<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K/A-1
CURRENT REPORT
Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): December 17, 1999
BULL RUN CORPORATION
------------------------------------------------------
(Exact name of registrant as specified in its charter)
GEORGIA 0-9385 91-1117599
- --------------- ---------------- -------------------
(State or other (Commission File (IRS Employer
jurisdiction of Number) Identification No.)
incorporation)
4370 PEACHTREE ROAD, ATLANTA, GEORGIA 30319
---------------------------------------------------
(Address of principal executive offices) (Zip Code)
(404) 266-8333
----------------------------------------------------
(Registrant's telephone number, including area code)
<PAGE> 2
In accordance with Item 7(c)(4) of Form 8-K, Item 7 of the Form 8-K, dated
December 17, 1999, filed by Bull Run Corporation, is hereby amended to include
the following information:
ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS
(a) Financial Statements of Businesses Acquired
See the Index to Financial Information following the signature page
hereto.
(b) Pro Forma Financial Information
See the Index to Financial Information following the signature page
hereto.
2
<PAGE> 3
SIGNATURE
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 thereto duly authorized.
January 28, 2000 BULL RUN CORPORATION
By /s/ FREDERICK J. ERICKSON
--------------------------------------
Frederick J. Erickson
Vice President - Finance and Treasurer
3
<PAGE> 4
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
<S> <C>
Audited Consolidated Financial Statements of Host Communications, Inc.
and subsidiaries as of June 30, 1999 and 1998, and for the each of the
years in the period ended June 30, 1999.............................................................. F-2
Condensed Consolidated Financial Statements of Host Communications,
Inc. and subsidiaries as of September 30, 1999 and for the three months
ended September 30, 1999 and 1998 (unaudited)........................................................ F-28
Audited Consolidated Financial Statements of Universal Sports America,
Inc. and subsidiaries as of June 30, 1999 and 1998, and for the each of
the years in the period ended June 30, 1999.......................................................... F-36
Condensed Consolidated Financial Statements of Universal Sports America,
Inc. and subsidiaries as of September 30, 1999 and for the three months
ended September 30, 1999 and 1998 (unaudited)........................................................ F-59
Audited Financial Statements of Capital Sports Properties, Inc. as of
June 30, 1999 and 1998, and for the each of the years in the period
ended June 30, 1999.................................................................................. F-68
Condensed Financial Statements of Capital Sports Properties, Inc. as of
September 30, 1999 and for the three months ended September 30,
1999 and 1998 (unaudited)............................................................................ F-77
Unaudited Pro Forma Financial Data................................................................... F-83
Unaudited Pro Forma Combined Condensed Balance Sheet as of
September 30, 1999................................................................................... F-84
Unaudited Pro Forma Combined Condensed Statement of Operations for
the three months ended September 30, 1999............................................................ F-85
Unaudited Pro Forma Combined Condensed Statement of Operations for
the six months ended June 30, 1999................................................................... F-86
Unaudited Pro Forma Combined Condensed Statement of Operations for
the year ended December 31, 1998..................................................................... F-87
Notes to Unaudited Pro Forma Combined Condensed Financial
Statements........................................................................................... F-88
</TABLE>
F-1
<PAGE> 5
Consolidated Financial Statements
Host Communications, Inc.
and Subsidiaries
Years ended June 30, 1999, 1998 and 1997
with Report of Independent Auditors
F-2
<PAGE> 6
Host Communications, Inc. and Subsidiaries
Consolidated Financial Statements
June 30, 1999
CONTENTS
<TABLE>
<CAPTION>
<S> <C>
Report of Independent Auditors ...........................................................................F-4
Audited Financial Statements
Consolidated Balance Sheets ..............................................................................F-5
Consolidated Statements of Income ........................................................................F-6
Consolidated Statements of Stockholders' Equity ..........................................................F-7
Consolidated Statements of Cash Flows ....................................................................F-8
Notes to Consolidated Financial Statements ...............................................................F-9
</TABLE>
F-3
<PAGE> 7
Report of Independent Auditors
The Board of Directors
Host Communications, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheets of Host
Communications, Inc. and subsidiaries as of June 30, 1999 and 1998 and the
related consolidated statements of income, stockholders' equity, and cash flows
for each of the three years in the period ended June 30, 1999. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Host
Communications, Inc. and subsidiaries at June 30, 1999 and 1998, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended June 30, 1999, in conformity with generally
accepted accounting principles.
/s/ ERNST & YOUNG LLP
-----------------
Indianapolis, Indiana
September 1, 1999
F-4
<PAGE> 8
Host Communications, Inc. and Subsidiaries
Consolidated Balance Sheets
(Dollar amounts in thousands)
<TABLE>
<CAPTION>
June 30,
1999 1998
--------------------
<S> <C> <C>
ASSETS
Current assets:
Cash $ 88 $ 13
Accounts and notes receivable, less allowance
of $84 in 1999 and $105 in 1998 13,945 8,885
Due from affiliates 246 423
Note receivable from officer 385 385
Prepaid project costs and expenses 1,213 1,329
Deferred income taxes 255 109
--------------------
Total current assets 16,132 11,144
Property and equipment, net 5,089 5,872
Investment in affiliates 25,642 12,274
Goodwill, net of accumulated amortization
of $229 in 1999 and $160 in 1998 1,687 1,756
Other assets 1,889 1,490
--------------------
Total assets $50,439 $32,536
====================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable $ 2,434 $ 6,756
Note payable to affiliate 8,000 --
Current maturities of long-term obligations 1,513 507
Trade accounts payable 1,924 391
Accrued expenses 5,062 4,288
Deferred income 2,451 2,904
--------------------
Total current liabilities 21,384 14,846
Long-term obligations 800 2,170
Long-term other 229 --
Deferred income taxes 8,643 4,062
--------------------
Total liabilities 31,056 21,078
Commitments and contingencies -- --
Series B redeemable cumulative preferred stock,
no par value - $100 stated and redemption value:
Authorized shares - 80,000
Issued and outstanding shares 37,500 in 1999 and 1998 5,686 5,333
Stockholders' Equity
Common stock, no par value:
Authorized shares - 1,500,000
Issued and outstanding shares - 927,783 in 1999 and 915,283 in 1998 1,216 1,138
Additional capital 3,911 1,801
Retained earnings 8,570 3,186
--------------------
Total stockholders' equity 13,697 6,125
--------------------
Total liabilities and stockholders' equity $50,439 $32,536
====================
</TABLE>
See accompanying notes.
F-5
<PAGE> 9
Host Communications, Inc. and Subsidiaries
Consolidated Statements of Income
(Dollar amounts in thousands except per share data)
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
1999 1998 1997
-----------------------------------------------
<S> <C> <C> <C>
Net revenues $ 53,071 $ 46,177 $ 39,591
Cost of revenues 35,837 28,464 24,672
-----------------------------------------------
Gross profit 17,234 17,713 14,919
Selling, general, and administrative expenses 15,446 14,700 12,416
-----------------------------------------------
Operating income before unusual items 1,788 3,013 2,503
Stock option awards (1,891) (1,610) (191)
Merger costs (363) -- --
Severance costs (714) -- --
-----------------------------------------------
Operating income (loss) (1,180) 1,403 2,312
Other income (expense):
Interest expense, net (671) (629) (417)
Equity in earnings of affiliates 12,588 459 677
Loss on sale of assets (32) -- --
Gain on sale of TC3 to Total Sports, Inc. -- 2,843 --
Loss on sale of AdCraft assets -- (276) --
Other, net (12) 64 --
-----------------------------------------------
Income before income taxes 10,693 3,864 2,572
Provision for income taxes 4,956 1,756 946
-----------------------------------------------
Net income $ 5,737 $ 2,108 $ 1,626
===============================================
Basic and diluted earnings per share:
Basic earnings per share $ 5.87 $ 1.98 $ 1.44
===============================================
Diluted earnings per share:
Diluted earnings per share $ 4.92 $ 1.77 1.40
===============================================
Basic weighted average shares outstanding 927,000 913,000 849,000
===============================================
Diluted weighted average shares outstanding 1,104,000 1,020,000 875,000
===============================================
</TABLE>
See accompanying notes.
F-6
<PAGE> 10
Host Communications, Inc. and Subsidiaries
Consolidated Statements of Stockholders' Equity
(Dollar amounts in Thousands)
<TABLE>
<CAPTION>
Common Stock Total
----------------------- Additional Retained Stockholders'
Shares Amount Capital Earning Equity
---------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at July 1, 1996 433,772 $ 1,096 $ -- $ 444 $ 1,540
Repurchase of common stock (507) (11) -- -- (11)
Common stock issued 26,374 -- -- -- --
Exercise of warrants outstanding 447,002 5 -- -- 5
Compensation expense
of stock options -- -- 184 -- 184
Stock options exercised 500 -- 7 -- 7
Accretion of issuance costs -- -- -- (239) (239)
Preferred stock dividends -- -- -- (400) (400)
Net income -- -- -- 1,626 1,626
------------------------------------------------------------------
Balance at July 1, 1997 907,141 1,090 191 1,431 2,712
Repurchase of common stock (100) (2) -- -- (2)
Common stock issued 242 -- -- --
Compensation expense
of stock options -- -- 1,610 -- 1,610
Stock options exercised 8,000 50 -- -- 50
Accretion of issuance costs -- -- -- (53) (53)
Preferred stock dividends (300) (300)
Net income -- -- -- 2,108 2,108
------------------------------------------------------------------
Balance at July 1, 1998 915,283 1,138 1,801 3,186 6,125
Compensation expense
of stock options -- -- 1,891 -- 1,891
Stock options exercised 12,500 78 219 -- 297
Accretion of issuance costs -- -- -- (53) (53)
Preferred stock dividends -- -- -- (300) (300)
Net income -- -- -- 5,737 5,737
------------------------------------------------------------------
Balance at June 30, 1999 927,783 $ 1,216 $ 3,911 $ 8,570 $ 13,697
==================================================================
</TABLE>
See accompanying notes
F-7
<PAGE> 11
Host Communications, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(Dollar amounts in thousands)
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
1999 1999 1997
--------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income $ 5,737 $ 2,108 $ 1,626
Adjustments to reconcile net income to net cash
(used in) provided by operating activities:
Depreciation and amortization 1,286 1,159 1,072
Provision for bad debt reserve (21) (53) 67
Equity in earnings of affiliates (12,588) (459) (677)
Gain on sale of TC3 to Total Sports, Inc. -- (2,843) --
Loss on disposal of property and equipment 32 -- --
Deferred taxes 4,435 1,360 966
Loss on Sale of AdCraft assets -- 276 --
Compensation expense of stock options 1,891 1,610 191
Tax effect of stock options exercised 219 -- --
Changes in assets and liabilities, net of effects of
acquisitions and dispositions of businesses:
Accounts and notes receivable (5,039) (3,552) 1,991
Amounts due from related parties 177 582 1,126
Prepaid expenses and other current assets 116 (105) 459
Trade accounts payable 1,533 (470) (357)
Accrued expenses 774 (2,503) (3,220)
Deferred income (453) (187) 1,378
Other (396) (737) (1,963)
--------------------------------------
Net cash (used in) provided by operating activities (2,297) (3,814) 2,659
INVESTING ACTIVITIES
Purchase of properties and equipment (724) (1,120) (1,492)
Proceeds from sale of properties and equipment 369 -- 48
Investments in businesses, net of cash acquired (894) (318) 201
--------------------------------------
Net cash used in investing activities (1,249) (1,438) (1,243)
FINANCING ACTIVITIES
Net activity on notes payable (4,322) 5,563 (688)
Proceeds from note payable to affiliate 8,000 -- --
Payments on long-term obligations (135) (387) (402)
Proceeds from long-term obligations -- -- 1,352
Net proceeds from issuance of common stock 78 50 5
Redemption of preferred stock -- -- (1,705)
Payments to repurchase common stock -- (2) (11)
--------------------------------------
Net cash provided by (used in) financing activities 3,621 5,224 (1,449)
--------------------------------------
Net increase (decrease) in cash 75 (28) (33)
Cash at beginning of year 13 41 74
--------------------------------------
Cash at end of year $ 88 $ 13 $ 41
======================================
Supplemental disclosures of cash flow information:
Interest paid during the year $ 763 $ 725 $ 366
======================================
Income taxes paid during the year $ 812 $ 764 $ 403
======================================
Noncash investing and financing activities:
Preferred stock dividends $ 300 $ 300 $ 400
======================================
Long-term obligations incurred for acquisition $ -- $ -- $ 1,046
======================================
</TABLE>
F-8
<PAGE> 12
Host Communications, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
1. ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
Host Communications, Inc. (the "Company" or "HCI") provides specialized
marketing and management services to corporate clients focusing primarily on
sports-related affinity groups. The Company also provides professional
marketing and other management services to the National Collegiate Athletic
Association (NCAA) and other groups and associations such as the National Tour
Association (a package travel association), Quest (J.D. Edwards user group
association) and the International Spa and Fitness Association. Among other
things, the Company'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. Host also produces a broad array of electronic and print media
through their broadcasting, printing, internet and publishing divisions and
maintain minority investments in-service companies which provide marketing and
production support to their corporate clients and associations.
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of the
Company and its subsidiaries, all of which are wholly owned. Intercompany
balances and transactions have been eliminated in consolidation.
RECOGNITION OF LICENSE FEE REVENUES AND RIGHTS FEE EXPENSES
License fee revenues and rights fee expenses are recognized on a straight-line
basis over the life of the contract, which provides for the uniform matching of
revenue and expense.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation and amortization are
provided for in amounts sufficient to relate the cost of depreciable assets to
operations over their estimated useful lives which range from 5 to 25 years.
Leasehold improvements and equipment held under capital leases are amortized
over the shorter of the lease term or the estimated useful lives. The
straight-line method of depreciation is followed for all assets for financial
reporting purposes and accelerated methods are used for tax purposes.
F-9
<PAGE> 13
Host Communications, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
1. ACCOUNTING POLICIES (CONTINUED)
GOODWILL
Goodwill represents the excess of the aggregate purchase price paid by the
Company in acquisitions accounted for as purchases over the fair value of the
net assets acquired. Goodwill is amortized on a straight-line basis over 25
years.
The Company periodically reevaluates the carrying amounts of its intangibles as
well as the related amortization period to determine whether current events and
circumstances warrant adjustments to the carrying amounts and/or revised
estimates of useful lives. If events and circumstances did warrant reevaluation
of the carrying value, the evaluation would be based on the Company's estimate
of the undiscounted operating income before depreciation, amortization, and
interest over the remaining lives of the amortization periods of the related
intangible assets.
BARTER TRANSACTIONS
The Company provides advertising and licensing rights to certain customers or
sub-licensees in exchange for services. The estimated fair value of the
services to be received is recorded as an account receivable. As these services
are used, they are charged to expense. Advertising revenue is recognized as the
advertising is used by the customer and license fee revenues are recognized on
a straight-line basis over the term of the sub-license agreement. Net revenues
and operating expenses include the following amounts related to barter
transactions:
<TABLE>
<CAPTION>
1999 1998 1997
--------------------------------------
<S> <C> <C> <C>
Net revenues $ 727 $1,278 $ 343
Operating expenses 778 1,366 755
</TABLE>
STOCK OPTIONS
SFAS No. 123, Accounting for Stock-Based Compensation, prescribes accounting
and reporting standards for all stock-based compensation plans. SFAS No. 123
provides that companies may elect to continue using existing accounting
requirements for stock-based awards or may adopt a new fair value method to
determine the intrinsic value. The Company has elected to continue to account
for its stock-based awards as prescribed by Accounting Principles Board Opinion
No. 25, Accounting for Stock Issued to Employees (APB No. 25).
F-10
<PAGE> 14
Host Communications, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
1. ACCOUNTING POLICIES (CONTINUED)
INCOME TAXES
The Company uses the liability method of recording income taxes in accordance
with Statement of Financial Accounting Standard (SFAS) No. 109. Under this
method, deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between financial statement carrying
amounts of assets and liabilities and their respective tax bases.
FINANCIAL INSTRUMENTS
SFAS No. 107, Disclosures About Fair Values of Financial Instruments, requires
the fair value of financial instruments to be disclosed. The Company's
financial instruments are account receivable, accounts payable, and long term
debt. Because of their nature, the carrying values of these items approximate
fair value.
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.
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 reported amounts of assets and liabilities and
the disclosure of contingent assets and liabilities at the date of the
consolidated financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
F-11
<PAGE> 15
Host Communications, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
1. ACCOUNTING POLICIES (CONTINUED)
RECLASSIFICATIONS
Certain 1998 and 1997 financial statement amounts have been reclassified to
conform with the 1999 presentation.
2. INVESTMENT IN AFFILIATES
The Company has various investments in affiliates that are accounted for on the
equity method.
INVESTMENT IN UNIVERSAL SPORTS AMERICA, INC.
In fiscal 1996, the Company and Streetball Sports Ventures Partners, L.P.
("Streetball") formed Universal Sports America, Inc. ("USA") to offer corporate
sponsors and advertisers the broadest array possible of sponsorship and
promotional opportunities involving college athletics and participatory
sporting events. The Company has a 33.79% ownership on a fully-diluted basis in
USA. The investment carrying amounts increased by the Company's share of the
income and gains of USA of $12,201, $825, and $478, respectively, which was
reported in the Company's 1999, 1998, and 1997 consolidated statements of
income.
Shown below is summarized financial information related to USA:
<TABLE>
<CAPTION>
1999 1998
------------------------
<S> <C> <C>
As of June 30:
Total assets $ 65,888 $ 34,690
Total liabilities 16,612 21,521
</TABLE>
USA sold 395,160 shares of broadcast.com inc. in January 1999 and recognized a
gain of approximately $61,500. HCI recognized its proportionate share of the
gain amounting to approximately $13,500 in January 1999.
F-12
<PAGE> 16
Host Communications, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
2. INVESTMENT IN AFFILIATES (CONTINUED)
Management, Administration and Other Services Agreement
The Company provides management, finance, administrative, production, national
sales, and accounting services to USA in exchange for an annual management fee.
Management fees of $600, $853 and $1,011 were recognized in 1999, 1998 and 1997
respectively. In addition, USA reimbursed the Company for expenses paid on its
behalf of $141 in 1997, none in 1998 or 1999.
INVESTMENT IN CORPORATE MARKETING ASSOCIATES
Effective July 1, 1997, HCI acquired a 45% interest in Corporate Marketing
Associates ("CMA"), a newly formed company engaged in corporate promotions and
advertising, for an initial investment of $125. During 1999, HCI's interest was
diluted to 42.5%. The investment is being accounted for on the equity method of
accounting. HCI recorded income on its investment in CMA during 1999 of $273
and recorded a loss on its investment in CMA during 1998 of $269. In connection
with the acquisition, HCI also entered into various arrangements with CMA on a
fee basis to provide leased employees and various accounting and professional
services and recorded total fees associated with these agreements of $1,427 and
$1,030 in 1999 and 1998, respectively. At June 30, 1999 and 1998, HCI had a
receivable for such fees of $447 and $155, respectively. HCI has also provided
working capital to CMA evidenced by a note receivable from CMA in the amount of
$286 and $250 as of June 30, 1999 and 1998, respectively.
BASKETBALL HALL OF FAME PROPERTIES
In 1999, HCI finalized its investment in Hall of Fame Properties, LLC ("HOFP"),
a joint venture with NBA Properties, Inc. HCI obtained a 25% interest in HOFP
for $741. HOFP has separately entered into a contract with the Naismith
Memorial Basketball Hall of Fame, Inc. ("HOF"), whereby HOFP was granted
exclusive marketing rights for the HOF. Under the terms of the contract, HOFP
will solicit advertising and sponsorship revenues for the HOF which is intended
to help HOF supplement funding for a new museum facility. In exchange for these
exclusive marketing rights, HOFP will pay HOF a guaranteed amount of $2,117 per
year during the first six years of the ten-year contract. The agreement also
calls for net revenue sharing between the parties based on certain revenue
thresholds achieved in excess of the initial guarantee by HOFP.
F-13
<PAGE> 17
Host Communications, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
3. ACQUISITION AND DISPOSITION OF BUSINESSES
On August 1, 1996, HCI acquired 100% of the outstanding common stock of AdCraft
Associates, Inc. ("AdCraft"). The transaction was accounted for under the
purchase method of accounting, and accordingly, the results of AdCraft are
included in the financial statements from the date of acquisition. In
connection with the acquisition, HCI recorded a future obligation under this
agreement in the amount of $712 as a long-term obligations, assuming a discount
rate of 8.5% (see Note 8). The total cost of the acquisition, including direct
costs of the acquisition, was $1,641, and total net deficiency of assets of
AdCraft at the date of the transaction, was $142. The excess of the purchase
price over net assets acquired of $1,783 was recorded as goodwill and is being
amortized over 25 years. Effective October 29, 1997, AdCraft was merged into
HCI.
Effective November 14, 1997, HCI sold certain assets and liabilities associated
with its investment in AdCraft to an individual who was an employee of the
Company in exchange for a $350 promissory note, resulting in a loss of $276.
The promissory note accrues interest at the prime rate and is payable on a
quarterly basis. The note matures on November 30, 1999 at which time the entire
principal amount of the note is due. HCI was also required to buy out the
remaining term of this individual's employment contract in the amount of $250,
pursuant to his terminating his employment in connection with this transaction.
On January 1, 1997, HCI acquired 100% of the outstanding common stock of Wayne
Smith Company ("WSC"). The transaction was accounted for under the purchase
method of accounting, and accordingly, the results of WSC are included in the
financial statements from the date of acquisition. In connection with the
acquisition, HCI granted 8,000 shares of HCI common stock to the previous owner
of WSC. The stock has a put/call option allowing the previous owner to put the
stock back to HCI at the conclusion of his employment agreement in 2002 for a
value of $50 per share, or $400. The agreement also permits HCI to call the
stock at any time upon written notice at $50 per share. At June 30, 1997, the
present value of the future obligation was recorded in the amount of $262 as a
long-term obligation, assuming a discounted rate of 8.5% (see Note 8). The
total cost of the acquisition, including direct costs of the acquisition was
$267, and total net assets of WSC at the date of acquisition were $250. The
excess of the purchase price over net assets acquired of $17 was recorded as
goodwill and is being amortized over 25 years. Effective May 22, 1998, WSC was
merged into HCI.
F-14
<PAGE> 18
Host Communications, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
3. ACQUISITION AND DISPOSITION OF BUSINESSES (CONTINUED)
On June 1, 1998, HCI exchanged its interest in a 50% owned joint venture
engaged in the production and marketing of Internet sites to various colleges
and universities for 418,971 shares of common stock of Total Sports, Inc.
("Total Sports"), representing approximately 15% of the total equity of Total
Sports on a fully diluted basis. Total Sports has access to a significant
database of sports information that it distributes through a variety of media,
including print, graphic design, and Internet. HCI's share of Total Sports at
the time of the exchange was valued at $7.11 per share, or approximately $2,977
resulting in a gain of $2,843.
4. NOTE RECEIVABLE FROM OFFICER
The note receivable from officer consists of a $385 demand note bearing
interest at the prime rate plus 1% (9.5% as of June 30, 1999) with interest
payable monthly. Interest due on the note receivable of $211 and $174 is
included in accounts receivables as of June 30, 1999 and 1998, respectively.
5. PROPERTY AND EQUIPMENT
Property and equipment at June 30 consists of the following:
<TABLE>
<CAPTION>
1999 1998
------------------
<S> <C> <C>
Land $ 448 $ 448
Building 1,136 1,183
Machinery and equipment 4,155 5,738
Leasehold and building improvements 955 955
Furniture and fixtures 1,571 1,581
Computer equipment 3,577 3,268
Autos and trucks 52 64
Construction in progress 104 -
------------------
11,998 13,237
Less accumulated depreciation and amortization 6,909 7,365
------------------
$ 5,089 $ 5,872
==================
</TABLE>
F-15
<PAGE> 19
Host Communications, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
6. ACCRUED EXPENSES
Accrued expenses as of June 30 consist of the following:
<TABLE>
<CAPTION>
1999 1998
----------------
<S> <C> <C>
Guaranteed rights fees $1,065 $1,066
Unbilled payables 2,758 2,906
Profit splits 674 124
Other 565 192
----------------
$5,062 $4,288
================
</TABLE>
7. NOTES PAYABLE
Notes payable under a loan agreement with Bank One Lexington, NA (Bank One) at
June 30, 1999 and 1998 were $2,434 and $6,756, respectively. The agreement
provides a revolving line of credit to $10,000 and expires December 31, 1999.
Interest is payable monthly at Bank One's prime rate or LIBOR plus 175 basis
points as selected by the Company for specified rate periods. The interest rate
on outstanding borrowings was 7.75% as of June 30, 1999. The facility fee is
0.32% per quarter on the average daily unadvanced portion of the revolving line
of credit.
The Bank One loan agreement is secured by accounts receivable and contains
various affirmative and negative covenants as well as specific financial
covenants relating to net worth, coverage ratios, debt ratios, and additional
indebtedness. The Company was in violation of certain of these covenants as of
June 30, 1999. Bank One waived its rights under these events of default at June
30, 1999.
In 1999, the Company borrowed $8,000 from USA, as evidenced by the Company's
promissory note. The note bears interest at 6% per annum, payable monthly. The
principal amount of the note is due upon the earlier of (i) 10 days following
demand made by USA or (ii) immediately upon change in control of the majority
ownership of USA. Interest expense incurred on this note was $164 in 1999.
F-16
<PAGE> 20
Host Communications, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
8. LONG-TERM OBLIGATIONS
Long-term obligations at June 30 consist of the following:
<TABLE>
<CAPTION>
1999 1998
----------------------
<S> <C> <C>
Obligations under acquisition agreements $1,236 $1,136
Obligations under equipment financing:
8.5% secured installment note, payable in monthly installments of
$17 including interest, due on January 5, 2003 610 749
9.0% secured installment note, payable in monthly installments of
$4 including interest, due on November 1, 2002 146 182
8.34% secured installment note, payable in monthly installments of
$4 including interest, due on June 27, 2004
219 262
Other 102 123
Obligations under capital leases -- 225
----------------------
2,313 2,677
Less current maturities 1,513 507
----------------------
Long-term obligations $ 800 $2,170
======================
</TABLE>
Obligations under capital leases relate to the acquisition of computer
equipment and expired during 1999. The amount of assets acquired under capital
leases included in properties and equipment at June 30, 1999 and 1998 was
$1,200. Accumulated amortization on assets under capital leases at June 30,
1999 and 1998 was $1,053 and $870, respectively. Amortization of assets held
under capital lease is included with depreciation expense.
Obligations under acquisition agreements relate to the put/call options issued
in connection with the AdCraft and WSC acquisitions (see Note 3). These
obligations were recorded at the present value of the future obligation based
on the put/call option price of $50 per share issued in the transactions. The
present value for each of these put/call options was based on a discount rate
of 8.5% per annum and are being accrued to their terminal value over the
respective terms of these agreements. Interest expense recorded for the years
ended June 30, 1999, 1998, and 1997 associated with the obligations was $100,
$90, and $69 respectively.
F-17
<PAGE> 21
Host Communications, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
8. LONG-TERM OBLIGATIONS (CONTINUED)
Aggregate annual principal payments of long-term obligations at June 30, 1999:
<TABLE>
<CAPTION>
<S> <C>
2000 $ 1,513
2001 282
2002 291
2003 183
2004 44
-------
$ 2,313
=======
</TABLE>
9. SERIES B REDEEMABLE CUMULATIVE PREFERRED STOCK
On December 15, 1992, the Company authorized 80,000 shares and issued 50,000
shares of Series B Redeemable cumulative preferred stock (Series B) having no
par value per share and $100 stated value per share. Pursuant to certain
agreements entered into in connection with the sale of this Series B, certain
restrictions were placed on transfers of common stock, voting and irrevocable
proxy agreements between certain stockholders and officers of the Company were
entered into and the Company is required to comply with various covenants
related to financial ratios and financial reporting. The Series B stockholders
are entitled to receive, as declared by the Company's Board of Directors,
cumulative cash dividends at an annual rate of $8.00 per share. The dividends
accrue quarterly in arrears and are payable on the dates set forth by the
Company's Board of Directors. Effective June 30, 1997, the Company redeemed
12,500 shares of Series B preferred stock, including cumulative dividends, for
$1,705. The Series B recorded value increased $300 in 1999 and 1998, to reflect
the dividends accrued from the issuance date through June 30, 1999.
Cumulative preferred dividends in arrears at June 30, 1999 were $1,964. The
Company incurred stock issuance costs of $371 which were netted against the
original proceeds and are being accreted to retained earnings.
The Series B shares may be redeemed at agreed-upon rates per share as called by
the Company, and must be redeemed on December 15, 1999. At June 30, 1999, the
cost of redeeming the shares is $5,491 including cumulative dividends.
F-18
<PAGE> 22
Host Communications, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
10. COMMON STOCK OPTION PLANS
The Company has three stock option plans: Directors' Non-Qualified Stock Option
Plan (the "Directors" Plan), Non-Qualified Stock Option Agreements for certain
senior executives (the "Senior Executive Plan"), and Management Committee
Non-Qualified Stock Option Plan (the "Management Committee Plan").
The Directors Plan provides for the grant of options to purchase up to 24,000
shares of common stock of the Company to non-employee directors. The Board of
Directors granted options to purchase 8,000 and 6,000 shares of common stock in
1998 and 1997, respectively. Under the Directors Plan, 50% of the options are
exercisable on the date of grant and 50% of the options are exercisable on the
first anniversary of the date of grant. The option price per share is $3.125.
In 1998, under the Senior Executive Plan, the Company granted to two senior
executives options to purchase 90,000 shares of common stock at $3.125 per
share. These options are exercisable 50% at the date of grant and 50% on or
after June 30, 1999. No additional options are available for grant under the
Senior Executive Plan.
The Management Committee Plan provides for the grant of options to purchase up
to 100,000 shares of common stock of the Company to eligible members of the
Company's Management Committee. The Board of Directors granted options to
purchase 38,000, 24,000, and 19,500 shares of common stock in 1999, 1998, and
1997, respectively. Under the Management Committee Plan, options are
exercisable as follows: 33 1/3% on the first anniversary of the grant date, 33
1/3% on the second anniversary of the grant date, and 33 1/3% on the third
anniversary of the grant date. Options under this plan are exercisable at $6.25
per share.
At June 30, 1999, 1998, and 1997, other outstanding options entitled the
holders (employees and others) to purchase 12,000 shares of common stock at
prices ranging from $11.25 to $22.00 per share through 1999. Options to
purchase 500 shares of common stock were granted in 1998 exercisable as
follows: 33 1/3% on the first anniversary of the grant date, 33 1/3% on the
second anniversary of the grant date, and 33 1/3% on the third anniversary of
the grant date at an exercise price of $6.25 per share.
The expiration date of certain outstanding option awards was extended from
December 31, 1998 to December 31, 1999. Such modification required additional
compensation expense of $365.
F-19
<PAGE> 23
Host Communications, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
10. COMMON STOCK OPTION PLANS (CONTINUED)
On the date of the grant of the stock options in 1999, 1998 and 1997, the fair
value of the Company's common stock exceeded the exercise price of such stock
options. Accordingly, compensation expense was recognized for the years ended
June 30, 1999, 1998, and 1997 in the aggregate amounts of $1,891, $1,610, and
$191 respectively. The fair value for options granted was estimated at the date
of grant using the minimum value options pricing model with the following
weighted average assumptions for fiscal 1999, 1998, and 1997: risk free
interest rate of 5.5%; no dividends expected to be declared; volatility factor
of zero for the expected price of the Company's common stock as it is not
publicly traded; and the expected life of the options of six years. The
weighted average grant date fair value of options was $31 in 1999, $25 in 1998,
and $9 in 1997. Had compensation cost been recognized based on the estimated
fair value of the options on the grant date under the methodology prescribed by
SFAS 123, the Company's net income for the years ended June 30, 1999, 1998, and
1997 would not have been materially different using the "minimum value" method
for valuing the options.
A summary of the Company's stock option activity for the years ended June 30
follows:
<TABLE>
<CAPTION>
1999 1998 1997
-----------------------------------------------------------
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE
-----------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding-beginning of
year 244,500 $4.46 131,500 $5.24 88,500 $5.60
Granted 38,000 6.25 122,500 3.75 43,500 4.53
Exercised (12,500) 6.25 (9,500) 6.25 (500) 6.25
--------------------------------------------------------
Outstanding-end
of year 270,000 $4.63 244,500 $4.46 131,500 $5.24
========================================================
Exercisable at end of year
209,167 $4.15 124,500 $4.63 64,667 $5.65
========================================================
</TABLE>
F-20
<PAGE> 24
Host Communications, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
11. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings
per share before the cumulative effect of a change in accounting principle (in
thousands, except per share data):
<TABLE>
<CAPTION>
1999 1998 1997
---------------------------------
<S> <C> <C> <C>
Numerator
Net income $ 5,737 $ 2,108 $ 1,626
Preferred stock dividends (300) (300) (400)
---------------------------------
Numerator for basic and diluted earnings
per share $ 5,437 $ 1,808 $ 1,226
=================================
Denominator
Weighted average shares for basic earnings
per share 927 913 849
Effect of dilutive securities:
Employee stock options 177 107 26
---------------------------------
Adjusted weighted average shares for
dilutive earnings per share 1,104 1,020 875
=================================
Basic earnings per common share $ 5.87 $ 1.98 $ 1.44
=================================
Diluted earnings per common share $ 4.92 $ 1.77 $ 1.40
=================================
</TABLE>
F-21
<PAGE> 25
Host Communications, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
12. INCOME TAXES
Income tax expense (benefit) consists of the following:
<TABLE>
<CAPTION>
CURRENT DEFERRED TOTAL
--------------------------------
<S> <C> <C> <C>
Year ended June 30, 1999:
Federal $ 507 $ 3,602 $ 4,109
State and local 14 833 847
--------------------------------
Total income tax expense $ 521 $ 4,435 $ 4,956
================================
Year ended June 30, 1998:
Federal $ 321 $ 1,240 $ 1,561
State and local 75 120 195
--------------------------------
Total income tax expense $ 396 $ 1,360 $ 1,756
================================
Year ended June 30, 1997:
Federal $ 16 $ 704 $ 720
State and local (36) 262 226
================================
Total income tax expense $ (20) $ 966 $ 946
================================
</TABLE>
Income tax expense differs from the amounts computed by applying the statutory
U.S. Federal income tax rate to income before income taxes and cumulative
effect of change in accounting principle as a result of the following:
<TABLE>
<CAPTION>
1999 1998 1997
--------------------------------
<S> <C> <C> <C>
Computed "expected" tax expense $ 3,743 $ 1,353 $ 967
Equity in earnings of affiliates - - (258)
State and local income taxes, net of
Federal income tax benefit 552 205 153
Tax benefit of stock options exercised 219 - -
Goodwill amortization 64 - -
Meals and entertainment 104 - -
Contribution carryover 58 - -
Other, net 216 198 84
--------------------------------
Income tax expense $ 4,956 $ 1,756 $ 946
================================
</TABLE>
F-22
<PAGE> 26
Host Communications, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
12. INCOME TAXES (CONTINUED)
The tax effects of temporary differences that give rise to significant portions
of the deferred tax assets and deferred tax liabilities are as follows:
<TABLE>
<CAPTION>
1999 1998
------------------------
<S> <C> <C>
Deferred tax assets:
Investments in affiliates $ 68 $ 176
Accounts receivable 34 43
Change from cash to accrual tax recognition on
acquired business 106 213
Restructuring charges 156 --
Federal and state net operating loss (NOL) carryforwards 47 81
Stock option compensation 1,886 611
Other 74 --
------------------------
Gross deferred tax assets 2,371 1,124
Valuation allowance -- (17)
------------------------
Deferred tax assets, net 2,371 1,107
------------------------
Deferred tax liabilities:
Gains on sale of businesses 3,839 3,841
Equity in earnings of affiliates 5,997 490
Plant and equipment 923 727
Other -- 2
------------------------
Deferred tax liabilities 10,759 5,060
------------------------
Net deferred tax liability $ 8,388 $ 3,953
========================
</TABLE>
13. EMPLOYEE BENEFIT PLANS
The Company provides defined contribution and profit sharing plans which cover
substantially all employees. In 1999 and 1998, the Company matched employee
contributions at 35% within prescribed limits. The Company's expense for these
plans was approximately $61, $85, and $77 in 1999, 1998 and 1997, respectively.
F-23
<PAGE> 27
Host Communications, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
14. COMMITMENTS AND CONTINGENCIES
The Company commits under certain contracts, the nature and terms of which
vary, to the payment of guaranteed rights fees as specified by contract. Future
guaranteed rights fee commitments at June 30, 1999 total $102,625. Included in
this amount is $39,195 representing contracts entered into by the Company from
which the revenues have been transferred to USA. USA has agreed to indemnify
the Company for these commitments.
The Company is also committed under contracts, the nature and terms of which
vary, projects to share the net profits, as specified by contract, with other
parties to the contract. The expense for 1999, 1998 and 1997, under these
arrangements was approximately $3,471, $1,098 and $2,501, respectively.
The Company has various leases for facilities and equipment which are
classified as operating leases. Rent expense for leased facilities and
equipment for 1999, 1998, and 1997 was $837, $908 and $778, respectively. Of
these amounts, rent expense for office facilities of $448 in 1999, $455 in
1998, and $410 in 1997 was paid to two organizations in which a stockholder of
the Company has a 16.0% and 33.3% ownership interest, respectively.
Future commitments associated with operating leases are $4,215 at June 30,
1999.
The total future minimum payments required under the above commitments are as
follows:
<TABLE>
<CAPTION>
<S> <C>
2000 $ 30,422
2001 29,707
2002 33,473
2003 10,120
2004 2,916
Thereafter 202
----------
$ 106,840
==========
</TABLE>
At June 30, 1999, a letter of credit in the amount of $75 was outstanding. This
letter of credit related to a contractual obligation associated with a leased
facility. The Company has also issued an irrevocable letter of credit in the
amount of $14,500 to guarantee the Company's payments to the NCAA for the
second contract year ending August 31, 1999. The letter of credit expires
September 10, 2000, and is secured by the accounts receivable of the Company.
F-24
<PAGE> 28
Host Communications, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
14. COMMITMENTS AND CONTINGENCIES (CONTINUED)
On January 20, 1998, a former salesman filed suit in the United States District
Court for the Northern District of Texas claiming the Company failed to pay
commissions due as a result of his effort to obtain a corporate sponsor
contract. The salesman is seeking damages in the amount of $580,000. A trial is
scheduled to begin in January 2000. A loss, if any, cannot be estimated at this
time. The Company intends to vigorously defend its position and believes it
will ultimately prevail, although there can be no assurances at this time.
The Company is also involved in various claims and legal actions arising in the
ordinary course of business. In the opinion of management, the ultimate
disposition of these matters will not have a significant effect on the
Company's consolidated financial position or results of operations.
15. CONCENTRATION OF CREDIT RISK
During 1999, 1998, and 1997, approximately $24,714 (47%), $21,209 (46%), and
$18,194 (46%), respectively, of the Company's net revenues arose from
sub-licensing NCAA corporate sponsor rights to major corporations. The
Company's current contract with the NCAA, which gives the Company the sole
rights to sub-license NCAA corporate partners, expires August 31, 2002. At June
30, 1999, accounts receivables related to NCAA corporate sponsors included
balances of $5,264, or 52% of total billed accounts receivable. At June 30,
1998, accounts receivables related to NCAA corporate sponsors included balances
of $1,943, or 35% of total billed accounts receivable.
Concentrations of credit risk with respect to accounts receivable are limited
because a large number of geographically diverse customers comprise the
Company's customer base, thus spreading the credit risk. In addition, the
Company controls credit risk through credit approvals, credit limits and other
monitoring procedures.
16. MERGER TRANSACTION
On February 15, 1999, the Company entered into a merger agreement whereby Bull
Run Corporation ("Bull Run"), the direct and indirect holder of 33% of the
Company's common stock and 52% of the Company's preferred stock, agreed to
acquire the stock of Universal Sports America, Inc. ("Universal"), Capital
Sports Properties, Inc. ("Capital") and the Company not currently owned,
directly or indirectly, by Bull Run for approximately $95,000,
F-25
<PAGE> 29
Host Communications, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
16. MERGER TRANSACTION (CONTINUED)
net of cash acquired (the "Bull Run Acquisition"). Pursuant to the merger
agreement, Bull Run will reorganize into a holding company structure
immediately prior to the Bull Run Acquisition whereby each outstanding share of
Bull Run common stock will be converted into one share of a new holding
company, BR Holding, Inc. ("BR Holding"). BR Holding, which will be a publicly
held company, will be owned by the stockholders of Bull Run immediately prior
to such conversion and Bull Run and its subsidiaries will be subsidiaries of BR
Holding. Under the merger agreement, each share of the Company's common stock
(except for shares held by Bull Run and Capital) will be converted into the
right to receive (a) an amount in cash and notes equal to $35.02 and (b) a
number of shares of BR Holding common stock having an aggregate value of
$36.37. This transaction is subject to the terms and conditions of the merger
agreement, which has been approved of the stockholders of Capital, Universal,
Bull Run and the Company. The merger is expected to be effective on or about
December 15, 1999.
17. YEAR 2000 READINESS (UNAUDITED)
The Year 2000 Issue is the result of computer programs being written using two
digits rather than four to define the applicable year. Computer programs or
hardware that have date-sensitive software or embedded chips may recognize a
date using "00" as the year 1900 rather than the year 2000. This could result
in a system failure or miscalculations causing disruptions of operations,
including, but not limited to, a temporary inability to process transactions,
send invoices or engage in similar normal business activities.
The Company completed an assessment of its computer programs equipment and
determined that it would have to modify or replace portions of its hardware and
software so that those systems would function properly with respect to dates
beyond December 31, 1999. A significant portion of the Company's software
systems has been upgraded to become Year 2000 compliant. Several remaining
systems, primarily associated with billing and manufacturing cost systems, have
been evaluated and modifications to such systems to become Year 2000 compliant
are substantially complete. The Company currently expects all modifications to
be complete by November 1999. The Company believes that with the modification
to the existing software and conversion to new software, the Year 2000 issue
will not pose significant operational problems for its computer systems.
F-26
<PAGE> 30
Host Communications, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
17. YEAR 2000 READINESS (UNAUDITED) (CONTINUED)
The Company made inquiries of its important suppliers and subcontractors that
do not share information systems with the Company. The Company has received
assurances from a majority of these external agents that their major systems
impacting the Company will be Year 2000 compliant. Based on these responses to
date, the Company is not aware of any external agent Year 2000 issue that would
materially impact the Company's results of operations, liquidity or capital
resources. However, the Company has no means of ensuring that external agents
will be Year 2000 ready if such assurances are not received. Most inventory and
supplies used in the Company's business, primarily in the printing operation,
are available from more than one supplier and therefore, management's
contingency plans include, but are not limited to, evaluating alternative
vendors who are Year 2000 compliant, as well as evaluating supply and inventory
levels.
The Company is utilizing both internal and external resources to reprogram,
replace, test and implement the software and hardware equipment for the Year
2000 modification. The total cost of the Year 2000 project is not expected to
exceed $500,000, of which $125,000 relates to a three year operating lease
associated with the installation of new computers. The costs associated with
the project are being funded through operating cash flows. To date, the Company
has incurred approximately $350,000 in connection with its Year 2000 compliance
program, the majority of which has been capitalized as part of the software
modifications.
The Company plans to complete the Year 2000 modifications based on management's
best estimates, which were derived utilizing numerous assumptions of future
events, including the continued availability of necessary resources and other
factors. Estimates on the status of completion and the expected completion
dates are based on costs incurred to date compared to total expected costs.
However, there can be no guarantee that these estimates will be achieved and
actual results could differ materially from those plans. Specific factors that
might cause such material differences include, but are not limited to, the
availability and cost of personnel trained in this area, the ability to locate
and correct all relevant computer codes and similar uncertainties.
F-27
<PAGE> 31
Condensed Consolidated Financial Statements
Host Communications, Inc.
and Subsidiaries
Three Months Ended September 30, 1999 and 1998
F-28
<PAGE> 32
Host Communications, Inc. and Subsidiaries
Condensed Consolidated Financial Statements
(Unaudited)
Three months ended September 30, 1999 and 1998
CONTENTS
<TABLE>
<CAPTION>
<S> <C>
Condensed Consolidated Balance Sheet (Unaudited).................................................F-30
Condensed Consolidated Statements of Income (Unaudited)..........................................F-31
Condensed Consolidated Statements of Stockholders' Equity (Unaudited)............................F-32
Condensed Consolidated Statements of Cash Flows (Unaudited)......................................F-33
Notes to Condensed Consolidated Financial Statements (Unaudited).................................F-34
</TABLE>
F-29
<PAGE> 33
Host Communications, Inc. and Subsidiaries
Condensed Consolidated Balance Sheet (Unaudited)
(in thousands, except per share data)
<TABLE>
<CAPTION>
September 30,
1999
-------------
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 37
Accounts receivable, net of allowance for
doubtful accounts of $85 20,825
Due from affiliate 103
Notes receivable from officer 385
Notes receivable 801
Prepaid costs 2,132
Deferred taxes 502
-------
Total current assets 24,785
Property and equipment, net 5,223
Investments in affiliates 25,683
Goodwill, net 1,668
Other assets 1,351
-------
Total assets $58,710
=======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable $ 591
Note payable to affiliate 8,000
Current maturities of long term obligations 1,679
Accounts payable 1,391
Accrued expenses 4,071
Deferred income 14,357
-------
Total current liabilities 30,089
Long term obligations 709
Deferred income taxes 8,890
Commitments and contingencies
Series B redeemable cumulative preferred stock, no par
value, $100 stated and redemption value:
Authorized shares - 80,000
Issued and outstanding shares - 37,500 5,761
Stockholders' equity:
Common stock, no par value:
Authorized shares - 1,500,000
Issued and outstanding shares - 945,283 1,326
Additional paid-in capital 4,036
Retained earnings 7,899
-------
Total stockholders' equity 13,261
-------
Total liabilities and stockholders' equity $58,710
=======
</TABLE>
See accompanying notes.
F-30
<PAGE> 34
Host Communications, Inc. and Subsidiaries
Condensed Consolidated Statements of Operations (Unaudited)
(in thousands, except per share data)
<TABLE>
<CAPTION>
Three months ended September 30,
1999 1998
--------------------------------
<S> <C> <C>
Net revenues $ 9,394 $ 7,845
Cost of revenues 6,766 5,352
------- -------
Gross profit 2,628 2,493
Selling, general and administrative 3,450 4,226
------- -------
Operating loss (822) (1,733)
Other income (expense):
Interest expense (190) (142)
Equity earnings in affiliates (16) (114)
Other , net 34 27
------- -------
Loss before income taxes (994) (1,962)
Income tax benefit (398) (785)
------- -------
Net loss $ (596) $(1,177)
======= =======
Basic and diluted earnings per common share $ (0.72) $ (1.36)
======= =======
</TABLE>
See accompanying notes.
F-31
<PAGE> 35
Host Communications, Inc. and Subsidiaries
Condensed Consolidated Statements of Stockholders' Equity
(Unaudited)
(in thousands, except per share data)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL TOTAL
--------------------------- PAID-IN RETAINED STOCKHOLDER'S
SHARES AMOUNT CAPITAL EARNINGS EQUITY
-------- -------- ---------- -------- -------------
<S> <C> <C> <C> <C> <C>
Balance at June 30, 1999 927,783 $ 1,216 $ 3,911 $ 8,570 $ 13,697
Compensation expense of options 125 125
Stock options exercised 17,500 110 110
Preferred stock dividends (75) (75)
Net loss -- -- -- (596) (596)
-------- -------- -------- -------- --------
Comprehensive income (596)
-------- -------- -------- -------- --------
Balance at September 30, 1999 945,283 $ 1,326 $ 4,036 $ 7,899 $ 13,261
======== ======== ======== ======== ========
</TABLE>
See accompanying notes.
F-32
<PAGE> 36
Host Communications, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows (Unaudited)
(in thousands)
<TABLE>
<CAPTION>
Three months ended
September 30,
------------------------
1999 1998
-------- ---------
<S> <C> <C>
OPERATING ACTIVITIES
Net loss $ (596) $ (1,177)
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Depreciation and amortization 270 314
Equity in earnings of affiliates 16 114
Stock compensation expense 125 425
Changes in operating assets and liabilities, net of
effects of acquired buisiness:
Accounts receivable (7,008) 437
Due from affiliates (237) (604)
Prepaid costs (1,725) (1,179)
Other assets
Accounts payable (534) 473
Accrued expenses (1,159) (2,740)
Deferred revenues 11,995 1,093
Other, net 1,014 (82)
-------- --------
Net cash provided by (used in) operating activities 2,161 (2,926)
INVESTING ACTIVITIES
Additions to property and equipment (353) (327)
Investments in businesses (3) (25)
-------- --------
Net cash used in investing activities (356) (352)
FINANCING ACTIVITIES
Net activity on notes payable (1,966) 3,207
Net payments to acquire stock 110 78
-------- --------
Net cash provided by (used in) financing activities (1,856) 3,285
-------- --------
Net increase (decrease) in cash (51) 7
Cash at beginning of period 88 13
-------- --------
Cash at end of period $ 37 $ 20
======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for interest $ 57 $ 52
======== ========
Cash paid for income taxes $ 12 $ --
======== ========
</TABLE>
See accompanying notes.
F-33
<PAGE> 37
Host Communications, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
(in thousands, except per share data)
1. DESCRIPTION OF THE BUSINESS
The accompanying consolidated financial statements include the accounts of Host
Communications, Inc. (the Company or "HCI"), and its wholly owned subsidiaries.
The Company 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 (a packaged
travel association), Quest (JD 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 in gameday or other programs as
well as advertising in radio and television broadcasts of games. HCI also
produces a broad array of electronic and print media through its broadcast,
printing, publishing and internet divisions as well as maintaining minority
investments in service companies which provide marketing and production support
to its corporate clients and associations.
2. UNAUDITED INTERIM FINANCIAL INFORMATION
The condensed consolidated financial statements as of September 30, 1999 and
for the three months ended September 30, 1999 and 1998 are unaudited, however,
in the opinion of management, reflect all adjustments (consisting of normal
recurring adjustments) necessary for a fair presentation of the financial
position and results of operations for such periods. Operating results for the
three months ended September 30, 1999 and 1998 are not necessarily indicative
of the results that may be expected for the entire year because of the seasonal
nature of the Company's events and sports marketing programs. These financial
statements should be read in conjunction with the consolidated financial
statements, including the notes thereto, for the year ending June 30, 1999,
appearing elsewhere in this document.
3. INCOME TAX BENEFIT
Income tax benefit for the three months ended September 30, 1999 and 1998
differs from the amount of income tax benefit that would result from applying
the domestic federal statutory tax rate to pretax income principally due to
expenditures disallowed for income tax purposes.
4. EARNINGS PER SHARE OF COMMON STOCK
Basic earnings per share is computed by dividing income available to common
shareholders by the weighted average number of common shares outstanding for
the
F-34
<PAGE> 38
Host Communications, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
(in thousands, except per share data)
reporting period. Diluted earnings per share reflect the potential dilution
that could occur if securities or other contracts to issue common stock were
exercised or converted into common stock. Since the company incurred losses for
the three months ending September 30, 1999 and 1998, these amounts would be
considered anti-dilutive and are therefore not included in the calculation. The
following table sets forth the computation of basic and diluted earnings per
share:
<TABLE>
<CAPTION>
Three months ended
September 30,
---------------------
1999 1998
------- -------
<S> <C> <C>
NUMERATOR:
Net loss $ (596) $(1,177)
======= =======
DENOMINATOR:
Weighted average shares for basic and dilutive
earnings per share 930 918
======= =======
Basic and diluted earnings per common share $ (0.72) $ (1.36)
======= =======
</TABLE>
5. PENDING TRANSACTION
On February 15, 1999, the Company entered into a merger agreement whereby Bull
Run Corporation ("Bull Run"), the direct and indirect holder of approximately
13% of the Company's common stock and approximately 15% of the preferred stock,
agreed to acquire the stock of Host, Capital Sports Properties, Inc.
("Capital") and the Company not currently owned, directly or indirectly, by
Bull Run for approximately $95 million, net of cash acquired (the "Bull Run
Acquisition"). Pursuant to the merger agreement, Bull Run will reorganize into
a holding company structure immediately prior to the Bull Run Acquisition
whereby each outstanding share of Bull Run common stock will be converted into
one share of a new holding company, will be owned by the stockholders of Bull
Run immediately prior to such conversion and Bull Run and its subsidiaries will
be subsidiaries of BR Holding. Under the merger agreement, each share of the
Company's common stock and preferred stock (except for shares held by Bull Run,
Capital or Host) will be converted into the right to receive (a) an amount in
cash and notes equal to $35.02 and (b) a number of shares of BR Holding common
stock having an aggregate value of $36.37. This transaction is subject to the
terms and conditions of the merger agreement, including the approvals of the
stockholders of Capital, Host, Bull Run, and the Company. The transaction is
expected to close prior to December 15, 1999.
F-35
<PAGE> 39
Consolidated Financial Statements
Universal Sports America, Inc.
and Subsidiaries
Years ended June 30, 1999, 1998, and 1997
with Reports of Independent Auditors
F-36
<PAGE> 40
Universal Sports America, Inc. and Subsidiaries
Consolidated Financial Statements
Years ended June 30, 1999, 1998, and 1997
<TABLE>
<CAPTION>
CONTENTS
<S> <C>
Report of Independent Auditors............................................ F-38
Audited Financial Statements
Consolidated Balance Sheets............................................... F-39
Consolidated Statements of Income......................................... F-40
Consolidated Statements of Stockholders' Equity........................... F-41
Consolidated Statements of Cash Flows..................................... F-42
Notes to Consolidated Financial Statements................................ F-43
</TABLE>
F-37
<PAGE> 41
Report of Independent Auditors
Board of Directors
Universal Sports America, Inc.
We have audited the accompanying consolidated balance sheets of Universal
Sports America, Inc. and subsidiaries as of June 30, 1999 and 1998, and the
related consolidated statement of operations, stockholders' equity, and cash
flow for the each of the three years in the period ended June 30, 1999. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Universal Sports
America, Inc. and subsidiaries as of June 30, 1999 and 1998, and the results of
their operations and their cash flows for the three years in the period ended
June 30, 1999, in conformity with generally accepted accounting principles.
/s/ ERNST & YOUNG LLP
Dallas, Texas
October 15, 1999
F-38
<PAGE> 42
Universal Sports America, Inc. and Subsidiaries
Consolidated Balance Sheets
<TABLE>
<CAPTION>
JUNE 30, JUNE 30,
1999 1998
----------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $16,498,258 $ 1,551,799
Accounts receivable, net of allowance for
doubtful accounts of $718,859 in 1999 and
$177,828 in 1998 24,382,085 13,756,671
Inventory 193,088 187,840
Prepaid costs 6,176,943 7,448,080
Loan to affiliate 8,044,000 --
Other assets 557,887 435,394
----------------------------
Total current assets 55,852,261 23,379,784
Property and equipment, net 1,490,060 1,451,868
Investments in affiliates 139,861 957,167
Contract investment, net 5,187,833 5,506,268
Goodwill, net 3,077,719 3,162,524
Other intangible assets, net 140,534 232,400
----------------------------
Total assets $65,888,268 $34,690,011
============================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable 3,466,432 2,641,748
Accrued rights fees 5,467,879 3,297,336
Accrued expenses 2,674,906 2,258,475
Deferred revenues 1,393,814 1,197,693
Deferred income taxes 1,826,821 2,473,585
Payable to affiliate -- 924,537
----------------------------
Total current liabilities 14,829,852 12,793,374
Long-term debt -- 7,245,000
Deferred income taxes 1,782,243 1,483,032
Series A redeemable convertible preferred stock, $1 par
value, $4,900,000 aggregate liquidation value:
Authorized shares - 600
Issued and outstanding shares - 490 4,900,000 4,900,000
Commitments and contingencies
Stockholders' equity:
Common stock, $1 par value:
Authorized shares - 10,000
Issued and outstanding shares - 1,640.5 1,640 1,640
Additional paid-in capital 3,491,516 3,491,516
Retained earnings 40,883,017 4,775,449
----------------------------
Total stockholders' equity 44,376,173 8,268,605
----------------------------
Total liabilities and stockholders' equity $65,888,268 $34,690,011
============================
</TABLE>
See accompanying notes.
F-39
<PAGE> 43
Universal Sports America, Inc. and Subsidiaries
Consolidated Statements of Operations
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
1999 1998 1997
--------------------------------------------------
<S> <C> <C> <C>
Revenues $ 68,280,538 $ 62,938,661 $ 52,871,781
Operating expenses:
Operating expenses 48,793,571 38,535,817 35,203,931
Selling, general and administrative 23,055,094 18,687,042 14,647,035
Depreciation and amortization 1,103,547 977,563 687,666
--------------------------------------------------
Total operating expenses 72,952,212 58,200,422 50,538,632
--------------------------------------------------
Operating income (loss) (4,671,674) 4,738,239 2,333,149
Other income (expense):
Interest income 936,904 -- --
Interest expense (476,019) (571,127) (140,122)
Equity in earnings of affiliates -- 220,840 101,451
Gain on sale of marketable security 61,470,504 -- --
Other -- (382,271) 182,635
--------------------------------------------------
Income before income taxes 57,259,715 4,005,681 2,477,113
Income tax provision 21,152,147 1,567,117 880,444
--------------------------------------------------
Net income $ 36,107,568 $ 2,438,564 $ 1,596,669
==================================================
Basic earnings per common share $ 22,010.10 $ 1,486.47 $ 973.28
==================================================
Diluted earnings per common share $ 16,947.93 $ 1,144.59 $ 749.43
==================================================
</TABLE>
See accompanying notes.
F-40
<PAGE> 44
Universal Sports America, Inc. and Subsidiaries
Consolidated Statements of Stockholders' Equity
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL RETAINED TOTAL
---------------- PAID-IN RETAINED STOCKHOLDER'S
SHARES AMOUNT CAPITAL EARNINGS EQUITY
------ ------ ---------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Balance at June 30, 1996 1,640 $1,640 $3,491,516 $ 740,216 $ 4,233,372
Net income -- -- -- 1,596,669 1,596,669
----- ------ ---------- ----------- -----------
Balance at June 30, 1997 1,640 1,640 3,491,516 2,336,885 5,830,041
Net income -- -- -- 2,438,564 2,438,564
----- ------ ---------- ----------- -----------
Balance at June 30, 1998 1,640 1,640 3,491,516 4,775,449 8,268,605
Net income -- -- -- 36,107,568 36,107,568
----- ------ ---------- ----------- -----------
Balance at June 30, 1999 1,640 $1,640 $3,491,516 $40,883,017 $44,376,173
===== ====== ========== =========== ===========
</TABLE>
See accompanying notes.
F-41
<PAGE> 45
Universal Sports America, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
1999 1998 1997
----------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income $ 36,107,568 $ 2,438,564 $ 1,596,669
Adjustments to reconcile net income to net cash used
in operating activities:
Gain on sale of marketable securities, net of tax (41,033,504) -- --
Amortization 474,441 456,335 425,896
Depreciation 629,106 521,228 261,770
Equity in earnings of affiliates -- (220,840) (101,451)
Deferred income taxes (347,553) 547,517 615,535
Changes in operating assets and liabilities, net of
effects of acquired business:
Accounts receivable (10,625,414) (5,960,261) (2,723,442)
Inventory (5,248) (65,856) 156,560
Prepaid costs 1,271,137 (2,029,142) (3,345,165)
Other assets (122,493) 62,867 (367,960)
Accounts payable and accrued expenses 3,411,658 3,080,318 2,014,854
Deferred revenues 196,121 (1,385,649) 717,425
Payable to affiliate (924,537) (288,264) (985,500)
------------ ------------ ------------
Net cash used in operating activities (10,968,718) (2,843,183) (1,734,809)
INVESTING ACTIVITIES
Additions to property and equipment (667,298) (548,683) (968,919)
Proceeds from sale of marketable securities, net of tax 41,079,856 -- --
Distribution from Street Hoops International 500,000 -- --
Other 291,619 -- (226,609)
------------ ------------ ------------
Net cash provided by (used in) investing activities 41,204,177 (548,683) (1,195,528)
FINANCING ACTIVITIES
Loan to affiliate (8,044,000) -- --
Borrowings on long-term debt -- 4,225,000 3,020,000
Repayments of notes payable (7,245,000) -- (650,000)
Other -- (81,547) --
------------ ------------ ------------
Net cash provided by (used in) financing activities (15,289,000) 4,143,453 2,370,000
------------ ------------ ------------
Net increase (decrease) in cash 14,946,459 751,587 (560,337)
Cash at beginning of period 1,551,799 800,212 1,360,549
------------ ------------ ------------
Cash at end of period $ 16,498,258 $ 1,551,799 $ 800,212
============ ============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
------------ ------------ ------------
Cash paid for interest $ 476,019 $ 553,023 $ 140,122
============ ============ ============
Cash paid for income taxes $ 20,437,000 $ 150,000 $ 99,070
============ ============ ============
</TABLE>
See accompanying notes.
F-42
<PAGE> 46
Universal Sports America, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
1. ORGANIZATION AND DESCRIPTION OF THE BUSINESS
ORGANIZATION
The accompanying consolidated financial statements include the accounts of
Universal Sports America, Inc. (the Company), and its wholly owned
subsidiaries, Universal Sports America, Inc. I, Streetball Sports Ventures
Partners, L.P. (Streetball), and USA Collegiate, L.P. (USA Collegiate).
DESCRIPTION OF BUSINESS
The Company, through its Streetball and Collegiate divisions, is a leading
provider of sports marketing and event management products and services to
national and international corporate sponsors, athletic institutions (high
school and collegiate sports), and grassroots sports participants. The Company
owns or controls sports-related products, services or events ("properties")
that have demonstrated commercial appeal to advertisers and consumers.
Specifically, during the year ended June 30, 1997, Company properties included,
among others, the production and management of over 250 grass roots sporting
events throughout the United States and 27 foreign countries and the management
of 16 exclusive sports marketing contracts for United States based universities
and athletic conferences.
2. SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements of the Company include all subsidiaries
which are over 50% owned and controlled by the Company. Significant
intercompany balances and transactions have been eliminated. Investments in
unconsolidated companies which are 20% to 50% owned are accounted for using the
equity method. Investments which are less than 20% are carried at cost.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with original maturities of
three months or less to be cash equivalents.
INVENTORY
Inventories are value at the lower of cost or market using the specific
identification method.
F-43
<PAGE> 47
Universal Sports America, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
PREPAID COSTS
The Company incurs significant costs directly relating to future events. Such
costs include, but are not limited to, production costs, amounts paid under
guaranteed rights fee arrangements, rent, insurance, tents, banners, and
trophies. These costs are recorded as prepaid costs at year-end and are charged
to expense as the related events occur.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost. The Company charges depreciation
to operations on a straight-line basis over the estimated useful lives
(generally three to seven years) of the related property and equipment.
INTANGIBLE ASSETS
In connection with the 1995 reverse acquisition of USA Collegiate from Host
Communications, Inc. (Host), contracts, and relationships with universities,
athletic conferences, and associations of USA Collegiate were recorded at their
estimated fair value as contract investment and are amortized straight-line
over an estimated useful life of 20 years. Contract investment accumulated
amortization totaled $1,180,863 and $862,428 at June 30, 1999 and 1998,
respectively. Goodwill related to the USA Collegiate acquisition is being
amortized on a straight-line basis over 40 years. At June 30, 1999 and 1998,
goodwill accumulated amortization totaled $314,480 and $229,675, respectively.
The Company periodically reevaluates the propriety of the carrying amounts of
its intangibles as well as the related amortization period to determine whether
current events and circumstances warrant adjustments to the carrying amounts
and/or revised estimates of useful lives. If events and circumstances warrant
revaluation of the carrying value, it would be based on the Company's
projection of the undiscounted operating cash flows over the remaining lives of
the amortization periods of the related intangible assets.
F-44
<PAGE> 48
Universal Sports America, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
BARTER ASSETS OR SERVICES
Barter assets or services are recognized at the estimated fair value of the
product or service received. The estimated fair value of these assets and
services are recognized as sponsor revenues and as event management and
operations expenses as used. Any unused amounts are capitalized as other assets
and the sponsor revenue is deferred until the related event occurs. The total
value of barter assets or services received was approximately $1,124,000,
$1,200,000 and $1,055,000 for the years ended June 30, 1999, 1998 and 1997,
respectively.
REVENUE RECOGNITION
The Company's revenues are principally derived from sponsorship revenue and
registration fees. Corporate sponsor license fee revenues and advertising
revenue are recognized as the related events occur. Registration fees are
received from individuals and teams participating in events and are recognized
as each event occurs.
INCOME TAXES
The Company uses the liability method for recording income taxes. Deferred tax
assets and liabilities are recognized for the future tax consequences
attributable to differences between financial statement carrying amounts of
assets and liabilities and their respective tax bases.
CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Company to concentration of
credit risk are accounts receivable. The Company performs ongoing credit
evaluation of its sponsors and generally does not require collateral. The
Company maintains an allowance for losses based upon the expected
collectibility of all accounts receivable.
F-45
<PAGE> 49
Universal Sports America, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and the disclosure
of contingent assets and liabilities at the date of the financial statements
and the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
EARNINGS PER SHARE OF COMMON STOCK
Basic earnings per share is computed by dividing income available to common
shareholders by the weighted average number of common shares outstanding for
the reporting period. Diluted earnings per share reflect the potential dilution
that could occur if securities or other contracts to issue common stock were
exercised or converted into common stock. Outstanding stock options and the
Series A redeemable convertible preferred stock represent additional securities
reflected in the diluted weighted average shares outstanding. The following
table sets forth the computation of basic and diluted earnings per share:
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
1999 1998 1997
--------------------------------------------
<S> <C> <C> <C>
NUMERATOR:
Net income available to common shareholders $36,107,568 $ 2,438,564 $1,596,669
===========================================
DENOMINATOR:
Weighted average shares for basic earnings per share 1,640.5 1,640.5 1,640.5
Effect of dilutive securities:
Redeemable convertible preferred stock 490.0 490.0 490.0
-------------------------------------------
Adjusted weighted average shares for dilutive earnings
per share 2,130.5 2,130.5 2,130.5
===========================================
Basic earnings per common share $ 22,010.10 $ 1,486.47 $ 973.28
===========================================
Diluted earnings per common share $ 16,947.93 $ 1,144.59 $ 749.43
===========================================
</TABLE>
F-46
<PAGE> 50
Universal Sports America, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
FINANCIAL INSTRUMENTS
The Company's financial instruments are accounts receivable, accounts payable,
and long term debt. Because of their short-term nature, the carrying amounts of
these items approximate fair value.
STOCK OPTIONS
The Company accounts for stock-based employee compensation arrangements in
accordance with the provisions of Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees ("APB 25"), and complies with the
disclosure provisions of Statement of Financial Accounting Standards No. 123,
Accounting for Stock Based Compensation ("FAS 123"). Under APB 25, compensation
cost is recognized over the vesting period based on the difference, if any, on
the date of grant between the fair market value of the Company's common stock
and the exercise price of the stock option granted. The Company's policy is to
grant options with an exercise price equal to the fair market value of the
Company's common stock on date of the grant.
NEW ACCOUNTING STANDARDS
Effective July 1, 1998, the Company adopted Statement of Financial Accounting
Standards No, 130, Reporting Comprehensive Income ("SFAS 130"). Under provision
of SFAS 130, there are no items other than net income that would be classified
as part of comprehensive income.
Effective June 30, 1999, the Company adopted Statement of Financial Accounting
Standards No. 131, (SFAS No. 131) Disclosures About Segments of an Enterprise
and Related Information. SFAS No. 131 establishes standards for the way that
public business enterprises report information about operating results in
annual financial statements and selected information in interim financial
statements issued to shareholders. See Note 14 segment disclosures.
RECLASSIFICATION
Certain prior year amounts have been reclassified to conform to current year
presentation.
F-47
<PAGE> 51
Universal Sports America, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
3. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
JUNE 30,
1999 1998
---------------------------
<S> <C> <C>
Machinery and equipment 1,266,773 $ 1,230,739
Computer equipment and software 1,576,462 1,178,374
Furniture and fixtures 545,161 414,202
Other 94,312 8,250
---------------------------
Property and equipment 3,482,708 2,831,565
Accumulated depreciation (1,992,648) (1,379,697)
---------------------------
Property and equipment, net $ 1,490,060 $ 1,451,868
=========== ===========
</TABLE>
4. LONG-TERM DEBT
The Company had a revolving line of credit agreement with a bank that provided
for borrowings of up to $13.0 million. There were $7.2 million in borrowings
outstanding at June 30, 1998. Interest on any outstanding borrowings was
incurred based on the prime rate or LIBOR rate. On January 31, 1999, the
Company terminated the agreement and repaid all outstanding borrowings with a
portion of the proceeds from the sale of the marketable security, see Note 12.
5. RELATED PARTY TRANSACTIONS
The Company and NBC Sports Ventures, Inc. (NBC Sport Ventures), a current
stockholder of the Company, entered into a television rights agreement with NBC
Sports, Inc. (NBC Sports), an affiliate of NBC Sport Ventures. The terms of the
contract require the Company to reimburse NBC Sports, for production costs
incurred to broadcast the Company's "3 on 3" basketball tour finals. For the
years ended June 30, 1999, 1998, and 1997, the production costs reimbursed to
NBC Sports, totaled $377,417, $364,680, and $336,241, respectively, which
amounts are included in event management and operations expense in the
accompanying consolidated financial statements.
F-48
<PAGE> 52
Universal Sports America, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
5. RELATED PARTY TRANSACTIONS (CONTINUED)
During 1997 and for the first quarter of fiscal 1998, Host, a stockholder of
the Company, performed certain finance and management services for the Company
under a fiveyear agreement for an annual fee of approximately $1,200,000. The
Company incurred expenses of approximately $250,000 and $1,200,000 under this
agreement for the years ended June 30, 1998 and 1997. Amounts under this
agreement are included in selling, general, and administrative expenses. This
agreement was terminated on October 1, 1997. In addition, the Company purchased
certain printed material from Host Communications, totaling approximately
$3,600,000, $3,900,000, and $2,300,000 for the years ended June 30, 1999, 1998,
and 1997, respectively. Amounts due Host Communications for services and
purchases totaled approximately $300,000 as of June 30, 1998.
Effective July 1, 1998, the Company renewed for an additional year a one-year
consulting agreement originally entered into with Host on July 1, 1997.
Pursuant to the renewed agreement, certain executives of Host will continue to
provide consulting services to the Company, and as compensation, the Company
will pay Host an aggregate consulting fee of $600,000 in each year of the
agreement. During the term of the agreement and for two years after termination
of the agreement, Host will be subject to a non-compete agreement. Similar
consulting services were provided in 1997 in the amount of approximately
$600,000.
On February 24, 1999, the Company loaned Host, $8 million in the form of a
promissory note. The note bears interest at 6% per annum, payable monthly
beginning in March 1999. The principal amount of the note is due upon the
earlier of (i) 10 days following demand made by the Company or (ii) immediately
upon change in control of the majority ownership of the Company.
At June 30, 1999 and 1998, the Company had a total of $472,797 and $416,045 in
accounts receivable from various stockholders and affiliates.
6. EMPLOYEE BENEFITS
The Company has a qualified 401(k) plan (the 401(k) Plan) whereby participants
may contribute portions of their annual compensation to the 401(k) Plan and
matching contributions are to be made by the Company based on criteria set
forth in the 401(k) Plan agreement. For the years ended June 30, 1999, 1998 and
1997, the Company's expense under the Plan was $123,254, $55,449 and $21,486,
respectively.
F-49
<PAGE> 53
Universal Sports America, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
7. SERIES A REDEEMABLE CONVERTIBLE PREFERRED STOCK
In conjunction with the acquisition of USA Collegiate, 490 shares of Series A
Redeemable Convertible Preferred Stock were issued to various investors. The
preferred shareholders have the right to receive dividends declared by the
Company on the same basis as the common shareholders. Each share of preferred
stock is entitled to one vote per share on all matters submitted to a vote of
the shareholders of the Company. The Company can redeem any outstanding
preferred stock three years after its issuance date. The preferred shareholders
can demand redemption of their preferred shares six years after their issuance
date. At any time after the issuance of their shares, the preferred
shareholders can convert their preferred stock into common stock at a one for
one exchange rate. In the case of the Company's liquidation, each preferred
shareholder is entitled to a liquidation preference of $10,000 plus any accrued
dividends unless the liquidation cannot be sufficed by the Company's assets,
then any such liquidating distribution will be on a pro-rata basis with the
common stock shareholders.
8. STOCK OPTIONS
The Company has a 1996 Employee Stock Option Plan (the "Option Plan") under
which the Company's Board of Directors is authorized to grant options to key
employees for the purchase of common stock at a price not less than the
estimated fair value at the date of grant. The Option Plan provides that the
estimated fair value of the Company's common stock is to be determined by the
Board of Directors based on an independent valuation. Options under the Option
Plan can be issued as either Non-qualified Stock Options (NSOs) or Incentive
Stock Options (IS0s). NSOs expire in seven years and ISOs expire in five years.
Each option granted to an optionee vests according to the respective option
agreement, but generally vest over three or four years.
F-50
<PAGE> 54
Universal Sports America, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
8. STOCK OPTIONS (CONTINUED)
Stock option transactions in the Options Plan for years ended June 30 are
summarized as follows:
<TABLE>
<CAPTION>
1999 1998 1997
--------------------- --------------------- ---------------------
WEIGHTED WEIGHTED WEIGHTED
NUMBER AVERAGE NUMBER AVERAGE NUMBER AVERAGE
OF EXERCISE OF EXERCISE OF EXERCISE
OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE
------- -------- ------- -------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
Options outstanding at
beginning 96 $10,000 96 $10,000 48 $10,000
of year
Options granted 72 17,000 -- -- 48 10,000
Options forfeited -- -- -- -- --
Options exercised -- -- -- -- -- --
--- ------- -- ------- -- -------
Options outstanding at end
of year 168 $13,000 96 $10,000 96 $10,000
=== ======= == ======= == =======
Options exercisable at end
of year 60 $10,000 36 $10,000 12 $10,000
=== ======= == ======= == =======
Weighted-average grant
date fair value of options
granted during the year $4,183 $ -- $ 2,450
====== ======= =======
</TABLE>
At June 30, 1999, the weighted-average remaining contractual life of the
options is 5.22 years.
Pro forma information regarding net income attributable to common stockholders
is required by FAS 123, and has been determined as if the Company had accounted
for employee stock options granted under the fair value method. In 1999 and
1997, the fair value for options granted was estimated at the date of grant
using a minimum value option pricing model with the following weighted-average
assumptions: risk-free interest rates of 5.71 - 5.62%; no dividends expected to
be declared; volatility factor of zero for the expected price of the Company's
common stock as it is not publicly traded; and the expected life of the options
of 5 years.
F-51
<PAGE> 55
Universal Sports America, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
8. STOCK OPTIONS (CONTINUED)
The pro forma effect on net income is as follows:
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
1999 1998 1997
--------------------------------------------
<S> <C> <C> <C>
Net Income:
As reported $36,107,568 $2,438,564 $1,596,669
Pro forma $36,036,432 $2,400,560 $1,569,204
Earnings per share:
As reported basic $ 22,010.10 $ 1,486.47 $ 973.28
As reported diluted $ 16,947.93 $ 1,144.59 $ 749.43
Pro forma basic $ 21,966.74 $ 1,463.31 $ 965.54
Pro forma diluted $ 16,914.54 $ 1,126.76 $ 736.54
</TABLE>
9. INCOME TAXES
Income tax expense (benefit) attributable to income before income taxes consists
of the following:
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
-------------------------------------------------
1999 1998 1997
-------------------------------------------------
<S> <C> <C> <C>
Current:
Federal $ 21,299,700 $ 889,440 $ 239,909
State 200,000 130,160 25,000
Deferred (347,553) 547,517 615,535
------------ ------------ ------------
$ 21,152,147 $ 1,567,117 $ 880,444
============ ============ ============
</TABLE>
Actual income tax expense differs from the "expected" income tax expense
(computed by applying the U.S. federal corporate tax rate to income before
income taxes) as follows:
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
-------------------------------------------
1999 1998 1997
-------------------------------------------
<S> <C> <C> <C>
Computed "expected" tax expense $20,040,271 $ 1,361,932 $ 842,218
State income taxes, net of federal benefit 132,000 85,906 16,500
Meals and entertainment 167,058 117,507 --
Other, net 812,818 1,772 21,726
----------- ----------- ---------
$21,152,147 $ 1,567,117 $ 880,444
=========== =========== =========
</TABLE>
F-52
<PAGE> 56
Universal Sports America, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
9. INCOME TAXES (CONTINUED)
The tax effects of temporary differences that give rise to significant portions
of the deferred tax assets and deferred tax liabilities are as follows:
<TABLE>
<CAPTION>
JUNE 30
--------------------------
1999 1998
--------------------------
<S> <C> <C>
Deferred tax assets:
Charitable contributions carryforward $ -- $ 612,912
Accounts receivable allowance 244,412 58,762
Other 154,082 121,934
---------- ----------
Total deferred tax assets 398,494 793,608
Deferred tax liabilities:
Intangible assets, principally due to
difference in amortization 1,799,561 2,080,514
Prepaid costs 2,071,234 2,532,347
Other 136,763 137,364
---------- ----------
Total deferred tax liabilities 4,007,558 4,750,225
---------- ----------
Net deferred tax liability $3,609,064 $3,956,617
========== ==========
</TABLE>
10. COMMITMENTS AND CONTINGENCIES
The Company is party to several long-term national sponsorship agreements which
obligate the Company to provide advertising (including commercials for the NBC
Sports broadcast of the tour) and other services at a minimum number of events
for each tour in exchange for cash payments, goods, and services.
The Company and NBC Sports Ventures are parties to a license and affiliation
agreement with NBA Properties, Inc. ("NBA Properties"), which expired December
31, 1997 and renewed on January 1, 1999. As part of the agreement, a joint
venture was formed between the Company and NBC Sports Ventures and was granted
the exclusive right to use the National Basketball Association (NBA) trademark
in promoting and operating the three-on-three basketball events. In
consideration, NBA Properties is entitled to 7.5% of net participant
registration fees (license fees) and 7.5% of certain sponsorship payments made
by NBA sponsors (sponsorship commissions), as defined therein. Further, NBA
Properties has directed the cash payment of the license fees to a charitable
organization that it supports. Amounts paid on behalf of NBA Properties to the
charitable organization were no amount, $128,066, and $118,011 for the years
ended June 30, 1999, 1998, and 1997.
F-53
<PAGE> 57
Universal Sports America, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
10. COMMITMENTS AND CONTINGENCIES (CONTINUED)
Certain agreements between the Company and various universities require the
Company to guarantee the university a rights fee to provide marketing and
production services. Total minimum payments required under the Company's
commitment to pay future guaranteed rights fees are as follows:
<TABLE>
<S> <C>
2000 $11,036,000
2001 8,370,000
2002 8,776,000
2003 8,823,000
2004 2,190,000
===========
$39,195,000
===========
</TABLE>
The Company leases certain facilities and equipment under noncancelable
operating leases. Rent expense incurred under the leases during the years ended
June 30, 1999, 1998, and 1997 was $990,454, $894,445 and $615,908,
respectively. These agreements, which expire on various dates through the year
2002, require future minimum rental payments as follows:
<TABLE>
<S> <C>
2000 $ 1,463,890
2001 1,544,705
2002 1,394,047
2003 1,220,470
2004 635,994
Thereafter --
===========
$ 6,259,106
===========
</TABLE>
11. INVESTMENTS IN AFFILIATES
As of June 30, 1996, the Company had a 50.01% non controlling interest in
Street Hoops International (SHI). On April 17, 1997, the other partner in SHI
agreed to purchase .01% of the Company's general partner interest in SHI. Such
sale reduced the Company's interest in SHI to 50%. Accordingly, the Company has
accounted for its investments in SHI using the equity method for the years
ended June 30, 1997 and 1998. Subsequent to June 30, 1998, the partnership was
dissolved and the Company received a cash distribution of $500,000.
F-54
<PAGE> 58
Universal Sports America, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
12. MARKETABLE SECURITY
At June 30, 1998, the Company owned 395,160 shares of broadcast.com inc. common
stock with a cost basis of $46,350. The cost basis of the investment was
determined based on the fair market value of the equipment donated to
broadcast.com inc. in exchange for the shares of common stock. In January 1999,
the Company sold all of its shares for total net proceeds of $61,516,854 with a
resulting pre-tax gain of $61,470,504.
13. PENDING TRANSACTION
On February 15, 1999, the Company entered into a merger agreement whereby Bull
Run Corporation ("Bull Run"), the direct and indirect holder of approximately
13% of the Company's common stock and approximately 15% of the preferred stock,
agreed to acquire the stock of Host, Capital Sports Properties, Inc.
("Capital") and the Company not currently owned, directly or indirectly, by
Bull Run for approximately $95 million, net of cash acquired (the "Bull Run
Acquisition"). Pursuant to the merger agreement, Bull Run will reorganize into
a holding company structure immediately prior to the Bull Run Acquisition
whereby each outstanding share of Bull Run common stock will be converted into
one share of a new holding company, will be owned by the stockholders of Bull
Run immediately prior to such conversion and Bull Run and its subsidiaries will
be subsidiaries of BR Holding. Under the merger agreement, each share of the
Company's common stock and preferred stock (except for shares held by Bull Run,
Capital or Host) will be converted into the right to receive (a) an amount in
cash equal to $27 million and (b) a number of shares of BR Holding common stock
having an aggregate value of $16.75 million. This transaction is subject to the
terms and conditions of the merger agreement, including the approvals of the
stockholders of Capital, Host, Bull Run, and the Company. The transaction is
expected to close prior to December 31, 1999.
14. SEGMENT INFORMATION
The Company operates in two business segments through its Streetball and
Collegiate divisions. The Company evaluates performance and allocates resources
based on operating profit or loss. The accounting policies of the Company's two
segments are the same as those described in the summary of significant
accounting policies. The following represents segment information for the
Company's segments (in thousands):
F-55
<PAGE> 59
Universal Sports America, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
14. SEGMENT INFORMATION (CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
1999 1998 1997
----------------------------------
<S> <C> <C> <C>
NET SALES
Streetball $ 26,809 $ 27,260 $ 21,805
Collegiate 41,472 35,679 31,067
----------------------------------
$ 68,281 62,939 $ 52,872
==================================
OPERATING PROFIT (LOSS)
Streetball $ 3,442 $ 7,415 $ 6,092
Collegiate 2,568 4,436 2,821
Unallocated corporate expenses (10,682) (7,113) (6,580)
----------------------------------
Total operating profit (loss) (4,672) 4,738 2,333
Interest income (expense) 461 (571) (140)
Other income (expense) -- (382) 183
Equity in earinings of affiliates -- 221 101
Gain on sale of marketable equity security 61,471 -- --
----------------------------------
Total pretax profit (loss) $ 57,260 $ 4,006 $ 2,477
==================================
CAPITAL EXPENDITURES
Streetball $ 326 $ 490 $ 887
Collegiate 103 64 81
General corporate 238 4 --
----------------------------------
$ 667 $ 558 $ 968
==================================
DEPRECIATION/AMORTIZATION
Streetball $ 45 $ 504 $ 214
Collegiate 97 63 71
General corporate 962 411 403
----------------------------------
$ 1,104 $ 978 $ 688
==================================
ASSETS
Streetball $ 16,567 $ 9,967 $ 8,390
Collegiate 14,254 10,779 6,686
General corporate 35,067 13,944 10,997
----------------------------------
$ 65,888 $ 34,690 $ 26,073
==================================
</TABLE>
F-56
<PAGE> 60
Universal Sports America, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
15. YEAR 2000 COMPLIANCE (UNAUDITED)
The Year 2000 issue is the result of computer programs being written using two
digits rather than four to define the applicable year. Computer programs or
hardware that have date-sensitive software or embedded chips may recognize a
date using "00" as the year 1900 rather than the year 2000. This could result
in a system failure or miscalculations causing disruptions of operations,
including, but not limited to, a temporary inability to process transactions,
send invoices, or engage in similar normal business activities.
The Company completed an assessment of its computer and other systems and
equipment and determined that it would have modify or replace portions of its
hardware and software so that those systems would function properly with
respect to dates beyond December 31, 1999. A significant portion of the
software systems have been upgraded to become Year 2000 compliant. Several
remaining systems primarily associated with the Company's contract management
and event systems have been evaluated and modifications to such systems to
become Year 2000 compliant are substantially complete. USA expects all
modifications to be complete by December 15, 1999. The Company believes that
with modification to the existing software and conversion to new software, the
Year 2000 issue will not pose significant operational problems for its computer
systems.
The Company intends to make inquiries of its important suppliers and
subcontractors that do not share information systems with the Company (external
agents) as to their Year 2000 compliance. The Company expects to complete these
inquiries by December 15, 1999. The Company expects to receive assurances from
those external agents that their major systems will be Year 2000 compliant.
Because of the service nature of the Company's business and the fact that
revenues are not dependent upon the receipt and sale of inventory, the Company
does not believe that the failure of a significant number of external agents to
be Year 2000 compliant would materially impact the Company's results of
operations, liquidity or capital resources. Therefore, management has not
developed a contingency plan and does not believe such a plan is necessary.
The Company will use both internal and external resources to reprogram,
replace, test and implement the software and hardware equipment for the Year
2000 modification. The total cost of the Company's Year 2000 project is not
expected to exceed $200,000. This cost will be funded through operating cash
flows. To date, the Company has incurred approximately $100,000, the majority
of which has been capitalized as part of the software modifications.
F-57
<PAGE> 61
Universal Sports America, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
15. YEAR 2000 COMPLIANCE (UNAUDITED) (CONTINUED)
The Company's plans to 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 necessary resources,
and other factors. Estimates on the status of completion and the expected
completion dates are based on costs incurred to date compared to total expected
cost. However, there can be no guarantee that these estimates will be achieved
and actual results could differ materially from those plans. Specific factors
that might cause such material differences include, but are not limited to, the
availability and cost of personnel trained in this area, the ability to locate
and correct all relevant computer codes and similar uncertainties.
F-58
<PAGE> 62
Condensed Consolidated Financial Statements
Universal Sports America, Inc.
and Subsidiaries
Three Months Ended September 30, 1999 and 1998
F-59
<PAGE> 63
Universal Sports America, Inc. and Subsidiaries
Condensed Consolidated Financial Statements
(Unaudited)
Three months ended September 30, 1999 and 1998
CONTENTS
<TABLE>
<CAPTION>
<S> <C>
Condensed Consolidated Balance Sheet (Unaudited)..................................................... F-61
Condensed Consolidated Statements of Income (Unaudited).............................................. F-62
Condensed Consolidated Statements of Stockholders' Equity (Unaudited)................................ F-63
Condensed Consolidated Statements of Cash Flows (Unaudited).......................................... F-64
Notes to Condensed Consolidated Financial Statements (Unaudited)..................................... F-65
</TABLE>
F-60
<PAGE> 64
Universal Sports America, Inc. and Subsidiaries
Condensed Consolidated Balance Sheet (Unaudited)
(in thousands, except per share data)
<TABLE>
<CAPTION>
September 30,
1999
-------------
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents $11,625
Accounts receivable, net of allowance for
doubtful accounts of $718,859 27,372
Inventory 118
Prepaid costs 7,756
Loan to affiliate 8,000
Other assets 279
-------
Total current assets 55,150
Property and equipment, net 1,652
Investments in affiliates 140
Contract investment, net 5,108
Goodwill, net 3,057
Other intangible assets, net 163
-------
Total assets $65,270
=======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,164
Accrued rights fees 3,591
Accrued expenses 3,827
Deferred revenues 2,963
Deferred income taxes 1,827
-------
Total current liabilities 14,372
Deferred income taxes 1,782
Series A redeemable convertible preferred stock, $1 par
value, $4,900,000 aggregate liquidation value:
Authorized shares - 600
Issued and outstanding shares - 490 4,900
Commitments and contingencies
Stockholders' equity:
Common stock, $1 par value:
Authorized shares - 10,000
Issued and outstanding shares - 1,640.5 2
Additional paid-in capital 3,492
Retained earnings 40,722
-------
Total stockholders' equity 44,216
-------
Total liabilities and stockholders' equity $65,270
=======
</TABLE>
See accompanying notes.
F-61
<PAGE> 65
Universal Sports America, Inc. and Subsidiaries
Condensed Consolidated Statements of Operations (Unaudited)
(in thousands, except per share data)
<TABLE>
<CAPTION>
Three months ended September 30,
1999 1998
--------------------------------
<S> <C> <C>
Net revenues $ 13,811 $ 15,569
Cost of revenues 9,131 10,114
-------- --------
Gross profit 4,680 5,455
Selling, general and administrative 5,238 5,834
-------- --------
Operating loss (558) (379)
Other income (expense):
Interest income (expense) , net 294 (171)
Other, net -- (29)
-------- --------
Income before income taxes (264) (579)
Income tax provision (103) (226)
-------- --------
Net loss $ (161) $ (353)
======== ========
Basic and diluted earnings per common share $ (98.14) $(215.18)
======== ========
</TABLE>
See accompanying notes.
F-62
<PAGE> 66
Universal Sports America, Inc. and Subsidiaries
Condensed Consolidated Statements of Stockholders' Equity
(Unaudited)
(in thousands, except per share data)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL TOTAL
--------------------- PAID-IN RETAINED STOCKHOLDER'S
SHARES AMOUNT CAPITAL EARNINGS EQUITY
-------- -------- ---------- -------- -------------
<S> <C> <C> <C> <C> <C>
Balance at June 30, 199 1,640.5 $ 2 $ 3,492 $ 40,883 $ 44,377
Net income -- -- -- $ (161) $ (161)
-------- -------- -------- -------- --------
Comprehensive income $ (161)
-------- -------- -------- -------- --------
Balance at September 30, 1999 1,640.5 2 3,492 40,722 $ 44,216
</TABLE>
See accompanying notes.
F-63
<PAGE> 67
Universal Sports America, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows (Unaudited)
(in thousands)
<TABLE>
<CAPTION>
Three months ended
September 30,
---------------------
1999 1998
-------- --------
<S> <C> <C>
OPERATING ACTIVITIES
Net loss $ (161) $ (353)
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 271 262
Equity in earnings of affiliates -- 29
Deferred taxes (472)
Changes in operating assets and liabilities, net of
effects of acquired buisiness:
Accounts receivable (2,990) (4,411)
Inventory 75 (123)
Prepaid costs (1,579) (173)
Loan to affiliate 44
Other assets 295 (188)
Accounts payable and accrued expenses (2,027) (554)
Deferred revenues 1,569 573
Payable to affiliate (17) 90
-------- --------
Net cash used in operating activities (4,520) (5,320)
INVESTING ACTIVITIES
Additions to property and equipment (353) (120)
-------- --------
Net cash provided by (used in) investing activities (353) (120)
FINANCING ACTIVITIES
Borrowings on long-term debt 4,985
-------- --------
Net cash provided by financing activities -- 4,985
-------- --------
Net decrease in cash (4,873) (455)
Cash at beginning of period 16,498 1,552
-------- --------
Cash at end of period $ 11,625 $ 1,097
======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for interest $ -- $ 165
======== ========
Cash paid for income taxes $ -- $ 975
======== ========
</TABLE>
See accompanying notes.
F-64
<PAGE> 68
Universal Sports America, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited) -
Continued
(in thousands, except per share data)
1. ORGANIZATION AND DESCRIPTION OF THE BUSINESS
ORGANIZATION
The accompanying consolidated financial statements include the accounts of
Universal Sports America, Inc. (the Company), and its wholly owned
subsidiaries, Universal Sports America, Inc. I, Streetball Sports Ventures
Partners, L.P. (Streetball), and USA Collegiate, L.P. (USA Collegiate).
DESCRIPTION OF BUSINESS
The Company, through its Streetball and Collegiate divisions, is a leading
provider of sports marketing and event management products and services to
national and international corporate sponsors, athletic institutions (high
school and collegiate sports), and grassroots sports participants. The Company
owns or controls sports-related products, services or events ("properties")
that have demonstrated commercial appeal to advertisers and consumers.
Specifically, during the year ended June 30, 1997, Company properties included,
among others, the production and management of over 250 grass roots sporting
events throughout the United States and 27 foreign countries and the management
of 16 exclusive sports marketing contracts for United States based universities
and athletic conferences.
2. UNAUDITED INTERIM FINANCIAL INFORMATION
The condensed consolidated financial statements as of September 30, 1999 and
for the three months ended September 30, 1999 and 1998 are unaudited, however,
in the opinion of management, reflect all adjustments (consisting of normal
recurring adjustments) necessary for a fair presentation of the financial
position and results of operations for such periods. Operating results for the
three months ended September 30, 1999 are not necessarily indicative of the
results that may be expected for the entire year because of the seasonal nature
of the Company's events and sports marketing programs. These financial
statements should be read in conjunction with the consolidated financial
statements, including the notes thereto, for the year ending June 30, 1999,
appearing elsewhere in this document.
3. INCOME TAX BENEFIT
Income tax benefit for the three months ended September 30, 1999 and 1998
differs from the amount of income tax benefit that would result from applying
the domestic federal
F-65
<PAGE> 69
Universal Sports America, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited) -
Continued
(in thousands, except per share data)
statutory tax rate to pretax income principally due to expenditures disallowed
for income tax purposes.
4. EARNINGS PER SHARE OF COMMON STOCK
Basic earnings per share is computed by dividing income available to common
shareholders by the weighted average number of common shares outstanding for
the reporting period. Diluted earnings per share reflect the potential dilution
that could occur if securities or other contracts to issue common stock were
exercised or converted into common stock. Outstanding stock options and the
Series A redeemable convertible preferred stock represent additional securities
reflected in the diluted weighted average shares outstanding. Since the company
incurred losses for the three months ending September 30, 1999 and 1998, these
amounts would be considered anti-dilutive and are therefore not included in the
calculation. The following table sets forth the computation of basic and
diluted earnings per share:
<TABLE>
<CAPTION>
Three months ended
September 30,
--------------------------------
1999 1998
--------- ---------
<S> <C> <C>
NUMERATOR:
Net loss $ (161) $ (353)
========= =========
DENOMINATOR:
Weighted average shares for basic and dilutive
earnings per share 1,640.50 1,640.50
========= =========
Basic and diluted earnings per common share $ (98.14) $ (215.18)
========= =========
</TABLE>
5. MARKETABLE SECURITY
At June 30, 1998, the Company owned 395,160 shares of broadcast.com inc. common
stock with a cost basis of $46,350. The cost basis of the investment was
determined based on the fair market value of the equipment donated to
broadcast.com inc. in exchange for the shares of common stock. In January 1999,
the Company sold all of its shares for total net proceeds of $61,516,854 with a
resulting pre-tax gain of $61,470,504.
F-66
<PAGE> 70
Universal Sports America, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited) -
Continued
(in thousands, except per share data)
6. PENDING TRANSACTION
On February 15, 1999, the Company entered into a merger agreement whereby Bull
Run Corporation ("Bull Run"), the direct and indirect holder of approximately
13% of the Company's common stock and approximately 15% of the preferred stock,
agreed to acquire the stock of Host, Capital Sports Properties, Inc.
("Capital") and the Company not currently owned, directly or indirectly, by
Bull Run for approximately $95 million, net of cash acquired (the "Bull Run
Acquisition"). Pursuant to the merger agreement, Bull Run will reorganize into
a holding company structure immediately prior to the Bull Run Acquisition
whereby each outstanding share of Bull Run common stock will be converted into
one share of a new holding company, will be owned by the stockholders of Bull
Run immediately prior to such conversion and Bull Run and its subsidiaries will
be subsidiaries of BR Holding. Under the merger agreement, each share of the
Company's common stock and preferred stock (except for shares held by Bull Run,
Capital or Host) will be converted into the right to receive (a) an amount in
cash and notes equal to $27 million and (b) a number of shares of BR Holding
common stock having an aggregate value of $16.75 million. This transaction is
subject to the terms and conditions of the merger agreement, including the
approvals of the stockholders of Capital, Host, Bull Run, and the Company. The
transaction is expected to close prior to December 15, 1999.
F-67
<PAGE> 71
Financial Statements
Capital Sports Properties, Inc.
Years ended June 30, 1999, 1998 and 1997
with Report of Independent Auditors
F-68
<PAGE> 72
Capital Sports Properties, Inc.
Financial Statements
Years ended June 30, 1999, 1998 and 1997
<TABLE>
<CAPTION>
CONTENTS
<S> <C>
Report of Independent Auditors ............................................F-70
Balance Sheets ............................................................F-71
Statements of Income and Retained Earnings.................................F-72
Statements of Cash Flows...................................................F-73
Notes to Financial Statements..............................................F-74
</TABLE>
F-69
<PAGE> 73
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Stockholders of Capital Sports Properties, Inc.:
We have audited the accompanying balance sheets of Capital Sports
Properties, Inc. as of June 30, 1999 and 1998, and the related statements of
income and retained earnings and cash flows for each of the three years in the
period ended June 30, 1999. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Capital Sports
Properties, Inc. at June 30, 1999 and 1998, and the results of its operations
and its cash flows for each of the three years in the period ended June 30,
1999, in conformity with generally accepted accounting principles.
/s/ ERNST & YOUNG LLP
Charlotte, North Carolina
November 30, 1999
F-70
<PAGE> 74
CAPITAL SPORTS PROPERTIES, INC.
BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
JUNE 30,
-------------------
1999 1998
------- ------
<S> <C> <C>
ASSETS
Investment in Host Communications, Inc. $ 7,924 $5,247
Accrued dividends receivable 1,964 1,664
Income taxes refundable 179 177
------- ------
$10,067 $7,088
======= ======
LIABILITIES AND STOCKHOLDERS' EQUITY
Deferred income taxes $ 1,430 $ 520
Amounts due to shareholders 334 322
------- ------
1,764 842
------- ------
Stockholders' equity:
Common stock, $.01 par value (authorized 200
shares; issued and outstanding 100 shares) -- --
Additional paid-in capital 5,000 5,000
Retained earnings 3,303 1,246
------- ------
Total stockholders' equity 8,303 6,246
------- ------
$10,067 $7,088
======= ======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-71
<PAGE> 75
CAPITAL SPORTS PROPERTIES, INC.
STATEMENTS OF INCOME AND RETAINED EARNINGS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Year Ended June 30,
---------------------------------
1999 1998 1997
-------- ------ ------
<S> <C> <C> <C>
Dividend income $ 300 $ 300 $ 400
Equity in earnings of Host Communications, Inc. 2,677 869 624
-------- ------ ------
Income 2,977 1,169 1,024
State franchise tax expense 5 4
-------- ------ ------
Income before income taxes 2,972 1,169 1,020
Income tax provision 915 330 231
-------- ------ ------
Net income 2,057 839 789
Retained earnings, beginning of period 1,246 407 1,322
Dividends paid (1,704)
-------- ------ ------
Retained earnings, end of period $ 3,303 $1,246 $ 407
======== ====== ======
Earnings per share - Basic $ 20,570 $8,390 $7,890
Earnings per share - Diluted $ 20,570 $8,390 $7,890
Weighted average number of shares outstanding:
Basic 100 100 100
Diluted 100 100 100
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-72
<PAGE> 76
CAPITAL SPORTS PROPERTIES, INC.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
-------------------------------
1999 1998 1997
------- ----- ------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 2,057 $ 839 $ 789
Adjustments to reconcile net income to net cash
provided by operating activities:
Equity in earnings of Host Communications, Inc. (2,677) (869) (624)
Change in operating assets and liabilities:
Accrued dividends receivable (300) (300) 54
Amounts due shareholders 12 226 41
State franchise taxes payable (5)
Income taxes refundable (2) (186) (14)
Deferred income taxes 910 295 212
------- ----- -------
Cash provided by operating activities -- -- 458
------- ----- -------
Cash flows from investing activities:
Exercise of warrant to purchase common stock (4)
Redemption of preferred stock investment 1,250
-------
Cash provided by investing activities 1,246
-------
Cash flows from financing activities:
Dividends paid (1,704)
-------
Cash used in financing activities (1,704)
-------
Net increase in cash -- -- --
Cash, beginning of year -- -- --
------- ----- -------
Cash, end of year $ -- $ -- $ --
======= ===== =======
Supplemental cash flow disclosure:
Income taxes paid $ 7 $ 221 $ 33
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-73
<PAGE> 77
CAPITAL SPORTS PROPERTIES, INC.
NOTES TO FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
1. DESCRIPTION OF BUSINESS
Capital Sports Properties, Inc. (the "Company"), a Delaware
corporation, holds a common stock and preferred stock investment in Host
Communications, Inc. ("HCI"), a sports marketing and association management
company. HCI, based in Lexington, Kentucky, and HCI's 33.8%-owned affiliate,
Universal Sports America, Inc. ("USA"), provide media and marketing services to
universities, athletic conferences and various associations representing
collegiate sports and, in addition, market and operate amateur participatory
sporting events.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
REVENUE RECOGNITION - Dividends on the Company's investment in HCI are
recognized on the accrual basis of accounting.
USE OF ESTIMATES - The preparation of the 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.
INVESTMENT IN HCI - The Company has accounted for its investment in
HCI by the equity method since August 30, 1996, the date on which the Company
exercised warrants to purchase the 447,002 shares of HCI common stock. Prior to
August 30, 1996, the Company accounted for its investment in HCI by the cost
method.
AMOUNTS DUE TO STOCKHOLDERS - Certain expenses, taxes and other cash
obligations of the Company are paid by certain shareholders of the Company,
including General Electric Capital Corporation ("GE Capital") and Bull Run
Corporation ("Bull Run"). The liability is non-interest bearing and has no
fixed repayment date.
INCOME TAXES - Income taxes are recognized in accordance with
Statement of Accounting Standards No. 109, "Accounting for Income Taxes,"
whereby deferred income tax liabilities or assets at the end of each period are
determined using the tax rate expected to be in effect when the taxes are
actually paid or recovered. Accordingly, income tax expense will increase or
decrease in the same period in which a change in tax rates is enacted. A
valuation allowance is recognized on certain deferred tax assets whose
realization is not reasonably assured.
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.
3. PENDING TRANSACTION
On February 15, 1999, the Company entered into an agreement whereby
Bull Run Corporation ("Bull Run"), a shareholder of 51.5% of the Company's
common stock, agreed to acquire the stock of HCI, USA and the Company not
currently owned by Bull Run, for approximately $95,000, net of cash acquired
(the "Bull Run Acquisition"). Pursuant to the
F-74
<PAGE> 78
merger agreement, Bull Run will reorganize into a holding company structure
immediately prior to the Bull Run Acquisition whereby each outstanding share of
Bull Run common stock will be converted into one share of the new holding
company, BR Holding, Inc. ("BR Holding"). BR Holding, which will be a publicly
held company, will be owned by the stockholders of Bull Run immediately prior
to such conversion and Bull Run and its subsidiaries will be subsidiaries of BR
Holding. Under the merger agreement, as amended, each share of the Company's
common stock (except for shares held by Bull Run) will be converted into the
right to receive (a) an amount in cash (or in a combination of cash and
three-year subordinated notes bearing interest at 8%) equal to $194,085 per
share, (b) an amount in cash equal to 1% of the Company's accrued dividends
payable on HCI preferred stock through the date of the Bull Run Acquisition,
and (c) a number of shares of Bull Run common stock having an aggregate value
of $162,562. This transaction is subject to the terms and conditions of the
merger agreement, as amended, including approval of the stockholders of HCI,
USA and the Company in connection with an amendment to the merger agreement.
4. INVESTMENT IN HCI
On December 15, 1992, the Company acquired 50,000 shares of HCI series
B cumulative preferred stock ("HCI Preferred Stock") and detachable warrants to
purchase 447,002 shares of HCI common stock ("HCI Common Stock"). On August 30,
1996, the Company exercised the warrants at the redemption price of $.01 per
share to purchase the HCI Common Stock. On June 30, 1997, HCI redeemed 12,500
shares of HCI Preferred Stock owned by the Company. The HCI Preferred Stock
accrues an annual dividend of $8.00 per share as declared by HCI's Board of
Directors. HCI may redeem the Preferred Stock at any time at a price of $100
per share plus a stated premium and if not previously redeemed, the HCI series
B cumulative preferred stock must be redeemed on December 15, 1999 at $100 per
share, plus any unpaid dividends. As of June 30, 1999 and 1998, the Company
owned approximately 47.8% of HCI's outstanding common stock. Undistributed
earnings of the investment in HCI accounted for by the equity method amount to
$4,170 as of June 30, 1999 and $1,493 as of June 30, 1998.
SUMMARIZED FINANCIAL INFORMATION - The summarized financial
information of HCI follows:
FINANCIAL POSITION AS OF JUNE 30, 1999 AND 1998:
<TABLE>
<CAPTION>
1999 1998
------- -------
<S> <C> <C>
CURRENT ASSETS $15,690 $11,144
PROPERTY AND EQUIPMENT 5,089 5,872
TOTAL ASSETS 50,439 32,536
CURRENT LIABILITIES 21,416 14,846
LONG-TERM DEBT 998 2,170
TOTAL LIABILITIES 31,112 21,078
STOCKHOLDERS' EQUITY 19,327 11,458
</TABLE>
OPERATING RESULTS FOR THE YEARS ENDED JUNE 30, 1999, 1998 AND 1997:
<TABLE>
<CAPTION>
1999 1998 1997
-------- ------- -------
<S> <C> <C> <C>
Operating revenue $ 53,072 $46,337 $39,591
Operating income (loss) (1,159) 1,563 2,312
Net income 5,901 2,108 1,626
</TABLE>
F-75
<PAGE> 79
5. INCOME TAXES
The Company's income tax provision consists of the following for the
years ended June 30, 1999, 1998 and 1997:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Federal taxes - current $ 5 $ 12 $ 19
State income taxes - current 23
Deferred taxes 910 295 212
---- ---- ----
$915 $330 $231
</TABLE>
A reconciliation of the Company's actual income tax expense to the
federal statutory amount of 34% for the years ended June 30, 1999, 1998 and
1997 follows:
<TABLE>
<CAPTION>
1999 1998 1997
------- ----- -----
<S> <C> <C> <C>
Federal tax at statutory rate $ 1,010 $ 397 $ 347
Dividends received deduction (97) (82) (109)
State income taxes and other 2 15 (7)
------- ----- -----
Income tax expense $ 915 $ 330 $ 231
======= ===== =====
</TABLE>
The Company's deferred tax liability arises from the Company's
investment in HCI.
6. FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair value of the Company's investment in HCI Preferred Stock and
HCI Common Stock was approximately $37,000 as of June 30, 1999 and $26,100 as
of June 30, 1998, compared to the carrying values of $7,924 and $5,247,
respectively. The estimate of fair value of the Company's investment in HCI
Preferred Stock and HCI Common Stock as of June 30, 1999 was based on the Bull
Run offer price in connection with the Bull Run Acquisition. The estimate of
fair value of the Company's investment in HCI Common Stock as of June 30, 1998
was based on transactions in HCI Common Stock occurring near June 30, 1998, and
the estimate of fair value of the Company's investment in HCI Preferred Stock
was estimated to approximate its face value.
All other financial instruments, including receivables and payables,
are estimated to have a fair value that approximates its carrying value in the
financial statements.
F-76
<PAGE> 80
Condensed Financial Statements
Capital Sports Properties, Inc.
Three Months ended September 30, 1999 and 1998
F-77
<PAGE> 81
Capital Sports Properties, Inc.
Condensed Financial Statements
Three months ended September 30, 1999 and 1998
<TABLE>
<CAPTION>
CONTENTS
<S> <C>
Condensed Balance Sheet (Unaudited)........................................F-79
Condensed Statements of Income and Retained Earnings (Unaudited)...........F-80
Condensed Statements of Cash Flows (Unaudited).............................F-81
Notes to Condensed Financial Statements (Unaudited)........................F-82
</TABLE>
F-78
<PAGE> 82
CAPITAL SPORTS PROPERTIES, INC.
CONDENSED BALANCE SHEET
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
SEPTEMBER 30,
1999
------
<S> <C>
ASSETS
Investment in Host Communications, Inc. $7,603
Accrued dividends receivable 2,039
Income taxes refundable 178
------
$9,820
======
LIABILITIES AND STOCKHOLDERS' EQUITY
Deferred income taxes $1,320
Amounts due to shareholders 334
------
1,654
------
Stockholders' equity:
Common stock, $.01 par value (authorized 200
shares; issued and outstanding 100 shares)
Additional paid-in capital 5,000
Retained earnings 3,166
------
Total stockholders' equity 8,166
------
$9,820
======
</TABLE>
See accompanying notes to these condensed financial statements.
F-79
<PAGE> 83
CAPITAL SPORTS PROPERTIES, INC.
CONDENSED STATEMENTS OF INCOME AND RETAINED EARNINGS
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1999 1998
------- -------
<S> <C> <C>
Dividend income $ 75 $ 75
Equity in losses of Host Communications, Inc. (321) (479)
------- -------
(246) (404)
State franchise tax expense 1
------- -------
Loss before income taxes (247) (404)
Income tax benefit 110 164
------- -------
Net loss (137) (240)
Retained earnings, beginning of period 3,303 1,246
------- -------
Retained earnings, end of period $ 3,166 $ 1,006
======= =======
Loss per share - Basic $(1,370) $(2,400)
Loss per share - Diluted $(1,370) $(2,400)
Weighted average number of shares outstanding:
Basic 100 100
Diluted 100 100
</TABLE>
See accompanying notes to these condensed financial statements.
F-80
<PAGE> 84
CAPITAL SPORTS PROPERTIES, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
Three Months Ended
------------------------------
September 30, September 30,
1999 1998
----- -----
<S> <C> <C>
Cash flows from operating activities:
Net loss $(137) $(240)
Adjustments to reconcile net income to net cash
provided by operating activities:
Equity in losses of Host Communications, Inc. 321 479
Change in operating assets and liabilities:
Accrued dividends receivable (75) (75)
Income taxes refundable 1
Deferred income taxes (110) (164)
----- -----
Cash provided by operating activities -- --
----- -----
Net increase in cash -- --
Cash, beginning of year -- --
----- -----
Cash, end of year $ -- $ --
===== =====
</TABLE>
See accompanying notes to these condensed financial statements.
F-81
<PAGE> 85
Capital Sports Properties, Inc.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
1. BASIS OF PRESENTATION
In management's opinion, the accompanying unaudited condensed
financial statements of Capital Sports Properties, Inc. (the "Company") reflect
all adjustments (consisting solely of normal, recurring adjustments) necessary
to present fairly the financial position and results of operations for the
annual period reported. These condensed financial statements should be read in
conjunction with the financial statements contained elsewhere herein this proxy
statement/prospectus.
2. PENDING TRANSACTION
On February 15, 1999, the Company entered into an agreement whereby
Bull Run Corporation ("Bull Run"), a shareholder of 51.5% of the Company's
common stock, agreed to acquire the stock of HCI, USA and the Company not
currently owned by Bull Run, for approximately $95,000, net of cash acquired
(the "Bull Run Acquisition"). Pursuant to the merger agreement, Bull Run will
reorganize into a holding company structure immediately prior to the Bull Run
Acquisition whereby each outstanding share of Bull Run common stock will be
converted into one share of the new holding company, BR Holding, Inc. ("BR
Holding"). BR Holding, which will be a publicly held company, will be owned by
the stockholders of Bull Run immediately prior to such conversion and Bull Run
and its subsidiaries will be subsidiaries of BR Holding. Under the merger
agreement, as amended, each share of the Company's common stock (except for
shares held by Bull Run) will be converted into the right to receive (a) an
amount in cash (or in a combination of cash and three-year subordinated notes
bearing interest at 8%) equal to $194,085 per share, (b) an amount in cash
equal to 1% of the Company's accrued dividends payable on HCI preferred stock
through the date of the Bull Run Acquisition, and (c) a number of shares of
Bull Run common stock having an aggregate value of $162,562. This transaction
is subject to the terms and conditions of the merger agreement, as amended,
including approval of the stockholders of HCI, USA and the Company in
connection with an amendment to the merger agreement.
3. INVESTMENT IN HCI
On December 15, 1992, the Company acquired 50,000 shares of HCI series
B cumulative preferred stock ("HCI Preferred Stock") and detachable warrants to
purchase 447,002 shares of HCI common stock ("HCI Common Stock"). On August 30,
1996, the Company exercised the warrants at the redemption price of $.01 per
share to purchase the HCI Common Stock. On June 30, 1997, HCI redeemed 12,500
shares of HCI Preferred Stock owned by the Company. The HCI Preferred Stock
accrues an annual dividend of $8.00 per share as declared by HCI's Board of
Directors. HCI may redeem the Preferred Stock at any time at a price of $100
per share plus a stated premium and if not previously redeemed, the HCI series
B cumulative preferred stock must be redeemed on December 15, 1999 at $100 per
share, plus any unpaid dividends. As of September 30, 1999, the Company owned
approximately 47.8% of HCI's outstanding common stock. Undistributed earnings
of the investment in HCI accounted for by the equity method amount to $4,055 as
of September 30, 1999.
HCI's operating results for the three months ended September 30, 1999
and 1998 were as follows:
<TABLE>
<CAPTION>
1999 1998
------- -------
<S> <C> <C>
Operating revenue $ 9,394 $ 7,845
Operating loss (822) (1,308)
Net loss (596) (920)
</TABLE>
4. INCOME TAXES
The principal differences between the federal statutory rate of 34%
and the effective tax rates is the 80% federal tax exclusion on dividend
income.
F-82
<PAGE> 86
UNAUDITED PRO FORMA FINANCIAL DATA
The following unaudited pro forma combined condensed financial
statements give effect to the merger and related financing by and among Bull
Run, BR Holding, Capital, Host and Universal as if such transactions had
occurred as of September 30, 1999 with respect to the balance sheet data as of
such date; as of July 1, 1999 with respect to the statement of operations for
the three months ended September 30, 1999; as of January 1, 1999 with respect
to the statement of operations for the six months ended June 30, 1999; and as
of January 1, 1998 with respect to the statement of operations for the year
ended December 31, 1998. On August 13, 1999, Bull Run elected to change its
fiscal year end from December 31 to June 30 effective in 1999.
The unaudited pro forma financial data reflect a purchase price of
$129,773,000, of which $54,316,000 is payable in cash, $18,809,000 is payable
in the form of Bull Run 8% subordinated notes, $46,748,000 is payable in the
form of BR Holding common stock (11,687,000 shares at an estimated value of
$4.00 per share), $8,700,000 represents the value of BR Holding stock options
to be issued in exchange for Host and Universal stock options, and $1,200,000
represents estimated expenses of the mergers.
The mergers are reflected using the purchase method of accounting for
business combinations. The pro forma financial information is provided for
comparative purposes only and does not purport to be indicative of the results
that actually would have been obtained if the events set forth above had been
effected on the dates indicated or of those results that may be obtained in the
future. The pro forma financial statements are based on preliminary estimates
of values and transaction costs. The actual recording of the transactions will
be based on final appraisals, values and transaction costs. Accordingly, the
actual recording of the transactions can be expected to differ from these pro
forma financial statements.
The historical statements of operations of Capital, Host and Universal
for the six months ended June 30, 1999 include the financial results for
Capital, Host and Universal for the fiscal year ended June 30, 1999 with the
deduction of their financial results for the six months ended December 31,
1998.
F-83
<PAGE> 87
UNAUDITED PRO FORMA COMBINED CONDENSED BALANCE SHEET
September 30, 1999
(In thousands)
<TABLE>
<CAPTION>
BULL RUN CAPITAL HOST UNIVERSAL ADJUSTMENT PRO FORMA
--------- -------- -------- --------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Cash and cash equivalents $ 157 $ $ 37 $ 11,625 $ (35,507)(c)
23,882 (e) $ 194
Accounts and notes receivable 6,111 22,114 35,372 (9,096)(a) 54,501
Inventories 5,242 118 5,360
Prepaid project costs and expenses 2,132 7,756 9,888
Other current assets 126 153 502 279 1,060
--------- -------- -------- -------- --------- --------
TOTAL CURRENT ASSETS 11,636 153 24,785 55,150 (20,721) 71,003
Property and equipment, net 2,542 5,223 1,652 9,417
Investment in affilated companies 85,616 9,849 25,683 140 (15,035)(c)
(31,417)(c) 74,836
Contract investment 5,108 (5,108)(c) -
Goodwill 7,338 3,057 (3,057)(c)
97,541 (c) 104,879
Other assets 1,107 3,019 163 4,289
--------- -------- -------- -------- --------- --------
TOTAL ASSETS $ 108,239 $ 10,002 $ 58,710 $ 65,270 $ 22,203 $264,424
========= ======== ======== ======== ========= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Notes payable and current portion $ 66,815 $ $ 10,270 $ $ (8,000)(a)
of long-term debt (59,085)(e) $ 10,000
Accounts payable 3,268 1,391 2,164 (505)(a) 6,318
Deferred income taxes 1,827 1,827
Deferred income 14,357 2,963 17,320
Accrued and other current liabilities 2,689 334 4,071 7,418 (591)(a)
--------- -------- -------- --------
1,200 (c) 15,121
--------- --------
TOTAL CURRENT LIABILITIES 72,772 334 30,089 14,372 (66,981) 50,586
Other liabilities 2,349 2,349
Long-term debt - 709 101,776 (e) 102,485
Subordinated notes payable 18,809 (e) 18,809
Deferred income taxes 4,525 1,390 8,890 1,782 (6,825)(c)
(3,609)(c) 6,153
Convertible preferred stock 5,761 4,900 (10,661)(c) -
Stockholders' equity, other 28,593 8,278 13,261 44,216 46,748 (c)
------- ------ ------- --------
8,700 (c)
(65,754)(c) 84,042
--------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 108,239 $ 10,002 $ 58,710 $ 65,270 $ 22,203 $264,424
========= ======== ======== ======== ========= ========
</TABLE>
See accompanying notes to unaudited pro forma combined condensed financial
statements.
F-84
<PAGE> 88
UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS
For the three months ended September 30, 1999
(In thousands, except per share data)
<TABLE>
<CAPTION>
BULL RUN CAPITAL HOST UNIVERSAL ADJUSTMENT PRO FORMA
-------- ------- ---- --------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
Net revenues $ 9,037 $ $ 9,394 $ 13,811 $ (543)(a) $ 31,699
Cost of revenues 5,865 6,766 9,131 (543)(a) 21,219
------- ------- ------- -------- ------- ---------
Gross profit 3,172 2,628 4,680 -- 10,480
------- ------- ------- -------- ------- ---------
Operating expenses:
Research and development 485 485
Selling, general and administrative 1,428 3,180 4,967 (125)(f) 9,450
Depreciation and amortization 202 270 271 (101)(b)
------- ------- --------
1,219 (d) 1,861
------- ---------
2,115 3,450 5,238 993 11,796
------- ------- -------- ------- ---------
OPERATING INCOME (LOSS) 1,057 (822) (558) (993) (1,316)
Other income (expense):
Equity in earnings (losses) of affiliated companies 630 (425) (16) -- 479 (b)
(1,744)(d) (1,076)
Gain on sale of marketable securities --
Interest and dividend income 226 75 294 (120)(a)
(75)(b) 400
Interest expense (1,317) (190) 120 (a)
(752)(e) (2,139)
Other income (expense) 104 34 138
------- ------- ------- -------- ------- ---------
INCOME (LOSS) BEFORE INCOME TAXES 700 (350) (994) (264) (3,085) (3,993)
Income tax provision (benefit) 217 (146) (398) (103) (696)(g) (1,126)
------- ------- ------- -------- ------- ---------
NET INCOME (LOSS) $ 483 $ (204) $ (596) $ (161) $(2,389) $ (2,867)
======= ======= ======= ======== ======= =========
Earnings (loss) per share:
Basic $ 0.02 $ (0.08)
Diluted $ 0.02 $ (0.08)
Weighted average shares outstanding:
Basic 22,467 11,687(h) 34,154
Diluted 22,467 11,687(h) 34,154
</TABLE>
See accompanying notes to unaudited pro forma combined condensed financial
statements.
F-85
<PAGE> 89
UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS
For the six months ended June 30, 1999
(In thousands, except per share data)
<TABLE>
<CAPTION>
BULL RUN CAPITAL HOST UNIVERSAL ADJUSTMENT PRO FORMA
-------- -------- ------- --------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
Net revenues $ 14,245 $ - $ 33,421 $ 25,900 $ (1,168)(a) $ 72,398
Cost of revenues 10,010 - 22,419 18,414 (1,168)(a) 49,675
-------- -------- ------- -------- --------- --------
Gross profit 4,235 - 11,002 7,486 - 22,723
-------- -------- ------- -------- --------- --------
Operating expenses:
Research and development 1,335 1,335
Selling, general and administrative 2,918 9,156 12,628 (676)(f) 24,026
Depreciation and amortization 403 - 717 564 (201)(b)
-------- -------- ------- --------
2,387 (d) 3,870
--------- --------
4,656 - 9,873 13,192 1,510 29,231
-------- -------- ------- -------- --------- --------
OPERATING INCOME (LOSS) (421) - 1,129 (5,706) (1,510) (6,508)
Other income (expense):
Equity in earnings (losses) of affiliated companies (997) 3,132 12,533 - (15,233)(b)
404 (d) (161)
Gain on sale of marketable securities - - 61,471 61,471
Interest and dividend income 453 150 932 (165)(a)
(150)(b) 1,220
Interest expense (2,529) (401) (62) 165 (a)
(1,505)(e) (4,332)
Other income (expense) 218 - (16) 42 - 244
-------- -------- ------- -------- --------- --------
INCOME (LOSS) BEFORE INCOME TAXES (3,276) 3,282 13,245 56,677 (17,994) 51,934
Income tax provision (benefit) (1,015) 1,082 5,741 20,885 (5,963)(g) 20,730
-------- -------- ------- -------- --------- --------
NET INCOME (LOSS) $ (2,261) $ 2,200 $ 7,504 $ 35,792 $ (12,031) $ 31,204
======== ======== ======= ======== ========= ========
Earnings (loss) per share:
Basic $ (0.10) $ 0.92
Diluted $ (0.10) $ 0.84
Weighted average shares outstanding:
Basic 22,330 11,687 (h) 34,017
Diluted 23,256 13,775 (h) 37,031
</TABLE>
See accompanying notes to unaudited pro forma combined condensed financial
statements.
F-86
<PAGE> 90
UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS
For the year ended December 31, 1998
(In thousands, except per share data)
<TABLE>
<CAPTION>
BULL RUN CAPITAL HOST UNIVERSAL ADJUSTMENT PRO FORMA
-------- ------- -------- --------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
Net revenues $ 31,466 $ $ 48,347 $ 68,929 $ (4,639) (a) $144,103
Cost of revenues 22,103 30,728 43,957 (4,639) (a) 92,149
-------- -------- -------- -------- --------
Gross profit 9,363 17,619 24,972 -- 51,954
-------- -------- -------- -------- -------
Operating expenses:
Research and development 2,323 2,323
Selling, general and administrative 5,538 35 16,136 21,133 (2,656) (f) 40,186
Depreciation and amortization 732 1,226 1,046 (403) (b)
-------- ------ -------- --------
4,535 (d) 7,136
-------- --------
8,593 35 17,362 22,179 1,476 49,645
-------- ------ -------- -------- -------- --------
OPERATING INCOME (LOSS) 770 (35) 257 2,793 (1,476) 2,309
Other income (expense):
Equity in earnings (losses) of affiliated
companies 6,734 752 269 113 (1,039) (b)
(371) (d) 6,458
Gain on sale of assets, net (128) 2,783 2,655
Interest and dividend income 1,085 300 (300) (b) 1,085
Interest expense (4,247) (791) (742) (2,986) (e) (8,766)
Other income (expense) 44 (412) (368)
-------- ------ -------- -------- -------- --------
INCOME (LOSS) BEFORE INCOME TAXES 4,214 1,017 2,562 1,752 (6,172) 3,373
Income tax provision (benefit) 1,854 268 1,234 768 (780) (g) 3,344
-------- ------ -------- -------- -------- --------
NET INCOME (LOSS) $ 2,360 $ 749 $ 1,328 $ 984 $ (5,392) $ 29
======== ====== ======== ======== ======== ========
Earnings (loss) per share:
Basic $ 0.11 $ 0.00
Diluted $ 0.10 $ 0.00
Weighted average shares outstanding:
Basic 22,189 11,327 (h) 33,516
Diluted 23,182 13,627 (h) 36,809
</TABLE>
See accompanying notes to unaudited pro forma combined condensed financial
statements.
F-87
<PAGE> 91
NOTES TO UNAUDITED PRO FORMA COMBINED
CONDENSED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
PRO FORMA ADJUSTMENTS
(a) Adjusted to eliminate certain intercompany transactions and
balances as follows:
(1) revenues and costs of revenues of $543 for the three months
ended September 30, 1999, $1,168 for the six months ended June 30,
1999 and $4,639 for the year ended December 31, 1998;
(2) accounts receivable of $1,096, accounts payable of $505 and
accrued expenses of $591 as of September 30, 1999 in connection
with services provided by Host to Universal, and services provided
by Universal to Host;
(3) notes receivable and notes payable of $8,000 as of September
30, 1999 in connection with a loan by Universal to Host following
Universal's receipt of proceeds on the sale of its investment in
broadcast.com in January 1999; and
(4) interest income and interest expense on the loan by Universal
to Host of $120 for the three months ended September 30, 1999 and
$165 for the six months ended June 30, 1999.
(b) Adjusted to eliminate the following income and expenses pertaining
to Capital's, Host's and Universal's investments in other members of the
combined group:
(1) Capital's equity in the earnings (losses) of Host and Host's
equity in the earnings (losses) of Universal of $(479) for the
three months ended September 30, 1999, $15,233 for the six months
ended June 30, 1999 and $1,039 for the year ended December 31,
1998;
(2) Capital's dividend income on its investment in Host preferred
stock of $75 for the three months ended September 30, 1999, $150
for the six months ended June 30, 1999 and $300 for the year ended
December 31, 1998; and
(3) Amortization of Universal's contract investment and goodwill
associated with its purchase of certain Host operations in 1996 of
$101 for the three months ended September 30, 1999, $201 for the
six months ended June 30, 1999 and $403 for the year ended
December 31, 1998.
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<PAGE> 92
(c) Adjusted to account for Bull Run's acquisition of Capital, Host
and Universal under the purchase method of accounting, as follows:
<TABLE>
<CAPTION>
<S> <C>
Purchase price payable in cash, including $35,507 at September 30,
1999 representing the portion of the proceeds on Universal's sale of
its investment in broadcast.com; remainder of the purchase price
will be paid with borrowings of $18,809 in connection
with a new credit facility as discussed in (e) below $ 54,316
Purchase price payable in the form of Bull Run 8%
subordinated notes maturing three years from date of issue 18,809
Purchase price payable in common stock; 11,687 shares
assumed to be issued at an estimated value of $4.00 per share 46,748
Estimated fair value of options for the purchase of
shares of BR Holding common stock for the Host and Universal stock
options to be assumed in the merger; estimated fair value is
determined using the Black-
Scholes option pricing model 8,700
Estimated expenses of the merger 1,200
Carrying value at September 30, 1999 for Bull Run's investments
in Capital, Host and Universal 15,035
--------
Total cost of Capital, Host and Universal 144,808
Net assets of Capital, Host and Universal at September 30, 1999 (65,754)
Host's and Universal's convertible preferred stock (10,661)
Capital's investment in Host and Host's investment in Universal
of $31,417, and deferred income taxes associated with such
investment of $6,825 24,592
Universal's contract investment of $5,108 and
goodwill of $3,057 associated with the purchase of
Host operations in 1996 and $3,609 of deferred taxes
attributable to such amounts 4,556
--------
Excess of cost over net assets acquired, recognized as goodwill $ 97,541
========
</TABLE>
The calculation of the estimated fair value of options to purchase
shares of BR Holding common stock to be exchanged for Host and Universal stock
options assumes a risk-free interest rate ranging from 4.74% to 5.64%, a
dividend yield of 0.0%, a volatility factor of .407 and a weighted average
expected life for the options of two years. The aggregate value attributable to
the Host class A options, Host class B options, Universal class A options and
Universal class B options is approximately $6,950, $1,140, $440 and $170,
respectively.
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<PAGE> 93
Assuming the Host and Universal stock options will be exchanged for
options to purchase BR Holding common stock based on a per share value of $4.00
for Bull Run common stock, the following table summarizes the terms of the
options to be issued in the mergers:
<TABLE>
<CAPTION>
NUMBER OF OPTIONS EXERCISE PRICE EXPIRATION DATE
----------------- -------------- ---------------
<S> <C> <C>
1,513,901 $ .344 12/99-6/08
327,330 $ .687 9/04-6/08
345,515 $ .687 1/09
90,925 $1.237 9/04
201,000 $2.388 1/04
18,185 $2.420 9/04
301,500 $4.060 1/06
</TABLE>
(d) Adjusted to eliminate the following income and expenses pertaining
to Bull Run's investments in other members of the combined group:
(1) elimination of Bull Run's equity in the earnings (losses) of
Capital and Host of $1,744 for the three months ended September
30, 1999, $(404) for the six months ended June 30, 1999 and $371
for the year ended December 31, 1998; and
(2) amortization of $1,219 for the three months ended September
30, 1999, $2,387 for the six months ended June 30, 1999 and $4,535
for the year ended December 31, 1998 for Bull Run's goodwill
attributable to this merger over a 20-year period.
(e) Adjusted to give effect to Bull Run's new credit facility and
issuance of subordinated notes, as follows:
(1) increase of $18,809 in long term debt to reflect borrowing
necessary to fund cash consideration payable in connection with
the mergers and $59,085 to reflect anticipated refinancing of
existing debt arrangements as of September 30, 1999;
(2) issuance of $18,809 in Bull Run subordinated notes as of
September 30, 1999;
(3) financing of $23,882 for the portion of the purchase price
payable in cash attributed to the proceeds on Universal's sale of
its investment in broadcast.com not otherwise funded by
Universal's cash and cash equivalents; and
(4) increase of interest expense by $752 for the three months
ended September 30, 1999, $1,505 for the six months ended June 30,
1999 and $2,986 for the year ended December 31, 1998 at an
estimated average 8% annual rate, based on the terms of Bull Run's
new credit agreement and subordinated notes, and variable rates in
effect during 1998 and 1999. The new credit agreement and
subordinated notes adds approximately $38,800 in
F-90
<PAGE> 94
new indebtedness, and refinances approximately $80,000 in existing
indebtedness of Bull Run and Host. The new credit agreement
provides for total borrowings of up to $130,000 and an interest
rate based on LIBOR plus 2.5%. A 1% increase in the assumed
interest rate would increase pro forma interest expense, and
decrease pro forma income before income taxes (or increase pro
forma loss before income taxes) by $94 for the three months ended
September 30, 1999, by $188 for the six months ended June 30, 1999
and by $373 for the year ended December 31, 1998.
(f) Adjusted to eliminate Host's compensation expense of $125 for the
three months ended September 30, 1999, $676 for the six months ended June 30,
1999 and $2,656 for the year ended December 31, 1998, associated with
nonqualified stock options issued during the period, all of which have been
exchanged for options to purchase BR Holding common stock on the effective date
of the merger.
(g) Adjusted to recognize the tax effect of the pro forma adjustments.
(h) The calculation of pro forma basic earnings per share assumes that
11,687 shares were issued in the merger. Diluted earnings per share adjust such
amount for the dilutive effect of stock options to be assumed in the merger.
A reconciliation between the number of shares used in the computation
of basic pro forma earnings per share and diluted pro forma earnings per share
follows:
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS YEAR
ENDED ENDED ENDED
SEPTEMBER 30, JUNE 30, DECEMBER 31,
1999 1999 1998
------------- ---------- ------------
<S> <C> <C> <C>
Weighted average number of common shares
outstanding for basic earnings per share 34,154 34,017 33,516
Effect of dilutive employee stock options 3,014 3,293
------ ------ ------
Adjusted weighted average number of common
shares and assumed conversions for
diluted earnings per share 34,154 37,031 36,809
====== ====== ======
</TABLE>
F-91
<PAGE> 95
(i) A reconciliation of historical results for the six months ended
June 30, 1999 to the financial statements for the year ended June 30, 1999
appearing elsewhere in this proxy statement/prospectus is set forth below:
<TABLE>
<CAPTION>
DEDUCT:
SIX MONTHS SIX MONTHS
YEAR ENDED ENDED ENDED
JUNE 30, DECEMBER 31, JUNE 30,
1999 1998 1999
---------- ------------ ----------
<S> <C> <C> <C>
Capital Sports Properties, Inc.:
Dividend income $ 300 $ 150 $ 150
Equity in earnings (losses) of
Host Communications, Inc. 2,677 (455) 3,132
Net income (loss) 2,031 (169) 2,200
Host Communications, Inc.:
Net revenue $ 53,072 $19,651 $ 33,421
Operating income (loss) (1,160) (2,289) 1,129
Net income (loss) 5,902 (1,602) 7,504
Universal Sports America, Inc.:
Net revenue $ 68,281 $42,381 $ 25,900
Operating income (loss) (4,672) 1,034 (5,706)
Net income 36,109 317 35,792
</TABLE>
F-92
