10-K/A 1 g70598a1e10-ka.txt BULL RUN CORPORATION 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K/A-1 [X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended JUNE 30, 2000 [ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the transition period from to ------ ------ Commission File Number 0-9385 BULL RUN CORPORATION (Exact name of registrant as specified in its charter) GEORGIA 58-2458679 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 4370 PEACHTREE ROAD, N.E., ATLANTA, GA 30319 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (404) 266-8333 Securities registered pursuant to Section 12(b) of the Act: Title of each class Name of each exchange on which registered None N/A ----------------- ----------------------------------------- Securities registered pursuant to Section 12(g) of the Act: COMMON STOCK, $.01 PAR VALUE (Title of class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. [X] Yes [ ] No Indicate by check mark if disclosure of delinquent filers in response to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] The aggregate market value of the voting and non-voting common equity held by non-affiliates as of June 30, 2001 was $31,661,354 based on the closing price thereof on The Nasdaq Stock Market. The number of shares outstanding of the registrant's Common Stock, par value $.01 per share, as of June 30, 2001, was 35,984,126. DOCUMENTS INCORPORATED BY REFERENCE None 2 Items 6, 7,8 of Part II and Item 14 of Part IV are hereby amended and restated in their entirety as follows: PART II ITEM 6. SELECTED FINANCIAL DATA Set forth below are certain selected historical consolidated financial data of the Company. This information should be read in conjunction with the audited consolidated financial statements of the Company and related notes thereto appearing elsewhere herein, as well as "Management's Discussion and Analysis." The selected consolidated financial data as of and for the year ended June 30, 2000, the six months ended June 30, 1999, and for each of the four years in the period ended December 31, 1998 are derived from the audited consolidated financial statements of the Company. The selected consolidated financial data as of and for the six months ended June 30, 1998 are derived from unaudited condensed consolidated financial statements of the Company. SELECTED FINANCIAL DATA (Dollars and shares in thousands, except per share amounts)
OPERATING RESULTS: SIX MONTHS ENDED YEAR ENDED JUNE 30, YEAR ENDED DECEMBER 31, JUNE 30, -------------------- ------------------------------ 2000 1999 1998 1998 1997 1996 1995 ---------- ------- ------- ------- ------- ------- ------- (RESTATED) (UNAUDITED) Total revenue $ 72,000 $ 609 $ 652 $ 1,618 $ 681 $ 844 $ 722 Direct operating costs (49,437) Selling, general and administrative (21,891) (693) (691) (1,312) (1,039) (1,022) (848) Amortization of acquisition intangibles (2,602) -------- ------- ------- ------- ------- ------- ------- Income (loss) from operations (1,930) (84) (39) 306 (358) (178) (126) Equity in earnings (losses) of affiliated companies (2,698) (997) (146) 6,734 (599) 1,731 107 Correction of purchase price allocation (11,330) Other income (expense) derived from investments in affiliates, net (358) 8,179 Interest expense and other, net (7,909) (1,858) (1,547) (3,162) (1,614) (1,250) (944) -------- ------- ------- ------- ------- ------- ------- Income (loss) from continuing operations before income taxes, extraordinary item and cumulative effect of accounting change (24,225) (2,939) (1,732) 3,878 (2,571) 8,482 (963) Income tax benefit (provision) 4,368 944 542 (1,599) 1,032 (3,349) 421 -------- ------- ------- ------- ------- ------- ------- Income (loss) from continuing operations before extraordinary item and cumulative effect of accounting change (19,857) (1,995) (1,190) 2,279 (1,539) 5,133 (542) Extraordinary loss (295) Cumulative effect of accounting change (274) -------- ------- ------- ------- ------- ------- ------- Income (loss) from continuing operations (19,857) (1,995) (1,190) 2,279 (1,539) 4,564 (542) Income (loss) from discontinued operations, net of tax (6,839) (266) (92) 81 (234) 744 1,265 -------- ------- ------- ------- ------- ------- ------- Net income (loss) $(26,696) $(2,261) $(1,282) $ 2,360 $(1,773) $ 5,308 $ 723 ======== ======= ======= ======= ======= ======= =======
See Notes to the Selected Financial Data on the following page. 2 3
SELECTED FINANCIAL DATA, CONTINUED SIX MONTHS ENDED EARNINGS (LOSS) PER YEAR ENDED JUNE 30, YEAR ENDED DECEMBER 31, SHARE: JUNE 30, ------------------------ -------------------------------------------------- 2000 1999 1998 1998 1997 1996 1995 ---------- ---------- ---------- ---------- --------- ---------- ----------- (RESTATED) (UNAUDITED) Earnings (loss) per share - Basic: Income (loss) from continuing operations before extraordinary item and cumulative effect of accounting change $ (0.68) $ (0.09) $ (0.05) $ 0.10 $ (0.07) $ 0.22 $ (0.02) Income (loss) from continuing operations $ (0.68) $ (0.09) $ (0.05) $ 0.10 $ (0.07) $ 0.21 $ (0.02) Income (loss) from discontinued operations, net of tax $ (0.24) $ (0.01) $ (0.01) $ 0.01 $ (0.01) $ 0.03 $ 0.05 Net income (loss) $ (0.92) $ (0.10) $ (0.06) $ 0.11 $ (0.08) $ 0.24 $ 0.03 Weighted average shares outstanding - Basic 29,044 22,330 22,098 22,189 21,302 22,013 22,127 Earnings (loss) per share - Diluted: Income (loss) from continuing operations before extraordinary item and cumulative effect of accounting change $ (0.68) $ (0.09) $ (0.05) $ 0.10 $ (0.07) $ 0.21 $ (0.02) Income (loss) from continuing operations $ (0.68) $ (0.09) $ (0.05) $ 0.10 $ (0.07) $ 0.20 $ (0.02) Income (loss) from discontinued operations, net of tax $ (0.24) $ (0.01) $ (0.01) $ 0.00 $ (0.01) $ 0.03 $ 0.05 Net income (loss) $ (0.92) $ (0.10) $ (0.06) $ 0.10 $ (0.08) $ 0.23 $ 0.03 Weighted average shares outstanding - Diluted 29,044 22,330 22,098 23,182 21,302 22,945 23,236 FINANCIAL POSITION: AS OF JUNE 30, AS OF DECEMBER 31, ---------------------- -------------------------------------------- 2000 1999 1998 1997 1996 1995 -------- --------- -------- ------ ------ ------- (RESTATED) Working capital $ 5,449 $ (61,595) $ 4,074 $ 2,913 $ 4,262 $ 4,005 Investment in affiliated companies 77,935 85,311 74,767 62,972 53,752 29,246 Total assets 228,555 104,317 95,195 76,402 66,211 41,692 Long-term obligations 122,794 51,848 41,998 31,364 14,896 Stockholders' equity 55,707 27,994 29,791 25,056 28,318 24,079 Current ratio 1.1 0.1 2.4 1.7 3.4 3.9 Book value per share $ 1.59 $ 1.25 $ 1.34 $ 1.18 $ 1.30 $ 1.09
NOTES TO THE SELECTED FINANCIAL DATA The changes from year to year are primarily a result of the following transactions: 2000 - Acquisition of Host, USA and Capital effective December 17, 1999 financed with common stock, options to acquire common stock and long-term debt. (See Notes 2 and 4 to the consolidated financial statements.) 1999 - Investment in Tarzian, financed with short-term debt; all amounts outstanding under long-term debt agreements were classified as current liabilities until December 17, 1999, when the obligations were refinanced. 1998 - Equity in the earnings attributable to Gray's gain on disposal of a television station; additional investments in Rawlings; and investment in Total Sports. 1997 - Initial investments in Rawlings. 1996 - Increase in the investment in Gray of $8.2 million resulting from Gray's public offering of its class B common stock; and purchase of Gray preferred stock for $15 million. 1995 - Initial investments in Host, USA and Capital. No dividends were declared or paid during the periods presented. Amounts presented as of and for the year ended June 30, 2000 have been restated where applicable to reflect the correction of errors discussed in Note 2 to the consolidated financial statements. Certain reclassifications, including the presentation of the Datasouth business segment as a discontinued operation, have been made in the results of operations and financial position for all prior periods to conform to the June 30, 2000 presentation. 3 4 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OVERVIEW Bull Run Corporation ("Bull Run" or the "Company"), based in Atlanta, Georgia, is a sports and affinity marketing and management company through its primary operating business, Host Communications, Inc. ("Host"), acquired in December 1999. Host's "Collegiate Marketing and Production Services" business segment provides sports marketing and production services to a number of collegiate conferences and universities, the National Collegiate Athletic Association, and state high school associations. Host's "Affinity Events" business segment produces and manages individual events, such as the "NFL Quarterback Challenge," and several events series, including the "Hoop-It-Up(R)" 3-on-3 basketball tour and the "Toyota Golf Skills Challenge". Host's "Affinity Management Services" business segment provides associations such as the National Tour Association and Quest (the J.D. Edwards users group association) with services ranging from member communication, recruitment and retention, to conference planning, marketing and administration. Effective December 17, 1999, the Company acquired the stock of Host, Universal Sports America, Inc. ("USA") and Capital Sports Properties, Inc. ("Capital") not then owned, directly or indirectly, by the Company. In January 2000, Host's executive management team assumed executive management responsibilities for USA, and many administrative and operating functions of the two companies were combined. Effective July 1, 2000, USA was merged into Host. As used herein, "Host-USA" refers to the combined businesses of Host and USA. Capital was solely an investor in Host and has no operating business. The Company also has significant investments in other sports and media companies, including Gray Communications Systems, Inc. ("Gray"), the owner and operator of 13 television stations, four newspapers and other media and communications businesses; Sarkes Tarzian, Inc. ("Tarzian"), the owner and operator of two television stations and four radio stations; Rawlings Sporting Goods Company, Inc. ("Rawlings"), a supplier of team sports equipment; Total Sports, Inc. ("Total Sports"), a sports content Internet company; and iHigh.com, Inc. ("iHigh.com"), a company developing a network of Internet web sites focused on high school sports and activities. The Company provides consulting services to Gray, in connection with Gray's acquisitions and dispositions. As of June 30, 2000, the Company owned approximately 13.1% of the outstanding common stock of Gray (representing 26.2% of the voting rights), in addition to non-voting preferred stock and warrants to purchase additional Gray common stock; 33.5% of the total outstanding common stock of Tarzian both in terms of the number of shares of common stock outstanding and in terms of voting rights (representing 73% of the equity of Tarzian for purposes of dividends, as well as distributions in the event of any liquidation, dissolution or other termination of Tarzian); 10.2% of the outstanding common stock of Rawlings, in addition to warrants for the purchase of additional shares of Rawlings common stock; 10.6% of the outstanding capital stock of Total Sports; and 37.0% of the outstanding common stock of iHigh.com. HOST-USA ACQUISITION On December 17, 1999, the Company acquired the stock of Host, USA and Capital not previously owned, directly or indirectly, by the Company (the "Host-USA Acquisition"). Aggregate consideration (net of cash acquired) was approximately $116.9 million, which included Common Stock (totaling 11,687,000 shares) and stock options (for a total of 2,819,000 shares of Common Stock) valued at approximately $52.3 million, 8% subordinated notes having a face value of approximately $18.6 million, cash (net of approximately $9.7 4 5 million in cash acquired) of $44.8 million and transaction expenses of approximately $1.2 million. The Company allocated $24.5 million of the Host-USA Acquisition purchase price to identifiable intangible assets and recognized goodwill in the amount of $66.4 million. As of June 30, 2000, goodwill and acquired intangibles, net of accumulated amortization, were approximately 39% of the Company's total assets. Prior to the Host-USA Acquisition, the Company accounted for its investment in Host and Capital under the equity method, and for its investment in USA under the cost method. Beginning December 17, 1999, the financial results of Host, USA and Capital have been consolidated with those of the Company. RESTATEMENT OF FINANCIAL STATEMENTS In April 2001, the Company became aware that the financial statements of USA prior to the Host-USA Acquisition, and financial information prepared by USA, as of and following the Host-USA Acquisition, contained errors resulting from the use of incorrect methodology used for the accounting for prepaid costs and expenses and sponsor contract receivables and deferred revenue associated with the Company's (and prior to the Host-USA Acquisition, USA's) Affinity Events business. The accompanying consolidated financial statements as of and for the year ended June 30, 2000 have been restated for the correction of such errors. DISPOSAL OF COMPUTER PRINTER OPERATIONS On July 26, 2000, the Company's Board of Directors authorized management to sell the operating assets of Datasouth Computer Corporation ("Datasouth"), the Company's wholly owned computer printer manufacturing business segment. The Company's decision to discontinue its Datasouth segment was attributable to the strategic decision to focus on the sports and affinity marketing and management businesses following the Host-USA Acquisition. Immediately following the board's authorization, the Company formalized its plan of disposal and began to aggressively pursue a sale of the assets of Datasouth to a potential purchaser. The Company consummated the sale of Datasouth's operating assets on September 29, 2000. Accordingly, the operating results and net assets associated with Datasouth's computer printer manufacturing business as of and for the year ended June 30, 2000 and all prior periods presented herein have been reflected as discontinued operations in the accompanying consolidated financial statements. An estimated loss on the sale of Datasouth of $6,522,000, including a $350,000 pretax provision for estimated operating losses during the disposal period, has been combined with Datasouth's operating results and presented as discontinued operations in the consolidated financial statements for the year ended June 30, 2000. The proceeds realized on the sale of Datasouth's assets were based on management's estimates of the most likely outcome, considering, among other things, the Company's discussions with the potential purchaser. Management's estimate of operating losses during the disposal period is based on management's knowledge of customer ordering patterns, industry trends and estimates of the length of time until a sale might be consummated. Actual amounts ultimately realized on the sale and losses incurred during the disposal period could differ materially from the amounts assumed in arriving at the loss on disposal. To the extent actual proceeds or operating results during the disposal period differ from the estimates that are reflected as of June 30, 2000, or as management's estimates are revised, the variance will be reported in discontinued operations in future periods. Management uses the proceeds from the sale to reduce outstanding debt under its bank credit agreement and paid transaction expenses of less than $100,000. 5 6 RESULTS OF CONTINUING OPERATIONS YEAR ENDED JUNE 30, 2000 Total revenues for the year ended June 30, 2000 were $72,000,000. Revenue derived from the companies acquired in the Host-USA Acquisition for the period from December 17, 1999 (date of acquisition) through June 30, 2000, was $70,689,000, of which, $54,443,000 was attributable to the Affinity Marketing and Production Services business segment (formerly named the "Collegiate" segment), $11,312,000 was attributable to the Affinity Events segment and $4,934,000 was attributable to the Affinity Management Services segment. Consulting fee income on services provided to Gray was $1,311,000 for the year ended June 30, 2000. As a result of the Company's 13.1% equity investment in Gray, approximately 13.1% of consulting fees charged to Gray is deferred and recognized as consulting fee income over 40 years. There can be no assurance that the Company will recognize any consulting fees in the future, other than recognition of currently deferred fees. Operating costs and expenses of $73,930,000 for the year ended June 30, 2000 included $68,320,000 associated with companies acquired in the Host-USA Acquisition, for the period from December 17, 1999 (date of acquisition) through June 30, 2000, amortization of acquisition intangibles of $2,602,000 as a result of the Host-USA Acquisition, and nonrecurring expenses of $1,460,000 in connection with a potential transaction involving one of the Company's investments. Operating income (loss) for the period December 17, 1999 (date of acquisition) to June 30, 2000 derived from the Affinity Marketing and Production Services, Affinity Events and Affinity Management Services business segments was $4,354,000, $(2,551,000) and $568,000, respectively. A significant portion of the Affinity Marketing and Production Services operating income is generated in the fiscal quarter ended March 31, due to the timing of events in connection from which revenues of this segment are generated. Likewise, the Affinity Events business segment generates most of its revenue during the fiscal quarters ended June 30 and September 30, the periods in which the majority of the events are held. Therefore, revenue and operating profit for the period from December 17, 1999 (date of acquisition) to June 30, 2000 is not necessarily indicative of the actual results that might have occurred had a full year's results been consolidated in the Company's consolidated financial statements for the year ended June 30, 2000. Equity in earnings (losses) of affiliated companies, totaling $(2,698,000) for the year ended June 30, 2000 included the Company's proportionate share of the earnings or losses of (a) Gray; (b) Rawlings; (c) subsequent to December 17, 1999, iHigh.com and certain other equity investments; and (d) prior to December 17, 1999, Host and Capital, net of amortization charges totaling $1,823,000. In January 1999, USA sold its investment in broadcast.com, inc., recognizing a gain of approximately $40 million. As a result of Host's equity investment in USA and the Company's equity investment in Host reported on a six-month lag basis, the Company recognized approximately $1.9 million in equity in earnings of affiliates in the year ended June 30, 2000 due to USA's gain on the sale. Rawlings recognized an after-tax charge of approximately $12.8 million associated with its decision to sell its Vic hockey business in its fiscal quarter ended May 31, 2000. As a result, the Company's pretax equity in earnings (losses) of Rawlings was negatively impacted in the year ended June 30, 2000 by approximately $1.3 million. 6 7 In the year ended June 30, 2000, the Company recognized an expense of $2,850,000 associated with an impairment in the value of the Company's investment in a warrant for Rawlings common stock. The determination to reduce the carrying value of the Company's investment in the Rawlings warrant was made based on management's assessment that the likelihood that the warrant would vest, in accordance with the present terms of the warrant, prior to its expiration date, was remote. As a result of this assessment, management believes its ability to recover any of the carrying value of the investment in the warrant is remote. As a result of Gray's issuance of shares of its class B common stock on October 1, 1999 in connection with consideration paid in the acquisition of three television stations, the Company's common equity ownership of Gray was reduced from 16.9% to 13.1%, resulting in a pretax gain for the Company of $2,492,000 in the year ended June 30, 2000. This share issuance also reduced the Company's common equity voting power in Gray from 27.5% to 26.2%. There can be no assurance that such sales or such gains of a material nature will occur in the future. As a result of the accounting errors discovered by the Company in the financial statements of USA, the Company recorded a charge of $11,330,000 in December 1999, reflecting the extent to which USA's net tangible assets as of the date of the Host-USA Acquisition were overstated. Interest and dividend income was $958,000 for the year ended June 30, 2000, primarily derived from dividends accrued on the Company's investment in Gray's series A and series B preferred stock. Interest expense was $8,746,000 for the year ended June 30, 2000, increasing in the last six months of the fiscal year due to the financing of the Host-USA Acquisition in December 1999, and to a lesser extent, an increase in interest rates. During the year ended June 30, 2000, the Company issued approximately 305,000 shares of Common Stock to a director of the Company who personally guaranteed up to $75 million of the Company's debt under its bank credit agreement. The value of the shares issued, approximately $1,219,000, is being amortized over one year, and approximately $610,000 is included in debt issue cost amortization for the year ended June 30, 2000. Other income for the year ended June 30, 2000 consisted primarily of income from an option agreement with Gray whereby Gray has the right to acquire the Company's investment in Tarzian. As of June 30, 2000, the Company has a net operating loss carryforward for tax purposes of approximately $14.2 million to reduce Federal taxable income in the future, an alternative minimum tax credit carryforward of $490,000 and a business credit carryforward of $142,000, to reduce regular Federal tax liabilities in the future. The principal differences between the federal statutory tax rate of 34% and the effective tax rate are nondeductible goodwill amortization, correction of purchase price and state income taxes. SIX MONTHS ENDED JUNE 30, 1999 COMPARED TO SIX MONTHS ENDED JUNE 30, 1998 Total revenue for the six months ended June 30, 1999, representing consulting fees earned from services rendered to Gray in connection with Gray's acquisitions and dispositions, was $609,000 compared to $652,000 for the same period in 1998. Operating expenses of $693,000 for the six months ended June 30, 1999 were comparable to operating expenses of $691,000 for the six months ended June 30, 1998. Equity in losses of affiliated companies, totaling $(997,000) and $(146,000) for the six months ended June 30, 1999 and 1998, respectively, included the Company's proportionate 7 8 share of the earnings or losses of Gray, Host, Capital and Rawlings, and amortization charges totaling $549,000 and $389,000, respectively. Interest and dividend income of $453,000 and $562,000 for the six months ended June 30, 1999 and 1998, respectively, was primarily derived from dividends paid on the Company's investment in Gray's series A and series B preferred stock. Interest expense, totaling $2,529,000 and $2,101,000 for the six months ended June 30, 1999 and 1998, respectively, was incurred primarily in connection with bank term loans and notes payable, the proceeds of which were used to finance (a) the Company's investments in Gray, Host, Capital, USA and Rawlings, and (b) the acquisition of a computer printer business in January 1998 (the "CodeWriter Acquisition"); and, for the six months ended June 30, 1999 only, (x) the Company's investments in Total Sports in August 1998 and January 1999, and (y) the Company's investment in Tarzian in January 1999. The Company's effective tax rate was 32.1% and 31.3% for the six months ended June 30, 1999 and 1998, respectively. YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997 Total revenue for 1998, representing consulting fees earned from services rendered to Gray in connection with Gray's acquisitions and dispositions, was $1,618,000 compared to $681,000 in 1997. Operating expenses of $1,312,000 in 1998 represented a 26.3% increase from 1997, due primarily to an increase in professional fees of approximately $80,000, an increase in insurance costs of approximately $75,000 and an increase in travel expenses of approximately $66,000. Equity in earnings (losses) of affiliated companies, totaling $6,734,000 in 1998 and ($599,000) in 1997, included the Company's proportionate share of the earnings of Gray, Host, Capital, and in 1998 only, Rawlings, net of amortization charges totaling $777,000 and $610,000 in 1998 and 1997, respectively. In 1998, Gray disposed of WALB-TV, its NBC affiliate in Albany, Georgia, fulfilling a Federal Communications Commission divestiture order. As a result of the gain on the disposition of WALB-TV, the Company's equity in Gray's earnings was favorably impacted by approximately $6.9 million in 1998. Interest and dividend income of $1,085,000 in 1998 and $1,102,000 in 1997 was primarily derived from dividends paid on the Company's investment in Gray's series A and series B preferred stock. Interest expense, totaling $4,247,000 in 1998 and $2,716,000 in 1997, was incurred primarily in connection with bank term loans, the proceeds of which were used to finance (a) the Company's investments in Gray, Host, Capital and USA; (b) the Company's investments in Rawlings from November 1997 through January 1998; (c) the acquisition of a computer printer business in January 1998; and (d) the Company's investment in Total Sports in August 1998. The Company's effective tax rate was 41.2% and 40.1% for the years ended December 31, 1998 and 1997, respectively. RESULTS OF DISCONTINUED OPERATIONS YEAR ENDED JUNE 30, 2000 COMPARED TO SIX MONTHS ENDED JUNE 30, 1999 Revenue from Datasouth's computer printer operations of $24,959,000 for the year ended June 30, 2000, compared to $13,626,000 for the six months ended June 30, 1999, reflect a decline in sales to The Sabre Group, Inc., Datasouth's largest customer, to $4.2 million in 2000, compared to $2.8 million for the six months ended June 30, 1999. Short term revenue 8 9 trends in the Company's computer printer business fluctuate due to variable ordering patterns of large customers. Gross profit from printer operations was 24.8% for the year ended June 30, 2000 compared to 26.6% for the six months ended June 30, 1999, due to an increase in overhead costs per manufactured unit sold during the year resulting from a decline in manufactured unit volume, primarily caused by the decline in sales to Sabre. Operating expenses associated with discontinued operations of $6,507,000 for the year ended June 30, 2000 represent 26.1% of revenue compared to 19.1% for the six months ended June 30, 1999. Operating expenses include non-cash goodwill amortization expense of $555,000 and $266,000 for the year ended June 30, 2000 and for the six months ended June 30, 1999, respectively. The Company allocated an income tax benefit to the discontinued segment of $10,000 and $72,000 for the year ended June 30, 2000 and the six months ended June 30, 1999, respectively, representing an effective tax rate of 3.0% and 21.3%, respectively. The change was due entirely to the impact of nondeductible goodwill amortization in each period, as was the differences between the effective tax rate and the statutory federal tax rate of 34%. SIX MONTHS ENDED JUNE 30, 1999 COMPARED TO SIX MONTHS ENDED JUNE 30, 1998 Revenue from Datasouth's computer printer operations was $13,636,000 for the six months ended June 30, 1999, compared to $14,158,000 for the same period in 1998, due to a decrease in printer sales to Sabre. Printer sales to this customer were $2.8 million for the six months ended June 30, 1999, compared to $4.3 million for the six months ended June 30, 1998. Gross profit from printer operations of 26.6% for the six months ended June 30, 1999 increased from the 24.9% realized for the same period in 1998, primarily due to a different mix of products sold and initial production costs associated with the introduction of a new printer line in 1998, which collectively increased gross profit 2.1% of revenue. Operating expenses associated with discontinued operations of $3,964,000 for the six months ended June 30, 1999 represented a 10.8% increase from the same period in 1998, due primarily to (a) a $181,000 increase in research and development costs attributable to software development activities for an airline ticket/boarding pass printer (the marketing rights for which were acquired in September 1998) and (b) expenses of $244,000 associated with the Company's European sales office established in October 1998. Operating expenses include non-cash goodwill amortization expense of $266,000 and $241,000 for the six months ended June 30, 1999 and 1998, respectively. The Company allocated an income tax benefit to the discontinued segment of $72,000 for the six months ended June 30, 1999 and a $36,000 income tax provision for the six months ended June 30, 1998, representing an effective tax rate of 21.3% and (65.2)%, respectively. The change from 1998 to 1999, as well as the difference between the effective tax rate and the federal statutory tax rate of 34%, was due primarily to the impact of nondeductible goodwill amortization in each period. YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997 Revenue from Datasouth's computer printer operations (including the CodeWriter product line, which was acquired in the CodeWriter Acquisition in January 1998) was $29,848,000 in 1998, representing a 38% increase over such revenue in 1997 of $21,639,000. CodeWriter products contributed revenue of approximately $4.4 million in 1998. Printer sales to Sabre were approximately $9.2 million in 1998 and $7.2 million in 1997. Gross profit from printer operations of 25.9% for 1998 decreased slightly from the 26.2% realized in 1997, primarily due to a different mix of products sold which increased gross profit 1.8% of revenue; less (a) 9 10 the impact of costs incurred by the Company immediately following the CodeWriter Acquisition, prior to the integration of manufacturing operations into the Company's existing product manufacturing facility, which decreased gross profit by 0.1% of revenue; and (b) an increase in freight costs and increases in inventory reserves, offset by some manufacturing overhead efficiencies gained as a result of higher unit volumes, which collectively reduced gross profit by 2.3% of revenue. Operating expenses associated with discontinued operations of $7,282,000 in 1998 represented a 25.2% increase from 1997, due primarily to (a) expenses of $245,000 associated with an increase in sales and marketing personnel attributable to the Company's expanded printer line; (b) expenses of $75,000 associated with the Company's European sales office opened in October 1998; (c) a $175,000 increase in advertising expenses relating to the introduction of new products in 1998; (d) an increase in personnel and administrative costs of $560,000 resulting from the CodeWriter Acquisition; and (e) goodwill amortization expense and certain nonrecurring post-acquisition transition costs of $225,000 in 1998 associated with the CodeWriter Acquisition. Operating expenses included non-cash goodwill amortization expense of $488,000 in 1998 and $301,000 in 1997, associated with the acquisition of Datasouth and, in 1998 only, the CodeWriter Acquisition. The Company allocated an income tax provision to the discontinued segment of $255,000 and $93,000 for the years ended December 31, 1998 and 1997, respectively, representing an effective tax rate of 75.9% and (65.4)%, respectively. The change from 1997 to 1998, as well as the difference between the effective tax rate and the federal statutory tax rate of 34%, was due primarily to the impact of nondeductible goodwill amortization in each period. LIQUIDITY AND CAPITAL RESOURCES Cash used in operating activities of continuing operations was $117,000 for the year ended June 30, 2000. In the year ended June 30, 2000, accounts receivable and prepaid costs and expenses decreased $15,527,000 due to decreases (subsequent to the date of the Host-USA Acquisition) in prepaid costs under various contracts and accounts receivable, and accounts payable and accrued expenses decreased $11,585,000 due primarily to decreases (subsequent to the date of the Host-USA Acquisition) in the accruals for guaranteed rights payments and incurred unbilled costs under various contracts. Cash used in operating activities of continuing operations was $1,120,000 for the six months ended June 30, 1999, compared to $1,388,000 for the same period in 1998, and cash used in operating activities of continuing operations was $2,091,000 and $1,028,000 for the years ended December 31, 1998 and 1997, respectively. In the six months ended June 30, 1999, receivables, net of payables and accruals, decreased $898,000, compared to a decrease of $90,000 in the six months ended June 30, 1999. Additionally, deferred income increased $126,000 more in the six months ended June 30, 1998 than in the following year, and interest paid was $2,050,000 compared to $2,346,000 for the six months ended June 30, 1999. In the year ended December 31, 1998, interest paid was $4,404,000 compared to $2,460,000 in the year ended December 31, 1997; however, consulting fees received in 1998 exceeded consulting fees received in 1997 by approximately $900,000. Cash provided by operating activities of discontinued operations was $676,000 for the year ended June 30, 2000, reflecting a decrease in accounts receivable and inventories, net of payables and accruals, of $376,000. Cash provided by operating activities of discontinued operations was $1,958,000 for the six months ended June 30, 1999, whereas cash used in operating activities of discontinued operations for the six months ended June 30, 1998 was $488,000, and was $533,000 and $799,000 for the years ended December 31, 1998 and 1997, respectively. In the six months ended June 30, 1999, accounts receivable and 10 11 inventories, net of payables and accruals, decreased $1,587,000, compared to an increase of $813,000 in the six months ended June 30, 1998. In the year ended December 31, 1998, accounts receivable and inventories, net of payables and accruals, increased $1,739,000, compared to an increase of $1,378,000 in the year ended December 31, 1997. In 1984, Host and the National Affinity Marketing and Production Services Athletic Association ("NCAA(R)") initiated the NCAA Corporate Partner Program. Under this program, Host partners with an exclusive group of corporations to link their target markets to and implement promotions around the NCAA and its championship events through a variety of advertising and promotional opportunities. Host's current contract with the NCAA expires in 2002. In 2000, Host announced the decision to withdraw from negotiations for an extension of Host's NCAA corporate marketing rights beyond 2002; however, Host subsequently reentered negotiations related to retaining NCAA corporate marketing rights and, in July 2001, announced that it had reached an agreement with CBS Sports for the exclusive right to administer the NCAA Corporate Partner Program, along with other NCAA marketing programs, beginning in September 2002 through August 2013. Guaranteed rights fee expense under the current NCAA contract for the period from December 17, 1999 (effective date of the Host-USA Acquisition) to June 30, 2000 was approximately $7,850,000, and will be $16,167,000, $19,417,000 and $3,333,000 for the years ending June 30, 2001, 2002 and 2003, respectively. The new agreement with CBS Sports will likewise require payment of significant guaranteed rights fees beginning in September 2002. Cash used in investing activities of continuing operations was $46,072,000 for the year ended June 30, 2000, of which, $45,315,000 was associated with the Host-USA Acquisition. Cash used in investing activities of continuing operations was $12,226,000 for the six months ended June 30, 1999, of which $10,000,000 was associated with the Company's investment in Sarkes Tarzian, Inc., $1,000,000 was a result of an additional investment in Total Sports preferred stock and $674,000 represented deferred acquisition costs of the Host-USA Acquisition. Cash used in investing activities of continuing operations was $5,043,000 for the six months ended June 30, 1998, of which $4,961,000 was associated with Company investments in Rawlings common stock. Cash used in investing activities of continuing operations was $4,886,000 for the year ended December 31, 1998, as a result of Company's investments in Rawlings totaling $4,961,000, the Company's initial investment in Total Sports capital stock of $2,500,000 and investments in Host totaling $1,263,000. Also during 1998, the Company received proceeds of $3,805,000 from Gray on the redemption of shares of its series B preferred stock. For the year ended December 31, 1997, cash used in investing activities of continuing operations was $8,109,000 as a result of the Company's initial investments in Rawlings of $5,804,000 and investments in Gray common stock of $3,108,000. Cash used in investing activities of discontinued operations was $642,000 for the six months ended June 30, 2000; $323,000 and $2,231,000 for the six months ended June 30, 1999 and 1998, respectively; and $3,268,000 and $1,148,000 for the years ended December 31, 1998 and 1997, respectively. Cash used for the CodeWriter Acquisition was $558,000 in the year ended June 30, 2000, $100,000 in the six months ended June 30, 1999 and approximately $2,000,000 in the six months ended June 30, 1998, and approximately $2,250,000 for the year ended December 31, 1998. Cash used for other acquisitions attributable to discontinued operations was approximately $660,000 in the year ended December 31, 1998. Capital expenditures of discontinued operations were $84,000 in the year ended June 30, 2000; $223,000 in the six months ended June 30, 1999 and 1998; and $353,000 and $1,148,000 for the years ended December 31, 1998 and 1997, respectively. 11 12 Cash provided by financing activities of continuing operations was $46,451,000 for the year ended June 30, 2000 as a result of borrowings utilized for the Host-USA Acquisition. Cash provided by financing activities of $11,976,000 for the six months ended June 30, 1999 was primarily as a result of financing the $10,000,000 investment in Sarkes Tarzian, Inc. in January 1999. Cash provided by financing activities of continuing operations was $7,096,000 for the six months ended June 30, 1998 and $7,534,000 for the year ended December 31, 1998 primarily as a result of financing Company investments in Rawlings and Total Sports. Cash provided by financing activities of continuing operations of $11,145,000 for the year ended December 31, 1997 was primarily a result of financing Company investments in Rawlings and Gray, as well as repurchases of the Company's common stock totaling $1,751,000. Cash provided by financing activities of discontinued operations of $2,500,000 for the six months ended June 30, 1998 and $3,160,000 for the year ended December 31, 1998 was a result of financing the CodeWriter Acquisition in January 1998 and an acquisition of product rights in September 1998. In connection with the Host-USA Acquisition, the Company entered into a new credit agreement with a group of banks on December 17, 1999, as modified in 2000, providing for (a) two term loans for borrowings totaling $95,000,000, bearing interest at either the banks' prime rate or the London Interbank Offered Rate ("LIBOR") plus 2.5%, requiring a minimum aggregate principal payment of $10,000,000 by December 17, 2000, with all amounts outstanding under the term loans due on December 17, 2001; and (b) a revolving loan commitment (the "Revolver") for borrowings of up to a maximum amount ranging from $25,000,000 to $35,000,000 through December 17, 2001, bearing interest at either the banks' prime rate or LIBOR plus 2.5%. Borrowings under the Revolver are limited to an amount not to exceed a percentage of eligible accounts receivable, determined monthly, and such borrowings may include up to $20,500,000 in outstanding letters of credit. In July 2001, certain provisions of the credit agreement were modified as discussed below. As of June 30, 2000, borrowings of $19,200,000 and letters of credit totaling $3,835,000 were outstanding under the Revolver, and additional available borrowing capacity under the Revolver was $560,000 at that date. Also in connection with the Host-USA Acquisition, the Company issued subordinated notes on December 17, 1999, bearing interest at 8%, having an aggregate face value of $18,594,000. Interest is payable quarterly until maturity on January 17, 2003. Payment of interest and principal are subordinate to the bank credit agreement. The new bank credit agreement and the subordinated notes provided the necessary financing for the Host-USA Acquisition, and refinanced all existing bank indebtedness of the Company, Host and USA. In connection with the Company's bank credit facilities the Company's chairman of the board entered into a guarantee agreement in favor of the banks for up to $75,000,000, for which he received compensation from the Company during the year ended June 30, 2000 in the form of 305,000 restricted shares of the Company's common stock valued at $1,219,000. Such agreement provides that if the Company defaults on its bank loan, the chairman will repay the amount of such loan to the banks. If he is obligated to pay such amount, he would have the right to purchase certain of the Company's collateral under such loan as would be necessary for him to recoup his obligation, with such collateral including the Company's investments in Gray and Tarzian. As a result of issues pertaining to the restatement of financial statements discussed above under "Restatement of Financial Statements" and in Note 2 to the consolidated financial 12 13 statements, among other reasons, the Company was not in compliance with certain financial covenants and other provisions considered to be events of default under the terms of its bank credit agreement; however, the Company obtained a waiver of these events of default. On July 27, 2001, the Company and its lenders amended certain provisions of the credit agreement to, among other things, (a) revise future financial covenants; (b) change the maturity date of the credit agreement from December 17, 2001 to July 1, 2002; (c) revise the interest rate on the term loans to prime plus 1.5% or LIBOR plus 4.0% and the Revolver to prime plus 1.0% or LIBOR plus 3.5%; and (d) require principal payments of at least $10,000,000 on or before October 15, 2001 plus $10,000,000 on or before December 15, 2001. In connection with the waiver and amendment, the Company's chairman of the board increased his personal guarantee of the Company's debt under its bank credit agreement to $100,000,000. The Company is a party to two interest rate swap agreements, which effectively modify the interest characteristics of $45,000,000 of its outstanding long-term debt. The first agreement, effective January 1, 1999, involves the exchange of amounts based currently on a fixed interest rate of 8.58% for amounts currently based on a variable interest rate of LIBOR plus 2.5% through December 31, 2002, without an exchange of the $20,000,000 notional amount upon which the payments are based. The second agreement, effective January 5, 2000, involves the exchange of amounts based on a fixed interest rate of 9.21% for amounts based on a variable interest rate of LIBOR plus 2.5% through December 31, 2002 (or December 31, 2004, at the bank's option), without an exchange of the $25,000,000 notional amount upon which the payments are based. The differential paid or received as interest rates change is settled quarterly and is accrued and recognized as an adjustment of interest expense related to the debt. The estimated amount to be received on terminating the swap agreements as of June 30, 2000, if the Company elected to do so, was approximately $511,000. Dividends on the series B preferred stock of Gray owned by the Company are payable in cash at an annual rate of $600 per share or, at Gray's option, payable in additional shares of series B preferred stock. During 1998, Gray redeemed 435.94 shares of its series B preferred stock owned by the Company, including 110.94 shares previously issued in-kind as dividends on the series B preferred stock, for a total of $3,805,000. The Company anticipates some amount of dividends on the series B preferred stock may be paid in the future in additional shares of series B preferred stock. The Company anticipates that its current working capital, funds available under its current credit facilities, quarterly cash dividends on the Gray preferred stock and Gray common stock owned by the Company, and cash flow from operations will be sufficient to fund its working capital requirements, capital spending requirements and debt service requirements, for at least the next 12 months. The Company's bank credit agreement requires aggregate principal payments totaling $20,000,000 by December 2001, and such principal payments may require the sale of certain investments whose sale may have some restrictions under applicable securities laws, and there can be no assurance that the Company will be able to sell such investments. Payment of the Company's $10,000,000 required principal payment in December 2000 was funded in part by the redemption by Gray in the amount of $5,000,000 of series B preferred stock owned by the Company having a face value of $5,000,000. The Company's capital expenditures are expected to total approximately $1,200,000 for the year ending June 30, 2001. IMPACT OF YEAR 2000 Some of the Company's computer programs were written using two digits rather than four to define the applicable year. As a result, those computer programs had time-sensitive software 13 14 that recognized a date using "00" as the year 1900 rather than the year 2000 (the "Year 2000 Issue"). The Company implemented a program designed to address the Year 2000 Issue. As a result of this program, the Company experienced no significant disruption in its operations from the Year 2000 Issue. The Company's total cost for this program was less than $200,000, excluding rent expense for new computer hardware. Equipment rent expense does not differ materially from depreciation expense attributed to the replaced equipment. INTEREST RATE AND MARKET RATE RISK The Company is exposed to changes in interest rates due to the Company's financing of its acquisitions, investments and operations. Interest rate risk is present with both fixed and floating rate debt. The Company uses interest rate swap agreements (as described in "Liquidity and Capital Resources" above) to manage its debt profile. Interest rate swap agreements generally involve exchanges of underlying face (notional) amounts of designated hedges. The Company continually evaluates the credit quality of counterparties to interest rate swap agreements and does not believe there is a significant risk of nonperformance by any of the counterparties to the agreements. Based on the Company's debt profile at June 30, 2000 and 1999, a 1% increase in market interest rates would increase interest expense and decrease the income before income taxes (or alternatively, increase interest expense and increase the loss before income taxes) by $538,000 for the year ended June 30, 2000; $216,000 and $254,000 for the six months ended June 30, 1999 and 1998, respectively; and $517,000 and $353,000 for the years ended December 31, 1998 and 1997, respectively. These amounts were determined by calculating the effect of the hypothetical interest rate on the Company's floating rate debt, after giving effect to the Company's interest rate swap agreements. These amounts do not include the effects of certain potential results of increased interest rates, such as a reduced level of overall economic activity or other actions management may take to mitigate the risk. Furthermore, this sensitivity analysis does not assume changes in the Company's financial structure that could occur if interest rates were higher. The Company holds investments in certain common stocks, preferred stocks and options to purchase common stock. The Company is exposed to changes in market values of these investments, some of which are publicly-traded common stocks. In each case where there exists a quoted market price for a publicly-traded security in which the Company holds investments, the investment is accounted for under the equity method, whereby changes in the quoted market price of the security do not impact the carrying value of the investment. However, fluctuations in market prices of investments could ultimately affect the amounts the Company might realize upon a disposal of some or all of its investments. Based on management's estimates of the aggregate fair value of the Company's investments in affiliated companies (as described in Note 12 to the consolidated financial statements), a 10% change in the aggregate market value of such investments would increase or decrease such aggregate market value by approximately $6.3 million as of June 30, 2000, $10.5 million as of June 30, 1999 and $8.8 million as of December 31, 1998. 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 will be required to adopt the new Statement effective July 1, 2000. The Statement will require the Company to recognize all derivatives on the balance sheet at fair value. The Company's adoption of this Statement resulted in an increase in Stockholders' Equity and Total Assets of approximately $3,160,000 on July 1, 2000. In addition, the Statement could increase 14 15 the volatility in earnings and comprehensive income for fiscal reporting periods subsequent to June 30, 2000 as a result of recognizing the net change in the value of an interest rate swap agreement during the future period. FORWARD-LOOKING STATEMENTS This Annual Report on Form 10-K contains "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. When used in this report, the words "believes," "expects," "anticipates," "estimates" and similar words and expressions are generally intended to identify forward-looking statements. Statements that describe the Company's future strategic plans, goals or objectives are also forward-looking statements. Readers of this Report are cautioned that any forward-looking statements, including those regarding the intent, belief or current expectations of the Company or management, are not guarantees of future performance, results or events, and involve risks and uncertainties. The forward-looking statements included in this report are made only as of the date hereof. The Company undertakes no obligation to update such forward-looking statements to reflect subsequent events or circumstances. Actual results and events may differ materially from those in the forward-looking statements as a result of various factors including, but not limited to the following: (i) the Company's and Gray's leverage may adversely affect their ability to obtain financing, thereby impairing their ability to withstand economic downturns or competitive pressures; (ii) Gray's business depends on its relationships with, and success of, its national network affiliates; (iii) Rawlings' and Host-USA's businesses are seasonal; (iv) adverse events affecting baseball, such as negative publicity or strikes, may adversely affect Rawlings' business; (v) Rawlings' and Host-USA's businesses depend on short term contracts and the inability to renew or extend these contracts could adversely affect their businesses; and (vi) Host-USA may lose money on some of its contracts, because it guarantees certain payments thereunder. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK See "Interest Rate and Market Rate Risk" in Item 7 "Management's Discussion and Analysis." 15 16 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Consolidated Financial Statements of Bull Run Corporation: PAGE ---- Report of Independent Auditors 18 Consolidated Balance Sheets at June 30, 2000 (restated) and 1999, and December 31, 1998 19 Consolidated Statements of Operations for the year ended June 30, 2000 (restated), the six months ended June 30, 1999 and June 30, 1998 (unaudited), and the years ended December 31, 1998 and 1997 20 Consolidated Statements of Stockholders' Equity for the year ended June 30, 2000 (restated), the six months ended June 30, 1999 and the years ended December 31, 1998 and 1997 21 Consolidated Statements of Cash Flows for the year ended June 30, 2000 (restated), the six months ended June 30, 1999 and June 30, 1998 (unaudited), and the years ended December 31, 1998 and 1997 22 Notes to Consolidated Financial Statements 23 Selected Quarterly Financial Data (Unaudited) 45 Consolidated Financial Statements of Gray Communications Systems, Inc., incorporated by reference to pages F-1 to F-29 of Bull Run's Form 10-K Annual Report for the year ended June 30, 2000: Report of Independent Auditors Consolidated Balance Sheets at December 31, 1999 and 1998 Consolidated Statements of Operations for each of the three years in the period ended December 31, 1999 Consolidated Statements of Stockholders' Equity for each of the three years in the period ended December 31, 1999 Consolidated Statements of Cash Flows for each of the three years in the period ended December 31, 1999 Notes to Consolidated Financial Statements Condensed Consolidated Financial Statements of Gray Communications Systems, Inc., incorporated by reference to pages F-30 to F-36 of Bull Run's Form 10-K Annual Report for the year ended June 30, 2000: Condensed Consolidated Balance Sheets at June 30, 2000 (Unaudited) Condensed Consolidated Statements of Operations for the six months ended June 30, 2000 and 1999 (Unaudited) Condensed Consolidated Statement of Stockholders' Equity for the six months ended June 30, 2000 (Unaudited) Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2000 and 1999 (Unaudited) Notes to Condensed Consolidated Financial Statements (Unaudited)
16 17 Consolidated Financial Statements of Rawlings Sporting Goods Company, Inc., incorporated by reference to pages F-37 to F-54 of Bull Run's Form 10-K Annual Report for the year ended June 30, 2000: Report of Independent Public Accountants Consolidated Statements of Income for each of the three years in the period ended August 31, 1999 Consolidated Balance Sheets at August 31, 1999 and 1998 Consolidated Statements of Stockholders' Equity for each of the three years in the period ended August 31, 1999 Consolidated Statements of Cash Flows for each of the three years in the period ended August 31, 1999 Notes to Consolidated Financial Statements Condensed Consolidated Financial Statements of Rawlings Sporting Goods Company, Inc incorporated by reference to pages F-55 to F-61 of Bull Run's Form 10-K Annual Report for the year ended June 30, 2000: Consolidated Statements of Income for the nine months ended May 31, 2000 and 1999 (Unaudited) Consolidated Balance Sheets at May 31, 2000 and August 31, 1999 (Unaudited) Consolidated Statements of Cash Flow for the nine months ended May 31, 2000 and 1999 (Unaudited) Notes to Consolidated Financial Statements (Unaudited) 17 18 REPORT OF INDEPENDENT AUDITORS BOARD OF DIRECTORS AND STOCKHOLDERS OF BULL RUN CORPORATION: We have audited the accompanying consolidated balance sheets of Bull Run Corporation as of June 30, 2000 and 1999, and December 31, 1998, and the related consolidated statements of operations, stockholders' equity and cash flows for the year ended June 30, 2000, the six months ended June 30, 1999 and for each of the two years in the period ended December 31, 1998. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. The financial statements of Rawlings Sporting Goods Company, Inc., (a corporation in which the Company has a 10% interest), as of August 31, 1999 and 1998 and for the years then ended, have been audited by other auditors whose report has been furnished to us; insofar as our opinion relates to data included for Rawlings Sporting Goods Company, Inc., it is based solely on their report. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits and the report of other auditors provide a reasonable basis for our opinion. In our opinion, based on our audits and the report of other auditors, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Bull Run Corporation at June 30, 2000 and 1999, and December 31, 1998, and the consolidated results of its operations and its cash flows for the year ended June 30, 2000, the six months ended June 30, 1999 and for each of the two years in the period ended December 31, 1998, in conformity with accounting principles generally accepted in the United States. As more fully described in Note 2, the Company restated certain amounts previously reported as of and for the year ended June 30, 2000. /s/ ERNST & YOUNG LLP Charlotte, North Carolina September 28, 2000, except for Notes 2, 4 and 10, as to which the date is July 27, 2001 18 19 BULL RUN CORPORATION CONSOLIDATED BALANCE SHEETS (Amounts in thousands)
JUNE 30, ------------------------- DECEMBER 31, 2000 1999 1998 --------- --------- -------- (RESTATED) ASSETS Current assets: Cash and cash equivalents $ 619 $ 323 $ 58 Accounts receivable, net of allowance of $1,155 and $-0- as of June 30, 2000 and 1999, respectively, and $-0- as of December 31, 1998 30,384 267 1,127 Inventories 648 Prepaid costs and expenses 3,710 78 34 Income taxes receivable 3,148 Deferred income taxes 3,516 Net assets of discontinued segment 6,286 6,845 8,546 --------- --------- -------- Total current assets 48,311 7,513 9,765 Property and equipment, net 6,868 22 14 Investment in affiliated companies 77,935 85,311 74,767 Goodwill 64,506 Customer base and trademarks 23,836 Other assets 2,714 771 114 Net noncurrent assets of discontinued segment 4,385 10,700 10,535 --------- --------- -------- $ 228,555 $ 104,317 $ 95,195 ========= ========= ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Notes payable and current portion of long-term debt $ 10,000 $ 67,361 $ 4,000 Accounts payable 2,690 402 1,115 Accrued and other liabilities 30,172 1,345 574 --------- --------- -------- Total current liabilities 42,862 69,108 5,689 Long-term debt 122,794 51,848 Deferred income taxes 3,924 5,030 5,682 Other liabilities 3,268 2,185 2,185 Stockholders' equity: Common stock, $.01 par value (authorized 100,000 shares; issued 35,627 and 22,983 shares as of June 30, 2000 and 1999, respectively, and 22,785 shares as of December 31, 1998) 356 230 228 Additional paid-in capital 76,123 21,840 21,378 Treasury stock, at cost (542 shares) (1,393) (1,393) (1,393) Retained earnings (accumulated deficit) (19,379) 7,317 9,578 --------- --------- -------- Total stockholders' equity 55,707 27,994 29,791 --------- --------- -------- $ 228,555 $ 104,317 $ 95,195 ========= ========= ========
The accompanying notes are an integral part of these consolidated financial statements. 19 20 BULL RUN CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS (Amounts in thousands, except per share data)
SIX MONTHS ENDED YEARS ENDED YEAR ENDED JUNE 30, DECEMBER 31, JUNE 30, ----------------------- ----------------------- 2000 1999 1998 1998 1997 -------- -------- -------- -------- -------- (RESTATED) (UNAUDITED) Revenue from services rendered $ 72,000 $ 609 $ 652 $ 1,618 $ 681 Operating costs and expenses: Direct operating costs of services rendered 49,437 Selling, general and administrative 21,891 693 691 1,312 1,039 Amortization of acquisition intangibles 2,602 -------- -------- -------- -------- -------- 73,930 693 691 1,312 1,039 -------- -------- -------- -------- -------- Operating income (loss) (1,930) (84) (39) 306 (358) Other income (expense): Equity in earnings (losses) of affiliated companies (2,698) (997) (146) 6,734 (599) Gain on issuance of shares by affiliate 2,492 Reduction in valuation of investment in affiliate (2,850) Correction of purchase price allocation (11,330) Interest and dividend income 958 453 562 1,085 1,102 Interest expense (8,746) (2,529) (2,101) (4,247) (2,716) Debt issue cost amortization (953) Other income (expense) 832 218 (8) -------- -------- -------- -------- -------- Income (loss) from continuing operations before income taxes (24,225) (2,939) (1,732) 3,878 (2,571) Income tax benefit (provision) 4,368 944 542 (1,599) 1,032 -------- -------- -------- -------- -------- Income (loss) from continuing operations (19,857) (1,995) (1,190) 2,279 (1,539) Income (loss) on operations of discontinued segment, net of tax (317) (266) (92) 81 (234) Estimated loss on disposal of discontinued segment, net of tax (6,522) -------- -------- -------- -------- -------- Net income (loss) $(26,696) $ (2,261) $ (1,282) $ 2,360 $ (1,773) ======== ======== ======== ======== ======== Earnings (loss) per share: Basic: Income (loss) from continuing operations $ (0.68) $ (0.09) $ (0.05) $ 0.10 $ (0.07) Income (loss) from discontinued segment (0.24) (0.01) (0.01) 0.01 (0.01) -------- -------- -------- -------- -------- Net income (loss) $ (0.92) $ (0.10) $ (0.06) $ 0.11 $ (0.08) ======== ======== ======== ======== ======== Diluted: Income (loss) from continuing operations $ (0.68) $ (0.09) $ (0.05) $ 0.10 $ (0.07) Income (loss) from discontinued segment (0.24) (0.01) (0.01) 0.00 (0.01) -------- -------- -------- -------- -------- Net income (loss) $ (0.92) $ (0.10) $ (0.06) $ 0.10 $ (0.08) ======== ======== ======== ======== ======== Weighted average number of common shares outstanding: Basic 29,044 22,330 22,098 22,189 21,302 Diluted 29,044 22,330 22,098 23,182 21,302
The accompanying notes are an integral part of these consolidated financial statements. 20 21 BULL RUN CORPORATION CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (Amounts in thousands)
RETAINED ADDITIONAL EARNINGS TOTAL COMMON STOCK PAID-IN TREASURY (ACCUMULATED STOCKHOLDERS' SHARES AMOUNT CAPITAL STOCK DEFICIT) EQUITY ------ ------ ---------- -------- ------------ ------------- Balances, January 1, 1997 22,325 $223 $ 20,541 $ (1,437) $ 8,991 $ 28,318 Purchase of treasury stock (1,751) (1,751) Exercise of stock options 258 3 259 262 Net loss (1,773) (1,773) ------ ---- -------- -------- --------- -------- BALANCES, DECEMBER 31, 1997 22,583 226 20,800 (3,188) 7,218 25,056 Issuance of treasury stock 555 1,945 2,500 Purchase of treasury stock (150) (150) Exercise of stock options 202 2 23 25 Net income 2,360 2,360 ------ ---- -------- -------- --------- -------- BALANCES, DECEMBER 31, 1998 22,785 228 21,378 (1,393) 9,578 29,791 Exercise of stock options 198 2 462 464 Net loss (2,261) (2,261) ------ ---- -------- -------- --------- -------- BALANCES, JUNE 30, 1999 22,983 230 21,840 (1,393) 7,317 27,994 Issuance of common stock 11,992 120 44,657 44,777 Issuance of nonqualified stock options 8,700 8,700 Exercise of stock options 652 6 776 782 Tax benefit from exercise of nonqualified stock options 150 150 Net loss (restated) (26,696) (26,696) ------ ---- -------- -------- --------- -------- BALANCES, JUNE 30, 2000 (RESTATED) 35,627 $356 $ 76,123 $ (1,393) $ (19,379) $ 55,707 ====== ==== ======== ======== ========= ========
The accompanying notes are an integral part of these consolidated financial statements. 21 22 BULL RUN CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (Amounts in thousands)
SIX MONTHS ENDED YEARS ENDED YEAR ENDED JUNE 30, DECEMBER 31, JUNE 30, -------------------- -------------------- 2000 1999 1998 1998 1997 ---------- -------- -------- -------- -------- (RESTATED) (UNAUDITED) CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) $(26,697) $ (2,261) $ (1,282) $ 2,360 $ (1,773) Loss (income) from discontinued segment 6,839 266 92 (81) 234 Adjustments to reconcile net income (loss) to net cash provided by (used in) continuing operations: Other expense derived from investment in affiliates, net 358 Correction of purchase price allocation 11,330 Provision for bad debts 267 Depreciation and amortization 4,669 17 17 35 34 Equity in (earnings) losses of affiliated companies 2,698 997 146 (6,734) 599 Deferred income taxes (4,638) (1,014) (396) 1,976 (759) Accrued preferred stock dividend income (150) (175) (300) Loss on disposition of assets 64 Change in operating assets and liabilities: Accounts receivable 12,497 860 (280) (64) 149 Inventories 270 Prepaid costs and expenses 3,030 (25) (33) 15 Accounts payable and accrued expenses (11,585) 38 370 230 645 Deferred income and other long-term liabilities 781 2 128 362 128 -------- -------- -------- -------- -------- Net cash used in continuing operations (117) (1,120) (1,388) (2,091) (1,028) Net cash provided by (used in) discontinued operations 676 1,958 (488) (533) (799) -------- -------- -------- -------- -------- Net cash provided by (used in) operating activities 559 838 (1,876) (2,624) (1,827) -------- -------- -------- -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures (1,146) (10) (12) Investment in affiliated companies (11,623) (5,071) (8,812) (9,099) Proceeds on sale of investment 267 Acquisition of businesses, net of cash acquired (45,315) (674) Redemption of preferred stock investment 3,805 Dividends received from affiliated companies 122 81 28 121 1,002 -------- -------- -------- -------- -------- Net cash used in continuing operation investing activities (46,072) (12,226) (5,043) (4,886) (8,109) Net cash used in discontinued operation investing activities (642) (323) (2,231) (3,268) (1,148) -------- -------- -------- -------- -------- Net cash used in investing activities (46,714) (12,549) (7,274) (8,154) (9,257) -------- -------- -------- -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Borrowings from notes payable 10,000 500 1,200 1,500 Borrowings from revolving lines of credit 32,702 8,648 7,966 17,598 15,232 Repayments on notes payable (12,000) (700) Repayments on revolving lines of credit (21,698) (7,988) (8,146) (18,718) (9,941) Proceeds from long-term debt 95,000 1,352 7,625 9,815 5,843 Repayments on long-term debt (47,165) (500) (864) (1,536) Debt issue costs (1,170) Exercise of stock options 782 464 17 25 262 Repurchase of common stock (2) (150) (1,751) -------- -------- -------- -------- -------- Net cash provided by continuing operation financing activities 46,451 11,976 7,096 7,534 11,145 Net cash provided by discontinued operation financing activities 2,500 3,160 -------- -------- -------- -------- -------- Net cash provided by financing activities 46,451 11,976 9,596 10,694 11,145 -------- -------- -------- -------- -------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 296 265 446 (84) 61 Cash and cash equivalents, beginning of year 323 58 142 142 81 -------- -------- -------- -------- -------- CASH AND CASH EQUIVALENTS, END OF YEAR $ 619 $ 323 $ 588 $ 58 $ 142 ======== ======== ======== ======== ========
The accompanying notes are an integral part of these consolidated financial statements. 22 23 BULL RUN CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Amounts in thousands, except per share data) 1. DESCRIPTION OF BUSINESS Bull Run Corporation ("Bull Run," and collectively with its subsidiaries, the "Company"), based in Atlanta, Georgia, is a sports and affinity marketing and management company through its wholly owned subsidiary, Host Communications, Inc. ("Host"). Effective December 17, 1999, Bull Run acquired the capital stock of Host, Universal Sports America, Inc. ("USA") and Capital Sports Properties, Inc. ("Capital") not then owned, directly or indirectly, by Bull Run. Effective July 1, 2000, USA was merged into Host. In July 2000, the Company made a strategic decision to sell the computer printer manufacturing business segment operated by wholly owned subsidiary, Datasouth Computer Corporation ("Datasouth"). Datasouth is reported as a discontinued operation (see Note 5). The Company also holds significant investments in sports and media companies, including Gray Communications Systems, Inc. ("Gray"), an owner and operator of thirteen television stations, four daily newspapers and other media and communications businesses; Sarkes Tarzian, Inc. ("Tarzian"), owner and operator of two television stations and four radio stations; Rawlings Sporting Goods Company, Inc. ("Rawlings"), a leading supplier of team sports equipment in North America; Total Sports, Inc. ("Total Sports"), a sports content Internet company; and iHigh.com, Inc. ("iHigh.com"), a company developing a network of Internet web sites focused on high school sports and activities. Effective June 30, 1999, Bull Run changed its fiscal year end from December 31 to June 30. All amounts appearing in the consolidated financial statements and accompanying notes for the six months ended June 30, 1998 are unaudited. Unless otherwise indicated, amounts provided in these notes to the consolidated financial statements pertain to continuing operations. 2. RESTATEMENT OF FINANCIAL STATEMENTS In April 2001, the Company became aware that the financial statements of USA prior to the Host-USA Acquisition, and financial information prepared by USA, as of and following the Host-USA Acquisition, contained errors resulting from the use of incorrect methodology used for the accounting for prepaid costs and expenses and sponsor contract receivables and deferred revenue associated with the Company's (and USA's) Affinity Events business. The accompanying consolidated financial statements as of and for the year ended June 30, 2000 have been restated for the correction of such errors. 23 24 A comparison of the Company's consolidated financial position and results of operations prior to and following the restatement follows:
PREVIOUSLY RESTATED REPORTED -------- ---------- YEAR ENDED JUNE 30, 2000: Revenue from services rendered $ 72,000 $ 72,000 Operating income (loss) (1,930) 2,282 Loss from continuing operations (19,857) (5,944) Net loss (26,696) (12,783) Earnings (loss) per share: Loss from continuing operations $ (0.68) $ (0.20) Net loss $ (0.92) $ (0.44) AS OF JUNE 30, 2000: Current assets $ 48,311 $ 61,466 Total assets 228,555 241,851 Current liabilities 42,862 42,245 Stockholders' equity 55,707 69,620
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES PRINCIPLES OF CONSOLIDATION - The accompanying consolidated financial statements include the accounts of Bull Run and its wholly owned subsidiaries, after elimination of intercompany accounts and transactions. Host, USA and Capital are included as wholly owned subsidiaries beginning December 17, 1999. USE OF ESTIMATES - The preparation of the consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. REVENUE RECOGNITION AND RIGHTS FEE EXPENSES - Revenue from services are recognized as the services are rendered. Corporate sponsor license fee revenue that is not related to specific events is recognized ratably over the term of the sponsorship. In certain circumstances, the Company enters into contractual arrangements with associations or institutions it represents in various capacities which involve payment of guaranteed rights fees. Guaranteed rights fee expense that is not related to specific events is recognized ratably over the term specified within the contract. Contractual arrangements with associations or institutions may also involve net profit sharing arrangements ("profit splits"), pursuant to applicable terms and conditions specified in the contract. Profit splits are based on the net profit associated with services rendered under the contract. Profit split expense is accrued over the contract period based on estimates and adjusted to actual at the end of the term specified in the contract. 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 recognized as accounts receivable and deferred revenue. As these services are used, an amount is charged to operating expense. Advertising revenue is recognized as the advertising is used by the customer and license fee revenue is recognized ratably over the term of the sub-license agreement. Net revenues include approximately $1,800 and operating expenses include approximately $1,100 for the year ended June 30, 24 25 2000 related to barter transactions. The Company had no barter transactions prior to the year ended June 30, 2000. CASH AND CASH EQUIVALENTS - Cash equivalents are composed of all highly liquid investments with an original maturity of three months or less. ACCOUNTS RECEIVABLE AND CREDIT RISK - In certain situations, the Company may invoice certain customers up to 90 days in advance. Accounts receivable pertaining to advance billings are also included as deferred income until such time as the revenue is earned. The Company performs ongoing credit evaluations of its customers' financial condition and generally requires no collateral from its customers. The Company has a significant amount of revenue generated from sub-licensing National Affinity Marketing and Production Services Athletic Association ("NCAA") corporate sponsorship 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. Approximately 36% of the Company's revenues from continuing operations for the year ended June 30, 2000 arose from sub-licensing NCAA corporate sponsor rights. As of June 30, 2000, accounts receivable included approximately $9,286 due from NCAA corporate sponsors. INVENTORIES - Inventories, stated at cost, consist of primarily materials and supplies associated with the Company's printing operations. PROPERTY AND EQUIPMENT - Property and equipment is stated at cost less depreciation computed under the straight-line method over the estimated useful life of the asset, generally from 3 to 10 years. Leasehold improvements and equipment held under capital leases are amortized over the lesser of the lease term or the estimated useful life of the asset. Depreciation expense for continuing operations was $1,054 in the year ended June 30, 2000; $2 in each of the six months ended June 30, 1999 and 1998; and $4 in each of the years ended December 31, 1998 and 1997. Depreciation expense for discontinued operations was $426 in the year ended June 30, 2000; $219 and $332 in the six months ended June 30, 1999 and 1998, respectively; and $588 and $610 in the years ended December 31, 1998 and 1997, respectively. INVESTMENT IN AFFILIATED COMPANIES - The Company accounts for its investments in Gray, Rawlings, iHigh.com and prior to December 17, 1999, Host and Capital, by the equity method, and its investments in Total Sports, Tarzian and prior to December 17, 1999, USA, by the cost method. On December 17, 1999, the Company acquired the capital stock of Host, USA and Capital not then owned, directly or indirectly, by the Company. The excess of the Company's investment over the underlying equity of equity method investments, totaling approximately $23,118 and $31,750 as of June 30, 2000 and 1999, respectively, and $29,600 as of December 31, 1998, is being amortized over 20 to 40 years, with such amortization (totaling $864 in the year ended June 30, 2000, $549 and $389 in the six months ended June 30, 1999 and 1998, respectively, and $777 and $610 in the years ended December 31, 1998 and 1997, respectively) reported as a reduction in the Company's equity in earnings of affiliated companies. The Company has accounted for its investments in Host (prior to the December 17, 1999 acquisition) and Rawlings by the equity method on a six-month and one-month lag basis, respectively. The Company recognizes a gain or loss on the issuance of shares by an affiliated company resulting in dilution of the Company's investment. The gain or loss is determined based on the difference between the Company's post-issuance allocable share of the affiliate's underlying equity, compared to the Company's allocable share of the affiliate's underlying equity immediately prior to the issuance. Deferred taxes are provided on recognized gains. 25 26 GOODWILL AND OTHER LONG-LIVED ASSETS - Goodwill and purchased intangibles (i.e., customer base and trademarks) associated with the Company's acquisition of Host, USA and Capital is being amortized over 20 years. The carrying value of goodwill, as well as other long-lived assets, are reviewed if the facts and circumstances suggest that they may be impaired. If an evaluation is required, the estimated future undiscounted cash flows associated with these assets would be compared to their carrying amount to determine if a write down to fair market value or discounted cash flow value is required. Accumulated amortization of acquisition intangibles was $2,602 as of June 30, 2000, including $1,939 associated with goodwill. 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. A valuation allowance is recognized on certain deferred tax assets if it is more likely than not that some or all of these deferred tax assets will not be realized. STOCK-BASED COMPENSATION - Except for stock options granted to former Host and USA optionholders in connection with the Host-USA Acquisition, the Company grants stock options for a fixed number of shares to employees with an exercise price equal to the fair value of the shares at the date of grant. In accordance with APB Opinion No. 25, "Accounting for Stock Issued to Employees", no compensation expense is recognized for such grants. The value of stock options issued by the Company in connection with the Host-USA Acquisition, having an exercise price which was less than the fair value of the shares on December 17, 1999, is included as a component of the Host-USA Acquisition price (see Note 4). EARNINGS (LOSS) PER SHARE - Basic and diluted earnings (loss) per share are determined in accordance with Financial Accounting Standards Board Statement No. 128, "Earnings Per Share", whereby basic earnings per share excludes any dilutive effects of stock options. In periods where they are anti-dilutive, dilutive effects of stock options are excluded from the calculation of dilutive earnings (loss) per share. RECENTLY-ISSUED ACCOUNTING STANDARD - In June 1998, the Financial Accounting Standards Board issued Statement No. 133, "Accounting for Derivative Instruments and Hedging Activities". The Company will be required to adopt the new Statement effective July 1, 2000. The Statement will require the Company to recognize all derivatives on the balance sheet at fair value. The Company's adoption of this Statement resulted in an increase in Stockholders' Equity and Total Assets of $3,160 on July 1, 2000. In addition, the Statement could increase the volatility in earnings and comprehensive income for fiscal reporting periods subsequent to June 30, 2000 as a result of recognizing the net change in the value of an interest rate swap agreement during future periods. 4. HOST-USA ACQUISITION On December 17, 1999, the Company acquired the stock of Host, USA and Capital not previously owned, directly or indirectly, by the Company (the "Host-USA Acquisition"). Aggregate consideration (net of cash acquired) was approximately $116,900, which included common stock (totaling 11,687 shares) and stock options (for a total of 2,819 shares of common stock) valued at approximately $52,300, 8% subordinated notes having a face value of approximately $18,600, cash (net of approximately $9,700 in cash acquired) of $44,800 and transaction expenses of approximately $1,200. 26 27 Prior to the Host-USA Acquisition, the Company accounted for its investment in Host and Capital under the equity method, and for its investment in USA under the cost method. Beginning December 17, 1999, the financial results of Host, USA and Capital have been consolidated with those of the Company. The acquisition has been accounted for under the purchase method of accounting, whereby the assets and liabilities of the acquired businesses have been included as of December 17, 1999 based on a preliminary allocation of the purchase price. The preliminary allocation of the purchase price was based upon estimated fair values at the date of acquisition and is subject to refinement upon obtaining certain additional information. The excess of the purchase price over assets acquired (i.e., goodwill) of approximately $66.4 million is being amortized on a straight-line basis over 20 years. The estimated fair values of assets and liabilities acquired are summarized as follows:
(RESTATED) Receivables $ 42,218 Inventories 918 Prepaid costs and expenses 6,740 Income taxes receivable 2,689 Property and equipment 7,112 Investment in affiliated companies 11,320 Goodwill 66,444 Customer base and trademarks 24,500 Other assets 1,075 Current liabilities assumed (42,763) Deferred income taxes (58) Other liabilities assumed (330) --------- 119,865 Less: Investment in Host, Capital and USA immediately prior to the acquisition (14,339) --------- 105,526 Purchase price in excess of fair values of assets and liabilities acquired 11,330 --------- $ 116,856 =========
Host, based in Lexington, Kentucky, and USA, based in Dallas, Texas, provide media and marketing services to universities, athletics conferences and various associations representing collegiate sports and, in addition, market and operate amateur participatory sporting events. Capital has no operations. Effective July 1, 2000, USA was merged into Host. As a result of the anticipated reorganization following the Host-USA Acquisition, the Company accrued approximately $195 for costs to close certain duplicative office facilities and accrued approximately $1,500 in severance costs for approximately fifty terminated employees of the acquired companies, primarily in the Affinity Marketing and Production Services and the Affinity Events business segments. These costs were accrued as part of the preliminary allocation of the purchase price. The facility consolidation and employee terminations resulted primarily from combining certain office facilities and duplicative functions, including management functions, of Host and USA. Although the Company has finalized its reduction and relocation of employees, it has not yet completed consolidation of its facilities. Any adjustment to the accrual for facility consolidation costs subsequent to June 30, 2000 is not expected to be significant. These adjustments, if any, will be reported as an increase or decrease in goodwill. Through June 30, 2000, the Company had charged $566 (which consisted of cash expenditures) against the reserve, and the accrual for future costs to be incurred was $1,129 as of June 30, 2000. 27 28 Pro forma operating results, assuming the Host-USA Acquisition had been consummated as of July 1, 1999, January 1, 1999 and January 1, 1998 for the year ended June 30, 2000, the six months ended June 30, 1999 and the year ended December 31, 1998, respectively, would have been as follows:
YEAR ENDED SIX MONTHS ENDED YEAR ENDED JUNE 30, JUNE 30, DECEMBER 31, 2000 1999 1998 ----------- ---------------- ----------- (UNAUDITED) (UNAUDITED) (UNAUDITED) (RESTATED) (RESTATED) (RESTATED) Net revenue $ 129,711 $ 53,974 $ 113,289 Operating loss (3,317) (9,898) (4,315) Loss from continuing operations (13,823) (10,976) (5,975) Net loss (20,662) (10,976) (5,975) Loss per share: Basic $ (0.60) $ (0.32) $ (0.17) Diluted $ (0.60) $ (0.32) $ (0.17)
Pro forma operating income (loss) includes amortization of acquisition intangibles of $4,545 for the years ended June 30, 2000 and December 31, 1998, and $2,318 for the six months ended June 30, 1999. The pro forma results do not include the $11,330 charge for the correction of the purchase price allocation. These pro forma results are not necessarily indicative of actual results that might have occurred had the operations and management of the Company and the acquired companies been combined in prior years. 5. DISCONTINUED OPERATION On July 26, 2000, the Company's Board of Directors authorized management to sell the operating assets of Datasouth, the Company's computer printer manufacturing operation. The Company's decision to discontinue its Datasouth operations was attributable to the strategic decision to focus on the sports, affinity marketing and management businesses acquired on December 17, 1999. Immediately following the board's authorization, the Company formalized its plan of disposal and began to aggressively pursue a sale of the assets of Datasouth to a potential purchaser. The Company consummated the sale of Datasouth on September 29, 2000. Accordingly, the operating results and net assets associated with Datasouth's computer printer manufacturing business as of and for the year ended June 30, 2000 and all prior periods presented herein have been reported as discontinued operations in the accompanying financial statements. An estimated loss on the sale of Datasouth of $6,522, including a $350 pretax provision for estimated operating losses during the disposal period, have been combined with Datasouth's operating results and presented as discontinued operations in the financial statements for the year ended June 30, 2000. The proceeds expected to be realized on the sale of Datasouth's assets are based on management's estimates of the most likely outcome, considering, among other things, the Company's current discussions with a potential buyer. Management's estimate of operating losses during the expected disposal period is based on management's knowledge of customer ordering patterns, industry trends and estimates of the length of time until a sale might be consummated. Actual amounts ultimately realized on the sale and losses incurred during the disposal period could differ materially from the amounts assumed in arriving at the loss on disposal. To the extent actual proceeds or 28 29 operating results during the expected disposal period differ from the estimates that are reported as of June 30, 2000, or as management's estimates are revised, such differences will be reported as discontinued operations in future periods. Management expects to use the proceeds from the sale to reduce outstanding debt under its bank credit agreements and pay transaction expenses estimated to be less than $100. Assets and liabilities of the discontinued operations have been reflected in the consolidated balance sheets as current or noncurrent based on the original classification of the accounts, except that current assets are presented net of current liabilities and noncurrent assets are presented net of noncurrent liabilities. As of June 30, 2000, net noncurrent assets reflect a valuation allowance of $7,419 to recognize the estimated loss on disposal. The following is a summary of assets and liabilities of discontinued operations:
JUNE 30, DECEMBER 31, -------------------------- ----------- 2000 1999 1998 ------- ------- ----------- Current assets: Accounts receivable, net $ 3,166 $ 3,660 $ 5,615 Inventories 5,501 5,505 5,167 Other current assets 328 82 197 Current liabilities: Accounts payable and accrued expenses (2,709) (2,402) (2,433) -------- -------- -------- $ 6,286 $ 6,845 $ 8,546 ======== ======== ======== Noncurrent assets: Property, plant and equipment, net of accumulated depreciation $ 2,254 $ 2,599 $ 2,609 Goodwill 7,419 7,417 7,583 Other assets 38 63 70 Deferred income taxes 2,093 621 273 Provision for estimated loss on disposal of discontinued operations (7,419) -------- -------- $ 4,385 $ 10,700 $ 10,535 ======== ======== ========
The following summarizes revenues and operating results from discontinued operations:
YEAR ENDED SIX MONTHS ENDED YEARS ENDED June 30, June 30, December 31, 2000 1999 1998 1998 1997 ---- ---- ---- ---- ---- (unaudited) Revenue from printer operations $ 24,959 $ 13,636 $ 14,157 $29,848 $ 21,639 Income (loss) from operations (326) (338) (56) 464 (141)
No interest expense has been allocated to discontinued operations. There are no material contingent liabilities related to discontinued operations, such as product or environmental liabilities or litigation, that are expected to remain with the Company after the disposal of Datasouth's assets. 29 30 6. SUPPLEMENTAL CASH FLOW DISCLOSURES
YEAR ENDED SIX MONTHS ENDED YEARS ENDED JUNE 30, JUNE 30, DECEMBER 31, 2000 1999 1998 1998 1997 ------- ------ ------- ------- ------ (unaudited) Interest paid $ 8,323 $2,346 $ 2,050 $ 4,404 $2,460 Income taxes paid (recovered), net 397 3 (25) (58) Noncash investing and financing activities: Treasury stock issued in business acquisition 2,500 2,500 Deferred payment on investment in stock warrant 1,421 Common stock and stock options issued in Host-USA Acquisition 52,258 Issuance of subordinated notes in Host-USA Acquisition 18,594
7. INVESTMENT IN AFFILIATED COMPANIES The Company's investment in affiliated companies consists of the following:
JUNE 30, 2000 JUNE 30, 1999 DECEMBER 31, 1998 AFFILIATE AMOUNT VOTING % AMOUNT VOTING% AMOUNT VOTING% --------- ------ -------- ------ ------ ------ ------- Gray $46,057 26.2% $45,513 27.5% $46,151 27.4% Tarzian 10,000 33.5% 10,000 33.5% Rawlings 8,071 10.2% 13,008 10.6% 12,422 10.3% Total Sports 7,151 10.6% 3,500 7.6% 2,500 7.7% iHigh.com 5,416 37.0% Host 2,747 7.7% 2,896 7.7% Capital 9,893 48.5% 10,148 48.5% USA 650 3.0% 650 3.0% Other 1,240 ------- ------- -------- Total $77,935 $85,311 $ 74,767 ======= ======= ========
Equity in earnings (losses) of affiliated companies consists of the following:
YEAR ENDED SIX MONTHS ENDED YEARS ENDED JUNE 30, JUNE 30, DECEMBER 31, ---------------- ----------------- AFFILIATE 2000 1999 1998 1998 1997 --------- ---- ---- ---- ---- ---- (unaudited) Gray $(1,826) $(757) $(455) $6,127 $(844) Rawlings (1,770) 164 501 237 iHigh.com (706) Host 492 (149) (53) 124 25 Capital 1,091 (255) (139) 246 220 Other 21 ------- ----- ----- ------ ----- Total $(2,698) $(997) $(146) $6,734 $(599) ======= ===== ===== ====== =====
30 31 INVESTMENT IN GRAY AND GAIN ON ISSUANCE OF COMMON SHARES - As of June 30, 2000, the Company owned approximately 13.1% of Gray's outstanding common stock, shares of series A and series B preferred stock having an aggregate face value of $11,750 and warrants to purchase additional shares of Gray's class A and class B common stock. Gray is a communications company, based in Atlanta, Georgia, that operates thirteen network affiliated television stations, four daily newspapers, and other media properties. Certain executive officers of the Company are also executive officers of Gray. In October 1999, Gray acquired three television stations for consideration that included 3,436 shares of Gray's class B common stock valued at approximately $49,500. As a result of such issuance, the Company's common equity ownership of Gray was reduced from 16.9% to 13.1% (resulting in a reduction in the Company's voting interest in Gray from 27.5% to 26.2%). As a result of this dilution, the Company recognized a $2,492 pretax gain on Gray's issuance of shares in the year ended June 30, 2000. In July 1998, Gray disposed of a television station and recognized an after-tax gain of approximately $43,000 in connection with the disposition. As a result, the Company's equity in Gray's earnings was favorably impacted by approximately $6,900 in 1998. The Company provides consulting services to Gray from time to time in connection with Gray's acquisitions (including acquisition financing) and dispositions. As a result of the Company's 13.1% equity investment in Gray, approximately 13.1% of consulting fees charged to Gray is deferred and recognized as consulting fee income over 40 years. The Company recognized consulting fee income from Gray of $1,311 for the year ended June 30, 2000; $609 and $652 for the six months ended June 30, 1999 and 1998, respectively; and $1,618 and $681 for the years ended December 31, 1998 and 1997, respectively, for services rendered in connection with certain of Gray's acquisitions and dispositions. As of June 30, 2000 and 1999, income from additional consulting fees of $699 and $608, respectively, has been deferred and will be recognized as Gray amortizes goodwill associated with its acquisitions. The Company owns all of shares of Gray's series A preferred stock entitling the holder thereof to annual cash dividends of $800 per share, payable quarterly, which are cumulative. The Company also owns 50% of Gray's series B preferred stock entitling the holder thereof to annual dividends of $600 per share, payable quarterly, which are cumulative. Dividends on the series B preferred stock are payable in cash or in additional shares of series B preferred stock, at Gray's option. Total dividend income on Gray series A and B preferred stock recognized by the Company was $905 for the year ended June 30, 2000; $452 and $550 for the six months ended June 30, 1999 and 1998, respectively; and $1,072 and $1,100 for the years ended December 31, 1998 and 1997, respectively. In 1998, Gray redeemed $3,805 of the series B preferred stock held by the Company. In connection with the Company's purchases of Gray's series A and series B preferred stock in 1996, the Company acquired warrants to purchase up to 731 shares of Gray's class A common stock at $11.92 per share and warrants to purchase up to 375 shares of Gray's class A common stock at $16.00 per share. Of the total warrants owned by the Company to purchase 1,106 shares of Gray's class A common stock, 990 are fully vested and exercisable as of June 30, 2000, with the remaining warrants vesting periodically through 2001. All warrants for Gray's class A common stock expire in 2006. The Company's warrants for 100 shares of Gray's class B common stock are described under "Investment in Tarzian" below. Gray's class A and class B common stock is publicly traded on the New York Stock Exchange (symbols: GCS and GCS.B, respectively). The aggregate market value of Gray common stock owned by the Company, which excludes the value of the Company's investments in Gray 31 32 preferred stock and warrants to purchase additional shares of Gray's common stock, was $19,913 on June 30, 2000 and $40,519 on June 30, 1999. INVESTMENT IN TARZIAN - In January 1999, the Company acquired shares of the outstanding common stock of Tarzian for $10,000. The acquired shares represent 33.5% of the total outstanding common stock of Tarzian as of June 30, 2000, both in terms of the number of shares of common stock outstanding and in terms of voting rights, but such investment represents 73% of the equity of Tarzian for purposes of dividends, as well as distributions in the event of any liquidation, dissolution or other termination of Tarzian. Tarzian filed a complaint with the United States District Court for the Southern District of Indiana, claiming that it had a binding contract with the seller to purchase the shares from the seller prior to the Company's purchase of the shares, and requests judgment providing that the seller be required to sell the shares to Tarzian. The Company believes that a binding contract between Tarzian and the seller did not exist prior to the Company's purchase of the shares, and in any case, the Company's purchase agreement with the seller provides that in the event that a court of competent jurisdiction awards title to a person or entity other than the Company, the purchase agreement is rescinded, and the seller is required to pay the Company the full $10,000 purchase price, plus interest. Tarzian owns and operates two television stations and four radio stations: WRCB-TV Channel 3 in Chattanooga, Tennessee, an NBC affiliate; KTVN-TV Channel 2 in Reno, Nevada, a CBS affiliate; WGCL-AM and WTTS-FM in Bloomington, Indiana; and WAJI-FM and WLDE-FM in Fort Wayne, Indiana. In March 1999, the Company executed an option agreement with Gray, whereby Gray has the option of acquiring the Tarzian investment from the Company for $10,000 plus related costs. Gray has the ability to extend the option period in 30-day increments at a fee of $67 per extension and as of June 30, 2000, has extended this option period through October 31, 2000. In addition, the Company receives a fee of $50 per month for services rendered in connection with the original investment in Tarzian. A portion of the option income and finders fee is deferred and recognized over 40 years as a result of the Company's equity investment position in Gray. The Company recognized option and finders fee income from Gray of $810 for the year ended June 30, 2000, and $222 for the six months ended June 30, 1999. As of June 30, 2000 and 1999, option and finder fee income of $152 and $45, respectively, has been deferred and will be recognized as Gray amortizes goodwill associated with its acquisitions. The Company received from Gray warrants to acquire 100 shares of Gray's class B common stock at $13.625 per share, in connection with the option agreement. The warrants will vest immediately upon Gray's exercise of the option. The warrants expire 10 years following the date on which Gray exercises its option. INVESTMENT IN RAWLINGS - In November 1997, the Company entered into an Investment Purchase Agreement with Rawlings (the "Purchase Agreement"), a supplier of team sports equipment based near St. Louis, Missouri. Pursuant to the Purchase Agreement, the Company acquired warrants to purchase approximately 10% of Rawlings' common stock, and has the right, under certain circumstances, to acquire additional warrants. The Company's total cost to purchase the warrants pursuant to this agreement (excluding the additional warrants) was $2,842. Fifty percent of the purchase price, or $1,421, was paid to Rawlings upon execution of the agreement in November 1997. The remaining fifty percent, plus interest at 7% per annum from November 21, 1997 until the date of payment, will be due on the earlier of the date of exercise or the date of expiration of the warrants. In the event of a partial exercise of warrants, a pro rata portion of the purchase price with interest accrued thereon will be payable. The warrants have a four-year term and an exercise price of $12.00 per share, but are exercisable only if Rawlings' common stock closes at or above $16.50 for twenty consecutive trading days during the four-year term. During the year ended June 30, 2000, 32 33 the Company reduced the book value of its investment in the Rawlings warrant to zero, recognizing a $2,850 expense. Under the terms of the Purchase Agreement, the Company also acquired approximately 10.2% of Rawlings' outstanding common stock in the open market from November 1997 through January 1998. The Company has the right to appoint two members to Rawlings' board of directors, currently having a total of seven members. The Company and Rawlings also entered into a Standstill Agreement, which, among other things, provides that, for a specified period, the Company will be restricted in acquiring additional shares of Rawlings' common stock or participating in certain types of corporate events relating to Rawlings, including proxy contests and tender offers, subject to certain exceptions. Pursuant to a Registration Rights Agreement, Rawlings has also granted the Company rights to have shares issuable upon the exercise of the warrants (and the additional warrants, if any) registered under the Securities Act of 1933 under certain circumstances. In its fiscal quarter ended May 31, 2000, Rawlings recognized an after tax charge of $12,800 associated with its decision to sell its Vic hockey business. As a result, the Company's pretax equity in losses of Rawlings was negatively impacted in the year ended June 30, 2000 by approximately $1,300. Rawlings' common stock is publicly traded on the Nasdaq Stock Market (symbol: RAWL). The aggregate market value of Rawlings common stock owned by the Company was $5,437 on June 30, 2000 and $8,260 on June 30, 1999. INVESTMENT IN TOTAL SPORTS - In 1998, the Company acquired shares of Total Sports series C convertible preferred stock for $2,500. In January 1999, the Company invested an additional $1,000 for shares of series C1 convertible preferred stock. In December 1999 in connection with the Host-USA Acquisition, the Company acquired Total Sports common stock owned by Host valued at $3,651. Total Sports, based in Raleigh, North Carolina, is a web site services provider for amateur and professional sports organizations and conferences, college athletic departments, and selected corporations. Assuming conversion of all Total Sports preferred stock, the Company's investment equates to approximately a 10.6% share of Total Sports capital stock as of June 30, 2000. Dividends on the series C and series C1 convertible preferred stock are cumulative, and accrue at $.85 per share per annum and $1.14 per share per annum, respectively, from the issue date, and are payable quarterly at Total Sports' discretion. Accumulated and unpaid dividends on outstanding series C and series C1 preferred stock are to be paid in cash on July 31, 2003. Due to the speculative nature of the Company's investment in Total Sports, and due to the preference of series A and series B preferred shareholders with respect to Total Sports dividend rights, the Company has not recognized dividend income on its preferred stock investment in Total Sports. In November 2000, Total Sports was sold to Quokka Sports, Inc. ("Quokka"). In exchange for its investment in preferred stock and common stock of Total Sports, the Company received Quokka common stock and warrants to purchase Quokka common stock. Quokka's common stock was publicly traded on the Nasdaq Stock Market (symbol: QKKA), until April 2001, when Quokka announced its intention to seek protection under the Federal Bankruptcy Code. The number of shares of Quokka common stock ultimately received by the Company in exchange for its Total Sports capital stock was determined based on the value of Quokka common stock at the closing date and the rights accorded Total Sports' preferred stockholders. INVESTMENT IN IHIGH.COM - In connection with the Host-USA Acquisition, the Company acquired 39.4% of the then outstanding common stock of iHigh.com valued at $6,122. Subsequently, iHigh.com issued additional shares such that the Company owns 37% of the outstanding common stock of iHigh.com as of June 30, 2000. 33 34 INVESTMENTS IN HOST, USA AND CAPITAL - Prior to the Host-USA Acquisition effective December 17, 1999, the Company was effectively Host's largest stockholder, owning directly or indirectly approximately 32.5% of Host's outstanding common stock and 51.5% of Host's preferred stock. The Company's indirect ownership of Host's common stock and Host's preferred stock was owned by Capital, in which the Company owned 51.5% of the outstanding common stock. The Company and Host together were the largest stockholders of USA, with the Company owning approximately 3% of USA's outstanding capital stock and Host owning approximately 33.8% of USA's outstanding capital stock. Capital's assets consisted solely of investments in Host's outstanding common stock and all of Host's 8% series B preferred stock. The Company recognized its equity in earnings of Host on a six-month lag basis. In January 1999, USA sold its investment in broadcast.com, inc., a marketable security, recognizing an after-tax gain of approximately $40,000. As a result of Host's equity investment in USA and the Company's equity investment in Host reported on a six-month lag basis, the Company recognized approximately $1,900 as equity in earnings of affiliates in the year ended June 30, 2000 due to USA's gain on the disposal of broadcast.com, inc. SUMMARIZED AGGREGATE FINANCIAL INFORMATION (unaudited) - The aggregate financial position of affiliated companies accounted for by the equity method (reflecting Gray as of June 30, 2000, June 30, 1999 and December 31, 1998; combined, for the June 30, 2000 data only, with iHigh.com and certain other equity investments as of June 30, 2000; combined with Rawlings as of May 31, 2000, May 31, 1999 and November 30, 1998; combined, for the June 30, 1999 and December 31, 1998 data only, with Capital as of June 30, 1999 and December 31, 1998, and Host as of December 31, 1999 and June 30, 1998) is as follows:
June 30, ------------------------ December 31, 2000 1999 1998 --------- --------- --------- Current assets $ 124,272 $ 148,446 $ 144,648 Property and equipment 90,124 71,665 70,614 Total assets 769,437 658,364 644,568 Current liabilities 100,099 64,514 59,699 Long-term debt 382,434 352,090 339,677 Total liabilities 568,274 477,219 462,833 Stockholders' equity 201,163 181,145 181,735
The aggregate operating results of affiliated companies accounted for by the equity method (reflecting Gray for the year ended June 30, 2000, the six months ended June 30, 1999 and 1998, and the years ended December 31, 1998 and 1997; combined with iHigh.com and certain other equity investments for the year ended June 30, 2000; combined with Rawlings for the year ended May 31, 2000, the six months ended May 31, 1999 and 1998, and the years ended November 30, 1998 and 1997; combined with Capital for the six months ended June 30, 1999 and 1998, and the years ended December 31, 1998 and 1997; combined with 34 35 Host for the six months ended December 31, 1998 and 1997, and the years ended June 30, 1998 and 1997) is as follows:
YEAR ENDED SIX MONTHS ENDED YEARS ENDED JUNE 30, JUNE 30, DECEMBER 31, ------------------- ------------ 2000 1999 1998 1998 1997 ---- ---- ---- ---- ---- Operating revenue $ 369,374 $ 190,094 $185,708 $347,850 $294,583 Income from operations 24,708 15,284 24,047 37,351 34,106 Net income (loss) (23,051) (938) 5,062 47,546 4,845
Undistributed earnings of investments accounted for by the equity method amount to approximately $260 as of June 30, 2000. 8. PROPERTY AND EQUIPMENT The Company's property and equipment consist of the following:
JUNE 30, ------------- DECEMBER 31, 2000 1999 1998 ---- ---- ---- Land $ 448 $ $ Building 950 Leasehold and building improvements 560 Machinery & equipment 2,274 Office furniture and equipment 3,700 43 38 ------ --- --- 7,932 43 38 Accumulated depreciation and amortization 1,064 21 24 ------ --- --- $6,868 $22 $14 ====== === ===
9. ACCRUED AND OTHER LIABILITIES Accrued and other liabilities consist of the following:
JUNE 30, -------------------- DECEMBER 31, 2000 1999 1998 ---- ---- ---- (RESTATED) Incurred unbilled costs $ 2,279 $ $ Guaranteed rights fees and profit splits 6,879 Deferred income 15,581 Interest 1,030 579 396 Other 4,403 766 178 ------- ------ ---- $30,172 $1,345 $574 ======= ====== ====
10. LONG-TERM DEBT AND NOTES PAYABLE In connection with the Host-USA Acquisition the Company entered into a new credit agreement with a group of banks on December 17, 1999, as modified in 2000, providing for (a) two term loans (the "Term Loans") for borrowings totaling $95,000, bearing interest at 35 36 either the banks' prime rate or the London Interbank Offered Rate ("LIBOR") plus 2.5%, requiring a minimum aggregate principal payment of $10,000 by December 17, 2000, with all amounts outstanding under the term loans due on December 17, 2001; and (b) a revolving loan commitment (the "Revolver") for borrowings of up to a maximum amount ranging from $25,000 to $35,000 through December 17, 2001, bearing interest at either the banks' prime rate or LIBOR plus 2.5%. Borrowings under the Revolver are limited to an amount not to exceed a percentage of eligible accounts receivable, determined monthly, and such borrowings may include up to $20,500 in outstanding letters of credit. As of June 30, 2000, borrowings of $19,200 and letters of credit totaling $3,835 were outstanding under the Revolver, and additional available borrowing capacity under the Revolver was $560 at that date. As of June 30, 2000, borrowings totaling $99,900 under the Term Loans and the Revolver were subject to a LIBOR-based rate of 9.31% and borrowings of $14,300 were subject to the banks' prime rate of 9.5%. Interest on prime rate advances is payable quarterly and at least quarterly on LIBOR-based borrowings. The credit agreement contains certain financial covenants, the most restrictive of which requires the maintenance of a debt service coverage ratio determined quarterly. On September 28, 2000, the Company amended certain provisions of the credit agreement to, among other things, ease covenant restrictions. Long-term debt is collateralized by all of the Company's assets, including all of its investments in affiliated companies. As a result of issues pertaining to the restatement of financial statements discussed in Note 2, among other reasons, the Company was not in compliance with certain financial covenants and other provisions considered to be events of default under the terms of the credit agreement as of March 31, 2001; however, the Company obtained a waiver of these events of default. On July 27, 2001, the Company and its lenders amended certain provisions of the credit agreement to, among other things, (a) revise future financial covenants; (b) change the maturity date of the credit agreement from December 17, 2001 to July 1, 2002; (c) revise the interest rate on the term loans to prime plus 1.5% or LIBOR plus 4.0% and the Revolver to prime plus 1.0% or LIBOR plus 3.5%; and (d) require principal payments of at least $10,000 on or before October 15, 2001 plus $10,000 on or before December 15, 2001. Also in connection with the Host-USA Acquisition, the Company issued subordinated notes on December 17, 1999, bearing interest at 8%, having an aggregate face value of $18,594. Interest is payable quarterly until maturity on January 17, 2003. Payment of interest and principal are subordinate to the bank credit agreement. The new bank credit agreement and the subordinated notes provided the necessary financing for the Host-USA Acquisition, and refinanced all existing bank indebtedness of the Company, Host and USA. Prior to the Host-USA Acquisition, the Company had long-term debt agreements and notes with two banks providing for (a) two term notes payable to a bank under which $42,313 was outstanding on June 30, 1999 and December 31, 1998; (b) two term notes payable to a bank issued in 1999, under which $1,353 was outstanding on June 30, 1999; (c) a revolving bank credit facility for borrowings of up to $3,500, under which $3,392 was outstanding on June 30, 1999 and $2,536 was outstanding on December 31, 1998; (d) a term note, under which $3,500 was outstanding on June 30, 1999 and $4,000 was outstanding on December 31, 1998; (e) a revolving bank credit facility for borrowings of up to $5,000, under which $4,803 was outstanding on June 30, 1999 and $5,000 was outstanding on December 31, 1998; (f) a bank note in the amount of $10,000 outstanding as of June 30, 1999; and (g) a demand bank note for borrowings of up to $2,000, bearing interest at the bank's prime rate, under which $2,000 was outstanding as of June 30, 1999 and December 31, 1998. As a result of the potential for future covenant violations under the credit facilities, the Company classified all of its long-term debt as current as of June 30, 1999. As of June 30, 1999, the weighted average interest rate for the term notes 36 37 was 6.91%, and the weighted average interest rate for the revolving bank notes and notes payable was 7.75%. The Company is a party to two interest rate swap agreements, which effectively modify the interest characteristics of $45,000 of its outstanding long-term debt. The first agreement, effective January 1, 1999, involves the exchange of amounts based on a fixed interest rate of 8.58% for amounts currently based on a variable interest rate of LIBOR plus 2.5% through December 31, 2002, without an exchange of the $20,000 notional amount upon which the payments are based. The second agreement, effective January 5, 2000, involves the exchange of amounts based on a fixed interest rate of 9.21% for amounts currently based on a variable interest rate of LIBOR plus 2.5% through December 31, 2002 (or December 31, 2004, at the bank's option), without an exchange of the $25,000 notional amount upon which the payments are based. The differential paid or received as interest rates change is settled quarterly and is accrued and recognized as an adjustment of interest expense related to the debt. In connection with the Company's bank credit facilities the Company's chairman of the board entered into a guarantee agreement in favor of the banks for up to $75,000, for which he received compensation from the Company during the year ended June 30, 2000 in the form of 305 restricted shares of the Company's common stock valued at $1,219. Such agreement provides that if the Company defaults on its bank loan, the chairman will repay the amount of such loan to the banks. If he is obligated to pay such amount, he would have the right to purchase certain of the Company's collateral under such loan as would be necessary for him to recoup his obligation, with such collateral including the Company's investments in Gray and Tarzian. In connection with the waiver and amendment in 2001, the Company's chairman increased his personal guarantee of the Company's debt under its bank credit agreement to $100,000. 11. INCOME TAXES The Company's income tax benefit (provision) attributable to continuing operations consists of the following:
YEAR ENDED SIX MONTHS ENDED YEARS ENDED JUNE 30, JUNE 30, DECEMBER 31, ----------------------- ----------------------- 2000 1999 1998 1998 1997 ---- ---- ---- ---- ---- (RESTATED) (UNAUDITED) Current: Federal $ $ $ $ $ 50 State (271) ------- ------ (271) 50 Deferred 4,639 944 542 (1,599) 982 ------- ---- ------- ------- ------ $ 4,368 $944 $ 542 $(1,599) $1,032 ======= ==== ======= ======= ======
37 38 The principal differences between the federal statutory tax rate and the effective tax rate applicable to continuing operations are as follows:
YEAR SIX MONTHS ENDED YEARS ENDED ENDED JUNE 30, DECEMBER 31, JUNE 30, -------------------- -------------------- 2000 1999 1998 1998 1997 --------- -------- -------- -------- -------- (RESTATED) (UNAUDITED) Federal statutory tax rate 34.0% 34.0% 34.0% 34.0% 34.0% Non-deductible goodwill amortization (3.6) Correction of purchase price allocation (15.9) State income taxes, net of federal benefit 1.5 Other, net 2.0 (1.9) (2.7) 7.2 6.1 ----- ----- ----- ---- ---- Effective tax rate 18.0% 32.1% 31.3% 41.2% 40.1% ===== ===== ===== ==== ====
Deferred tax liabilities (assets) associated with continuing operations are comprised of the following:
JUNE 30, ---------------------- DECEMBER 31, 2000 1999 1998 ------- ------- ------------ (RESTATED) Prepaid costs and expenses $ 668 $ $ Investment in affiliated companies 6,877 6,578 6,971 Property and equipment 749 Other, net 916 92 1 ------- ------- ------- Gross deferred tax liabilities 9,210 6,670 6,972 ------- ------- ------- Allowance for doubtful accounts (809) Accrued expenses (727) Deferred income (570) (262) (263) Nonqualified stock options outstanding (1,293) Charitable contributions (75) Net operating loss carryforward (4,838) (993) (535) Alternative Minimum Tax credit carryforward (490) (385) (492) ------- ------- ------- Gross deferred tax assets (8,802) (1,640) (1,290) ------- ------- ------- Total deferred taxes, net $ 408 $ 5,030 $ 5,682 ======= ======= =======
Income (loss) on the operations of the discontinued segment is presented net of a tax (provision) benefit of $10, $72, $(36), $(255) and $(92) for the year ended June 30, 2000, the six months ended June 30, 1999 and 1998, and the years ended December 31, 1998 and 1997, respectively. The loss on disposal of the discontinued segment for the year ended June 30, 2000 is presented net of an income tax benefit of $1,247. As of June 30, 2000, the Company has a net operating loss carryforward for tax purposes of approximately $14,200 expiring beginning in 2018 to reduce Federal taxable income in the future. The Company also has as of June 30, 2000 an Alternative Minimum Tax ("AMT") credit carryforward of $490, and a business credit carryforward of $142, to reduce regular Federal tax liabilities in the future. 38 39 12. STOCK OPTIONS The Company's 1994 Long Term Incentive Plan (the "1994 Plan") reserves 7,200 shares of the Company's common stock for issuance of stock options, restricted stock awards and stock appreciation rights, following shareholder approval on September 14, 1999 of an increase in the number of shares available for grant under the 1994 Plan. Certain options granted under the 1994 Plan are fully vested at the date of grant, and others vest over three to five year periods. Options granted under the 1994 Plan have terms ranging from five to ten years. In connection with the Host-USA Acquisition, options for an aggregate of 2,819 exercisable shares were granted to former holders of options for Host and USA shares, at exercise prices ranging from $.34 to $4.06 per share. As of June 30, 2000, June 30, 1999 and December 31, 1998, there were 2,207, 1,478 and 1,528 shares available for future option grants under the 1994 Plan, respectively. The Company's Non-Employee Directors' 1994 Stock Option Plan (the "1994 Directors' Plan") reserves 350 shares of the Company's common stock for issuance of stock options. Options under the 1994 Directors' Plan are fully vested when granted. Shares available for future option grants under the 1994 Directors' Plan were 160 as of June 30, 2000 and 170 as of June 30, 1999 and December 31, 1998. Information with respect to the Company's stock option plans follows:
OPTION OPTION SHARES PRICE RANGE -------- ------------- Outstanding as of January 1, 1997 2,035 $0.75 - $2.68 Grants 135 $2.31 - $2.44 Exercised (258) $0.75 - $1.48 Forfeited (30) $2.44 ------ OUTSTANDING AS OF DECEMBER 31, 1997 1,882 $0.75 - $2.68 Grants 50 $3.19 - $4.38 Exercised (254) $0.88 - $0.96 ------ OUTSTANDING AS OF DECEMBER 31, 1998 1,678 $0.75 - $4.38 Grants 50 $3.69 Exercised (198) $0.88 - $2.68 ------ OUTSTANDING AS OF JUNE 30, 1999 1,530 $0.75 - $4.38 Grants 3,004 $0.34 - $4.25 Exercised (652) $0.34 - $4.06 Forfeited (24) $2.31 - $2.41 ------ OUTSTANDING AS OF JUNE 30, 2000 3,858 $0.34 - $4.38 ====== EXERCISABLE AS OF: DECEMBER 31, 1997 1,287 $0.75 - $2.68 DECEMBER 31, 1998 1,387 $0.75 - $4.38 JUNE 30, 1999 1,363 $0.75 - $4.38 JUNE 30, 2000 3,594 $0.34 - $4.38
The weighted average per share fair value of options granted was $1.85 for the year ended June 30, 2000, $1.98 for the six months ended June 30, 1999, and $1.59 and $1.26 for the years ended December 31, 1998 and 1997. As of June 30, 2000, the number of outstanding shares under option, weighted average option exercise price and weighted average remaining option contractual life is as follows: 75 exercisable shares at $.75 per share, expiring in 2.3 years; 526 exercisable shares at $.88 per share, expiring in 4.0 years; 150 exercisable shares at $1.50 per share, expiring in 4.3 years; 380 exercisable shares at $2.63 per share, expiring in 1.9 years; 45 shares at $2.40 per share, expiring in 6.5 years (23 shares of which were 39 40 exercisable); 50 shares at $3.59 per share, expiring in 7.9 years (23 shares of which were exercisable); 60 shares at $3.73 per share expiring in 8.7 years (20 shares of which were exercisable); 2,397 exercisable shares at $1.03 per share expiring in 4.4 years; and 175 non-exercisable shares at $4.25 per share expiring in 9.8 years. Pro forma net income and earnings per share required by FASB Statement No. 123, "Accounting for Stock-Based Compensation" ("FAS 123") has been determined as if the Company had accounted for its employee stock options under the fair value method of that Statement. The fair values for these options were estimated at the time of grant using a Black-Scholes option pricing model assuming a risk-free interest rate of 6.32%, dividend yield of 0.0%, a volatility factor of .632, and a weighted-average expected life for the options of four to six years. Had compensation cost been measured based on the fair value based accounting of FAS 123, net income (loss) would have been $(26,846), or $(.92) per share (basic and diluted), for the year ended June 30, 2000; $(2,303), or $(.10) per share (basic and diluted), for the six months ended June 30, 1999; $2,224, or $.10 per share (basic and diluted), for the year ended December 31, 1998; and $(1,900), or $(.09) per share (basic and diluted), for the year ended December 31, 1997. These pro forma results are provided for comparative purposes only and do not purport to be indicative of what would have occurred had compensation cost been measured under FAS 123 or of results that may occur in the future. Since FAS 123 is applicable only to options granted subsequent to December 31, 1994, its pro forma effect will not be fully reflected until at least the year ending June 30, 2001. 13. FAIR VALUE OF FINANCIAL INSTRUMENTS The aggregate fair value of the Company's investment in affiliated companies was approximately $63,000, compared to the carrying value of $77,935, as of June 30, 2000; $105,000, compared to the carrying value of $85,311, as of June 30, 1999; and $88,000, compared to the carrying value of $74,767, as of December 31, 1998. The estimate of fair value was based on, in the case of publicly-traded Gray and Rawlings, quoted market prices on the New York Stock Exchange and the Nasdaq Stock Market as of June 30, 2000 and 1999, and December 31, 1998; in the case of Tarzian, acquisition cost; in the case of Total Sports and iHigh.com, recent transactions in its capital stock; in the case of privately-held Host, USA and Capital, for June 30, 1999 and December 31, 1998, the negotiated Host-USA Acquisition per share purchase price for shares not then owned by the Company; and management estimates. The fair value of the Company's interest rate swap agreements, having an aggregate notional amount of $45,000 as of June 30, 2000, $20,000 as of June 30, 1999 and $24,000 as of December 31, 1998, is not recognized in the financial statements. If, in the future, an interest rate swap agreement was terminated, any resulting gain or loss would be deferred and amortized to interest expense over the initial remaining life of the interest rate swap agreement. In the event of early extinguishment of a designated debt obligation, any realized or unrealized gain or loss from the swap would be recognized in the statement of operations coincident with the extinguishment. During the year ended June 30, 2000, the Company amended one of its agreements to change the termination date from December 31, 2007 to December 31, 2002, resulting in a cash settlement of $882, which was deferred and recognized as income ratably over the remaining term of the agreement. As of June 30, 2000, deferred income on the settlement to be recognized over the remaining 30 months of the agreement was $825. The estimated amount to be received on terminating the swap agreements, if the Company had elected to do so, was approximately $511 and $432 as of June 30, 2000 and 1999, respectively. 40 41 All other financial instruments, including cash, cash equivalents, receivables, payables and variable rate bank debt are estimated to have a fair value which approximates carrying value in the financial statements. 14. EARNINGS (LOSS) PER SHARE The following table sets forth the computation of basic and diluted earnings (loss) per share:
SIX MONTHS ENDED YEARS ENDED YEAR ENDED JUNE 30, DECEMBER 31, JUNE 30, -------------------------- ------------------------- 2000 1999 1998 1998 1997 ---------- ---------- ---------- ---------- ---------- (RESTATED) (UNAUDITED) Income (loss) from continuing operations $ (19,857) $ (1,995) $ (1,190) $ 2,279 $ (1,539) Income (loss) from discontinued operations (6,839) (266) (92) 81 (234) ---------- ---------- ---------- ---------- ---------- Net income (loss) $ (26,696) $ (2,261) $ (1,282) $ 2,360 $ (1,773) ========== ========== ========== ========== ========== Weighted average number of common shares outstanding for basic earnings (loss) per share 29,044 22,330 22,098 22,189 21,302 Effect of dilutive employee stock options 993 ---------- ---------- ---------- ---------- ---------- Adjusted weighted average number of common shares and assumed conversions for diluted earnings (loss) per share 29,044 22,330 22,098 23,182 21,302 ========== ========== ========== ========== ========== Basic earnings (loss) per share: Income (loss) from continuing operations $ (0.68) $ (0.09) $ (0.05) $ 0.10 $ (0.07) Loss from discontinued operations (0.24) (0.01) (0.01) 0.01 (0.01) ---------- ---------- ---------- ---------- ---------- Net income (loss) $ (0.92) $ (0.10) $ (0.06) $ 0.11 $ (0.08) ========== ========== ========== ========== ========== Diluted earnings (loss) per share: Income (loss) from continuing operations $ (0.68) $ (0.09) $ (0.05) $ 0.10 $ (0.07) Loss from discontinued operations (0.24) (0.01) (0.01) 0.00 (0.01) ---------- ---------- ---------- ---------- ---------- Net income (loss) $ (0.92) $ (0.10) $ (0.06) $ 0.10 $ (0.08) ========== ========== ========== ========== ==========
The effect of potentially dilutive employee stock options not considered above because they were anti-dilutive is 1,831 shares for the year ended June 30, 2000; 927 shares and 1,084 shares for the six months ended June 30, 1999 and 1998, respectively; and 847 shares for the year ended December 31, 1997. 15. RETIREMENT PLANS The Company has three 401(k) defined contribution benefit plans, two of which pertain to the employees of Host and USA, whereby employees of the Company may contribute a portion of their gross pay to the plan subject to limitations set forth by the Internal Revenue Service. The Company may make matching and/or discretionary contributions to the employees' accounts in amounts based on criteria set forth in the plan agreements. Total Company contributions to the plan were $349 for the year ended June 30, 2000 (including contributions made to the Host and USA plans subsequent to the Host-USA Acquisition effective date of December 17, 1999), $163 and $140 for the six months ended June 30, 1999 and 1998, respectively, and $252 and $208 for the years ended December 31, 1998 and 1997, respectively. 41 42 16. COMMITMENTS AND CONTINGENCIES The Company commits under certain contracts, the nature and terms of which vary, to the payment of guaranteed rights fees. Future guaranteed rights fee commitments at June 30, 2000 total approximately $92,000. The Company is also committed under contracts, the nature and terms of which vary, projects to share the net profits ("profit splits") with other parties to the contract. Profit split expense for the period December 17, 1999 (the effective date of the Host-USA Acquisition) through June 30, 2000 was $6,705. The Company is obligated under its contract with the NCAA expiring August 31, 2002 to issue an irrevocable letter of credit in contractually determined amounts to guarantee the Company's payments to the NCAA for each contract period. As of June 30, 2000, the outstanding letter of credit for the benefit of the NCAA was $3,625. The maximum letter of credit contractual requirement during the remainder of the NCAA contract in 2002 is $20,000. In July 2001, the Company announced that it had reached an agreement with CBS Sports for the exclusive right to administer the NCAA Corporate Partner Program, along with other NCAA marketing programs, beginning in September 2002 through August 2013. The new agreement with CBS Sports will likewise require the Company to issue an irrevocable letter of credit to guarantee each of the Company's annual guaranteed rights fee payments to CBS Sports. The Company has a 25% interest and NBA Properties, Inc. ("NBA") has a 75% interest in a joint venture, Hall of Fame Properties, LLC ("HOFP"). Under a contract executed in 1998, HOFP was granted exclusive marketing rights by the Naismith Memorial Basketball Hall of Fame ("HOF") for the HOF. Under the terms of the contract, HOFP solicits advertising and sponsorship revenues for the HOF intended to supplement funding for the museum facility. In exchange for these exclusive marketing rights, HOFP pays HOF a guaranteed amount of $2,117 per year during the first six years of the 10-year contract. The agreement also includes a revenue sharing arrangement between the parties based on certain revenue thresholds achieved in excess of the initial guarantee by HOFP. The joint venture agreement with NBA provides that the Company's portion of the liabilities associated with this joint venture will not exceed $530 annually. Bull Run's executive offices are leased from a company affiliated with a principal stockholder and director of the Company under an operating lease expiring in 2002. Host and USA have various operating leases for facilities and equipment expiring in 2001 through 2006. The Company's total rental expense was $1,843 for the year ended June 30, 2000, $226 and $263 for the six months ended June 30, 1999 and 1998, respectively, and $481 and $328 for the years ended December 31, 1998 and 1997, respectively. The minimum annual rental commitments under these and other leases with an original lease term exceeding one year are $2,687, $2,097, $1,484, $1,176 and $961 for the years ending June 30, 2001, 2002, 2003, 2004 and 2005, respectively, and $480 thereafter. The Company is 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. 42 43 17. SEGMENT DATA (UNAUDITED) Following the Host-USA Acquisition, the Company had four business segments associated with its continuing operations that provide different products or services: (a) marketing and production services, which primarily includes services rendered in connection with college and high school athletics ("Affinity Marketing and Production Services", formerly named the "Collegiate" segment); (b) event management and marketing services ("Affinity Events"); (c) association management services ("Affinity Management Services"); and (d) consulting services ("Consulting"). A fifth business segment, associated with computer printer manufacturing and related sales and services, has been classified as a discontinued segment. Information for each of the Company's segments associated with continuing operations is presented below. Operating results for the Affinity Marketing and Production Services, Affinity Events and Affinity Management Services segments only include results for the period December 17, 1999 (effective date of the Host-USA Acquisition) through June 30, 2000.
SIX MONTHS ENDED YEAR ENDED YEAR ENDED JUNE 30, DECEMBER 31, JUNE 30, -------------------- ---------------------- 2000 1999 1998 1998 1997 -------- -------- -------- -------- -------- (RESTATED) Net revenues, continuing operations: Affinity Marketing and Production Services $ 54,443 $ $ $ $ Affinity Events 11,312 Affinity Management Services 4,934 Consulting 1,311 609 652 1,618 681 -------- ----- ------- ------- ------- $ 72,000 $ 609 $ 652 $ 1,618 $ 681 ======== ===== ======= ======= ======= Income (loss) from continuing operations: Affinity Marketing and Production Services $ 4,354 $ $ $ $ Affinity Events (2,551) Affinity Management Services 568 Consulting 1,311 609 652 1,618 681 Amortization of acquisition intangibles (2,602) Unallocated general and administrative costs (3,010) (693) (691) (1,312) (1,039) -------- ----- ------- ------- ------- $ (1,930) $ (84) $ (39) $ 306 $ (358) ======== ===== ======= ======= =======
43 44
SIX MONTHS ENDED YEAR ENDED YEAR ENDED JUNE 30, DECEMBER 31, JUNE 30, -------------------- ---------------------- 2000 1999 1998 1998 1997 -------- -------- -------- -------- -------- (restated) Depreciation expense, continuing operations: Affinity Marketing and Production Services $ 692 $ $ $ $ Affinity Events 176 Affinity Management Services 181 Unallocated general and administrative costs 5 2 2 4 4 -------- ----- ------- ------- ------- $ 1,054 $ 2 $ 2 $ 4 $ 4 ======== ===== ======= ======= ======= Capital expenditures, continuing operations: Affinity Marketing and Production Services $ 910 $ $ $ $ Affinity Events 47 Affinity Management Services 182 Unallocated general and administrative expenditures 7 10 12 -------- ----- ------- ------- ------- $ 1,146 $ 10 $ $ $ 12 ======== ===== ======= ======= =======
JUNE 30, JUNE 30, 2000 1999 -------- -------- (RESTATED) Total assets, continuing operations: Affinity Marketing and Production Services $ 31,811 $ Affinity Events 7,151 Affinity Management Services 9,917 Investments in affiliated companies 77,935 85,311 Goodwill, customer base and trademarks 88,342 Net assets of discontinued segment 10,671 17,545 Other 2,728 1,461 -------- -------- $228,555 $104,317 ======== ========
44 45 SUPPLEMENTARY DATA SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED) (Dollars and shares in thousands, except per share amounts)
QUARTERS ENDED ---------------------------------------------------------------- SEPTEMBER 30, DECEMBER 31, MARCH 31, JUNE 30, 1999 1999 2000 2000 ------------- ------------ --------- --------- (RESTATED) (RESTATED) (RESTATED) Revenue from services rendered $ 670 $ 6,720 $ 39,426 $ 25,184 Operating income (loss) 270 (354) 1,088 (2,934) Income (loss) from continuing operations 23 (11,278) (1,935) (6,667) Income (loss) from discontinued operations 460 (56) (141) (7,102) Net income (loss) 483 (11,334) (2,076) (13,769) Income (loss) from continuing operations per share: Basic $ 0.00 $ (0.47) $ (0.06) $ (0.19) Diluted $ 0.00 $ (0.47) $ (0.06) $ (0.19) Earnings (loss) per share: Basic $ 0.02 $ (0.47) $ (0.06) $ (0.39) Diluted $ 0.02 $ (0.47) $ (0.06) $ (0.39) Weighted average number of shares: Basic 22,467 24,080 34,700 34,928 Diluted 23,310 25,321 34,700 34,928 SEPTEMBER 30, DECEMBER 31, MARCH 31, JUNE 30, 1998 1998 1999 1999 ------------- ------------ --------- --------- Revenue from services rendered $ 964 $ 2 $ 195 $ 414 Operating income (loss) 657 (312) (201) 117 Income (loss) from continuing operations 4,058 (589) (1,074) (921) Loss from discontinued operations (18) 191 17 (283) Net income (loss) 4,040 (398) (1,057) (1,204) Income (loss) from continuing operations per share: Basic $ 0.18 $ (0.03) $ (0.05) $ (0.04) Diluted $ 0.17 $ (0.03) $ (0.05) $ (0.04) Earnings (loss) per share: Basic $ 0.18 $ (0.02) $ (0.05) $ (0.05) Diluted $ 0.17 $ (0.02) $ (0.05) $ (0.05) Weighted average number of shares: Basic 22,283 22,277 22,264 22,396 Diluted 23,285 22,277 22,264 22,396
45 46 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) List of documents filed as part of this report: (1) Financial Statements and Related Independent Auditors' Reports: The following consolidated financial statements of the Company and Report of Independent Auditors are included in Item 8: Report of Independent Auditors Consolidated Balance Sheets at June 30, 2000 (restated), June 30, 1999 and December 31, 1998 Consolidated Statements of Operations for the year ended June 30, 2000 (restated), the six months ended June 30, 1999 and 1998 (unaudited), and the years ended December 31, 1998 and 1997 Consolidated Statements of Stockholders' Equity for the year ended June 30, 2000 (restated), the six months ended June 30, 1999 and the years ended December 31, 1998 and 1997 Consolidated Statements of Cash Flows for the year ended June 30, 2000 (restated), the six months ended June 30, 1999 and 1998 (unaudited) and the years ended December 31, 1998 and 1997 Notes to Consolidated Financial Statements Supplementary Data, Selected Quarterly Financial Data (Unaudited) The consolidated financial statements of Gray Communications Systems, Inc. and Gray's "Schedule II - Valuation and qualifying accounts" and the independent auditors reports thereon dated January 31, 2000, filed on pages F-1 through F-29 of Bull Run's Form 10-K Annual Report for the year ended June 30, 2000 and incorporated by reference herein. The condensed consolidated financial statements of Gray Communications Systems, Inc. as of June 30, 2000 and for the six months ended June 30, 2000 and 1999 (Unaudited), file on pages F-30 through F-36 of Bull Run's Form 10-K Annual Report for the year ended June 30, 2000 and incorporated by reference herein. The consolidated financial statements of Rawlings Sporting Goods Company, Inc. and the report of independent public accountants thereon dated December 14, 1999 (except as to the matter discussed in Note 2 to Rawlings' consolidated financial statements, as to which the date is December 28, 1999), on pages F-37 through F-54 of Bull Run's Form 10-K Annual Report for the year ended June 30, 2000 and incorporated by reference herein. The consolidated financial statements of Rawlings Sporting Goods Company, Inc. as of May 31, 2000 and August 31, 1999, and for the nine months ended May 31, 2000 and 1999 (Unaudited), on pages F-55 through F-61 of Bull Run's Form 10-K Annual Report for the year ended June 30, 2000 and incorporated by reference herein. (2) The following consolidated financial statement schedule of Bull Run Corporation is included in Item 14(d): Schedule II - Valuation and qualifying accounts 46 47 All other schedules for which provision is made in the applicable accounting regulation of the Securities and Exchange Commission are not required under the related instructions or are inapplicable and therefore have been omitted. (b) Reports on Form 8-K None (c) Exhibits
Exhibit Numbers Description ------- ----------- (2.1) Restated Agreement and Plan of Merger, dated as of February 15, 1999, by and among Bull Run Corporation (formerly, BR Holding, Inc.), BR Holding, Inc. (formerly, Bull Run Corporation), Capital Sports Properties, Inc., Host Communications, Inc., Universal Sports America, Inc., Capital Merger Sub, Inc., Host Merger Sub, Inc., and USA Merger Sub, Inc. (g) (2.2) Form of Agreement and Plan of Merger, by and among Bull Run Corporation (formerly, BR Holding, Inc.), BR Holding, Inc. (formerly, Bull Run Corporation) and a wholly owned subsidiary of Bull Run Corporation (formerly, BR Holding, Inc.) (g) (3.1) Articles of Incorporation (a) (3.2) Certificate of Amendment to Articles of Incorporation, filed November 29, 1994 (a) (3.3) Bylaws of the Registrant (a) (3.4) Articles of Incorporation of Bull Run Corporation (formerly, BR Holding, Inc.) (g) (3.5) Bylaws of Bull Run Corporation (formerly, BR Holding, Inc.) (g) (10.1) Amended and Restated 1994 Long Term Incentive Plan (g) (10.2) Non-Employee Directors' 1994 Stock Option Plan (a) (10.3) 1987 Non-Qualified Stock Option Plan (b) (10.4) Form of Stockholders' Agreement, by and among Hilton H. Howell, Jr., Douglas L. Jarvie, Robinson-Prather Partnership, W. James Host and Charles L. Jarvie (g) (10.5) Credit Agreement and among BR Holding, Inc. (formerly, Bull Run Corporation), Capital Sports Properties, Inc., Host Communications, Inc., Universal Sports America, Inc. and Datasouth Computer Corporation, as Borrowers, Bull Run Corporation (formerly, BR Holding, Inc.), as a Guarantor, and Bank of America, N.A. and Bank One, Kentucky, N.A., as Issuing Banks, First Union National Bank, as Syndication Agent for the Issuing Banks and the Lenders, and Bank of America, N.A., as Administrative Agent for the Issuing Banks and the Lenders, dated December 17, 1999 (h) (10.6) Gray Communications Systems, Inc. Warrant dated September 24, 1996 (731,250 shares of Gray class A common stock) (c) (10.7) Gray Communications Systems, Inc. Warrant dated September 24, 1996 (375,000 shares of Gray class A common stock) (c) (10.8) Investment Purchase Agreement dated November 21, 1997 by and between Rawlings Sporting Goods Company, Inc. and Bull Run Corporation (d) (10.9) Common Stock Purchase Warrant dated November 21, 1997 issued by Rawlings Sporting Goods Company, Inc. to Bull Run Corporation (d) (10.10) Standstill Agreement dated November 21, 1997 by and between Rawlings Sporting Goods Company, Inc. and Bull Run Corporation (d)
47 48
Exhibit Numbers Description ------- ----------- (10.11) Amendment Number One to Standstill Agreement dated April 23, 1999 by and between Rawlings Sporting Goods Company, Inc. and Bull Run Corporation (f) (10.12) Registration Rights Agreement dated November 21, 1997 by and between Rawlings Sporting Goods Company, Inc. and Bull Run Corporation (d) (10.13) Stock Purchase Agreement dated January 28, 1999 by and between U.S. Trust Company of Florida Savings Bank, as Personal Representative of the Estate of Mary Tarzian and Bull Run Corporation (e) (21) List of Subsidiaries of Registrant (i) (23.1) Consent of Ernst & Young LLP - Bull Run Corporation (x) (23.2) Consent of Ernst & Young LLP - Gray Communications Systems, Inc. (x) (23.3) Consent of Arthur Andersen LLP - Rawlings Sporting Goods Company, Inc. (x)
(a) Filed as an exhibit to Registration Statement on Form S-4 (Registration No. 33-81816), effective November 3, 1994 and incorporated by reference herein (b) Filed as an exhibit to Form 10-K Annual Report for the year ended December 31, 1988 and incorporated by reference herein (c) Filed as an exhibit to Form 10-KSB Annual Report for the year ended December 31, 1996 and incorporated by reference herein (d) Filed as an exhibit to Form 8-K Current Report dated as of November 21, 1997 and incorporated by reference herein (e) Filed as an exhibit to Form 8-K Current Report dated as of January 28, 1999 and incorporated by reference herein (f) Filed as an exhibit to Form 8-K Current Report dated as of April 23, 1999 and incorporated by reference herein (g) Filed as an exhibit to Registration Statement on Form S-4 (Registration No. 333-84833), effective August 11, 1999 and incorporated by reference herein (h) Filed as an exhibit to Form 8-K Current Report dated as of December 17, 1999 and incorporated by reference herein (i) Filed as an exhibit to Form 10-K Annual Report for the year ended June 30, 2000 and incorporated by reference herein (x) Filed herewith (d) Financial Statement Schedules The response to this section is submitted as part of Item 14(a)(1) and Item 14(a)(2). 48 49 SIGNATURES Pursuant to the requirements of Section 13 of 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on July 27, 2001. BULL RUN CORPORATION by: /s/ ROBERT S. PRATHER, JR. ------------------------------------------ Robert S. Prather, Jr. President and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the date indicated.
Signature Title Date --------- ----- ---- /s/ ROBERT S. PRATHER, JR. President, Chief July 27, 2001 ---------------------------------------- Executive Officer and Robert S. Prather, Jr. Director (Principal Executive Officer) /s/ GERALD N. AGRANOFF Director July 27, 2001 ---------------------------------------- Gerald N. Agranoff /s/ JAMES W. BUSBY Director July 27, 2001 ---------------------------------------- James W. Busby /s/ FREDERICK J. ERICKSON Vice President - July 27, 2001 ---------------------------------------- Finance and Frederick J. Erickson Treasurer (Principal Accounting and Financial Officer) /s/ W. JAMES HOST Director July 27, 2001 ---------------------------------------- W. James Host /s/ HILTON H. HOWELL, JR. Vice President, July 27, 2001 ---------------------------------------- Secretary and Director Hilton H. Howell, Jr. /s/ MONTE C. JOHNSON Director July 27, 2001 ---------------------------------------- Monte C. Johnson /s/ J. MACK ROBINSON Chairman of the Board July 27, 2001 ---------------------------------------- J. Mack Robinson
49 50 REPORT OF INDEPENDENT AUDITORS We have audited the consolidated financial statements of Bull Run Corporation as of June 30, 2000, June 30, 1999 and December 31, 1998, and for the year ended June 30, 2000, for the six months ended June 30, 1999 and for each of the years ended December 31, 1998 and 1997, and have issued our report thereon dated September 28, 2000 (except for Notes 2, 4 and 10, as to which the date is July 27, 2001), included elsewhere in this Form 10-K/A-1. Our audits also included the financial statement schedule of Bull Run Corporation listed in Item 14(a). This schedule is the responsibility of the Company's management. Our responsibility is to express an opinion based on our audits. The financial statements of Rawlings Sporting Goods Company, Inc., (a corporation in which the Company has a 10% interest), as of August 31, 1999 and 1998 and for the years then ended, have been audited by other auditors whose report has been furnished to us; insofar as our opinion relates to data included for Rawlings Sporting Goods Company, Inc., it is based solely on their report. In our opinion, based on our audits and the report of other auditors, the financial statement schedule referred to above, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. As more fully described in Note 2 to the consolidated financial statements, the Company restated certain amounts previously reported as of and for the year ended June 30, 2000. /s/ ERNST & YOUNG LLP Charlotte, North Carolina September 28, 2000 50 51 BULL RUN CORPORATION SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
Additions Balance at Charged to Charged to Balance at Beginning Costs and Other End of Description Of Period Expenses Accounts(1) Deductions(2) Period ----------- ---------- ---------- ------------ ------------- ---------- YEAR ENDED JUNE 30, 2000 Allowance for doubtful accounts $ 0 $267,000 $1,999,000 $1,111,000 $1,155,000
There was no allowance for doubtful accounts reported for continuing operations prior to the year ended June 30, 2000. (1) Represents amounts recorded in connection with the Host-USA Acquisition. (2) "Deductions" represent write-offs of amounts not considered collectible. 51