<PAGE> 1
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 1999
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE TRANSITION PERIOD FROM _______________ TO _______________.
COMMISSION FILE NUMBER 0-9385
BULL RUN CORPORATION
(Exact name of registrant as specified in its charter)
GEORGIA 91-1117599
(State of incorporation (I.R.S. Employer
or organization) Identification No.)
4370 PEACHTREE ROAD, N.E., ATLANTA, GA 30319
(Address of principal executive offices) (Zip Code)
(404) 266-8333
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date: 34,551,452 shares of Common
Stock, par value $.01 per share, were outstanding as of January 31, 2000.
<PAGE> 2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
BULL RUN CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1999 1999
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 2,937,701 $ 323,202
Accounts and notes receivable 51,201,625 3,927,085
Inventories 6,656,359 5,504,597
Prepaid costs and expenses 15,915,305 107,698
Refundable income taxes 93,173 52,343
------------- -------------
Total current assets 76,804,163 9,914,925
Property and equipment, net 9,431,478 2,620,345
Investment in affiliated companies 85,097,653 85,311,175
Goodwill 96,608,695 7,417,146
Deferred acquisition costs 673,605
Other assets 2,274,843 160,967
------------- -------------
$ 270,216,832 $ 106,098,163
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable and current portion of long-term debt $ 10,000,000 $ 67,360,921
Accounts payable 4,103,477 1,951,357
Accrued expenses:
Employee compensation and related taxes 1,520,329 417,492
Incurred unbilled costs 10,644,284
Guaranteed rights fees 10,678,159
Interest 539,826 578,698
Other 4,721,957 1,202,019
Deferred revenue 16,849,936
Deferred income taxes 1,220,045
------------- -------------
Total current liabilities 60,278,013 71,510,487
Long-term debt 119,494,013
Deferred income taxes 6,529,651 4,408,711
Other liabilities 2,553,433 2,185,433
Stockholders' equity:
Common stock, $.01 par value (authorized 100,000,000
shares; issued 35,064,145 and 22,983,271 shares as of
December 31, 1999 and June 30, 1999, respectively) 350,641 229,832
Additional paid-in capital 74,563,881 21,839,571
Treasury stock, at cost (542,004 shares) (1,392,430) (1,392,430)
Retained earnings 7,839,630 7,316,559
------------- -------------
Total stockholders' equity 81,361,722 27,993,532
------------- -------------
$ 270,216,832 $ 106,098,163
============= =============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
<PAGE> 3
BULL RUN CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
DECEMBER 31, DECEMBER 31,
1999 1998 1999 1998
<S> <C> <C> <C> <C>
Net revenues:
Revenue from services rendered $ 6,719,564 $ 2,130 $ 7,389,973 $ 966,260
Revenue from computer printer operations 6,521,400 8,470,664 14,888,613 15,690,489
------------ ------------ ------------ ------------
13,240,964 8,472,794 22,278,586 16,656,749
Operating costs and expenses:
Direct operating costs for services rendered 5,035,557 5,035,557
Cost of revenue from printer operations 4,751,183 6,095,127 10,616,882 11,466,407
Selling, general and administrative 3,062,907 1,497,864 4,549,796 2,895,091
Research and development 484,079 560,504 968,860 1,169,116
------------ ------------ ------------ ------------
13,333,726 8,153,495 21,171,095 15,530,614
------------ ------------ ------------ ------------
Operating income (loss) before goodwill
amortization (92,762) 319,299 1,107,491 1,126,135
Goodwill amortization 325,689 123,696 461,056 245,585
------------ ------------ ------------ ------------
Operating income (loss) (418,451) 195,603 646,435 880,550
Other income (expense):
Equity in earnings (losses) of affiliated
companies (763,199) 54,005 (133,687) 6,879,961
Gain on issuance of shares by affiliate 2,492,231 2,492,231
Interest and dividend income 228,655 233,925 455,033 522,553
Interest expense (1,657,709) (1,066,269) (2,974,698) (2,146,020)
Debt issue cost amortization (106,676) (7,795) (114,470) (15,590)
Other income (expense), net 283,229 (119,778) 387,230 (119,638)
------------ ------------ ------------ ------------
Income (loss) before income taxes 58,080 (710,309) 758,074 6,001,816
Income tax benefit (expense) (18,005) 312,388 (235,003) (2,360,094)
------------ ------------ ------------ ------------
Net income (loss) $ 40,075 $ (397,921) $ 523,071 $ 3,641,722
============ ============ ============ ============
Earnings (loss) per share:
Basic $ 0.00 $ (0.02) $ 0.02 $ 0.16
Diluted $ 0.00 $ (0.02) $ 0.02 $ 0.16
</TABLE>
See accompanying notes to condensed consolidated financial statements.
<PAGE> 4
BULL RUN CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(UNAUDITED)
<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, June 30, 1999 22,983,271 $ 229,832 $21,839,571 $ (1,392,430) $7,316,559 $27,993,532
Issuance of common
shares in connection
with acquisition 11,687,164 116,872 43,441,188 43,558,060
Issuance of stock options
in connection with
acquisition 8,700,000 8,700,000
Exercise of stock options 393,710 3,937 583,122 587,059
Net income 523,071 523,071
---------- ---------- ----------- ------------ ---------- -----------
BALANCES, DECEMBER 31, 1999 35,064,145 $ 350,641 $74,563,881 $ (1,392,430) $7,839,630 $81,361,722
========== ========== =========== ============ ========== ===========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
<PAGE> 5
BULL RUN CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
DECEMBER 31,
1999 1998
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 523,071 $ 3,641,722
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Provision for bad debts 56,106 10,512
Depreciation and amortization 913,104 500,675
Equity in (earnings) losses of affiliated companies 133,687 (6,879,961)
Gain on issuance of shares by affiliate (2,492,231)
Loss on disposition of assets 63,764 121,890
Deferred income taxes (1,069,868) 2,339,265
Accrued preferred stock dividend income (24,692)
Change in operating assets and liabilities:
Accounts and notes receivable 4,014,455 (615,732)
Inventories (233,657) 558,338
Prepaid costs and expenses (172,660) 168,834
Refundable income taxes (323,596) 44,830
Accounts payable and accrued expenses 2,212,065 (614,215)
Deferred revenue 1,283,546
------------ ------------
Net cash provided by (used in) operating activities 4,907,786 (748,534)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (20,079) (129,881)
Investment in affiliated companies (1,614,125) (3,740,926)
Proceeds on sale of investment 288,736
Acquisition of businesses and product rights, net of cash acquired (43,984,832) (907,728)
Redemption of preferred stock investment 3,804,692
Dividends received from affiliated company 81,175 93,835
------------ ------------
Net cash used in investing activities (45,249,125) (880,008)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments on notes payable (12,000,000) (700,000)
Borrowings from revolving lines of credit 26,792,640 10,332,000
Repayments on revolving lines of credit (19,088,567) (10,572,052)
Borrowings from long-term debt 95,000,000 2,850,000
Repayments on long-term debt (47,164,994) (671,729)
Debt issue costs (1,170,300)
Exercise of stock options 587,059 7,437
Repurchase of common stock (147,500)
------------ ------------
Net cash provided by financing activities 42,955,838 1,098,156
------------ ------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 2,614,499 (530,386)
Cash and cash equivalents, beginning of period 323,202 587,965
------------ ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 2,937,701 $ 57,579
============ ============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
<PAGE> 6
BULL RUN CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
In management's opinion, the accompanying unaudited condensed consolidated
financial statements reflect all adjustments (consisting solely of normal,
recurring adjustments) necessary to present fairly the financial position and
results of operations for the interim periods reported. These condensed
consolidated financial statements should be read in conjunction with the
consolidated financial statements contained in the Transition Report on Form
10-K of Bull Run Corporation for the period January 1, 1999 to June 30, 1999.
The accompanying condensed consolidated financial statements include the
accounts of Bull Run Corporation and its wholly-owned subsidiaries
(collectively, unless the context otherwise requires, the "Company"), after
elimination of intercompany accounts and transactions.
2. HOST-USA ACQUISITION
On December 17, 1999, the Company acquired the stock of Host Communications,
Inc. ("Host"), Universal Sports America, Inc. ("USA") and Capital Sports
Properties, Inc. ("Capital") not previously owned, directly or indirectly, by
the Company (the "Host-USA Acquisition"). Pursuant to the merger agreement, a
new holding company for the Company was created immediately prior to the
Host-USA Acquisition, whereby each outstanding share of the Company's common
stock was converted into one share of a newly formed Georgia corporation. The
new holding company, which was renamed Bull Run Corporation, is owned by the
stockholders of the former Company. The former Bull Run Corporation and its
subsidiaries have become subsidiaries of the holding company. Aggregate
consideration (net of cash acquired) was approximately $114.9 million, which
included common stock and stock options valued at approximately $52.3 million,
8% subordinated notes having a face value of approximately $18.6 million, cash
(net of approximately $11.8 million in cash acquired) of $42.7 million and
transaction expenses of approximately $1.3 million.
Prior to the Host-USA Acquisition, the Company accounted for its investment in
Host and Capital under the equity method, and for its investment in USA under
the cost method. Beginning December 17, 1999, the financial results of Host, USA
and Capital are consolidated with those of the Company. The acquisition has been
accounted for under the purchase method of accounting, whereby the assets and
liabilities of the acquired businesses have been included as of December 17,
1999 based on a preliminary allocation of the purchase price. The preliminary
allocation of the purchase price was based upon estimated fair values at the
date of acquisition and is subject to refinement upon obtaining certain
additional information. The excess of the purchase price over assets acquired
(i.e., goodwill) of approximately $89.1 million is being amortized on a
straight-line basis over 20 years.
Host, 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. Capital has no operating assets.
In connection with the Host-USA Acquisition, the Company accrued approximately
$250,000 for costs to close certain duplicative office facilities and accrued
approximately $500,000 in severance costs for approximately fifty terminated
employees of the acquired companies primarily in the Collegiate and Streetball
business segments. These costs were accrued for as part of the preliminary
allocation of the purchase price. The facility consolidation and employee
terminations resulted from primarily combining certain office facilities and
duplicative functions, including management functions, of Host and USA. The
Company has not yet finalized its plans to consolidate facilities and to
terminate or relocate employees, nor has it finalized a determination of costs
to be incurred upon the termination of certain office facility leases or its
ability to sublease vacated office space. Accordingly, unresolved issues could
result in an increase or decrease in the liabilities for facility consolidation
and employee termination. These adjustments will be reported as an increase or
decrease in goodwill.
<PAGE> 7
Pro forma operating results, assuming the acquisition had been consummated as of
October 1, 1999 and 1998 for the three months ended December 31, 1999 and 1998,
respectively, and July 1, 1999 and 1998 for the six months ended December 31,
1999 and 1998, respectively, were as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
DECEMBER 31, DECEMBER 31,
1999 1998 1999 1998
<S> <C> <C> <C> <C>
Net revenue $ 49,014,000 $ 45,698,000 $ 80,715,000 $76,395,000
Operating income before goodwill
amortization 1,106,000 3,382,000 1,274,000 2,602,000
Operating income (loss) (146,000) 2,145,000 (1,227,000) 129,000
Net income (loss) (327,000) (223,000) (5,128,000) 970,000
Earnings (loss) per share:
Basic $ (0.01) $ (0.01) $ (0.15) $ 0.03
Diluted $ (0.01) $ (0.01) $ (0.15) $ 0.03
</TABLE>
These pro forma results are not necessarily indicative of actual results which
might have occurred had the operations and management teams of the Company and
the acquired companies been combined in prior years.
3. SUPPLEMENTAL CASH FLOW DISCLOSURES
Supplemental cash flow information follows:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
DECEMBER 31,
1999 1998
<S> <C> <C>
Interest paid $ 3,013,570 $ 1,902,797
Income taxes received (15,830) (24,000)
Noncash investing and financing activities in connection with
the Host-USA Acquisition:
Common stock and stock options issued as a
component of the purchase price $ 52,258,060
Subordinated notes issued as a component
of the purchase price 18,594,013
</TABLE>
<PAGE> 8
4. INVESTMENT IN AFFILIATED COMPANIES
The Company's investment in affiliated companies is comprised of the following:
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1999 1999
<S> <C> <C>
Gray Communications Systems, Inc. $47,064,753 $45,512,799
Sarkes Tarzian, Inc. 10,000,000 10,000,000
Rawlings Sporting Goods Company, Inc. 13,455,177 13,007,820
Total Sports, Inc. 10,450,728 3,499,999
iHigh.com, Inc. 2,585,959
Host Communications, Inc. 2,747,427
Capital Sports Properties, Inc. 9,893,130
Universal Sports America, Inc. 650,000
Other 1,541,036
----------- -----------
$85,097,653 $85,311,175
=========== ===========
</TABLE>
As part of the Host-USA Acquisition, the Company acquired an additional
investment in Total Sports, Inc. valued at $6,950,729, an investment in
iHigh.com, Inc. ("iHigh") valued at $2,622,147 and other investments valued at
$1,546,769.
The Company accounts for its investments in Gray Communications Systems, Inc.
("Gray"), Rawlings Sporting Goods Company, Inc. ("Rawlings"), and prior to
December 17, 1999 (the date the Company consummated the Host-USA Acquisition),
Host and Capital, using the equity method. Beginning December 17, 1999, the
Company also accounts for its investment in iHigh (an investee of Host) using
the equity method. The amount that the Company's equity investments exceed the
Company's proportionate share of the investee's book value is being amortized
over 20 to 40 years, with such amortization (totaling $493,000 and $434,000 for
the three months ended December 31, 1999 and 1998, respectively, and $996,000
and $859,000 for the six months ended December 31, 1999 and 1998, respectively)
reported as a reduction (increase) in the Company's equity in earnings (losses)
of affiliated companies.
In October 1999, Gray acquired three television stations for consideration that
included shares of Gray's class B common stock. The transaction resulted in
diluting the Company's investment in Gray from approximately 16.9% to 13.2%
(resulting in a reduction in the Company's voting interest in Gray from 27.5% to
26.2%). As a result of this dilution, the Company recognized a $2,492,231 gain
on Gray's issuance of shares in the three month and six month periods ended
December 31, 1999.
The Company provides consulting services to Gray from time to time in connection
with Gray's acquisitions and dispositions. Income on a portion of such fees is
deferred and recognized over 40 years as a result of the Company's 13.2% equity
investment position in Gray as of December 31, 1999. The Company and Gray
entered into an agreement under which Gray has the option to acquire the
Company's investment in Sarkes Tarzian, Inc. for $10,000,000, plus related
costs. Under the terms of the option agreement, Gray has the ability to extend
such option for $66,700 per month. A portion of this option income is deferred
and recognized over 40 years as a result of the Company's 13.2% equity
investment position in Gray. The total amount of deferred consulting fee and
option income to be recognized by the Company in future periods was $799,000 as
of December 31, 1999.
Prior to acquiring Host on December 17, 1999, the Company accounted for its
investment in Host by the equity method on a six-month lag basis. The Company
accounts for its investment in Rawlings by the equity method on a one month lag
basis, in order to align Rawlings' fiscal quarters ending November 30, February
28, May 31 and August 31 with the Company's fiscal quarters.
In January 1999, USA sold its investment in broadcast.com, inc., recognizing an
after-tax gain of approximately $40,000,000. As a result of Host's equity
investment in USA and the Company's equity investment in Host reported
<PAGE> 9
on a six-month lag basis, the Company recognized approximately $1,900,000 in
equity in earnings of affiliates in the six months ended December 31, 1999
pertaining to USA's gain on the sale of its investment in broadcast.com, inc.
In July 1998, Gray disposed of a television station and recognized an after-tax
gain of approximately $43,000,000 in connection with the disposition. As a
result, the Company's equity in Gray's earnings was favorably impacted by
approximately $6,900,000 in the six months ended December 31, 1998.
Aggregate operating results of affiliated companies (reflecting, for 1999: (i)
Gray and Capital for the three months and six months ended December 31, 1999;
(ii) Host for the three months and six months ended June 30, 1999; and (iii)
Rawlings for the three months and six months ended November 30, 1999; and
reflecting, for 1998: (i) Gray and Capital for the three months and six months
ended December 31, 1998; (ii) Host for the three months and six months ended
June 30, 1998; and (iii) Rawlings for the three months and six months ended
November 30, 1998) were as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
DECEMBER 31, DECEMBER 31,
1999 1998 1999 1998
<S> <C> <C> <C> <C>
Net revenue $90,600,000 $80,190,000 $174,192,000 $161,983,000
Income from operations 6,850,000 6,898,000 4,799,000 13,145,000
Net income (loss) (4,454,000) 654,000 (7,576,000) 41,926,000
</TABLE>
5. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
1999 1999
<S> <C> <C>
Computer printer operations:
Raw materials $3,567,834 $3,423,468
Work-in-process 711,753 742,465
Finished goods 1,458,667 1,338,664
---------- ----------
5,738,254 5,504,597
Printing operations materials and supplies 557,560
Marketing materials and supplies 360,545
---------- ----------
$6,656,359 $5,504,597
========== ==========
</TABLE>
6. NOTES PAYABLE AND LONG-TERM DEBT
In connection with the Host-USA Acquisition, the Company entered into a new
credit agreement with a group of banks on December 17, 1999, providing for (a)
two term loans (the "Term Loans") for borrowings totaling $95,000,000, bearing
interest at either the banks' prime rate or the London Interbank Offered Rate
("LIBOR") plus 2.5%, requiring a minimum aggregate principal payment of
$10,000,000 by December 17, 2000 and a minimum aggregate principal payment of
$30,000,000 by December 17, 2001, with all amounts outstanding under the term
loans due on December 17, 2002; and (b) a revolving loan commitment (the
"Revolver") for borrowings of up to $35,000,000 through December 17, 2002,
bearing interest at either the banks' prime rate or LIBOR plus 2.5%. Borrowings
under the Revolver are limited to an amount not to exceed a percentage of
eligible accounts receivable, determined monthly, and such borrowings may
include up to $20,500,000 in outstanding letters of credit. As of December 31,
1999, borrowings of $15,900,000 and letters of credit totaling $11,000,000 were
outstanding under the Revolver, and additional available borrowing capacity
under the Revolver was $8,100,000 at that date. As of December 31, 1999, all of
the borrowings under the Term Loans and the Revolver were subject to the banks'
prime rate of 8.5%. Interest on prime rate advances is payable quarterly
beginning April 1, 2000 and at least quarterly on
<PAGE> 10
LIBOR-based borrowings. The credit agreement contains certain financial
covenants the most restrictive of which requires the maintenance of a certain
debt service coverage ratio determined quarterly.
Also in connection with the Host-USA Acquisition, the Company issued
subordinated notes on December 17, 1999, bearing interest at 8%, having an
aggregate face value of $18,594,013. Interest is payable quarterly beginning May
15, 2000 until maturity on January 17, 2003. Payment of interest and principal
are subordinate to the bank credit agreement.
The new bank credit agreement and the subordinated notes provided the necessary
financing for the Host-USA Acquisition, and refinanced all existing bank
indebtedness of the Company, Host and USA.
The Company is a party to two interest rate swap agreements, which effectively
modify the interest characteristics of $45,000,000 of its outstanding long-term
debt. The first agreement, effective January 1, 1999, involves the exchange of
amounts based currently on a fixed interest rate of 8.58% for amounts currently
based on a variable interest rate of LIBOR plus 2.5% through December 31, 2007,
without an exchange of the $20,000,000 notional amount upon which the payments
are based. The second agreement, effective January 5, 2000, involves the
exchange of amounts based currently on a fixed interest rate of 9.21% for
amounts currently based on a variable interest rate of LIBOR plus 2.5% through
December 31, 2002 (or December 31, 2004, at the bank's option), without an
exchange of the $25,000,000 notional amount upon which the payments are based.
The differential to be paid or received as interest rates change is accrued and
recognized as an adjustment of interest expense related to the debt. The
estimated amount to be received on terminating the $20,000,000 swap agreement,
if the Company elected to do so, was approximately $1,152,000 and $432,000 as of
December 31, 1999 and June 30, 1999, respectively.
7. INCOME TAXES
The principal differences between the federal statutory tax rate of 34% and the
effective tax rates are nondeductible goodwill amortization and state income
taxes.
8. EARNINGS (LOSS) PER SHARE
The following table sets forth the computation of basic and diluted earnings
(loss) per share:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
DECEMBER 31, DECEMBER 31,
1999 1998 1999 1998
<S> <C> <C> <C> <C>
Net income (loss) $ 40,075 $ (397,921) $ 523,071 $ 3,641,722
=========== ============ =========== ===========
Weighted average number of
common shares outstanding for
basic earnings (loss) per share 24,080,299 22,276,745 23,273,419 22,279,637
Effect of dilutive employee stock
options 1,240,955 1,042,393 902,738
----------- ------------ ----------- -----------
Adjusted weighted average number
of common shares and assumed
conversions for diluted earnings
(loss) per share 25,321,254 22,276,745 24,315,812 23,182,375
=========== ============ =========== ===========
Basic earnings (loss) per share $ 0.00 $ (0.02) $ 0.02 $ 0.16
Diluted earnings (loss) per share $ 0.00 $ (0.02) $ 0.02 $ 0.16
</TABLE>
<PAGE> 11
9. SEGMENT INFORMATION
Following the Host-USA Acquisition, the Company operates in five business
segments that provide different products or services: (a) collegiate marketing
and production services, which also includes services rendered in connection
with high schools and printing/publishing operations ("Collegiate"); (b) event
management and marketing services ("Streetball"); (c) computer printer
manufacturing and related sales and services ("Datasouth"); (d) association
management services ("Association Management") and (e) consulting services
("Consulting"). Information for each of the Company's segments is presented
below:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
DECEMBER 31, DECEMBER 31,
1999 1998 1999 1998
<S> <C> <C> <C> <C>
Net revenues:
Collegiate $ 5,451,830 $ $ 5,451,830 $
Streetball 296,388 296,388
Datasouth 6,521,400 8,470,664 14,888,613 15,690,489
Association Management 343,125 343,125
Consulting 628,221 2,130 1,298,630 966,260
------------ ------------ ------------ ------------
$ 13,240,964 $ 8,472,794 $ 22,278,586 $ 16,656,749
============ ============ ============ ============
Operating income (loss):
Collegiate $ (268,980) $ $ (268,980) $
Streetball (250,194) (250,194)
Datasouth 94,952 624,107 1,025,455 763,592
Association Management 64,853 64,853
Consulting 628,221 2,130 1,298,630 966,260
Goodwill amortization (325,689) (123,696) (461,056) (245,585)
Unallocated general and
administrative costs (361,614) (306,938) (762,273) (605,524)
------------ ------------ ------------ ------------
$ (418,451) $ 195,603 $ 646,435 $ 878,743
============ ============ ============ ============
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1999 1999
<S> <C> <C>
Total assets:
Collegiate $ 55,215,845 $
Streetball 11,104,752
Datasouth 12,124,304 11,860,601
Association Management 8,242,562
Investments in affiliated companies 85,097,653 85,311,175
Goodwill 96,608,695 7,417,146
Other 1,823,021 1,509,241
------------ ------------
$270,216,832 $106,098,163
============ ============
</TABLE>
No assets are allocated to the Consulting segment.
10. RECENTLY-ISSUED ACCOUNTING STANDARD
In June 1998, the Financial Accounting Standards Board issued Statement No. 133,
"Accounting for Derivative Investments and Hedging Activities". The Company will
be required 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 has not yet determined what the effect of Statement No.
133 will be on its results of operations or financial position. However, the
Statement could increase volatility in earnings and comprehensive income.
<PAGE> 12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
Bull Run Corporation (the "Company") acquired all of the outstanding capital
stock of Host Communications, Inc. ("Host"), Universal Sports America, Inc.
("USA") and Capital Sports Properties, Inc. ("Capital") that it did not then own
prior to the December 17, 1999 acquisition date (the "Host-USA Acquisition"). As
a result of the acquisition, the Company added new business segments including
sports marketing, event management and association management, in addition to
its existing wholly-owned computer printer manufacturing operation, Datasouth
Computer Corporation. The results of Host and USA for the period from December
17, 1999 (the date of their acquisition by the Company) through December 31,
1999 are not necessarily indicative of the results that would have been obtained
for Host and USA for the three or six months ended December 31, 1999. The
Company also makes significant investments in other sports and media companies,
including Gray Communications Systems, Inc. ("Gray"), the owner and operator of,
among other businesses, 13 television stations and four daily newspapers; Sarkes
Tarzian, Inc. ("Tarzian"), the owner and operator of two television stations and
four radio stations; Rawlings Sporting Goods Company, Inc. ("Rawlings"), a
supplier of team sports equipment; Total Sports, Inc. ("Total Sports"), a sports
content Internet company; and iHigh.com, Inc., a recently formed company
creating an Internet network of websites devoted to high school sports and
activities. In addition, the Company provides consulting services to Gray in
connection with Gray's acquisitions and dispositions.
For information with respect to the Host-USA Acquisition, reference is made to
Note 2 of the Company's financial statements included in Item 1 hereof.
Effective June 30, 1999, the Company changed its fiscal year end from December
31 to June 30.
RESULTS OF OPERATIONS -
THREE MONTHS ENDED DECEMBER 31, 1999 COMPARED TO THREE MONTHS ENDED
DECEMBER 31, 1998
Total revenue for the three months ended December 31, 1999 was $13,241,000
compared to $8,473,000 for the same period in 1998. Revenue from computer
printer operations decreased by $1,950,000 to $6,521,000 for the three months
ended December 31, 1999, from $8,471,000 for the same period in 1998, primarily
as a result of a decrease in sales to The Sabre Group, Inc., Datasouth's largest
customer, from $2,580,000 in 1998 to $1,248,000 in 1999. Short term revenue
trends in the Company's computer printer business fluctuate due to variable
ordering patterns of large customers. Host and USA had combined revenue of
$6,092,000 for the period from December 17, 1999 (date of acquisition) through
December 31, 1999, of which, $5,452,000 was attributable to Host's and USA's
Collegiate business segment. Consulting fee income on services provided to Gray
was $628,000 for the three months ended December 31, 1999 compared to $2,000 for
the same period in 1998.
A portion of the income from consulting fees for services provided to Gray is
deferred and recognized over 40 years as a result of the Company's equity
investment in Gray. As of December 31, 1999, consulting fees of $711,000 were
deferred for future revenue recognition. There can be no assurance that the
Company will earn any consulting fees in the future, other than recognition of
currently deferred fees.
Operating costs and expenses of $13,334,000 for the three months ended December
31, 1999 include $6,545,000 associated with Host and USA for the period from
December 17, 1999 (date of acquisition) through December 31, 1999. Excluding the
effects of Host and USA, total costs and expenses for the three months ended
December 31, 1999 declined $1,365,000 from the same period last year, due to a
$1,344,000 reduction in Datasouth's cost of sales, as a result of the reduction
in revenue, and a $76,000 decrease in research and development expenses, net of
a $179,000 increase in selling, general and administrative expenses.
Goodwill and debt issue cost amortization increased for the three months ended
December 31, 1999 from the same period last year as a result of the Host-USA
Acquisition and related financing.
<PAGE> 13
Equity in earnings (losses) of affiliated companies, totaling $(763,000) and
$54,000 for the three months ended December 31, 1999 and 1998, respectively,
included the Company's proportionate share of the earnings or losses of Gray,
Rawlings, and prior to December 17, 1999, Host and Capital, net of goodwill
amortization totaling $493,000 and $434,000, respectively. The decrease from the
prior year period was a result of a decrease in the net income (or increase in
net loss) of Gray and Rawlings in their quarters ended December 31, 1999 and
November 30, 1999, respectively, compared to the prior year.
As a result of Gray's issuance of shares of its class B common stock on October
1, 1999 in connection with consideration paid in the acquisition of three
television stations, the Company's common equity ownership of Gray was reduced
from 16.9% to 13.2%, resulting in a pretax gain for the Company of $2,492,231
recognized by the Company in the quarter ended December 31, 1999. This share
issuance also reduced the Company's common equity voting power in Gray from
27.5% to 26.2%.
Interest and dividend income of $229,000 and $234,000 for the three months ended
December 31, 1999 and 1998, respectively, was primarily derived from dividends
accrued on the Company's investment in Gray's series A and series B preferred
stock. Interest expense increased to $1,658,000 from $1,066,000 for the three
months ended December 31, 1999 compared to the same period in the prior year, as
a result of (a) financing the Host-USA Acquisition in December 1999; (b) the
Company's investment in Tarzian in January 1999; and (c) an increase in interest
rates.
Other income for the three months ended December 31, 1999 consisted primarily of
income on an option agreement with Gray. Under the option agreement, whereby
Gray has the option until March 31, 2000 to acquire the Company's investment in
Tarzian for $10,000,000 plus related costs, the Company received $200,100 in the
three months ended December 31, 1999. The option agreement provides that Gray
may extend the expiration date of the option in 30-day increments at a fee of
$66,700 per extension. The Company currently anticipates that Gray will continue
to extend its option for the foreseeable future. A portion of the option income
from Gray is deferred and recognized over 40 years as a result of the Company's
equity investment in Gray. As of December 31, 1999, option income of $88,000 was
deferred for future revenue recognition.
The principal differences between the federal statutory tax rate of 34% and the
effective tax rates of 31.0% estimated for the current year and 44.0% for the
prior year are nondeductible goodwill amortization and state income taxes.
RESULTS OF OPERATIONS -
SIX MONTHS ENDED DECEMBER 31, 1999 COMPARED TO SIX MONTHS ENDED
DECEMBER 31, 1998
Total revenue for the six months ended December 31, 1999 was $22,279,000
compared to $16,657,000 for the same period in 1998. Revenue from computer
printer operations was $14,889,000 for the six months ended December 31, 1999,
compared to $15,690,000 for the same period in 1998, primarily as a result of a
decrease in sales to The Sabre Group, Inc., Datasouth's largest customer, from
$4,860,000 in 1998 to $3,025,000 in 1999. Host and USA added combined revenue of
$6,092,000 for the period from December 17, 1999 (date of acquisition) through
December 31, 1999, of which, $5,452,000 was attributable to Host's and USA's
Collegiate segment. Consulting fee income on services provided to Gray was
$1,298,000 for the six months ended December 31, 1999 compared to $966,000 for
the same period in 1998.
Operating costs and expenses of $21,171,000 for the six months ended December
31, 1999 include $6,545,000 associated with Host and USA, for the period from
December 17, 1999 (date of acquisition) through December 31, 1999. Excluding the
effects of Host and USA, total costs and expenses for the three months ended
December 31, 1999 declined $905,000 from the same period last year, due to a
$849,000 reduction in Datasouth's cost of sales and a $200,000 decrease in
research and development expenses, net of a $144,000 increase in selling,
general and administrative expenses.
Goodwill and debt issue cost amortization increased for the six months ended
December 31, 1999 from the same period last year as a result of the Host-USA
Acquisition and related financing.
<PAGE> 14
Equity in earnings (losses) of affiliated companies, totaling $(134,000) and
$6,880,000 for the six months ended December 31, 1999 and 1998, respectively,
included the Company's proportionate share of the earnings or losses of Gray,
Rawlings, and prior to December 17, 1999, Host and Capital, net of goodwill
amortization totaling $996,000 and $859,000, respectively.
In January 1999, USA sold its investment in broadcast.com, inc., recognizing an
after-tax gain of approximately $40,000,000. As a result of Host's equity
investment in USA and the Company's equity investment in Host reported on a
six-month lag basis, the Company recognized approximately $1,900,000 in equity
in earnings of affiliates in the six months ended December 31, 1999 due to USA's
gain on the sale of its investment in broadcast.com, inc. In July 1998, Gray
disposed of a television station and recognized an after-tax gain of
approximately $43,000,000 in connection with the disposition. As a result, the
Company's equity in Gray's earnings was favorably impacted by approximately
$6,900,000 in the six months ended December 31, 1998. There is no assurance that
such sales or such gains of a material nature will occur in the future.
Excluding the impact of the USA gain in the current year and the Gray gain in
the prior year, equity in earnings (losses) of affiliated companies decreased
from the prior year period as a result of a decrease in the net income (or
increase in net loss) of Gray and Rawlings in the six month periods ended
December 31, 1999 and November 30, 1999, respectively, compared to the prior
year.
As a result of Gray's issuance of shares of its class B common stock on October
1, 1999 in connection with consideration paid in the acquisition of three
television stations, the Company's common equity ownership of Gray was reduced
from 16.9% to 13.2%, resulting in a pretax gain for the Company of $2,492,231
recognized by the Company in the six months ended December 31, 1999.
Interest and dividend income of $455,000 and $523,000 for the six months ended
December 31, 1999 and 1998, respectively, was primarily derived from dividends
accrued on the Company's investment in Gray's series A and series B preferred
stock. Interest expense increased to $2,975,000 from $2,146,000 for the six
months ended December 31, 1999 and 1998, respectively, as a result of (a)
financing the Host-USA Acquisition in December 1999; (b) the Company's
investment in Tarzian in January 1999; and (c) an increase in interest rates.
Other income for the six months ended December 31, 1999 consisted primarily of
income on the option agreement with Gray.
The principal differences between the federal statutory tax rate of 34% and the
effective tax rates of 31.0% estimated for the current year and 39.3% for the
prior year are nondeductible goodwill amortization and state income taxes.
LIQUIDITY AND CAPITAL RESOURCES
Cash provided by operating activities was $4,908,000 for the six months ended
December 31, 1999, compared to cash used in operating activities of $749,000 for
the same period in 1998. In the six months ended December 31, 1999, receivables
decreased $4,014,000, due to collections from Host and USA accounts subsequent
to the Host-USA Acquisition closing date; accounts payable and accrued expenses
increased $2,212,000; and deferred income associated with Host and USA increased
$1,284,0000. In the six months ended December 31, 1998, receivables increased
$616,000, whereas inventories decreased $558,000 and accounts payable and
accrued expenses decreased $614,000.
Cash used in investing activities was $45,249,000 for the six months ended
December 31, 1999, of which, $43,985,000 was associated with the Host-USA
Acquisition, compared to $880,000 for the same period in 1998. In the six months
ended December 31, 1998, the Company received proceeds of $3,805,000 from Gray
on the redemption of shares of its series B preferred stock. Also during the
1998 period, the Company made its initial investment in Total Sports of
$2,500,000 and acquired printer product rights for approximately $660,000.
Cash provided by financing activities was $42,956,000 for the six months ended
December 31, 1999 as a result of borrowings utilized for the Host-USA
Acquisition, compared to cash provided by financing activities of $1,098,000 for
<PAGE> 15
the six months ended December 31, 1998. In the six months ended December 31,
1998, the Company financed a portion of its investments with bank debt.
The Company is a party to two interest rate swap agreements, which effectively
modify the interest characteristics of $45,000,000 of its outstanding long-term
debt. The first agreement, effective January 1, 1999, involves the exchange of
amounts based currently on a fixed interest rate of 8.58% for amounts currently
based on a variable interest rate of LIBOR plus 2.5% through December 31, 2007,
without an exchange of the $20,000,000 notional amount upon which the payments
are based. The second agreement, effective January 5, 2000, involves the
exchange of amounts based currently on a fixed interest rate of 9.21% for
amounts currently based on a variable interest rate of LIBOR plus 2.5% through
December 31, 2002 (or December 31, 2004, at the bank's option), without an
exchange of the $25,000,000 notional amount upon which the payments are based.
The differential to be paid or received as interest rates change is accrued and
recognized as an adjustment of interest expense related to the debt. The
estimated amount to be received on terminating the $20,000,000 swap agreement,
if the Company elected to do so, was approximately $1,152,000 as of December 31,
1999.
Dividends on the series B preferred stock of Gray owned by the Company are
payable in cash at an annual rate of $600 per share or, at Gray's option,
payable in additional shares of series B preferred stock. The Company
anticipates that dividends on the series B preferred stock will be paid in cash
for the foreseeable future.
The Company anticipates that its current working capital, funds available under
its current credit facilities (see Note 6 in Item 1), quarterly cash dividends
on the Gray preferred stock and common stock, anticipated extension fees on the
option agreement with Gray and cash flow from operations will be sufficient to
fund its debt service, working capital requirements and capital spending
requirements for at least the next 12 months. The $10,000,000 principal payment
due under the new credit facility in December 2000 will likely require the sale
of certain investments and/or the redemption of some or all of the Gray
preferred stock.
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 December 31, 1999 and 1998, and June 30,
1999 and 1998, 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 $97,000 and
$131,000 for the three months ended December 31, 1999 and 1998, respectively,
and $215,000 and $263,000 for the six months ended December 31, 1999 and 1998,
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 Investments and Hedging Activities". The Company will
be required 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 has not yet determined what the effect of Statement No.
133 will be on its results of operations or financial position. However, the
Statement could increase volatility in earnings and comprehensive income.
<PAGE> 16
FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains "forward-looking statements" within
the meaning of the Private Securities Litigation Reform Act of 1995. When used
in this report, the words "believes," "expects," "anticipates," "estimates" and
similar words and expressions are generally intended to identify forward-looking
statements. Statements that describe the Company's future strategic plans, goals
or objectives are also forward-looking statements. Readers of this Report are
cautioned that any forward-looking statements, including those regarding the
intent, belief or current expectations of the Company or management, are not
guarantees of future performance, results or events, and involve risks and
uncertainties. The Company undertakes no obligation to update such
forward-looking statements to reflect subsequent events or circumstances. Actual
results and events may differ materially from those in the forward-looking
statements as a result of various factors including, but not limited to the
following: (i) the Company's and Gray's leverage may adversely affect their
ability to obtain financing, thereby impairing their ability to withstand
economic downturns or competitive pressures; (ii) Gray's business depends on its
relationships with, and success of, its national network affiliates; (iii)
Rawlings', Host'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', Host's and USA's businesses depend on short
term contracts and the inability to renew or extend these contracts could
adversely affect their businesses; and (vi) Host and USA may lose money on some
of their contracts, because they guarantee certain payments thereunder.
<PAGE> 17
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 27 - Financial Data Schedule (for SEC use only)
(b) Reports on Form 8-K
Form 8-K dated December 17, 1999 related to the Company's
acquisition of Host Communications, Inc., Universal Sports
America, Inc. and Capital Sports Properties, Inc.
Form 8-K/A-1 dated December 17, 1999 filed to amend Form 8-K
for the inclusion of required financial statements of the
businesses acquired and pro forma financial information.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized.
BULL RUN CORPORATION
Date: February 14, 2000 By: /s/ FREDERICK J. ERICKSON
-------------------------------
Frederick J. Erickson
Vice President-Finance, Treasurer
and Assistant Secretary
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