.03(b) of the Credit Agreement is hereby
amended by deleting the date "June 30, 1999" and
substituting therefor the date "September 30, 1999."
(f) Section 6.05(a) of the Credit Agreement is hereby
amended by deleting both references to the date "June
30, 1999" and substituting therefor the date
"September 30, 1999."
(g) Section 6.05(b) of the Credit Agreement is hereby
amended by deleting the date "June 30, 1999" and
substituting therefor the date "September 30, 1999."
(h) Section 6.21 of the Credit Agreement is hereby
amended by deleting such section in its entirety.
(i) Section 6.22 is hereby amended by deleting such
section in its entirety and substituting therefor the
following:
SECTION 6.22 Interest Coverage. (a) At the
end of each Fiscal Quarter, commencing with the
Fiscal Quarter ending September 30, 1999, the
Interest Coverage Ratio, as determined in accordance
with Section 6.22(b), shall not be less than the
following limits:
(i) from September 30, 1999 through December
31, 1999, the Interest Coverage Ratio shall not be
less than 1.85 to 1.00; and
(ii) 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 September
30, 1999, and shall be the ratio of EBITDA for the
twelve months then ended to Consolidated Interest
Expense for the twelve months then ended.
SECTION 3. No Other Amendment. Except for the amendments set forth
above, the text of the Credit Agreement shall remain unchanged and in full force
and effect. This Amendment is not intended to effect, nor shall it be construed
as, a novation. The Credit Agreement and this Amendment shall be construed
together as a single instrument and any reference to the "Agreement" or any
other defined term for the Credit Agreement in the Credit Agreement, the Loan
Documents or any certificate, instrument or other document delivered pursuant
thereto shall mean the Credit Agreement as amended hereby and as it may be
amended, supplemented or otherwise modified hereafter. Nothing herein contained
shall waive, annul, vary or affect any provision, condition, covenant or
agreement contained in the Credit Agreement, except as herein amended, or any of
the other Loan Documents nor affect nor impair any rights, powers or remedies
under the Credit Agreement, as hereby amended, or any of the other Loan
Documents. The Bank hereby reserves all of its rights and remedies against all
other parties who may be or may hereafter become secondarily liable for the
<PAGE> 4
repayment of the Notes. The Borrower promises and agrees to perform all of the
requirements, conditions, agreements and obligations under the terms of the
Credit Agreement, as hereby amended, and the other Loan Documents, the Credit
Agreement, as amended, and the other Loan Documents being hereby ratified and
affirmed. The Borrower hereby expressly agrees that the Credit Agreement, as
amended, and the other Loan Documents are in full force and effect.
SECTION 4. Representations and Warranties. The Borrower hereby
represents and warrants in favor of the Bank as follows:
(a) No Default or Event of Default under the Credit Agreement
has occurred and is continuing on the date hereof (except those being cured by
the amendments effected by this Amendment);
(b) The Borrower has the corporate power and authority to
enter into this Amendment and the Deed of Trust and to do all acts and things as
are required or contemplated hereunder to be done, observed and performed by it;
(c) This Amendment and the Deed of Trust have been duly
authorized, validly executed and delivered by one or more authorized officers of
the Borrower and each of this Amendment, and the Credit Agreement, as amended
hereby, and the Deed of Trust constitutes the legal, valid and binding
obligation of the Borrower, enforceable against it in accordance with its terms;
and
(d) The execution and delivery of this Amendment and the Deed
of Trust and the Borrower's performance hereunder and under the Credit
Agreement, as amended hereby, and under the Deed of Trust, do not and will not
require the consent or approval of any regulatory authority or governmental
authority or agency having jurisdiction over the Borrower other than those which
have already been obtained or given, nor be in contravention of or in conflict
with the Articles of Incorporation or Bylaws of the Borrower, or the provision
of any statute, or any judgment, order or indenture, instrument, agreement or
undertaking, to which the Borrower is a party or by which its assets or
properties are or may become bound.
SECTION 5. Counterparts. This Amendment may be executed in
multiple counterparts, each of which shall be deemed to be an original and all
of which, taken together, shall constitute one and the same agreement.
SECTION 6. Governing Law. This Amendment shall be deemed to be
made pursuant to the laws of the State of North Carolina with respect to
agreements made and to be performed wholly in the State of North Carolina and
shall be construed, interpreted, performed and enforced in accordance therewith.
SECTION 7. Effective Date. This Amendment shall be effective
as of the date first set forth above. This Amendment shall not become effective
until the Borrower has executed and delivered to the Bank the Deed of Trust,
together with evidence satisfactory to Bank of the Borrower's authority to enter
into the Deed of Trust, and Bull Run Corporation has executed and delivered to
the Bank the Guaranty together with evidence of Bull Run Corporation's authority
to enter into the Guaranty. In addition, the Borrower shall pay all out of
pocket fees and expenses of the Bank in connection with this Amendment, the Deed
of Trust and the Guaranty, including, without limitation, the reasonable fees
and expenses of counsel for the Bank.
<PAGE> 5
IN WITNESS WHEREOF, the parties hereto have caused this
Amendment to be duly executed by their respective authorized officers as of the
day and year first above written.
BORROWER:
Attest: DATASOUTH COMPUTER CORPORATION
/s/ K. NICK WALLER By: /s/ FREDERICK J. ERICKSON
- ------------------------ -----------------------------------------
Its: Assistant Secretary Its: Executive VP - Finance & Administration,
Secretary & Treasurer
[CORPORATE SEAL]
BANK:
WACHOVIA BANK, N.A.
By: /s/ CHRISTOPHER L. FINCHER
-----------------------------------------
Title: Senior Vice President
<PAGE> 1
EXHIBIT 10.15
FOURTH AMENDMENT OF AMENDED AND RESTATED LOAN AGREEMENT BETWEEN
BULL RUN CORPORATION AND BANK OF AMERICA, N.A. (F/K/A NATIONSBANK, N.A.),
DATED AS OF AUGUST 23, 1999
<PAGE> 2
FOURTH AMENDMENT OF AMENDED AND RESTATED LOAN AGREEMENT
THIS AMENDMENT is made as of this 23rd day of August, 1999, by and
between BULL RUN CORPORATION, a Georgia corporation ("Borrower"), and BANK OF
AMERICA, N.A. (F/K/A 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 (as amended, supplemented or
otherwise modified from time to time, 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, the parties desire to modify the Loan Agreement in certain
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:
AMENDMENT OF LOAN AGREEMENT. Subject to the fulfillment of the
conditions precedent to the effectiveness of this Amendment which are set forth
below, Section 1.1 of the Loan Agreement is hereby amended by deleting from
Section 1.1 the terms "Fourth Term Loan Maturity Date" and "Third Term Loan
Maturity Date" and by substituting in lieu thereof the following new definitions
of such terms:
"Fourth Term Loan Maturity Date" shall mean November 24, 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 November 24, 1999
(as such date may be extended, accelerated or amended from
time to time pursuant to this Agreement).
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.
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, Datasouth,
the Partnership
<PAGE> 3
and the Purchaser 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.
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.
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
the receipt by Lender of one or more duly executed counterparts of this
Amendment.
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.
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.
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.
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:
BANK OF AMERICA, N.A.
(F/K/A NATIONSBANK, N.A.)
By: /s/ DAVID B. JACKSON
-------------------------------
Name: David B. Jackson
Title: Senior Vice President
<PAGE> 1
EXHIBIT 10.29
REPLACEMENT SECURED PROMISSORY NOTE BY AND BETWEEN
BULL RUN CORPORATION AND BANK OF AMERICA, N.A. (F/K/A NATIONSBANK, N.A.),
DATED AS OF AUGUST 23, 1999
<PAGE> 2
REPLACEMENT SECURED PROMISSORY NOTE
Date: August 23, 1999
Amount: $10,000,000
Maturity Date: November 24, 1999
================================================================================
Bank: Borrower:
Bank of America, N.A. (f/k/a NationsBank, N.A.) Bull Run Corporation
Banking Center: Financial Strategies 4370 Peachtree Road, N.E.
600 Peachtree Street, N.E. Atlanta, Georgia 30319
Atlanta, Georgia 30308-2213
Attn: Tracey B. Silverman
County: Fulton County: Fulton
(Street address including county) (Name and street address,
including county)
================================================================================
FOR VALUE RECEIVED, the undersigned Borrower unconditionally (and jointly and
severally, if more than one) promises to pay to the order of Bank, its
successors and assigns, without setoff, at its offices indicated at the
beginning of this Note, or at such other place as may be designated by Bank, the
principal amount of TEN MILLION DOLLARS ($10,000,000), or so much thereof as may
be advanced from time to time in immediately available funds, together with
interest computed daily on the outstanding principal balance hereunder, at an
annual interest rate, and in accordance with the payment schedule, indicated
below.
1. RATE.
Interest shall be calculated and shall accrue at a rate per annum equal to
the rate of interest announced from time to time by Bank as its "prime rate,"
"prime lending rate," "base rate" or similar reference rate (with each change
therein to be effective as of the date of such change). Each such rate announced
by Bank is a reference rate and does not necessarily represent the lowest or
best rate actually charged by it to any customer. Bank may make commercial loans
or other loans at rates of interest at, above or below such reference rate. In
the event Bank ceases to use its "prime rate," prime lending rate," "base rate"
or similar reference rate as a standard, Bank shall designate or substitute
therefore.
Notwithstanding any provision of this Note, Bank does not intend to charge
and Borrower shall not be required to pay any amount of interest or other
charges in excess of the maximum permitted by the applicable law of the State of
Georgia; if any higher rate ceiling is lawful, then that higher rate ceiling
shall apply. Any payment in excess of such maximum shall be refunded to Borrower
or credited against principal, at the option of Bank.
2. ACCRUAL METHOD. Unless otherwise indicated, interest at the Rate set forth
above will be calculated by the 365/360 day method (a daily amount of interest
is computed for a hypothetical year of 360 days; that amount is multiplied by
the actual number of days for which any principal is outstanding hereunder).
3. RATE CHANGE DATE. Any Rate based on a fluctuating index or base rate will
change, unless otherwise provided, each time and as of the date that the index
or base rate changes.
In the event any index is discontinued, Bank shall substitute an index
determined by Bank to be comparable, in its sole discretion.
4. PAYMENT SCHEDULE. All payments received hereunder shall be applied first to
the payment of any expense or charges payable hereunder or under any other loan
documents
<PAGE> 3
executed in connection with this Note, then to interest due and payable, with
the balance applied to principal, or in such other order as Bank shall determine
at its option.
SINGLE PRINCIPAL AND INTEREST PAYMENT. The total outstanding amount of
principal and accrued interest hereunder shall be due and payable in a single
payment on November 24, 1999.
5. LOAN FEE. Upon the execution of this Note, an administrative fee in the
amount of $9,375 shall be due and payable.
6. COLLATERAL. This note is secured by (i) Borrower's first-priority and
perfected pledge to Bank of 301,119 shares of common stock of Sarkes Tarzian,
Inc., an Indiana corporation, now owned or hereafter acquired by Borrower
pursuant to a certain Borrower Stock Pledge Agreement dated the date hereof
between Borrower, as Pledgor, and Bank, as Pledgee.
7. WAIVERS, CONSENTS AND COVENANTS. Borrower, any endorser or guarantor hereof,
or any other party hereto (individually an "Obligor" and collectively
"Obligors") and each of them jointly and severally: (a) waives presentment,
demand, protest, notice of demand, notice of intent to accelerate, notice of
acceleration of maturity, notice of protest, notice of nonpayment, notice of
dishonor, and any other notice required to be given under the law to Obligor in
connection with the delivery, acceptance, performance, default or enforcement of
this Note, any indorsement or guaranty of this Note, or any other documents
executed in connection with this Note or any other note or other loan documents
now or hereafter executed in connection with any obligation of Borrower to Bank
(the "Loan Documents"); (b) consents to all delays, extensions, renewals or
other modifications of this Note or the Loan Documents, or waivers of any term
hereof or of the Loan Documents, or release or discharge by Bank of any of
Obligors, or release, substitution or exchange of any security for the payment
hereof, or the failure to act on the part of Bank, or any indulgence shown by
Bank (without notice to or further assent from Obligor), and agree that no such
action, failure to act or failure to exercise any right or remedy by Bank shall
in any way affect or impair the obligations of any Obligors or be construed as a
waiver by Bank of, or otherwise affect, any of Bank's rights under this Note,
under any indorsement or guaranty of this Note or under any of the Loan
Documents; and (c) agrees to pay, on demand, all costs and expenses of
collection or defense of this Note or of any indorsement or guaranty hereof
and/or the enforcement or defense of Bank's rights with respect to, or the
administration, supervision, preservation, or protection of, or realization
upon, any property securing payment hereof, including, without limitation,
reasonable attorney's fees, including fees related to any suit, mediation or
arbitration proceeding, out of court payment agreement, trial, appeal,
bankruptcy proceedings or other proceeding, in such amount as may be determined
reasonable by any arbitrator or court, whichever is applicable.
8. "INTEREST" LIMITED. As used in this Note and for the purposes of Section
7-4-2 of the Official Code of Georgia Annotated, or any successor thereto, the
term "interest" does not include any fees (including, but not limited to, the
Loan Fee) or other charges imposed on Borrower in connection with the
indebtedness evidenced by this Note, other than the interest described above.
9. PREPAYMENTS. Prepayments may be made in whole or in part at any time on any
loan for which the Rate is based on the Prime Rate. All prepayments of principal
shall be applied in the inverse order of maturity, or in such other order as
Bank shall determine in its sole discretion. No prepayment of any other loan
shall be permitted without the prior written consent of Bank. Notwithstanding
such prohibition, if there is a prepayment of any such loan, whether by consent
of Bank, or because of acceleration or otherwise, Borrower shall, within 15 days
of any request by Bank, pay to Bank any loss or expense which Bank may incur or
sustain as a result of such prepayment. For the purposes of calculating the
amounts owed only, it shall be assumed that Bank actually funded or committed to
fund the loan through the purchase of an underlying deposit in an amount and for
a term comparable to the loan, and such determination by Bank shall be
conclusive, absent a manifest error in computation.
10. DELINQUENCY CHARGE. To the extent permitted by law, a delinquency charge may
be imposed in an amount not to exceed four percent (4%) of any payment that is
more than fifteen days late.
<PAGE> 4
11. EVENTS OF DEFAULT. The following are events of default (each, an "Event of
Default") hereunder: (a) the failure to pay or perform any obligation, liability
or indebtedness of any Obligor to Bank, or to any affiliate or subsidiary of
NationsBank Corporation, whether under this Note or any Loan Documents, as and
when due (whether upon demand, at maturity or by acceleration); (b) the failure
to pay or perform any other obligation, liability or indebtedness of Obligor to
any other party; (c) the death of any Obligor (if an individual); (d) the
resignation or withdrawal of any material owner/officer of Borrower, as
determined by Bank in its sole discretion; (e) the commencement of a proceeding
against Obligor for dissolution or liquidation, the voluntary or involuntary
termination or dissolution of Obligor or the merger or consolidation of Obligor
with or into another entity; (f) the insolvency of, the business failure of, the
appointment of a custodian, trustee, liquidator or receiver for or for any of
the property of, the assignment for the benefit of creditors by, or the filing
of a petition under bankruptcy, insolvency or debtor's relief law or the filing
of a petition for any adjustment of indebtedness, composition or extension by or
against Obligor; (g) the determination by Bank that any representation or
warranty made to Bank by Obligor in any Loan Documents or otherwise is or was,
when it was made, untrue or materially misleading; (h) the failure of Obligor to
timely deliver such financial statements, including tax returns, other
statements of condition or other information, as Bank shall request from time to
time; (i) the entry of a judgment against Obligor which Bank deems to be of a
material nature, in Bank's sole discretion; (j) the seizure or forfeiture of, or
the issuance of any writ of possession, garnishment or attachment, or any
turnover order for any property of Obligor; (k) the determination by Bank that
it is insecure for any reason; (l) the determination by Bank that a material
adverse change has occurred in the financial condition of Obligor; (m) the
failure of Borrower's business to comply with any law or regulation controlling
its operation; (n) the aggregate value of all of J. Mack Robinson's (an
individual resident of the State of Georgia, "Purchaser") unpledged and
non-affiliated Marketable Securities (which shall mean any security traded on
the American Stock Exchange, the New York Stock Exchange or NASDAQ) shall be
less than $45,000,000; or (o) the aggregate value of Purchaser's unpledged and
non-affiliated Marketable Securities which constitute the capital stock of
Wachovia Bank shall be less than $30,000,000.
12. REMEDIES UPON DEFAULT. Whenever there is a default under this Note (a) the
entire balance outstanding hereunder and all other obligations of Obligor to
Bank (however acquired or evidenced) shall, at the option of Bank, become
immediately due and payable and any obligation of Bank to permit further
borrowing under this Note shall immediately cease and terminate, and/or (b) to
the extent permitted by law, the Rate of interest on the unpaid principal shall
be increased at Bank's discretion up to 2% per annum above the interest rate
otherwise in effect (the "Default Rate"). The provisions herein for a Default
Rate shall not be deemed to extend the time for any payment hereunder or to
constitute a "grace period" giving Obligor a right to cure any default. At
Bank's option, any accrued and unpaid interest, fees or charges may, for
purposes of computing and accruing interest on a daily basis after the due date
of this Note or any installment thereof, be deemed to be a part of the principal
balance, and interest shall accrue on a daily compounded basis after such date
at the Default Rate provided in this Note until the entire outstanding balance
of principal and interest is paid in full. Upon a default under this Note, Bank
is hereby authorized at any time, at its option and without notice or demand, to
set off and charge against any deposit accounts of Obligor (as well as any
money, instruments, securities, documents, chattel paper, credits, claims,
demands, income and any other property, rights and interests of Obligor), which
at any time shall come into the possession or custody or under the control of
Bank or any of its agents, affiliates or correspondents, any and all obligations
due hereunder. Additionally, Bank shall have all rights and remedies available
under each of the Loan Documents, as well as all rights and remedies available
at law or in equity.
13. NON-WAIVER. The failure at any time of Bank to exercise any of its options
or any other rights hereunder shall not constitute a waiver thereof, nor shall
it be a bar to the exercise of any of its options or rights at a later date. All
rights and remedies of Bank shall be cumulative and may be pursued singly,
successively or together, at the option of Bank. The acceptance by Bank of any
partial payment shall not constitute a waiver of any default or of any of Bank's
rights under this Note. No waiver of any of its rights hereunder, and no
modification or amendment of this Note, shall be deemed to be made by Bank
unless the same shall be in writing, duly signed on behalf of Bank; each such
waiver shall apply only
<PAGE> 5
with respect to the specific instance involved, and shall in no way impair the
rights of Bank or the obligations of Obligor to Bank in any other respect at any
other time.
14. APPLICABLE LAW, VENUE AND JURISDICTION. This Note and the rights and
obligations of Borrower and Bank shall be governed by and interpreted in
accordance with the law of the State of Georgia. In any litigation in connection
with or to enforce this Note or any indorsement or guaranty of this Note or any
Loan Documents, Obligors, and each of them, irrevocably consent to and confer
personal jurisdiction on the courts of the State of Georgia or the United States
located within the State of Georgia and expressly waive any objections as to
venue in any such courts. Nothing contained herein shall, however, prevent Bank
from bringing any action or exercising any rights within any other state or
jurisdiction or from obtaining personal jurisdiction by any other means
available under applicable law.
15. PARTIAL INVALIDITY. The unenforceability or invalidity of any provision of
this Note shall not affect the enforceability or validity of any other provision
herein and the invalidity or unenforceability of any provision of this Note or
of the Loan Documents to any person or circumstance shall not affect the
enforceability or validity of such provision as it may apply to other persons or
circumstances.
16. BINDING EFFECT. This Note shall be binding upon and inure to the benefit of
Borrower, Obligors and Bank and their respective successors, assigns, heirs and
personal representatives, provided, however, that no obligations of Borrower or
Obligors hereunder can be assigned without prior written consent of Bank.
17. CONTROLLING DOCUMENT. To the extent that this Note conflicts with or is in
any way incompatible with any other document related specifically to the loan
evidenced by this Note, this Note shall control over any other such document,
and if this Note does not address an issue, then each other such document shall
control to the extent that it deals most specifically with an issue.
18. ARBITRATION. ANY CONTROVERSY OR CLAIM BETWEEN OR AMONG THE PARTIES HERETO
INCLUDING BUT NOT LIMITED TO THOSE ARISING OUT OF OR RELATING TO THIS
INSTRUMENT, AGREEMENT OR DOCUMENT OR ANY RELATED INSTRUMENTS, AGREEMENTS OR
DOCUMENTS, INCLUDING ANY CLAIM BASED ON OR ARISING FROM AN ALLEGED TORT, SHALL
BE DETERMINED BY BINDING ARBITRATION IN ACCORDANCE WITH THE FEDERAL ARBITRATION
ACT (OR IF NOT APPLICABLE, THE APPLICABLE STATE LAW), THE RULES OF PRACTICE AND
PROCEDURE FOR THE ARBITRATION OF COMMERCIAL DISPUTES OF J.A.M.S./ENDISPUTE OR
ANY SUCCESSOR THEREOF ("J.A.M.S."), AND THE "SPECIAL RULES" SET FORTH BELOW. IN
THE EVENT OF ANY INCONSISTENCY, THE SPECIAL RULES SHALL CONTROL. JUDGMENT UPON
ANY ARBITRATION AWARD MAY BE ENTERED IN ANY COURT HAVING JURISDICTION. ANY PARTY
TO THIS INSTRUMENT, AGREEMENT OR DOCUMENT MAY BRING AN ACTION, INCLUDING A
SUMMARY OR EXPEDITED PROCEEDING, TO COMPEL ARBITRATION OF ANY CONTROVERSY OR
CLAIM TO WHICH THIS AGREEMENT APPLIES IN ANY COURT HAVING JURISDICTION OVER SUCH
ACTION.
A. SPECIAL RULES. THE ARBITRATION SHALL BE CONDUCTED IN THE COUNTY OF ANY
BORROWER'S DOMICILE AT THE TIME OF THE EXECUTION OF THIS INSTRUMENT, AGREEMENT
OR DOCUMENT AND ADMINISTERED BY J.A.M.S. WHO WILL APPOINT AN ARBITRATOR; IF
J.A.M.S. IS UNABLE OR LEGALLY PRECLUDED FROM ADMINISTERING THE ARBITRATION, THEN
THE AMERICAN ARBITRATION ASSOCIATION WILL SERVE. ALL ARBITRATION HEARINGS WILL
BE COMMENCED WITHIN 90 DAYS OF THE DEMAND FOR ARBITRATION; FURTHER, THE
ARBITRATOR SHALL ONLY, UPON A SHOWING OF CAUSE, BE PERMITTED TO EXTEND THE
COMMENCEMENT OF SUCH HEARING FOR UP TO AN ADDITIONAL 60 DAYS.
B. RESERVATION OF RIGHTS. NOTHING IN THIS ARBITRATION PROVISION SHALL BE
DEEMED TO (I) LIMIT THE APPLICABILITY OF ANY OTHERWISE APPLICABLE STATUTES OF
LIMITATION OR REPOSE AND ANY WAIVERS CONTAINED IN THIS INSTRUMENT, AGREEMENT OR
DOCUMENT; OR (II) BE A WAIVER BY BANK OF THE PROTECTION AFFORDED TO IT BY 12
U.S.C. SEC. 91 OR ANY SUBSTANTIALLY EQUIVALENT STATE LAW; OR (III) LIMIT THE
RIGHT OF BANK HERETO (A) TO EXERCISE SELF HELP REMEDIES SUCH AS (BUT NOT LIMITED
TO) SETOFF, OR (B) TO FORECLOSE AGAINST ANY REAL OR
<PAGE> 6
PERSONAL PROPERTY COLLATERAL, OR (C) TO OBTAIN FROM A COURT PROVISIONAL OR
ANCILLARY REMEDIES SUCH AS (BUT NOT LIMITED TO) INJUNCTIVE RELIEF, WRIT OF
POSSESSION OR THE APPOINTMENT OF A RECEIVER. BANK MAY EXERCISE SUCH SELF HELP
RIGHTS, FORECLOSE UPON SUCH PROPERTY, OR OBTAIN SUCH PROVISIONAL OR ANCILLARY
REMEDIES BEFORE, DURING OR AFTER THE PENDENCY OF ANY ARBITRATION PROCEEDING
BROUGHT PURSUANT TO THIS INSTRUMENT, AGREEMENT OR DOCUMENT. NEITHER THIS
EXERCISE OF SELF HELP REMEDIES NOR THE INSTITUTION OR MAINTENANCE OF AN ACTION
FOR FORECLOSURE OR PROVISIONAL OR ANCILLARY REMEDIES SHALL CONSTITUTE A WAIVER
OF THE RIGHT OF ANY PARTY, INCLUDING THE CLAIMANT IN ANY SUCH ACTION, TO
ARBITRATE THE MERITS OF THE CONTROVERSY OR CLAIM OCCASIONING RESORT TO SUCH
REMEDIES.
NOTICE OF FINAL AGREEMENT. THIS WRITTEN PROMISSORY NOTE REPRESENTS THE FINAL
AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR,
CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO
UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES.
BORROWER ACKNOWLEDGES HAVING READ AND UNDERSTOOD, AND AGREES TO BE BOUND BY, ALL
TERMS AND CONDITIONS OF THIS NOTE AND HEREBY EXECUTES THIS NOTE UNDER SEAL AS OF
THE DATE HERE ABOVE WRITTEN.
THIS NOTE IS MADE AND GIVEN IN REPLACEMENT OF, AND IS AN AMENDMENT AND
RESTATEMENT OF THAT CERTAIN NOTE DATED JUNE , 1999, IN AN ORIGINAL PRINCIPAL
AMOUNT OF $10,000,000 ISSUED BY BORROWER IN FAVOR OF BANK AND IS NOT INTENDED TO
BE A NOVATION.
BORROWER:
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, the Registration Statement (Form S-8
No. 33-91298) pertaining to the Bull Run Corporation Non-Employee Directors'
1994 Stock Option Plan, and the Registration Statement (Form S-4 No. 333-84833)
pertaining to the issuance of shares of BR Holding, Inc. of our reports dated
August 14, 1999, except as to Note 9 to the financial statements, for which the
date is September 14, 1999, with respect to the consolidated financial
statements and schedule of Bull Run Corporation included in the Annual Report
(Form 10-K) of Bull Run Corporation for the six months ended June 30, 1999,
filed with the Securities and Exchange Commission.
/s/ ERNST & YOUNG LLP
Charlotte, North Carolina
November 8, 1999
<PAGE> 1
EXHIBIT 23.2
We consent to the incorporation by reference in this Annual Report (Form 10-K)
of Bull Run Corporation 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
for the year ended December 31, 1998.
We also 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, the Registration Statement (Form S-8
No. 33-91298) pertaining to the Bull Run Corporation Non-Employee Directors'
1994 Stock Option Plan and the Registration Statement (Form S-4 No. 333-84833)
pertaining to the issuance of shares of BR Holding, Inc. of our reports dated
January 26, 1999, with respect to the consolidated financial statements and
schedule of Gray Communications Systems, Inc. incorporated herein by reference.
/s/ ERNST & YOUNG LLP
Atlanta, Georgia
November 8, 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 and
in the Registration Statement (No. 333-84833) on Form S-4 of BR Holding, Inc. 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 June
30, 1999 transition report on Form 10-K of Bull Run Corporation.
/s/ KPMG LLP
Stamford, Connecticut
November 8, 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 and
in the Registration Statement (No. 333-84833) on Form S-4 of BR Holding, Inc. of
our report dated October 11, 1996 with respect to the consolidated statements of
income, stockholders' equity and cash flows of Host Communications, Inc. and
subsidiaries for the year ended June 30, 1996, which report appears in the June
30, 1999 transition 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
November 8, 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 Nos. 33-91296, 33-91298 and 333-56125
and into BR Holding, Inc.'s previously filed Form S-4 Registration Statement
File No. 333-84833.
/s/ ARTHUR ANDERSEN LLP
St. Louis, Missouri
November 8, 1999
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<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 323,202
<SECURITIES> 0
<RECEIVABLES> 3,997,085
<ALLOWANCES> 70,000
<INVENTORY> 5,504,597
<CURRENT-ASSETS> 9,914,925
<PP&E> 5,262,246
<DEPRECIATION> 2,641,901
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<COMMON> 229,773
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<TOTAL-LIABILITY-AND-EQUITY> 106,098,163
<SALES> 13,635,754
<TOTAL-REVENUES> 14,245,253
<CGS> 10,009,941
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<OTHER-EXPENSES> 1,335,418
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<INCOME-PRETAX> (2,279,152)
<INCOME-TAX> (1,015,654)
<INCOME-CONTINUING> (2,260,650)
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