-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Pb2SZEWUXxrVosxVRT74yJ8/owNUe6aqjkQQZUnhy9eEwYZ2IrrixCjXv5Y4wQiH KWEO4b9eiH2tKIqv6AhINw== 0000950144-99-003739.txt : 19990402 0000950144-99-003739.hdr.sgml : 19990402 ACCESSION NUMBER: 0000950144-99-003739 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 11 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990331 FILER: COMPANY DATA: COMPANY CONFORMED NAME: BULL RUN CORP CENTRAL INDEX KEY: 0000319697 STANDARD INDUSTRIAL CLASSIFICATION: COMPUTER PERIPHERAL EQUIPMENT, NEC [3577] IRS NUMBER: 911117599 STATE OF INCORPORATION: GA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-09385 FILM NUMBER: 99581492 BUSINESS ADDRESS: STREET 1: 4370 PEACHTREE RD NE CITY: ATLANTA STATE: GA ZIP: 30319 BUSINESS PHONE: 4042668333 MAIL ADDRESS: STREET 1: 4310 PEACHTREE ROAD N.E. CITY: ATLANTA STATE: GA ZIP: 30319 FORMER COMPANY: FORMER CONFORMED NAME: BULL RUN GOLD MINES LTD DATE OF NAME CHANGE: 19920703 10-K 1 BULL RUN CORPORATION FORM 10-K 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K [X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended DECEMBER 31, 1998 [ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the transition period from __________________ to __________________ Commission File Number 0-9385 BULL RUN CORPORATION (Exact name of registrant as specified in its charter) GEORGIA 91-1117599 (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 4370 PEACHTREE ROAD, N.E., ATLANTA, GA 30319 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (404) 266-8333 Securities registered pursuant to Section 12(b) of the Act: Title of each class Name of each exchange on which registered None Securities registered pursuant to Section 12(g) of the Act: COMMON STOCK, $.01 PAR VALUE (Title of class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. [ X ] Yes [ ] No Indicate by check mark if disclosure of delinquent filers in response to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] The aggregate market value of the voting and non-voting common equity held by non-affiliates as of February 26, 1999 was $53,018,295, based on the closing price thereof on The Nasdaq Stock Market. The number of shares outstanding of the registrant's Common Stock, par value $.01 per share, as of February 26, 1999, was 22,268,267. DOCUMENTS INCORPORATED BY REFERENCE None 2 BULL RUN CORPORATION FORM 10-K INDEX PART I
PAGE ---- ITEM 1. Business............................................................................ 3 ITEM 2. Properties.......................................................................... 9 ITEM 3. Legal Proceedings................................................................... 10 ITEM 4. Submission of Matters to a Vote of Security Holders................................. 10 PART II ITEM 5. Market for Registrant's Common Equity and Related Stockholder Matters........................................................................ 10 ITEM 6. Selected Financial Data............................................................. 12 ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.......................................................... 13 ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk.......................... 20 ITEM 8. Financial Statements and Supplementary Data......................................... 21 ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure........................................................... 41 PART III ITEM 10. Directors and Executive Officers of the Registrant.................................. 41 ITEM 11. Executive Compensation.............................................................. 42 ITEM 12. Security Ownership of Certain Beneficial Owners and Management...................... 44 ITEM 13. Certain Relationships and Related Transactions...................................... 46 PART IV ITEM 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.................... 47 Signatures.......................................................................... 50
2 3 PART I ITEM 1. BUSINESS GENERAL Bull Run Corporation (the "Company"), a Georgia corporation, was originally incorporated in 1983 under the laws of the State of Washington. Its principal executive offices are located at 4370 Peachtree Road, N.E., Atlanta, Georgia 30319. In November 1994, the Company acquired by merger (the "Merger") Datasouth Computer Corporation ("Datasouth"). Datasouth, located in Charlotte, North Carolina, designs, manufactures and markets heavy-duty dot matrix and thermal printers for vertical markets including transportation, distribution, manufacturing and health care. Datasouth sells its products worldwide through distributors and value-added resellers, and directly to large volume major accounts. Since the Merger, Datasouth has operated as a wholly-owned subsidiary of the Company. The Company, through Datasouth, owns approximately 16.9% of the total outstanding common stock of Gray Communications Systems, Inc. ("Gray"), representing 27.4% of the voting interest in Gray, as of December 31, 1998. The Company also owns shares of series A and series B preferred stock of Gray and warrants to purchase additional shares of Gray's common stock. Parties affiliated with the Company, including officers and directors of the Company and companies of which they are principal shareholders and/or executive officers, owned an additional 13.9% of Gray's common stock as of December 31, 1998, representing an additional 21.5% voting interest in Gray. Gray is a communications company headquartered in Atlanta, Georgia which currently operates: (i) three NBC-affiliated television stations - WEAU-TV in Eau Claire-La Crosse, Wisconsin, which was acquired during 1998; WJHG-TV in Panama City, Florida; and WITN-TV, in the Greenville-Washington-New Bern, North Carolina market; (ii) seven CBS-affiliated television stations - WCTV-TV in Tallahassee, Florida; WVLT-TV in Knoxville, Tennessee; WKYT-TV in Lexington, Kentucky; WYMT-TV in Hazard, Kentucky; WRDW-TV in Augusta, Georgia; and two stations acquired during 1998, KOLN-TV in Lincoln, Nebraska and KGIN-TV in Grand Island, Nebraska; (iii) four daily newspapers, The Albany Herald in Albany, Georgia; The Rockdale Citizen in Conyers, Georgia; The Gwinnett Daily Post in Lawrenceville, Georgia; and, acquired in March 1999, The Goshen News in Goshen, Indiana; (iv) an advertising weekly shopper in southwest Georgia; (v) Lynqx Communications, a satellite transmission and production services business based in the southeastern United States; and (vi) PortaPhone Paging, a communications and paging business in the Southeast. During 1998, Gray disposed of its NBC-affiliated television station in Albany, Georgia, fulfilling a Federal Communications Commission divestiture order in March 1997 following Gray's acquisition of WCTV-TV. Gray reported revenue of $128.9 million in 1998 and had total assets of $470.3 million as of December 31, 1998. J. Mack Robinson, the Company's Chairman of the Board, Hilton H. Howell, Jr., the Company's Vice President, Secretary and a director, and Mr. Prather are members of Gray's Board of Directors. Mr. Robinson is President and the chief executive officer of Gray, and Mr. Prather is Executive Vice President of Gray. Frederick J. Erickson, the Company's Vice President - Finance and chief financial officer, was the interim chief financial officer of Gray from March 1998 until September 1998. In November 1997, the Company entered into an Investment Purchase Agreement with Rawlings Sporting Goods Company, Inc. ("Rawlings"). Pursuant to this agreement, the Company acquired warrants to purchase 925,804 shares of Rawlings' common stock, and has the right, under certain circumstances, to purchase additional warrants. The warrants have a four-year term and an exercise price of $12.00 per share, but are exercisable only if Rawlings' common stock closes at or above $16.50 for 20 consecutive trading days during the four year term. In addition, under the terms of the agreement, the Company purchased 10.4% of the outstanding shares of Rawlings' common stock in the open market from November 1997 3 4 through January 1998. Simultaneously with the execution of the Investment Purchase Agreement, Rawlings and Host Communications, Inc. ("HCI") entered into a five year strategic marketing alliance, under which HCI and Rawlings will jointly market and sell Rawlings' products primarily through corporate promotions, local events and international programs. Rawlings, headquartered near St. Louis, Missouri, is a leading supplier of team sports equipment in North America, operating eight manufacturing facilities throughout the United States, Canada and Latin America, as well as distribution centers in the United States and Canada. Rawlings' total revenue for its most recently completed fiscal year ended August 31, 1998 was $170.6 million and total assets were $132.5 million as of such date. Mr. Prather is a member of Rawlings' Board of Directors. In August 1998, the Company acquired series C preferred stock of Total Sports, Inc. ("TSI"). Based in Raleigh, North Carolina, TSI is a sports content Internet company, which owns and adds daily to its proprietary sports content on its web site; powers America Online's Internet portal destination for sports news; publishes, among other print and electronic publications, "Total Baseball", "Total Football" and "Total Hockey", the official encyclopedias of Major League Baseball, the National Football League and the National Hockey League, respectively; and, in partnership with Associated Press, publishes the sports section of the "Wall Street Journal Interactive Edition". In conjunction with HCI and the National Collegiate Athletic Association ("NCAA"), TSI "TotalCasts" (real-time event coverage) on the Internet many college sporting events including the "Final Four" college basketball championship tournament, in addition to its TotalCast coverage of Major League Baseball games. The Company increased its investment in TSI from 7.7% of TSI's outstanding capital stock as of December 31, 1998, to 9.0%, following an additional investment made in January 1999. In addition to the Company's direct investment in TSI, HCI owns approximately 8.3% of TSI's common stock, assuming conversion of all TSI preferred stock. The shares owned by HCI are expected to be acquired by the Company in connection with the HCI-USA Acquisition (discussed below). Mr. Prather is a member of TSI's Board of Directors. In January 1999, the Company acquired common stock of Sarkes Tarzian, Inc. ("Tarzian"), representing 33.5% of the total outstanding common stock of Tarzian both in terms of the number of shares of common stock outstanding and in terms of voting rights, but such investment represents 73% of the equity of Tarzian for purposes of dividends, as well as distributions in the event of any liquidation, dissolution or other termination of Tarzian. Tarzian owns and operates two television stations and four radio stations: WRCB-TV in Chattanooga, Tennessee, an NBC affiliate; KTVN-TV in Reno, Nevada, a CBS affiliate; WGCL-AM and WTTS-FM in Bloomington, Indiana; and WAJI-FM and WLDE-FM in Fort Wayne, Indiana. In March 1999, the Company executed an option agreement with Gray, whereby Gray has the option of acquiring the Tarzian investment from the Company. In connection with the option agreement, the Company received warrants to purchase additional class B common shares of Gray. In February 1999, the Company entered into an agreement to acquire the stock of HCI, Universal Sports America, Inc. ("USA") and Capital Sports Properties, Inc. ("CSP") not currently owned, directly or indirectly, by the Company (the "HCI-USA Acquisition"). The Company is currently HCI's largest stockholder, owning directly or indirectly approximately 32.5% of HCI's outstanding common stock and 51.5% of HCI's outstanding preferred stock. The Company's indirect ownership of HCI's common stock and HCI's preferred stock is owned by CSP, in which the Company owns 51.5% of the outstanding common stock. The Company and HCI together are the largest stockholders of USA, with the Company owning approximately 3% of USA's outstanding capital stock and HCI owning approximately 33% of USA's outstanding capital stock. For their most recent fiscal year ended June 30, 1998, HCI and USA together had revenues of approximately $109 million. This transaction is subject to the terms and conditions of the merger agreement, including approval of the stockholders of each of the companies, and is expected to close during the second quarter of 1999. Following the closing of this transaction, the Company's revenues 4 5 will be predominantly generated by HCI and USA, which will be wholly-owned subsidiaries of the Company. Robert S. Prather, Jr., the Company's President, chief executive officer and a director, is a director of HCI, CSP and USA. Pursuant to the agreement, a new holding company for the Company will be created immediately prior to the HCI-USA Acquisition whereby each outstanding share of the Company's common stock will be converted into one share of a newly formed Delaware company. The new holding company, which will be a publicly held company, will be owned by the stockholders of the Company immediately prior to such conversion and the Company and its subsidiaries will become subsidiaries of such holding company. HCI, based in Lexington, Kentucky, is a well established sports marketing and association management company. It is the primary marketer for the NCAA, a business relationship that is now in its 24th year. Additionally, HCI has significant printing, publishing, broadcast and Internet operating divisions. HCI also manages the National Tour Association, National Grocers Association, Quest, J.D. Edwards Users Group, and other associations. HCI's total revenue for its most recently completed fiscal year ended June 30, 1998 was $46.3 million and total assets were $32.5 million as of such date. USA, based in Dallas, is a full-service, lifestyle and sports marketing company that specializes in developing integrated marketing programs and events on the professional, collegiate and high school level. USA's Streetball International division oversees the management and production of more than 270 worldwide events in conjunction with NBC Sports, the National Basketball Association, the National Football League, the National Hockey League, Major League Baseball and the Professional Golfers' Association Tour. USA's collegiate division is a marketing partner for many leading schools and conference athletic programs, including the University of Tennessee, Florida State University and the Big 12 Conference. USA's total revenue for its most recently completed fiscal year ended June 30, 1998 was $62.9 million and total assets were $34.7 million as of such date. As of December 31, 1998, Datasouth represented 22.4% of the Company's total assets; investments in HCI, CSP and USA, collectively represented 14.4%; investments in Gray represented 48.5%; investments in Rawlings represented 11.5%; and the investment in TSI represented 2.6%. PRINCIPAL PRODUCTS AND MARKETS The Company, through Datasouth, designs, manufactures and markets heavy-duty dot matrix and thermal printers for industrial applications, generally selling under the "Datasouth" name. Although it has historically targeted the heavy-duty, multipart forms segment of the serial matrix impact printer market in industries such as transportation/travel, healthcare and manufacturing/distribution, the Company recognizes that this market is declining. Therefore, the Company has been recently involved in the industrial thermal printer market through the development and acquisition of Automated Ticket / Boarding Pass version 2 ("ATB2") printers for the travel industry, as well as through the acquisition of portable and desktop thermal barcode label printer product lines. The printer business is not seasonal to any significant degree; however, short term revenue trends fluctuate due to variable ordering patterns of large customers. The Company's impact printers compete in the medium and high speed (i.e., 300 to 600 characters per second, or "cps") serial impact dot matrix printer markets. Datasouth's dot matrix products distinguish themselves from many lower priced printers in their ability to print forms and reports as thick as nine parts and to withstand rugged duty cycles. These printers are used primarily for forms such as invoices, purchase orders, bills of lading, customs documents, insurance documents, travel documents and patient admission forms. Datasouth currently manufactures two dot matrix product families: Documax and the XL line. A third line, Performax, was discontinued in 1997. Documax, a heavy-duty dot matrix printer 5 6 designed to provide maximum forms printing capabilities in a minimum amount of space, is a narrow carriage printer intended for printing on demand industry specific documents such as hotel bills, patient admissions/discharge forms, airline tickets, packing slips and invoices. A multipath printer for multipart forms, Documax offers a dual-tractor feature that allows the operator to switch automatically from one form to another. The original Documax versions print at speeds up to 333 cps and generate bar codes, OCR and industrial graphics as well. The Company also has a 600 cps version of Documax. "Documax" is a registered trademark of Datasouth. The XL line is a family of medium speed wide carriage serial impact dot matrix printers which operate at speeds ranging from 300 to 400 cps. The Company also has provided a line of portable and desktop thermal printers for several years, including the 4-inch wide portable "FreeLiner", and desktop version "FreeLiner DT", both of which take advantage of "liner-free" label adaptations. "Liner-free" labels have no silicone coated liner, offering several advantages over conventional liner-backed labels, including more printable labels per roll, superior print image and durability, and elimination of label liner waste, resulting in lower cost of use and greater efficiency. The Company has filed a trademark application for "FreeLiner". In January 1998, Datasouth acquired the CodeWriter product line of direct thermal and thermal transfer desktop and portable bar code label printers (the "CodeWriter Acquisition"). CodeWriter's product line includes the 4500 Series of 4.25" print width desktop thermal / thermal transfer barcode printers, and a 4.1" print width portable thermal / thermal transfer barcode printer. "CodeWriter" is a registered trademark of the Company. The Company was awarded a contract by The SABRE Group in February 1997 to develop and manufacture a new ATB2 airline ticket printer. In December 1997, the Company began shipping to The SABRE Group the resulting product, "Journey", for which the Company has filed a trademark application. This printer, which uses direct thermal printing technology, was designed to be compact, easy to use, and durable, with features such as an easily accessible jam-free paper path and a simpler method to load ticket stock. During the second quarter of 1999, the Company plans to introduce the "Journey II" version of the printer which adds features such as a second bin for invoice and receipt printing. In September 1998, the Company purchased marketing rights for the Sigma-Data 7200 high speed ATB2 printer (the "SD7200"). The SD7200 product line prints up to 24 coupons per minute and allows for either direct thermal or thermal transfer printing. Additional information concerning the Company's printer products is set forth under the caption "Sales and Distribution" below in this Item 1. COMPETITION The computer printer industry is very competitive and some of the Company's competitors have greater financial and other resources. As the printer market continues to segment by speed, application and technology, the Company believes its dot matrix products to be competitive in the medium and high speed serial impact dot matrix printer markets for applications requiring high performance output of text, graphics and bar codes, and believes its thermal printer products to be competitive in the portable and desktop thermal printer markets, and in the airline ticket printer market. The Company believes that its products do not generally compete in "mass market" dot matrix and thermal printer applications. The Company's products are intended for use in industrial markets often avoided by large Japanese and domestic printer manufacturers, which may not deem these markets large enough to pursue. MANUFACTURING AND QUALITY CONTROL The Company believes that its printer manufacturing capabilities provide a strategic advantage over most competitors. Focusing on customer response time and high quality customer service, the Company's goal is to provide quick, on-time product delivery while 6 7 maintaining low finished goods inventories. Product configurations are scheduled daily based on customer orders. Raw materials and manufactured assemblies, including PC boards assembled by the Company, are transferred to work-in-process as materials and assemblies are consumed in the manufacturing process, thereby eliminating unnecessary inventories and scheduling. After configuration, the units are burned-in and are available for shipment within 24 hours. As a result, the product mix can be altered within hours, allowing the Company to deliver its products more quickly than many of its competitors. The Company assembles products in accordance with the Company's designs and specifications. The Company utilizes components and sub-assemblies procured from outside suppliers, some of which produce parts from tooling designed and owned by the Company. Most of the materials, components and subassemblies are available from a variety of sources and are generally not subject to significant price volatility. Although the Company has not experienced any significant problems in obtaining materials, components or subassemblies, future shortages could result in production delays that would adversely affect its business. Product design reflects an awareness of the practical aspects of manufacturing high quality products. Commonality of components and subassemblies across product lines provides efficiencies in quality control, productivity, material cost and inventory control. The Company utilizes automated component insertion, wave soldering and automated test equipment to reduce labor costs while maintaining high quality. The Company verifies the quality of its products by thorough testing at various stages of the assembly process. The Company, in the ordinary course of its business, is subject to various state and federal laws and regulations relating to the protection of the environment. Compliance with these laws and regulations has not been material to the Company's business. WARRANTY AND SERVICE The Company warrants its printers against defects in workmanship, generally for one year, in addition to providing in-house depot repair service. Distributors and national third party service organizations provide on-site repair under service contracts. The Company has a technical support staff accessible to all customers through a toll-free telephone number, as well as through the Company's Internet web site. The Company's warranty experience over the past three years has ranged from approximately .4% to .6% of revenue. Total warranty expense for 1998, 1997 and 1996 was approximately $133,000, $124,000 and $104,000, respectively. SALES AND DISTRIBUTION Printers, parts, accessories and consumables are sold through an international network of approximately 60 independent distributors and directly to large volume major accounts, which consist of end-users and original equipment manufacturers. During 1998, finished product sales to distributors represented 26% of total revenue, and finished product sales to major accounts represented 50%, compared to 28% and 48% in 1997, respectively. Distributors typically operate in nonexclusive territories on a local, regional, national or international basis. The distributors carry complementary lines of computers and peripheral products and may carry products competitive with the Company's products. The distributors sell principally to large industrial companies, hospitals, banks, government agencies, educational institutions, airlines, rental car companies and travel agencies. The Company supplies Documax and Journey printers to The SABRE Group under contracts that are cancelable at any time by The SABRE Group. Moreover, The SABRE Group is under no contractual obligation to purchase any minimum number of printers from Datasouth during the term of the contracts. Sales to The SABRE Group, which began in 7 8 earnest in 1993, were approximately $9,200,000 in 1998, $7,200,000 in 1997 and $7,200,000 in 1996, representing 31%, 33% and 30% of the Company's sales from printer operations, respectively. As the travel market embraces a number of new technologies, such as Internet reservation booking and electronic ticketing, the Company believes that travel agencies will require more cost-effective equipment, such as its "Journey" products. Priced at less than $2,000, Journey products provide an attractively priced alternative to traditional ATB2 printers and will be affordable for even small travel agencies. The addition of the SD7200 product line in 1998 strategically expands the Company's ATB2 product line to offer a wide range of ticket printing solutions for airlines, customer reservation systems ("CRSs") and remote locations, such as corporate offices and hotels/motels. In 1998, the Company established a sales office and distribution point in the United Kingdom following the acquisition of a sales organization that primarily sold the Documax and SD7200 printers to airlines and CRSs in Europe, Asia and Africa. The Company intends to expand its sales to customers in these areas of the world and continue to pursue new major account business in 1999, while maintaining and strengthening relationships with key distributors. BACKLOG The Company sells its products to its customers pursuant to cancelable purchase orders and, accordingly, does not require firm quantity commitments. Customers generally issue cancelable purchase orders with short delivery lead times. The time lapse between receipt of a purchase order and shipment of printers generally ranges from one to 90 days. For this reason, the Company's production schedule is based substantially on anticipated releases, and management does not regard the backlog of purchase orders at any one time to be indicative of future trends in its revenue. As of December 31, 1998, the Company had unfilled cancelable purchase orders with an aggregate selling price of approximately $1,603,000, compared with $1,724,000 and $1,821,000 as of December 31, 1997 and 1996, respectively. ADVERTISING AND PROMOTION The Company participates in numerous regional, national and international trade shows and actively promotes its products through direct mail, telemarketing and cooperative advertising arrangements with distributors. It also advertises its products in publications serving the industrial markets targeted by its products. Advertising costs were approximately $271,000, $130,000, and $227,000 in 1998, 1997 and 1996, respectively. RESEARCH AND DEVELOPMENT The Company employs approximately 25 engineers, technicians and support personnel to engage in basic and applied research. In 1998, the Company's engineering team developed and released design enhancements to the CodeWriter 4500 series printer following the acquisition of the CodeWriter product line in January 1998, and substantially completed the design of the "Journey II" product currently expected to be released in the second quarter of 1999. In 1999, the Company's primary product development focus will be on expanding the current product lines with complementary products. In addition, engineering efforts are focused on enhancement of existing products to expand market penetration and customization of existing products to meet special printing applications for specific customer needs. Total research and development expense was $2,323,000, $2,418,000 and $1,568,000 in 1998, 1997 and 1996, respectively. 8 9 PATENTS, TRADEMARKS AND RELATED CONTRACTS Although the Company holds certain patents, trademarks and related contracts, none is considered to be material to its business. EMPLOYEES As of December 31, 1998, the Company had 134 full-time employees, of which, 114 were located at Datasouth's administrative and manufacturing facility in Charlotte, North Carolina. No employees are subject to collective bargaining agreements, and there have been no work stoppages due to labor difficulties. Management believes that its relationship with its employees is good. EXPORT SALES Sales to non-domestic customers, located principally in Western Europe and South America, totaled $2,823,000 in 1998, $2,497,000 in 1997, and $2,954,000 in 1996. EXECUTIVE OFFICERS Set forth below is certain information with respect to the executive officers of the Company: J. Mack Robinson, age 75, has been Chairman of the Board since 1994 and a director since 1992. He has been Chairman of the Board and President of Delta Life Insurance Company since 1958, President of Atlantic American Corporation from 1988 to 1995, and Chairman of the Board of Atlantic American since 1974. Mr. Robinson has also been President and Chief Executive Officer of Gray since 1996, and is a director of Gray. Robert S. Prather, Jr., age 54, has been President, Chief Executive Officer and a director since 1992. He has been Executive Vice President of Gray since 1996 and a director of Gray since 1993. Mr. Prather is a director of HCI, CSP, USA, Rawlings and TSI. In addition, Mr. Prather is a director of The Morgan Group, Inc. Hilton H. Howell, Jr., age 37, has been Vice President and Secretary since 1994 and a director since 1994. He has been President and Chief Executive Officer of Atlantic American Corporation since 1995 and Executive Vice President from 1992 to 1995, and Executive Vice President and General Counsel of Delta Life Insurance Company and Delta Fire & Casualty Insurance Company since 1991. Mr. Howell is also a director of Gray, and is married to Mr. Robinson's daughter. Frederick J. Erickson, age 40, has been Vice President - Finance, Treasurer and Chief Financial Officer since 1994. He has been Executive Vice President - Finance & Administration of Datasouth since 1997 and Vice President - - Finance & Administration from 1993 to 1997. ITEM 2. PROPERTIES The Company's executive offices are located in Atlanta, Georgia in approximately 2,000 square feet of office space leased from Delta Life Insurance Company, an affiliate of J. Mack Robinson, the Company's Chairman of the Board. The lease expires in December 2002, subject to several renewal options on the part of the Company. Datasouth's administrative offices and operations are located in Charlotte, North Carolina in approximately 74,000 square feet of fully-utilized leased facilities. Although present facilities are suitable and adequate for its current needs, the Company owns approximately eight acres of land contiguous to its Charlotte facility for future expansion, if necessary. 9 10 Datasouth's main administrative and manufacturing facility is leased through December 2001 and additional office and warehousing space is leased through December 2000. Datasouth's west coast service and distribution center in Vista, California operates in a 6,781 square foot fully-utilized facility leased through April 2001. Datasouth's 608 square foot sales office in Northampton, England is leased through September 2001. ITEM 3. LEGAL PROCEEDINGS The Company has been named as a co-defendant in a Complaint filed on February 1, 1999 with the United States District Court in Indianapolis, Indiana by Sarkes Tarzian, Inc., an Indiana corporation ("Tarzian"). The Company acquired 301,119 shares of Sarkes Tarzian, Inc. common stock, $4.00 par value (the "Tarzian Shares") from U.S. Trust Company of Florida Savings Bank as Personal Representative of the Estate of Mary Tarzian (the "Estate"), the other co-defendant, on January 28, 1999 for $10 million. Tarzian claims that it had a binding and enforceable contract to purchase the Tarzian Shares from the Estate prior to the Company's purchase of such shares, and requests judgment providing that the Estate be required to sell the Tarzian Shares to Tarzian. The Company believes that a binding contract between Tarzian and the Estate did not exist prior to the Company's purchase of the Tarzian Shares from the Estate, and in any case, the Company's purchase agreement with the Estate provides that in the event that a court of competent jurisdiction awards title to a person or entity other than the Company, the purchase agreement is rescinded, and the Estate is required to pay the Company the full $10 million purchase price, plus interest. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS The Company did not submit any matter to a vote of security holders during the quarter ended December 31, 1998. PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS MARKET INFORMATION The Company's common stock, par value $.01 per share (the "Common Stock"), trades on The Nasdaq Stock Market under the symbol "BULL." The following table sets forth for each period indicated the high and low sale prices for the Common Stock as reported by The Nasdaq Stock Market. Such prices reflect interdealer prices without adjustments for retail markups, markdowns or commissions.
HIGH LOW 1997 First Quarter $3.06 $2.00 Second Quarter 2.75 2.13 Third Quarter 2.84 2.25 Fourth Quarter 3.84 2.56 1998 First Quarter $4.25 $2.88 Second Quarter 5.13 3.63 Third Quarter 5.00 3.44 Fourth Quarter 3.81 2.88
HOLDERS As of February 26, 1999, there were 2,592 holders of record of Common Stock. 10 11 DIVIDENDS Since its inception, the Company has not declared or paid a cash dividend on its Common Stock. It is the present policy of the Company's Board of Directors to retain all earnings to finance the development and growth of the Company's business. The Company's future dividend policy will depend upon its earnings, capital requirements, financial condition and other relevant circumstances existing at that time. 11 12 ITEM 6. SELECTED FINANCIAL DATA Set forth below is certain selected historical consolidated financial data of the Company. This information should be read in conjunction with the Audited Consolidated Financial Statements of the Company and related notes thereto appearing elsewhere herein, as well as "Management's Discussion and Analysis". The selected consolidated financial data as of and for each of the years in the five-year period ended December 31, 1998 are derived from the Audited Consolidated Financial Statements of the Company. Also refer to the pro forma data for the CodeWriter Acquisition and the Company's investment in Rawlings appearing in Note 4 to the Company's Audited Consolidated Financial Statements included elsewhere herein. SELECTED FINANCIAL DATA (Dollars and shares in thousands, except per share amounts)
OPERATING RESULTS FOR THE YEARS ENDED: 1998 1997 1996 1995 1994 Revenue from printer operations $ 29,848 $ 21,639 $ 23,810 $ 26,432 $ 2,751 Cost of goods sold (22,103) (15,967) (17,170) (18,649) (1,853) ------- ------- ------- ------- ------ Gross profit 7,745 5,672 6,640 7,783 898 Other operating revenue 1,618 681 844 721 323 Operating expenses (8,593) (6,852) (6,255) (6,764) (1,174) ------- ------- ------- ------- ------ Income (loss) from operations 770 (499) 1,229 1,740 47 Equity in earnings (losses) of affiliated companies 6,734 (599) 1,731 107 266 Gain on issuance of shares by affiliated company -- -- 8,179 -- -- Interest expense and other, net (3,290) (1,614) (1,250) (944) (11) ------- ------- ------- ------- ------ Income (loss) before income taxes, extraordinary item and cumulative effect of accounting change 4,214 (2,712) 9,889 903 302 Income tax benefit (provision) (1,854) 939 (4,012) (180) (86) ------- ------- ------- ------- ------ Income (loss) before extraordinary item and cumulative effect of accounting change 2,360 (1,773) 5,877 723 216 Extraordinary loss -- -- (295) -- -- Cumulative effect of accounting change -- -- (274) -- -- ------- ------- ------- ------- ------ Net income (loss) $ 2,360 $ (1,773) $ 5,308 $ 723 $ 216 ======= ======= ======= ======= ====== Earnings (loss) per share - Basic: Income (loss) before extraordinary item and cumulative effect of accounting change $ 0.11 $ (0.08) $ 0.26 $ 0.03 $ 0.02 Net income (loss) $ 0.11 $ (0.08) $ 0.24 $ 0.03 $ 0.02 Weighted average shares outstanding - Basic 22,189 21,302 22,013 22,127 13,350 Earnings (loss) per share - Diluted Income (loss) before extraordinary item and cumulative effect of accounting change $ 0.10 $ (0.08) $ 0.25 $ 0.03 $ 0.02 Net income (loss) $ 0.10 $ (0.08) $ 0.23 $ 0.03 $ 0.02 Weighted average shares outstanding - Diluted 23,182 21,302 22,945 23,236 13,534
FINANCIAL POSITION AS OF DECEMBER 31: 1998 1997 1996 1995 1994 Working capital $ 3,312 $ 2,513 $ 3,990 $ 3,739 $ 4,813 Investment in affiliated companies 73,346 61,551 53,752 29,246 15,709 Total assets 95,172 76,832 67,851 44,300 30,756 Long-term obligations 51,848 41,998 31,364 14,896 2,775 Stockholders' equity 29,791 25,056 28,318 24,079 23,584 Current ratio 1.4 1.4 2.1 1.9 2.6 Book value per share $ 1.34 $ 1.18 $ 1.30 $ 1.09 $ 1.07
The changes from year to year are primarily a result of the following transactions: 1998 - Equity in the earnings attributable to Gray's gain on disposal of a television station; acquisition of a printer manufacturer; additional investments in Rawlings; and investment in TSI. 1997 - Initial investments in Rawlings. 1996 - Increase in the investment in Gray of $8,179 resulting from Gray's public offering of its class B common stock; and purchase of Gray preferred stock for $15 million. 1995 - Investments in HCI and its affiliates, CSP and USA; merger with Datasouth effective November 29, 1994. No dividends were declared or paid during the periods presented. 12 13 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS The consolidated operating results include those of Bull Run Corporation ("Bull Run") and Datasouth Computer Corporation ("Datasouth", and collectively, with Bull Run, the "Company"), after elimination of intercompany accounts and transactions. PENDING HCI-USA ACQUISITION AND OTHER SUBSEQUENT EVENTS On February 15, 1999, the Company entered into an agreement to acquire the stock of Host Communications, Inc. ("HCI"), Universal Sports America, Inc. ("USA") and Capital Sports Properties, Inc. ("CSP") not currently owned, directly or indirectly, by the Company, for approximately $95 million, net of cash acquired (the "HCI-USA Acquisition"). Pursuant to the agreement, a new holding company for the Company will be created immediately prior to the HCI-USA Acquisition whereby each outstanding share of the Company's common stock will be converted into one share of a newly formed Delaware company. The new holding company, which will be a publicly held company, will be owned by the stockholders of the Company immediately prior to such conversion and the Company and its subsidiaries will become subsidiaries of such holding company. Approximately $37 million of the HCI-USA Acquisition purchase price is expected to be paid to HCI, USA and CSP stockholders in cash and the remainder is expected to be paid in common stock of the new holding company. The Company is currently HCI's largest stockholder, owning directly or indirectly approximately 32.5% of HCI's outstanding common stock and 51.5% of HCI's outstanding preferred stock. The Company's indirect ownership of HCI's common stock and HCI's preferred stock is owned by CSP, in which the Company owns 51.5% of the outstanding common stock. The Company and HCI together are the largest stockholders of USA, with the Company owning approximately 3% of USA's outstanding capital stock and HCI owning approximately 33% of USA's outstanding capital stock. For their most recent fiscal year ended June 30, 1998, HCI and USA together had revenues of approximately $109 million. This transaction is subject to the terms and conditions of the merger agreement, including approval of the stockholders of each of the companies, and is currently expected to close during the second quarter of 1999. On January 15, 1999, the Company invested an additional $1 million for shares of Total Sports, Inc. ("TSI") series C1 preferred stock, increasing its investment in TSI to 9.0% of TSI's total outstanding capital stock. The shares, like the shares of TSI's series C preferred stock acquired by the Company in August 1998 for $2.5 million, are convertible to TSI's common stock. The Company will acquire HCI's investment in an additional 8.3% of TSI's total outstanding capital stock in connection with the HCI-USA Acquisition. On January 28, 1999, the Company acquired shares of the outstanding common stock of Sarkes Tarzian, Inc. ("Tarzian") from the estate of Mary Tarzian (the "Estate") for $10 million. The acquired shares (the "Tarzian Shares") represent 33.5% of the total outstanding common stock of Tarzian both in terms of the number of shares of common stock outstanding and in terms of voting rights, but such investment represents 73% of the equity of Tarzian for purposes of dividends, as well as distributions in the event of any liquidation, dissolution or other termination of Tarzian. Tarzian has filed a complaint with the United States District Court, claiming that it had a binding contract with the Estate to purchase the Tarzian Shares from the Estate prior to the Company's purchase of the shares, and requests judgment providing that the Estate be required to sell the Tarzian Shares to Tarzian (see "Legal Proceedings" in Item 3 for further discussion). Tarzian owns and operates two television stations and four radio stations: WRCB-TV Channel 3 in Chattanooga, Tennessee, an NBC affiliate; KTVN-TV Channel 2 in Reno, Nevada, a CBS affiliate; WGCL-AM and WTTS-FM in Bloomington, Indiana; and WAJI-FM and WLDE-FM in Fort Wayne, Indiana. The Company's investment in Tarzian was financed with a $10 million bank note payable with interest at the bank's prime rate, expiring May 28, 1999. The Company intends to refinance or extend the $10 million note prior to the note's expiration date, if necessary. On March 1, 1999, the Company executed an option agreement with Gray Communications Systems, Inc. ("Gray"), the Company's 16.9%-owned affiliate, whereby Gray has the option of acquiring the Tarzian 13 14 investment from the Company for $10 million plus related costs, expiring May 31, 1999. Gray has the ability to extend the option period in 30 day increments at a fee of $66,700 per extension. The Company also received from Gray warrants to acquire 100,000 shares of Gray's class B common stock at $13.625 per share, in connection with the option agreement. The warrants will vest immediately upon Gray's exercise of the option. RESULTS OF OPERATIONS - 1998 AS COMPARED TO 1997 Total revenue for 1998, primarily from the printer manufacturing operations of Datasouth, was $31,466,000 compared to $22,320,000 in 1997. Revenue from Datasouth's printer operations (including the CodeWriter product line, which was acquired on January 2, 1998 as discussed in "Liquidity and Capital Resources" and in note 2 to the consolidated financial statements, referred to as the "CodeWriter Acquisition"), was $29,848,000 in 1998, representing a 38% increase from such revenue in 1997 of $21,639,000. CodeWriter products contributed revenue of approximately $4,400,000 in 1998. Printer sales to the Company's largest customer were approximately $9,200,000 in 1998 and $7,200,000 in 1997. Short term revenue trends in the Company's printer business fluctuate due to variable ordering patterns of large customers. The increase in 1998 revenue compared to 1997 was also due in part to an increase in consulting fee income in 1998 compared to 1997. Gross profit from printer operations of 25.9% for 1998 decreased slightly from the 26.2% realized in 1997, primarily due to (a) a different mix of products sold; (b) initial production costs associated with the introduction of a new printer line; and (c) costs incurred by the Company immediately following the CodeWriter Acquisition, prior to the integration of manufacturing operations into the Company's existing product manufacturing facility, offset by (d) some manufacturing overhead efficiencies gained as a result of higher unit volumes. The Company provides consulting services to Gray in connection with Gray's acquisitions and dispositions. Income on a portion of such fees is deferred and recognized over forty years as a result of the Company's equity investment position in Gray. Consulting fee income of $1,618,000 was recognized in 1998 compared to $681,000 in 1997. There can be no assurance that the Company will recognize any consulting fees in the future, other than recognition of currently deferred fees. Operating expenses of $8,593,000 in 1998 represented a 25% increase from 1997, due primarily to (a) an increase in sales and marketing personnel attributable to the Company's expanded printer line; (b) expenses associated with the Company's European sales office opened in October 1998; (c) an increase in advertising expenses relating to the introduction of new products in 1998; (d) an increase in personnel as a result of the CodeWriter Acquisition; and (e) goodwill amortization expense and certain nonrecurring post-acquisition transition costs in 1998 associated with the CodeWriter Acquisition. Operating expenses include non-cash goodwill amortization expense of $488,000 in 1998 and $301,000 in 1997, associated with the acquisition of Datasouth and, in 1998 only, the CodeWriter Acquisition. Equity in earnings (losses) of affiliated companies, totaling $6,734,000 in 1998 and ($599,000) in 1997, includes the Company's proportionate share of the earnings of Gray, HCI, CSP, and in 1998 only, Rawlings Sporting Goods Company, Inc. ("Rawlings"), net of goodwill amortization totaling $777,000 and $610,000, respectively. In 1998, Gray disposed of WALB-TV, its NBC affiliate in Albany, Georgia, fulfilling a Federal Communications Commission divestiture order. As a result of the gain on the disposition of WALB-TV, the Company's equity in Gray's earnings was favorably impacted by approximately $6,900,000 in 1998. Interest and dividend income of $1,085,000 in 1998 and $1,102,000 in 1997 was primarily derived from dividends accrued on the Company's investment in Gray's series A and series B preferred stock. Interest expense, totaling $4,247,000 in 1998 and $2,716,000 in 1997, was incurred primarily in connection with bank term loans, the proceeds of which were used 14 15 to finance (a) the Company's investments in Gray, HCI, CSP and USA; (b) the Company's investments in Rawlings from November 1997 through January 1998; (c) the CodeWriter Acquisition in January 1998; and (d) the Company's investment in TSI in August 1998. As of December 31, 1998, the Company has a net operating loss carryforward for tax purposes of approximately $1,500,000 to reduce Federal taxable income in the future, an Alternative Minimum Tax ("AMT") credit carryforward of approximately $500,000 and a business credit carryforward of approximately $115,000, to reduce regular Federal tax liabilities in the future. Nondeductible goodwill amortization increased the Company's tax provision in 1998 and reduced the Company's tax benefit in 1997, resulting in an effective tax rate of 44.0% in 1998 and 34.5% in 1997. RESULTS OF OPERATIONS - 1997 AS COMPARED TO 1996 Total revenue for 1997, primarily from the printer manufacturing operations of Datasouth, was $22,320,000 compared to $24,654,000 in 1996. Revenue from Datasouth's printer operations of $21,639,000 in 1997 represented a 9% decrease from such revenue in 1996 of $23,810,000. Printer sales to the Company's largest customer were approximately $7,200,000 in 1997 and 1996. Sales to two significant distributors were approximately $980,000 lower in 1997 than in 1996, and a product line generating sales of $1,230,000 of sales in 1996 was discontinued in 1997. Short term revenue trends in the Company's printer business fluctuate due to variable ordering patterns of large customers. Gross profit from printer operations of 26.2% for 1997 decreased from the 27.9% realized in 1996, primarily due to a different mix of products sold, initial production costs associated with the introduction of a new printer line, and greater manufacturing overhead efficiencies gained in 1996 as a result of higher unit volumes. Consulting fee income on services provided to Gray in connection with Gray's acquisitions and dispositions was $681,000 in 1997 compared to $844,000 in 1996. Operating expenses of $6,852,000 in 1997 represented a 10% increase from 1996, due primarily to (a) the cost of research and development efforts incurred for the design of a new printer introduced in the fourth quarter of 1997 and (b) certain general and administrative expenses. Operating expenses include non-cash goodwill amortization associated with the acquisition of Datasouth of $301,000 in 1997 and $292,000 in 1996. Equity in earnings (losses) of affiliated companies totaled ($599,000) in 1997 and $1,731,000 in 1996, net of goodwill amortization totaling $610,000 and $487,000, respectively. Approximately $975,000 of the decrease from 1996 to 1997 in equity in earnings of affiliated companies can be attributed to Gray's gain on the sale of a television station and HCI's gain on the sale of assets to USA in 1996. Additional decreases in Gray's earnings for 1997 compared to 1996 are attributable to increased interest expense and amortization of goodwill associated with Gray's acquisitions. In 1996, Gray consummated a public offering of 3.5 million shares of its newly-issued class B common stock, resulting in net proceeds to Gray of $67,100,000. As a result of this issuance, the Company's common equity ownership of Gray was reduced from 27.1% to 15.2%, resulting in a pretax gain for the Company of approximately $8,200,000 (approximately $5,000,000 million after tax). This offering also reduced the Company's common equity voting power in Gray from 27.1% to 25.1%. There is no assurance that such sales or such gains of a material nature will occur in the future. Interest and dividend income in 1997 of $1,102,000 was primarily derived from dividends accrued on the Company's investment in Gray's series A and series B preferred stock. Interest expense, totaling $2,716,000 in 1997, was incurred primarily in connection with bank term loans, the proceeds of which were used to finance (a) the Company's investments in 15 16 Gray, HCI, CSP, USA and (b) the Company's investments in Rawlings beginning in November 1997. The Company recognizes its equity in earnings of HCI on a six month lag basis, in order to align HCI's fiscal year ending June 30 with the Company's fiscal year. Effective July 1, 1995 (the first day of HCI's 1996 fiscal year), HCI adopted a new accounting policy for the recognition of corporate sponsor license fee revenue and guaranteed rights fee expenses, since the nature of HCI's contracts were changing to include revenue-sharing or net profit split arrangements, rather than guaranteed rights fee payments. As a result, the rights fee expense associated with this type of contract could not be accurately measured until the expiration of each contract period when the revenue-sharing or net profit split amount was determined. Under the new policy, license fee revenue and rights fee expense are recognized on a straight-line basis over the life of the contract, instead of recognizing revenue and expense in their entirety on the effective date of the contract, thereby providing for the uniform matching of revenue and expenses. As a result of the change in accounting policy, HCI recognized a $4,559,000 charge against its earnings, representing the after-tax cumulative effect of the accounting change. The Company reported 9.1% of the charge, or $415,000, less a $141,000 deferred tax benefit, as a charge against its 1996 earnings. In 1996, Gray retired certain debt with the proceeds from its public offerings of class B common stock and notes, and the sale of its series B preferred stock. As a result, Gray incurred an after-tax extraordinary loss of $3,159,000 related to costs associated with the retired debt. The Company therefore recognized 15.2% of Gray's charge, or $480,000, less a $185,000 deferred tax benefit, as an extraordinary loss. As of December 31, 1997, the Company had an Alternative Minimum Tax ("AMT") credit carryforward of approximately $500,000 to reduce regular Federal tax liabilities in the future. In part resulting from the carryback of the 1997 taxable loss to 1995, the Company had a business credit carryforward of approximately $115,000 to reduce regular Federal tax liabilities in the future. Nondeductible goodwill amortization reduced the Company's tax benefit in 1997 and increased the Company's tax expense in 1996, thereby reducing the Company's effective tax rate to 34.5% in 1997 from 40.6% in 1996. The valuation allowance on deferred tax assets was reduced in 1996, thereby reducing the 1996 income tax provision by approximately $47,000 and goodwill by approximately $131,000. LIQUIDITY AND CAPITAL RESOURCES The Company amended its long-term debt agreements with two banks in 1998, and further amended the agreements in February and March 1999. Under an agreement amended on March 20, 1998, and further amended February 24, 1999, March 22, 1999 and March 24, 1999, the Company has outstanding (a) four term notes payable to a bank, requiring no principal payments prior to maturity on January 1, 2003, bearing interest at the London Interbank Offered Rate ("LIBOR") plus 1.75%, under which $42,312,000 was outstanding as of December 31, 1998; and (b) a revolving bank credit facility for borrowings of up to $3,500,000 expiring May 1, 2000, bearing interest at the bank's prime rate, under which $2,536,000 was outstanding as of December 31, 1998. Under an agreement amended February 20, 1998 (the "February 1998 Agreement"), the Company entered into (a) a $5,000,000 term note, payable to a bank in quarterly installments of $250,000, under which $4,000,000 was outstanding as of December 31, 1998, and (b) a revolving bank credit facility for borrowings of up to $5,000,000, under which the Company had borrowed $5,000,000 as of December 31, 1998. The February 1998 Agreement was further modified on March 5, 1999 to revise certain terms, resulting in (a) a $4,000,000 term note, payable to a bank in quarterly installments of $250,000 through March 31, 2000, with the remainder due June 30, 2000, and (b) a revolving bank credit facility for borrowings of up to $5,000,000 until June 30, 1999, and $4,000,000 thereafter until expiration on June 30, 2000. Borrowings under the February 1998 Agreement, as modified, currently bear interest at 16 17 either (a) the prime rate or (b) LIBOR plus 3%. The Company also had a demand bank note for borrowings of up to $2,000,000, bearing interest at the bank's prime rate, under which $2,000,000 was outstanding as of December 31, 1998. The demand note expires June 30, 1999. The Company's investment in Tarzian was financed with a $10,000,000 bank note payable with interest at the bank's prime rate, expiring May 28, 1999. The Company intends to refinance or extend the note prior to the note's expiration date, if necessary. The Company currently anticipates refinancing all existing notes payable and long-term debt agreements in 1999 in connection with the bank financing of the HCI-USA Acquisition. In January 1998, the Company executed two interest rate swap agreements, effectively modifying the interest characteristics of $24,000,000 of the Company's outstanding long-term debt. The agreements involve the exchange of amounts based on a fixed interest rate for amounts based on variable interest rates over the life of the agreements, without an exchange of the notional amount upon which the payments are based. The differential to be paid or received as interest rates change will be accrued and recognized as an adjustment of interest expense related to the debt. The Company effectively converted $20,000,000 and $4,000,000 of floating rate debt to a fixed rate basis under two separate agreements, one of which was modified in September 1998. Under the first agreement, $20,000,000 of long-term debt is subject to a one-year forward swap agreement, whereby beginning January 1, 1999 and for the following nine years, the Company will be subject to a fixed rate of 7.83%, instead of LIBOR plus 1.75%, the rate in effect until then. Under the second agreement, $4,000,000 of long-term debt is subject to a fixed rate of no more than 8.66% beginning September 30, 1998 through December 31, 2004, instead of LIBOR plus 3%, the rate in effect until then. In aggregate, the estimated cost of terminating the swap agreements, if the Company elected to do so, is approximately $1,300,000 as of December 31, 1998. Effective January 2, 1998, the Company acquired all of the outstanding common stock of CodeWriter Industries, Inc. ("CodeWriter") and all of the outstanding membership interests of CodeWriter's affiliate, CW Technologies, LLC ("CWT"), in a transaction valued at approximately $6,200,000 (the "CodeWriter Acquisition"), of which $5,000,000 was paid at closing in the form of $2,500,000 in cash and $2,500,000 in the Company's common stock. In addition, the Company is obligated to pay quarterly to the Members of CWT, a specified percentage of revenue generated by the Company from CodeWriter's and CWT's products and services during each calendar quarter through December 31, 2001, but in no event will the aggregate payments exceed $1,200,000. In 1997, the Company entered into an Investment Purchase Agreement with Rawlings. Pursuant to this agreement, the Company acquired warrants to purchase 925,804 shares of Rawlings' common stock, and has the right, under certain circumstances, to purchase additional warrants. The Company's total cost to purchase the warrants pursuant to this agreement (excluding the additional warrants) was $2,842,000. Fifty percent of the purchase price, or $1,421,000, was paid to Rawlings in 1997. The remaining fifty percent of the purchase price, plus interest at 7% per annum from November 21, 1997 until the date of payment, will be due on the earlier of the date of exercise or the date of expiration of the warrants. In the event of a partial exercise of the warrants, a pro rata portion of the purchase price with interest accrued thereon will be payable. The warrants have a four-year term and an exercise price of $12.00 per share, but are exercisable only if Rawlings' common stock closes at or above $16.50 for twenty consecutive trading days during the four-year term. In addition, under the terms of the agreement, the Company purchased 10.4% of the outstanding shares of Rawlings' common stock in the open market from November 1997 through January 1998. Investments in Rawlings were financed with borrowings under the $42,312,000 term loans previously described. 17 18 Dividends on the series B preferred stock of Gray owned by the Company are payable in cash at an annual rate of $600 per share or, at Gray's option, payable in additional shares of series B preferred stock. During 1998, Gray redeemed 435.94 shares of its series B preferred stock owned by the Company, including 110.94 shares previously issued in-kind as dividends on the series B preferred stock, for a total of $3,805,000. The Company anticipates that dividends on the series B preferred stock will be paid in cash for the foreseeable future. Inventories increased to $5,167,000 as of December 31, 1998 from $3,757,000 at December 31, 1997, as a result of (a) the CodeWriter Acquisition, which added inventories of $538,000 at the acquisition date; (b) an increase in raw materials on hand associated with the Company's new internally-developed Journey Automated Ticket / Boarding Pass Version 2 ("ATB2") airline ticket printer initially introduced in December 1997; and (c) the purchase of assets, consisting primarily of inventories associated with the Sigma-Data 7200 high-speed ATB2 printer, from a Japanese company in September 1998, in a transaction valued at approximately $750,000 (the "Sigma-Data 7200 Purchase"). As of December 31, 1998, the Company had open purchase commitments totaling approximately $8,500,000, primarily for raw materials inventories. The Company's total working capital increased to $3,312,000 as of December 31, 1998 from $2,513,000 as of December 31, 1997, primarily as a result of (a) the CodeWriter Acquisition, which added $409,000 in working capital as of the acquisition date; (b) the increase in raw materials for Journey, discussed above; (c) the Sigma-Data 7200 Purchase, which added approximately $750,000 in working capital as of the acquisition date; and (d) an increase in accounts receivable due to the increase in product sales, net of (x) an increase in the demand note payable; (y) an increase in the current portion of long-term debt attributable to the CodeWriter Acquisition financing, as modified; and (z) an increase in accounts payable attributable to an increase in raw materials inventories. The Company has an active stock repurchase program authorized by its Board of Directors for the repurchase of up to 2,000,000 shares of its common stock. Repurchases may be made from time to time in the open market or directly from shareholders at prevailing market prices, and may be discontinued at any time. During 1998, the Company repurchased 40,500 shares at a total cost of $150,000 under the Program, in addition to 50,956 shares valued at $217,000 acquired in a private transaction in 1998. Capital spending for 1999 is expected to be approximately $600,000, excluding any impact of the HCI-USA Acquisition. The Company anticipates that its current working capital, funds available under its revolving credit facilities, quarterly cash dividends on the Gray preferred stock and Gray class A common stock, anticipated redemption of some amount of Gray preferred stock, anticipated extension fees on the option agreement with Gray and cash flow from operations will be sufficient to fund its debt service, working capital requirements and capital spending requirements for at least the next twelve months. Any capital required for potential additional business acquisitions would have to be funded by issuing additional securities or by entering into other financial arrangements. INTEREST RATE RISK MANAGEMENT The Company is exposed to changes in interest rates due to the Company's financing of its acquisitions, investments and operations. Interest rate risk is present with both fixed and floating rate debt. The Company uses interest rate swap agreements (as detailed in "Liquidity and Capital Resources" above) to manage its debt profile. Interest rate swap agreements generally involve exchanges of underlying face (notional) amounts of designated hedges. The Company continually evaluates the credit quality of counterparties to interest rate swap agreements and does not believe there is a significant risk of nonperformance by any of the counterparties. 18 19 Based on the Company's debt profile at December 31, 1998 and 1997, a 1% increase in market interest rates would increase interest expense and decrease the income before income taxes (or alternatively, increase interest expense and increase the loss before income taxes) by $517,000 in 1998 and $353,000 in 1997. These amounts were determined by calculating the effect of the hypothetical interest rate on the Company's floating rate debt, after giving consideration to the Company's interest rate swap agreements. These amounts do not include the effects of certain potential results of increased interest rates, such as a reduced level of overall economic activity or other actions management may take to mitigate the risk. Furthermore, this sensitivity analysis does not assume changes in the Company's financial structure that could occur if interest rates were higher. RECENTLY-ISSUED ACCOUNTING STANDARD In June 1998, the Financial Accounting Standards Board issued Statement No. 133, Accounting for Derivative Instruments and Hedging Activities. The Company expects to adopt the new Statement effective January 1, 2000. The Statement will require the Company to recognize all derivatives on the balance sheet at fair value. The Company does not anticipate that the adoption of this Statement will have a significant effect on its results of operations or financial position. IMPACT OF YEAR 2000 Some of the Company's older computer programs were written using two digits rather than four to define the applicable year. As a result, those computer programs have time-sensitive software that recognize a date using "00" as the year 1900 rather than the year 2000. This could cause a system failure or miscalculations causing disruptions of operations, including, among other things, a temporary inability to process transactions, send invoices, or engage in similar normal business activities. During 1997, the Company completed an assessment and determined (a) that its printer products did not contain time-sensitive software that make them susceptible to the Year 2000 Issue; however, (b) there were portions of the Company's internal systems software and some hardware that would have to be modified or replaced so that its computer systems would function properly with respect to dates in the year 2000 and thereafter. The most significant computer systems, which pertain to the Company's manufacturing and financial accounting systems, were upgraded in 1998 and are currently Year 2000 compliant. Expense incurred in 1998 related to Year 2000 upgrades and modifications was approximately $100,000, including equipment lease rent expense. Future equipment rent expense will not differ materially from depreciation expense attributed to the replaced equipment. Although management expects to replace some personal computers and other computer hardware during 1999 which are not Year 2000 compliant, management does not expect the cost of these additional expenditures to exceed $50,000, nor does it expect that any of the necessary modifications or replacements will have a material impact on the results of any future financial reporting period. The remaining modifications and replacements are expected to be completed by mid-1999, prior to any anticipated impact on its operating systems. The Company believes that with the completed and anticipated modifications to existing software and conversions to new software, the Year 2000 Issue will not pose significant operational problems for its computer systems. The Company has had communications with most of its major vendors and sole source suppliers to determine the extent to which the Company may be vulnerable to those third parties' failure to remedy their own Year 2000 issues. These communications include both oral communications, as well as the receipt of written Year 2000 compliance statements, and focus on certain key vendors and suppliers from whom the Company receives unique materials, products and services. The Company expects to complete its assessment of its major vendors and sole source suppliers by mid-1999. Most raw materials used in the manufacture of the Company's computer printers are available from more than one supplier; 19 20 therefore, management's contingency plans include, but are not limited to, evaluating alternative vendors who are Year 2000 compliant, as well as evaluating the adequacy of inventory levels. The costs of the project and the date on which the Company believes it will complete the Year 2000 modifications are based on management's best estimates, which were derived utilizing numerous assumptions of future events, including the continued availability of certain resources and other factors. However, there can be no guarantee that these estimates will be achieved and actual results could differ materially from those anticipated. Specific factors that might cause such material differences include, but are not limited to, the availability and cost of personnel trained in this area, the availability of suitable replacement hardware, the ability to locate and correct all relevant computer codes, and similar uncertainties. Furthermore, it is too early to determine to what extent, if any, contingency plans will have to be implemented. Although the Company expects to be Year 2000 compliant by mid-1999 and does not expect to be materially impacted by the external environment, such future events cannot be known with certainty. FORWARD-LOOKING STATEMENTS This Annual Report on Form 10-K contains "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. When used in this report, the words "believes," "expects," "anticipates," "estimates" and similar words and expressions are generally intended to identify forward-looking statements. Statements that describe the Company's future strategic plans, goals or objectives are also forward-looking statements. Readers of this Report are cautioned that any forward-looking statements, including those regarding the intent, belief or current expectations of the Company or management, are not guarantees of future performance, results or events, and involve risks and uncertainties. Actual results and events may differ materially from those in the forward-looking statements as a result of various factors including, but not limited to, (i) general economic conditions in the markets in which the Company and its affiliates operate, (ii) competitive pressures in the markets in which the Company and its affiliates operate, (iii) the effect of future legislation or regulatory changes on the Company's and its affiliates' operations and (iv) other factors described from time to time in the Company's filings with the Securities and Exchange Commission. The forward-looking statements included in this report are made only as of the date hereof. The Company undertakes no obligation to update such forward-looking statements to reflect subsequent events or circumstances. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK See "Interest Rate Risk Management" in Item 7 "Management's Discussion and Analysis". 20 21 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
PAGE ---- Audited Consolidated Financial Statements of Bull Run Corporation Report of Independent Auditors 22 Consolidated Balance Sheets at December 31, 1998 and 1997 23 Consolidated Statements of Operations for the years ended December 31, 1998, 1997 and 1996 24 Consolidated Statements of Stockholders' Equity for the years ended December 31, 1998, 1997 and 1996 25 Consolidated Statements of Cash Flows for the years ended December 31, 1998, 1997 and 1996 26 Notes to Consolidated Financial Statements 27 Selected Quarterly Financial Data (Unaudited) 40 Audited Consolidated Financial Statements of Gray Communications Systems, Inc. Report of Independent Auditors F-1 Consolidated Balance Sheets at December 31, 1998 and 1997 F-2 Consolidated Statements of Operations for the years ended December 31, 1998, 1997 and 1996 F-4 Consolidated Statements of Stockholders' Equity for the years ended December 31, 1998, 1997 and 1996 F-5 Consolidated Statements of Cash Flows for the years ended December 31, 1998, 1997 and 1996 F-7 Notes to Consolidated Financial Statements F-8
21 22 REPORT OF INDEPENDENT AUDITORS BOARD OF DIRECTORS AND STOCKHOLDERS OF BULL RUN CORPORATION: We have audited the accompanying consolidated balance sheets of Bull Run Corporation as of December 31, 1998 and 1997, and the related consolidated statements of operations, stockholders' equity and cash flows for each of the three years in the period ended December 31, 1998. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. The financial statements of Rawlings Sporting Goods Company, Inc. ("Rawlings") as of and for the year ended August 31, 1998, and the financial statements of Host Communications, Inc. ("HCI") and Capital Sports Properties, Inc. ("CSP") as of and for the year ended June 30, 1996 and for the six months ended June 30, 1996 have been audited by other auditors whose reports have been furnished to us; the report as to HCI included an explanatory paragraph relating to an accounting change in the method of recognizing certain revenue and related expenses. Our opinion, insofar as it relates to data included for Rawlings, HCI and CSP for their respective periods in 1998 and 1996, is based solely on the reports of the other auditors. In the consolidated financial statements, the Company's investment in Rawlings is stated at $11,001,000 at December 31, 1998 and the Company's investment in HCI and CSP is stated at $11,854,000 at December 31, 1996; the Company's equity in the net income of Rawlings is stated at $237,000 for the year ended December 31, 1998; and the Company's equity in the net income of HCI and CSP is stated at $762,000 for the year ended December 31, 1996; and the Company's cumulative effect of accounting change recognized by HCI is stated at $(274,000) for the year ended December 31, 1996. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits and the reports of the other auditors provide a reasonable basis for our opinion. In our opinion, based on our audits and, for 1998 and 1996, the reports of other auditors, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Bull Run Corporation at December 31, 1998 and 1997, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 1998, in conformity with generally accepted accounting principles. As discussed in Note 4 to the Consolidated Financial Statements, during 1996 HCI changed its method of recognizing certain revenue and related expenses. /s/ ERNST & YOUNG LLP Atlanta, Georgia February 9, 1999, except as to Notes 4 and 7, as to which the date is March 24, 1999 22 23 BULL RUN CORPORATION CONSOLIDATED BALANCE SHEETS (Dollars and shares in thousands)
December 31 1998 1997 ASSETS Current assets: Cash and cash equivalents $ 58 $ 142 Accounts receivable (includes $880 and $850 due from Gray Communications Systems, Inc. as of December 31, 1998 and 1997, respectively) 5,980 4,600 Inventories 5,167 3,757 Other 231 193 -------- -------- Total current assets 11,436 8,692 Property and equipment, net 2,623 2,638 Investment in affiliated companies 73,346 61,551 Goodwill 7,583 3,589 Other assets 184 362 -------- -------- $ 95,172 $ 76,832 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Note payable and current portion of long-term debt $ 4,000 $ 2,500 Accounts payable 2,781 2,462 Accrued and other liabilities: Employee compensation and related taxes 571 430 Interest 396 553 Other 376 234 -------- -------- Total current liabilities 8,124 6,179 Long-term debt 51,848 41,998 Deferred income taxes 5,409 3,599 Stockholders' equity: Common stock, $.01 par value (authorized 100,000 shares; issued 22,785 and 22,583 shares as of December 31, 1998 and 1997, respectively) 228 226 Additional paid-in capital 21,378 20,800 Treasury stock, at cost (542 and 1,287 shares as of December 31, 1998 and 1997, respectively) (1,393) (3,188) Retained earnings 9,578 7,218 -------- -------- Total stockholders' equity 29,791 25,056 -------- -------- $ 95,172 $ 76,832 ======== ========
The accompanying notes are an integral part of these consolidated financial statements. 23 24 BULL RUN CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS (Dollars and shares in thousands, except per share amounts)
Years Ended December 31 1998 1997 1996 Revenue from printer operations $ 29,848 $ 21,639 $ 23,810 Cost of goods sold 22,103 15,967 17,170 -------- -------- -------- Gross profit 7,745 5,672 6,640 Consulting fee income 1,618 681 844 Operating expenses: Research and development 2,323 2,418 1,568 Selling, general and administrative 6,270 4,434 4,687 -------- -------- -------- 8,593 6,852 6,255 -------- -------- -------- Income (loss) from operations 770 (499) 1,229 Other income (expense): Equity in earnings (losses) of affiliated companies 6,734 (599) 1,731 Gain on issuance of common shares by affiliated company -- -- 8,179 Interest and dividend income 1,085 1,102 874 Interest expense (4,247) (2,716) (2,124) Other expense (128) -- -- -------- -------- -------- Income (loss) before income taxes, extraordinary item and cumulative effect of accounting change 4,214 (2,712) 9,889 Income tax benefit (provision) (1,854) 939 (4,012) -------- -------- -------- Income (loss) before extraordinary item and cumulative effect of accounting change 2,360 (1,773) 5,877 Extraordinary loss recognized by affiliated company (net of $185 tax benefit) -- -- (295) Cumulative effect of accounting change recognized by affiliate (net of $141 tax benefit) -- -- (274) -------- -------- -------- Net income (loss) $ 2,360 $ (1,773) $ 5,308 ======== ======== ======== Earnings (loss) per share - Basic: Income (loss) before extraordinary item and cumulative effect of accounting change $ 0.11 $ (0.08) $ 0.26 Extraordinary loss -- -- (0.01) Cumulative effect of accounting change -- -- (0.01) -------- -------- -------- Net income (loss) $ 0.11 $ (0.08) $ 0.24 ======== ======== ======== Earnings (loss) per share - Diluted: Income (loss) before extraordinary item and cumulative effect of accounting change $ 0.10 $ (0.08) $ 0.25 Extraordinary loss -- -- (0.01) Cumulative effect of accounting change -- -- (0.01) -------- -------- -------- Net income (loss) $ 0.10 $ (0.08) $ 0.23 ======== ======== ======== Weighted average number of common shares outstanding: Basic 22,189 21,302 22,013 Diluted 23,182 21,302 22,945
The accompanying notes are an integral part of these consolidated financial statements. 24 25 BULL RUN CORPORATION CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (Dollars and shares in thousands)
Additional Total Common Stock Paid-In Treasury Retained Stockholders' Shares Amount Capital Stock Earnings Equity Balances, December 31, 1995 22,280 $ 223 $20,503 $ (330) $3,683 $24,079 Purchase of treasury stock (1,107) (1,107) Exercise of stock options 45 38 38 Net income 5,308 5,308 ------ ------- ------- ------- ------ ------- Balances, December 31, 1996 22,325 223 20,541 (1,437) 8,991 28,318 Purchase of treasury stock (1,751) (1,751) Exercise of stock options 258 3 259 262 Net loss (1,773) (1,773) ------ ------- ------- ------- ------ ------- Balances, December 31, 1997 22,583 226 20,800 (3,188) 7,218 25,056 Issuance of treasury stock 555 1,945 2,500 Purchase of treasury stock (150) (150) Exercise of stock options 202 2 23 25 Net income 2,360 2,360 ------ ------- ------- ------- ------ ------- Balances, December 31, 1998 22,785 $ 228 $21,378 $(1,393) $9,578 $29,791 ====== ======= ======= ======= ====== =======
The accompanying notes are an integral part of these consolidated financial statements. 25 26 BULL RUN CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (Dollars in thousands)
Years Ended December 31 1998 1997 1996 Cash flows from operating activities: Net income (loss) $ 2,360 $ (1,773) $ 5,308 Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Cumulative effect of accounting change 415 Extraordinary loss 480 Gain on issuance of common shares by affiliate (8,179) Provision for bad debts 22 27 1 Depreciation and amortization 1,122 1,001 950 Equity in (earnings) losses of affiliated companies (6,734) 599 (1,731) Deferred income taxes 1,837 (892) 3,553 Accrued preferred stock dividend income (175) (300) Loss on disposition of assets 128 Change in operating assets and liabilities: Accounts receivable (1,100) (553) (166) Inventories (161) (442) 440 Other current assets 47 (6) 74 Accounts payable and accrued expenses 30 512 122 ------ ------ ------ Net cash provided by (used in) operating activities (2,624) (1,827) 1,267 ------ ------ ------ Cash flows from investing activities: Capital expenditures (352) (1,160) (366) Investment in affiliated companies (8,812) (9,099) (5,566) Acquisition of printer manufacturer and printer product rights, net of cash acquired (2,916) Note purchased from affiliated company (10,000) Redemption of preferred stock investment 3,805 Dividends received from affiliated companies 121 1,002 73 ------ ------ ------ Net cash used in investing activities (8,154) (9,257) (15,859) ------ ------ ------ Cash flows from financing activities: Borrowings from notes payable 1,200 1,500 Borrowings from revolving lines of credit 17,598 15,232 11,339 Repayments on notes payable (700) Repayments on revolving lines of credit (18,718) (9,941) (10,656) Proceeds from long-term debt 12,975 5,843 15,000 Repayments on long-term debt (1,536) Loan commitment fees (87) Issuance of common stock 25 262 38 Repurchase of common stock (150) (1,751) (1,107) ------ ------ ------ Net cash provided by financing activities 10,694 11,145 14,527 ------ ------ ------ Net increase (decrease) in cash and cash equivalents (84) 61 (65) Cash and cash equivalents, beginning of year 142 81 146 ------ ------ ------ Cash and cash equivalents, end of year $ 58 $ 142 $ 81 ====== ====== ====== Supplemental cash flow disclosures: Interest paid $ 4,404 $ 2,460 $ 1,917 Income taxes paid (recovered), net (25) (58) 612 Treasury stock issued in connection with acquisition of printer manufacturer, a noncash investing and financing activity 2,500
The accompanying notes are an integral part of these consolidated financial statements. 26 27 BULL RUN CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except per share amounts) 1. DESCRIPTION OF BUSINESS Bull Run Corporation ("Bull Run"), based in Atlanta, Georgia, sells computer printers and provides service worldwide to distributors, value-added resellers and large volume end users through its wholly-owned subsidiary, Datasouth Computer Corporation ("Datasouth", and collectively, the "Company"), and makes significant investments in sports and media companies, including Gray Communications Systems, Inc. ("Gray"), an owner and operator of ten television stations and four daily newspapers; Host Communications, Inc. ("HCI"), a sports marketing and association management company; Rawlings Sporting Goods Company, Inc. ("Rawlings"), a leading supplier of team sports equipment in North America; Universal Sports America, Inc. ("USA"), a lifestyle and sports marketing company; and Total Sports, Inc. ("TSI"), a sports content Internet company. In January 1999, the Company made an investment in Sarkes Tarzian, Inc. ("Tarzian"), owner and operator of two television stations and four radio stations. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES PRINCIPLES OF CONSOLIDATION - The accompanying consolidated financial statements include the accounts of Bull Run and its wholly-owned subsidiary, Datasouth, after elimination of intercompany accounts and transactions. USE OF ESTIMATES - The preparation of the consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. CASH AND CASH EQUIVALENTS - Cash equivalents are composed of all highly liquid investments with an original maturity of three months or less. ACCOUNTS RECEIVABLE - The Company performs ongoing credit evaluations of its customers' financial condition and generally requires no collateral from its customers. In addition, the Company receives consulting fees generally payable in monthly installments from Gray, an investee, for the performance of services in connection with Gray's acquisitions and dispositions. The allowance for doubtful accounts was $82 as of December 31, 1998 and $55 as of December 31, 1997. INVENTORIES - Inventories are associated with the printer operations and are stated at the lower of cost, determined on the first-in, first-out method, or market. PROPERTY AND EQUIPMENT - Property and equipment is stated at cost less depreciation computed under the straight-line method over the estimated useful life of the asset, generally from 3 to 7 years. When assets are disposed, the associated cost and accumulated depreciation are eliminated from the respective accounts and any resulting gain or loss is reflected in income. Expenditures for maintenance, repairs and minor renewals are charged to expense. Depreciation expense was $592 in 1998, $614 in 1997 and $590 in 1996. INVESTMENT IN AFFILIATED COMPANIES - The Company has accounted for its investments in Gray, HCI, Rawlings and Capital Sports Properties, Inc. ("CSP") by the equity method, and its investments in USA and TSI by the cost method. The excess of the Company's investment over the underlying equity of Gray, HCI and Rawlings, totaling approximately $29,600 and $24,200 as of December 31, 1998 and 1997, respectively, is being amortized over 20 to 40 27 28 years, with such amortization (totaling $777 in 1998, $610 in 1997 and $487 in 1996) reported as a reduction in the Company's equity in earnings of affiliated companies. The equity in earnings of HCI is recognized by the Company on a six month lag basis, in order to align HCI's fiscal year ending each June 30 with the Company's fiscal year. Effective January 15, 1998, the date on which a representative of the Company was elected to Rawlings' Board of Directors, the Company has accounted for its investment in Rawlings by the equity method on a one month lag basis, in order to align Rawlings' fiscal quarters ending November 30, February 28, May 31 and August 31 with the Company's fiscal quarters. GOODWILL AND OTHER LONG-LIVED ASSETS - Goodwill associated with the Company's acquisitions of printer manufacturing businesses is being amortized over 15 to 20 years. The carrying value of goodwill, as well as other long-lived assets, are reviewed if the facts and circumstances suggest that they may be impaired. If this review indicates that the assets will not be recoverable, as determined based on undiscounted estimated cash flows over the remaining amortization period, the carrying value of the assets would be reduced to their estimated fair value. Goodwill amortization was $488 in 1998, $301 in 1997 and $292 in 1996, and accumulated amortization was $1,416 and $928 as of December 31, 1998 and 1997, respectively. WARRANTY COSTS - An estimated allowance for future warranty costs of the printer operations, based on past experience, is recorded as a charge to cost of goods sold. Accrued warranty costs were $85 and $60 as of December 31, 1998 and 1997, respectively. RESEARCH AND DEVELOPMENT - Research and development costs of the printer operations, including the costs of software developed internally and costs for development services performed by third parties, are expensed as incurred. INCOME TAXES - Income taxes are recognized in accordance with Statement of Accounting Standards No. 109, "Accounting for Income Taxes," whereby deferred income tax liabilities or assets at the end of each period are determined using the tax rate expected to be in effect when the taxes are actually paid or recovered. Accordingly, income tax expense will increase or decrease in the same period in which a change in tax rates is enacted. A valuation allowance is recognized on certain deferred tax assets whose realization is not reasonably assured. STOCK-BASED COMPENSATION - The Company grants stock options for a fixed number of shares to employees with an exercise price equal to the fair value of the shares at the date of grant. In accordance with APB Opinion No. 25, "Accounting for Stock Issued to Employees", no compensation expense is recognized for such grants. EARNINGS (LOSS) PER SHARE - Basic and diluted earnings (loss) per share are determined in accordance with Financial Accounting Standards Board Statement No. 128, "Earnings Per Share", whereby basic earnings per share excludes any dilutive effects of stock options. In periods where they are anti-dilutive, dilutive effects of stock options are excluded from the calculation of dilutive earnings (loss) per share. RECENTLY-ISSUED ACCOUNTING STANDARD - In June 1998, the Financial Accounting Standards Board issued Statement No. 133, "Accounting for Derivative Instruments and Hedging Activities". The Company expects to adopt the new Statement effective January 1, 2000. The Statement will require the Company to recognize all derivatives on the balance sheet at fair value. The Company does not anticipate that the adoption of this Statement will have a significant effect on its results of operations or financial position. 28 29 3. PENDING AND COMPLETED ACQUISITIONS On February 15, 1999, the Company entered into an agreement to acquire the stock of HCI, USA and CSP not currently owned, directly or indirectly, by the Company, for approximately $95,000, net of cash acquired (the "HCI-USA Acquisition"). Pursuant to the agreement, a new holding company for the Company will be created immediately prior to the HCI-USA Acquisition whereby each outstanding share of the Company's common stock will be converted into one share of a newly formed Delaware company. The new holding company, which will be a publicly held company, will be owned by the stockholders of the Company immediately prior to such conversion and the Company and its subsidiaries will become subsidiaries of such holding company. Approximately $37,000 of the HCI-USA Acquisition purchase price is expected to be paid to HCI, USA and CSP stockholders in cash and the remainder is expected to be paid in common stock of the new holding company. The Company is currently HCI's largest stockholder, owning directly or indirectly approximately 32.5% of HCI's outstanding common stock and 51.5% of HCI's outstanding preferred stock. The Company's indirect ownership of HCI's common stock and HCI's preferred stock is owned by CSP, in which the Company owns 51.5% of the outstanding common stock. The Company and HCI together are the largest stockholders of USA, with the Company owning approximately 3% of USA's outstanding capital stock and HCI owning approximately 33% of USA's outstanding capital stock. For their most recent fiscal year ended June 30, 1998, HCI and USA together had revenues of approximately $109,000. This transaction is subject to the terms and conditions of the merger agreement, including approval of the stockholders of each of the companies, and is currently expected to close during the second quarter of 1999. Effective January 2, 1998, the Company acquired all of the outstanding common stock of CodeWriter Industries, Inc. and all of the outstanding membership interests of its affiliate, CW Technologies, LLC (collectively referred to as "CodeWriter"), in a transaction valued at approximately $6,200, including the issuance of treasury stock valued at $2,500 and future consideration of $1,200, payable quarterly through December 2001 based on the greater of (a) a percentage of revenue generated by CodeWriter products, or (b) $50, but in no event will the aggregate quarterly payments exceed $1,200. The future consideration increases goodwill as incurred. CodeWriter designs and manufactures a line of direct thermal and thermal transfer desktop and portable bar code label printers. The acquisition has been accounted for under the purchase method of accounting, whereby the results of operations of the acquired business are included in the accompanying condensed consolidated financial statements as of its acquisition date. The assets and liabilities of the acquired business are included based on an allocation of the purchase price. On September 25, 1998, the Company purchased the assets, consisting primarily of inventories, associated with the Sigma-Data 7200 high speed Automated Ticket / Boarding Pass Version 2 printer from a Japanese company, in a transaction valued at approximately $750. Effective October 1, 1998, the Company purchased a United Kingdom-based sales organization from its UK parent, for future consideration. The UK organization, which has been selling the Company's printer products and the Sigma-Data 7200 printer to computer reservation systems and airlines throughout the world, serves as the Company's European sales office and stocking facility. The future consideration is scheduled to be paid annually in arrears through September 2003, at amounts determined as a percentage of revenue generated by the Company's European sales office. This future consideration is charged to Cost of Goods Sold as the associated revenue is recognized. 4. INVESTMENT IN AFFILIATED COMPANIES INVESTMENTS IN HCI, CSP AND USA - The Company acquired its initial interests in the outstanding common stock of HCI and CSP in 1995. In 1996, CSP exercised warrants to acquire HCI common shares. As a result of this exercise of warrants and subsequent purchases of HCI common stock by the Company, the Company's direct common equity 29 30 ownership in HCI, plus the Company's indirect common equity ownership in HCI through its investment in CSP, was increased to 32.5% as of December 31, 1998. Additionally, the Company owns indirectly, through CSP, 51.5% of HCI's 8% series B preferred stock having a face value of $3,750. Unless previously acquired by the Company as a result of the HCI-USA Acquisition, outstanding shares of series B preferred stock, plus all accumulated and unpaid dividends thereon, are scheduled to be redeemed and paid in cash on December 15, 1999. HCI, based in Lexington, Kentucky, and HCI's 33.8%-owned affiliate, USA, provide media and marketing services to universities, athletic conferences and various associations representing collegiate sports and, in addition, market and operate amateur participatory sporting events. The Company recognizes its equity in earnings of HCI on a six month lag basis, in order to align HCI's fiscal year ending June 30 with the Company's fiscal year. Effective July 1, 1995 (the first day of HCI's 1996 fiscal year), HCI adopted a new accounting policy for the recognition of corporate sponsor license fee revenue and guaranteed rights fee expenses, since the nature of HCI's contracts were changing to include revenue-sharing or net profit split arrangements, rather than guaranteed rights fee payments. As a result, the rights fee expense associated with this type of contract could not be accurately measured until the expiration of each contract period when the revenue-sharing or net profit split amount was determined. Under the new policy, license fee revenue and rights fee expense are recognized on a straight-line basis over the life of the contract, instead of recognizing revenue and expense in their entirety on the effective date of the contract, thereby providing for the uniform matching of revenue and expenses. As a result of such adoption, HCI recognized a $4,559 charge against its earnings, representing the after-tax cumulative effect of the accounting change. The Company reported 9.1% of such charge, or $415, less a $141 deferred tax benefit, as a charge against its 1996 earnings. During HCI's 1996 fiscal year, HCI sold certain operating assets to USA in exchange for its 33.8% common equity position. The transaction resulted in a gain, net of tax, of approximately $4,000 for HCI, the Company's share of which amounted to $377, as reflected in the Company's 1996 equity in earnings of affiliated companies. In 1995, the Company invested $650 in preferred stock of USA, which is convertible to 3.0% of USA's total common shares, assuming conversion of all USA preferred stock. INVESTMENT IN GRAY AND GAIN ON ISSUANCE OF COMMON SHARES - In 1996, Gray consummated a public offering of 3.5 million shares of class B common stock, resulting in net proceeds to Gray of $67,060. As a result of such issuance, the Company's common equity ownership of Gray was reduced from 27.1% to 15.2% (subsequently increasing to 16.9% as of December 31, 1998), resulting in a pretax gain for the Company of $8,179 in 1996. This offering also reduced the Company's common equity voting power in Gray from 27.1% to 25.1% (subsequently increasing to 27.4% as of December 31, 1998. On July 31, 1998, Gray disposed of a television station and recognized an after-tax gain of approximately $43 million in connection with the disposition. As a result, the Company's equity in Gray's earnings was favorably impacted by approximately $4,000 in 1998. Gray is a communications company, based in Atlanta, Georgia, that operates ten network affiliated television stations (three of which were acquired in August 1998), four daily newspapers (one of which was acquired in March 1999), an advertising weekly shopper, a satellite broadcasting operation and a paging business. Gray's class A and class B common stock is publicly traded on the New York Stock Exchange (symbols: GCS and GCS.B, respectively). The Company provides consulting services to Gray from time to time in connection with Gray's acquisitions, dispositions and acquisition financing. Income on a portion of such fees is deferred and recognized over forty years as a result of the Company's equity investment position in Gray. Due to the reduction in the Company's equity ownership of Gray as described above, $174 of previously deferred consulting fees were recognized as consulting fee income in 1996. The Company recognized consulting fee income from Gray of $1,618, $681 and $844 in 1998, 1997 and 1996, respectively, for services rendered in connection with certain of Gray's acquisitions and dispositions. As of December 31, 1998 and 1997, 30 31 income from additional consulting fees of $762 and $400, respectively, has been deferred and will be recognized as Gray amortizes goodwill associated with its acquisitions. In January 1996, the Company purchased an 8% Subordinated Note (the "8% Note") of Gray in the principal amount of $10,000, on which the Company received interest income of $580 during 1996. In connection with the purchase of the 8% Note, Gray issued to the Company warrants to purchase up to 731,250 shares of Gray's class A common stock at $11.92 per share (as adjusted for a 3-for-2 stock split announced by Gray effective September 30, 1998). In September 1996, the Company exchanged the 8% Note for 1,000 shares of Gray's series A preferred stock, which entitles the holder thereof to cash dividends at an annual rate of $800 per share. At that same time, the Company purchased for $5,000, 500 shares of Gray's series B preferred stock entitling the holder thereof to annual dividends of $600 per share, which are cumulative. In connection with the Company's acquisition of series B preferred stock, Gray issued to the Company warrants to purchase up to 375,000 shares of Gray's class A common stock at $16.00 per share (adjusted for the 3-for-2 stock split). Of the total warrants owned by the Company to purchase 1,106,250 shares of Gray's class A common stock, 847,500 are fully vested and exercisable as of December 31, 1998, with the remaining warrants vesting periodically through 2001. The warrants expire in 2006. Dividends on the series B preferred stock are payable in cash or in additional shares of series B preferred stock, at Gray's option. Total dividend income of $1,072, $1,100 and $293 was recognized by the Company in 1998, 1997 and 1996, respectively, on Gray series A and B preferred stock. In 1998, Gray redeemed $3,805 of the series B preferred stock held by the Company. As a result, the Company held 175 shares of Gray's series B preferred stock as of December 31, 1998. In 1996, Gray retired certain of its debt, thereby incurring an after-tax extraordinary loss of $3,159 related to costs associated with the retired debt. As a result, the Company recognized 15.2% of Gray's charge, or $480, less a $185 deferred tax benefit, as an extraordinary loss in 1996. INVESTMENT IN TARZIAN - On January 28, 1999, the Company acquired shares of the outstanding common stock of Tarzian from the Estate of Mary Tarzian (the "Estate") for $10 million. The acquired shares (the "Tarzian Shares") represent 33.5% of the total outstanding common stock of Tarzian both in terms of the number of shares of common stock outstanding and in terms of voting rights, but such investment represents 73% of the equity of Tarzian for purposes of dividends, as well as distributions in the event of any liquidation, dissolution or other termination of Tarzian. Tarzian has filed a complaint with the United States District Court, claiming that it had a binding contract with the Estate to purchase the Tarzian Shares from the Estate prior to the Company's purchase of the shares, and requests judgment providing that the Estate be required to sell the Tarzian Shares to Tarzian. The Company believes that a binding contract between Tarzian and the Estate did not exist prior to the Company's purchase of the Tarzian Shares from the Estate, and in any case, the Company's purchase agreement with the Estate provides that in the event that a court of competent jurisdiction awards title to a person or entity other than the Company, the purchase agreement is rescinded, and the Estate is required to pay the Company the full $10 million purchase price, plus interest. Tarzian owns and operates two television stations and four radio stations: WRCB-TV Channel 3 in Chattanooga, Tennessee, an NBC affiliate; KTVN-TV Channel 2 in Reno, Nevada, a CBS affiliate; WGCL-AM and WTTS-FM in Bloomington, Indiana; and WAJI-FM and WLDE-FM in Fort Wayne, Indiana. The Company's investment in Tarzian was financed with a $10 million bank note payable with interest at the bank's prime rate, expiring May 28, 1999. On March 1, 1999, the Company executed an option agreement with Gray Communications Systems, Inc. ("Gray"), the Company's 16.9%-owned affiliate, whereby Gray has the option of acquiring the Tarzian investment from the Company for $10 million plus related costs, expiring May 31, 1999. Gray has the ability to extend the option period in 30-day increments at a fee of $66,700 per extension. The Company also received from Gray warrants to acquire 31 32 up to 100,000 shares of Gray's class B common stock at $13.625 per share, in connection with the option agreement. The warrants will vest immediately upon Gray's exercise of the option. INVESTMENT IN RAWLINGS - In November 1997, the Company entered into an Investment Purchase Agreement with Rawlings, a supplier of team sports equipment based near St. Louis, Missouri. Pursuant to this agreement, the Company acquired warrants to purchase approximately 10% of Rawlings' common stock, and has the right, under certain circumstances, to acquire additional warrants. The Company's total cost to purchase the warrants pursuant to this agreement (excluding the additional warrants) was $2,842. Fifty percent of the purchase price, or $1,421, was paid to Rawlings upon execution of the agreement in November 1997. The remaining fifty percent, plus interest at 7% per annum from November 21, 1997 until the date of payment, will be due on the earlier of the exercise date and the expiration date of the warrants. In the event of a partial exercise of warrants, a pro rata portion of the purchase price with interest accrued thereon will be payable. The warrants have a four year term and an exercise price of $12.00 per share, but are exercisable only if Rawlings' common stock closes at or above $16.50 for twenty consecutive trading days during the four year term. In addition, under the terms of the agreement, the Company purchased approximately 10.4% of Rawlings' outstanding common stock in the open market from November 1997 through January 1998. Rawlings' common stock is publicly traded on the Nasdaq Stock Market (symbol: RAWL). The Company and Rawlings also entered into a Standstill Agreement, which, among other things, provides that, for a specified period, the Company will be restricted in acquiring additional shares of Rawlings' common stock or participating in certain types of corporate events relating to the Company, including proxy contests and tender offers, subject to certain exceptions. Pursuant to a Registration Rights Agreement, Rawlings has also granted the Company rights to have shares issuable upon the exercise of the warrants (and the additional warrants, if any) registered under the Securities Act of 1933 under certain circumstances. INVESTMENT IN TSI - In 1998, the Company acquired 351,815 shares of TSI series C convertible preferred stock for $2,500. In January 1999, the Company invested an additional $1,000 for 105,374 shares of series C1 convertible preferred stock. TSI, based in Raleigh, North Carolina, is a website services provider for amateur and professional sports organizations and conferences, college athletic departments, and selected corporations. Assuming conversion of all TSI preferred stock, the Company's investment equates to a 7.7% share of TSI's capital stock as of December 31, 1998, increasing to 9.0% immediately following the additional investment made by the Company in January 1999. Dividends on the series C and series C1 convertible preferred stock are cumulative, and accrue at $.85 per share per annum and $1.14 per share per annum, respectively, from the issue date, and are payable quarterly at TSI's discretion. Any outstanding series C and series C1 preferred stock, plus all accumulated and unpaid dividends thereon, are scheduled to be redeemed and paid in cash on July 31, 2003. In addition to the Company's direct investment in TSI, HCI owns approximately 8.3% of TSI's common stock, assuming conversion of all TSI preferred stock. The shares owned by HCI are expected to be acquired by the Company in connection with the HCI-USA Acquisition. 32 33 SUMMARIZED AGGREGATE FINANCIAL INFORMATION - The summarized aggregate financial information of affiliated companies follows: AGGREGATE FINANCIAL POSITION (REFLECTING GRAY AND CSP AS OF DECEMBER 31, 1998 AND 1997; COMBINED WITH HCI AS OF JUNE 30, 1998 AND 1997; COMBINED WITH RAWLINGS AS OF NOVEMBER 30, 1998 AND 1997):
1998 1997 Current assets $144,648 $126,302 Property and equipment 70,614 59,361 Total assets 644,568 503,667 Current liabilities 59,699 53,732 Long-term debt 339,677 288,144 Total liabilities 462,833 362,892 Stockholders' equity 181,735 140,775
AGGREGATE OPERATING RESULTS (REFLECTING GRAY AND CSP FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996; COMBINED WITH HCI FOR THE YEARS ENDED JUNE 30, 1998, 1997 AND 1996; COMBINED WITH RAWLINGS FOR THE YEARS ENDED NOVEMBER 30, 1998, 1997 AND 1996):
1998 1997 1996 Operating revenue $347,850 $294,583 $263,302 Income from operations 37,351 34,106 27,901 Net income 47,546 4,845 7,666
Undistributed earnings of investments accounted for by the equity method amount to approximately $3,950 as of December 31, 1998. UNAUDITED PRO FORMA FINANCIAL INFORMATION - Unaudited pro forma results for the years ended 1998 and 1997, assuming the acquisition of CodeWriter and the investment in Rawlings had occurred on January 1, 1997, are presented below. This unaudited pro forma data does not purport to represent the Company's actual results of operations had the CodeWriter acquisition and the Rawlings' investment occurred on January 1, 1997, and should not serve as a forecast of the Company's operating results for any future periods. The pro forma adjustments, including (a) the elimination of certain expenses pertaining to the former owners and members of CodeWriter; (b) adjustments to the Company's equity in earnings (losses) for the Company's proportionate share of Rawlings' net income; (c) amortization of goodwill in connection with the CodeWriter acquisition; (d) the increase in interest expense in connection with acquisition debt incurred; (e) adjustments for the income tax effects of the pro forma adjustments; and (f) the increase in the number of outstanding shares of the Company's common stock to reflect the treasury shares issued to the former shareholders and members of CodeWriter, are based solely upon certain assumptions that management believes are reasonable under the circumstances at this time.
1998 1997 Revenue from printer operations $29,848 $ 26,908 Consulting fee income 1,618 681 Net income (loss) 2,380 (2,340) Net income (loss) per share: Basic $ 0.11 $ (0.11) Diluted $ 0.10 $ (0.11)
33 34 5. INVENTORIES Inventories related to the Company's printer operations consist of the following as of December 31:
1998 1997 Raw materials $3,200 $2,734 Work-in-process 729 711 Finished goods 1,238 312 ------ ------ $5,167 $3,757 ====== ======
6. PROPERTY AND EQUIPMENT The Company's property and equipment consist of the following as of December 31:
1998 1997 Land $ 750 $ 750 Production equipment 2,993 2,797 Research and development equipment 638 534 Office furniture and equipment 666 568 ------ ------ 5,047 4,649 Accumulated depreciation and amortization 2,424 2,011 ------ ------ $2,623 $2,638 ====== ======
Bull Run's executive offices are leased from a company affiliated with a principal stockholder and director of the Company under an operating lease expiring in 2002. Datasouth leases its main facility for printer operations under an operating lease expiring in December 2000, having a renewal option for an additional three year period, and leases its west coast repair and distribution center under an operating lease expiring in April 2001. The Company's total rental expense was $481, $328 and $309 in 1998, 1997 and 1996, respectively. The minimum annual rental commitments under these and other leases with an original lease term exceeding one year are approximately $433 for each of 1999 and 2000, $244 for 2001 and $17 for each of 2002 and 2003. 7. LONG-TERM DEBT AND NOTE PAYABLE The Company amended its long-term debt agreements with two banks in 1998, and further amended the agreements in February and March 1999. Under an agreement amended March 20, 1998 and further amended February 24, 1999, March 22, 1999 and March 24, 1999 (the "March 1998 Agreement"), the Company has outstanding (a) four term notes payable to a bank, bearing interest at the London Interbank Offered Rate ("LIBOR") plus 1.75%, requiring no principal payments prior to maturity on January 1, 2003, under which $42,312 and $34,343 was outstanding as of December 31, 1998 and 1997, respectively, and (b) a revolving bank credit facility for borrowings of up to $3,500 expiring May 1, 2000, bearing interest at the bank's prime rate, under which $2,536 and $3,183 was outstanding as of December 31, 1998 and 1997, respectively. Under an agreement amended February 20, 1998 (the "February 1998 Agreement"), the Company entered into (a) a $5,000 term note, payable to a bank in quarterly installments of $250, and (b) a revolving bank credit facility for borrowings of up to $5,000. The February 1998 Agreement was further modified on March 5, 1999 to revise certain terms, resulting in (a) a $4,000 term note, payable in quarterly installments of $250 through March 31, 2000, with the remainder due on June 30, 2000, and (b) a revolving bank credit facility for borrowings of up to $5,000 until June 30, 1999, and $4,000 thereafter until expiration on 34 35 June 30, 2000. Borrowings under the February 1998 Agreement, as modified, currently bear interest at either (a) the prime rate or (b) LIBOR plus 3%. As of December 31, 1998, $9,000 was outstanding under the February 1998 Agreement, and $5,472 was outstanding as of December 31, 1997 under its predecessor agreement. The Company also had a demand bank note for borrowings of up to $2,000, bearing interest at the bank's prime rate, under which $2,000 and $1,500 was outstanding as of December 31, 1998 and 1997, respectively. The loans are collateralized by Datasouth's accounts receivable, inventories and equipment; common stocks of Gray, HCI, CSP, Rawlings and TSI owned by the Company; preferred stock of Gray owned by the Company; warrants to purchase Gray's and Rawlings' common stocks held by the Company; and shares of the Company's common stock held by a significant shareholder of the Company. The loans require adherence to certain financial covenants, the most restrictive of which requires maintaining a debt service ratio, as defined, of 1.1 to 1.0. In January 1998, the Company executed two interest rate swap agreements, effectively modifying the interest characteristics of $24,000 of the Company's outstanding long-term debt. The agreements involve the exchange of amounts based on a fixed interest rate for amounts based on variable interest rates over the life of the agreements, without an exchange of the notional amount upon which the payments are based. The differential to be paid or received as interest rates change will be accrued and recognized as an adjustment of interest expense related to the debt. The Company effectively converted $20,000 and $4,000 of floating rate debt to a fixed rate basis under two separate agreements, one of which was modified in September 1998. Under the first agreement, $20,000 of long-term debt is subject to a one-year forward swap agreement, whereby beginning January 1, 1999 and for the following nine years, the Company will be subject to a fixed rate of 7.83%, instead of LIBOR plus 1.75%, the rate in effect until then. Under the second agreement, $4,000 of long-term debt is subject to a fixed rate of no more than 8.66% beginning September 30, 1998 through December 31, 2004, instead of LIBOR plus 3%, the rate in effect until then. The bank's prime rate as of December 31, 1998 was 7.75%. The interest rate on the Company's LIBOR-based debt of $31,912 for the 90-day period including December 31, 1998 was 8.72%. The interest rate on the Company's LIBOR-based debt of $10,400 for the 90-day period including December 31, 1998 was 8.73%. The interest rate on the Company's LIBOR-based borrowings of $4,000 for the 30-day period including December 31, 1998 was 8.38%. 8. INCOME TAXES The Company's income tax benefit (provision) for the years ending December 31 consists of the following:
1998 1997 1996 Current: Federal $ - $ 50 $ (67) Foreign (14) - - State (3) (3) (66) ------- ------- ------- (17) 47 (133) Deferred (1,837) 892 (3,879) ------- ------- ------- $(1,854) $ 939 $(4,012) ======= ======= =======
35 36 The principal differences between the federal statutory tax rate and the effective tax rate are as follows:
1998 1997 1996 Federal statutory rate 34.0% 34.0% 34.0% Reduction in valuation allowance (0.5) Goodwill amortization 3.1 (3.8) 1.0 State income taxes, net of federal benefit 6.3 1.7 4.6 Other, net 0.6 2.6 1.5 ---- ---- ---- Effective tax rate 44.0% 34.5% 40.6% ==== ==== ====
Deferred tax liabilities (assets) are comprised of the following as of December 31:
1998 1997 Investment in affiliated companies $ 6,971 $ 4,420 Property and equipment 165 204 Goodwill 32 - ------- ------- Gross deferred tax liabilities 7,168 4,624 ------- ------- Deferred consulting fee income (263) (141) Allowance for doubtful accounts (32) (21) Inventory costs and reserves (232) (154) Employee benefits (47) (40) Warranty reserve (33) (23) Net operating loss carryforward (535) - Business credit carryforward (115) (129) Alternative Minimum Tax credit carryforward (492) (503) Other, net (10) (14) ------- ------- Gross deferred tax assets (1,759) (1,025) ------- ------- Total deferred taxes, net $ 5,409 $ 3,599 ======= =======
A valuation allowance was provided principally to offset a portion of the deferred tax asset associated with an Alternative Minimum Tax ("AMT") credit carryforward at December 31, 1995, the realization of which was uncertain. Following two successive years in which the Company utilized some of its AMT credit carryforward, the Company determined that the realization of the entire AMT credit carryforward was reasonably certain, and as a result, reduced its valuation allowance to zero. The reduction in the valuation allowance resulted in a tax benefit of $47 and a reduction in goodwill of $131 in 1996. As of December 31, 1998, the Company has a net operating loss carryforward for tax purposes of approximately $1,500 expiring in 2018 to reduce Federal taxable income in the future, and an Alternative Minimum Tax ("AMT") credit carryforward of approximately $500, and a business credit carryforward of approximately $115, to reduce regular Federal tax liabilities in the future. 9. STOCK OPTIONS The Company's 1994 Long Term Incentive Plan (the "1994 Plan") reserves 3,500,000 shares of the Company's common stock for issuance of stock options, restricted stock awards and stock appreciation rights. Certain options granted under the 1994 Plan are fully vested at the date of grant, and others vest over three to five year periods. Options granted under the 1994 Plan have terms ranging from three to ten years. Shares available for future option grants 36 37 under the 1994 Plan as of December 31, 1998 and 1997 were 1,527,500 and 567,000, respectively. The Company's Non-Employee Directors' 1994 Stock Option Plan (the "1994 Directors' Plan") reserves 350,000 shares of the Company's common stock for issuance of stock options. Options under the 1994 Directors' Plan are fully vested when granted. Shares available for future option grants under the 1994 Directors' Plan as of December 31, 1998 and 1997 were 170,000 and 180,000, respectively. Information with respect to the Company's stock option plans follows:
SHARES PRICE RANGE Outstanding as of December 31, 1995 1,641,000 $0.75 - $1.66 Granted 535,000 $2.44 - $2.68 Exercised (45,000) $ 0.88 Forfeited (96,000) $ 0.88 --------- OUTSTANDING AS OF DECEMBER 31, 1996 2,035,000 $0.75 - $2.68 Granted 135,000 $2.31 - $2.44 Exercised (258,000) $0.75 - $1.48 Forfeited (30,000) $ 2.44 --------- OUTSTANDING AS OF DECEMBER 31, 1997 1,882,000 $0.75 - $2.68 Granted 50,000 $3.19 - $4.38 Exercised (254,000) $0.88 - $0.96 --------- OUTSTANDING AS OF DECEMBER 31, 1998 1,678,000 $0.75 - $4.38 ========= EXERCISABLE AS OF DECEMBER 31: 1996 1,120,000 $0.75 - $2.44 1997 1,287,000 $0.75 - $2.68 1998 1,387,000 $0.75 - $4.38
The weighted average per share fair value of options granted was $1.59 in 1998 and $1.26 in 1997. As of December 31, 1998, the number of outstanding shares under option, weighted average option exercise price and weighted average remaining option contractual life is as follows: 75,000 exercisable shares at $.75 per share, expiring in 3.8 years; 613,000 exercisable shares at $.88 per share, expiring in 4.5 years; 300,000 exercisable shares at $1.46 per share, expiring in 4.5 years; 535,000 shares at $2.64 per share, expiring in 1.4 years (360,000 shares of which are exercisable); 105,000 shares at $2.40 per share, expiring in 7.2 years (29,000 shares of which are exercisable); and, 50,000 shares at $3.59 per share, expiring in 9.4 years (10,000 shares of which are exercisable). Pro forma net income and earnings per share required by FASB Statement No. 123, "Accounting for Stock-Based Compensation" ("FAS 123") has been determined as if the Company had accounted for its employee stock options under the fair value method of that Statement. The fair values for these options were estimated at the time of grant using a Black-Scholes option pricing model assuming a risk-free interest rate of 6.32%, dividend yield of 0.0%, a volatility factor of .461, and a weighted-average expected life for the options of four to six years. Had compensation cost been measured based on the fair value based accounting of FAS 123, 1998 net income would have been $2,224, or $.10 per share (basic) and $.10 per share (diluted), 1997 net loss would have been $(1,900), or $(.09) per share (basic and diluted), and 1996 net income would have been $5,225, or $.24 per share (basic) and $.23 per share (diluted). These pro forma results are provided for comparative purposes only and do not purport to be indicative of what would had occurred had compensation cost been measured under FAS 123 or of results which may occur in the future. Since FAS 123 is applicable only to options granted subsequent to December 31, 1994, its pro forma effect will not likely be representative of the effects on reported net income for future years. 37 38 10. FAIR VALUE OF FINANCIAL INSTRUMENTS The aggregate fair value of the Company's investment in affiliated companies was approximately $88,000 as of December 31, 1998, compared to the carrying value of $73,346, and approximately $73,000 as of December 31, 1997, compared to the carrying value of $61,551. The estimate of fair value was based on, in the case of public-traded Gray and Rawlings, quoted market prices on the New York Stock Exchange and the Nasdaq Stock Market, respectively, as of December 31, 1998 and 1997; in the case of privately-held HCI, CSP and USA, for December 31, 1998, the negotiated HCI-USA Acquisition per share purchase price for shares not currently owned by the Company, and for December 31, 1997, recent transactions in the capital stock of each company; in the case of TSI, recent transactions in its capital stock; and management estimates. The fair value of the interest rate swap agreements executed in 1998, having an aggregate notional amount of $24,000 as of December 31, 1998 and $24,750 as of December 31, 1997, is not recognized in the financial statements. If, in the future, an interest rate swap agreement was terminated, any resulting gain or loss would be deferred and amortized to interest expense over the remaining life of the interest rate swap agreement. In the event of early extinguishment of a designated debt obligation, any realized or unrealized gain or loss from the swap would be recognized in the statement of operations coincident with the extinguishment. In aggregate, the estimated cost of terminating the swap agreements, if the Company elected to do so, was approximately $1.3 million as of December 31, 1998. All other financial instruments, including cash, cash equivalents, receivables, payables and variable rate notes payable and long-term debt are estimated to have a fair value which approximates its carrying value in the financial statements. 11. EARNINGS (LOSS) PER SHARE The following table sets forth the computation of basic and diluted earnings (loss) per share:
1998 1997 1996 Income (loss) before extraordinary item and cumulative effect of accounting change $ 2,360 $ (1,773) $ 5,877 ======= ======== ======= Weighted average number of common shares outstanding for basic earnings (loss) per share 22,189 21,302 22,013 Effect of dilutive employee stock options 993 - 932 ------- -------- ------- Adjusted weighted average number of common shares and assumed conversions for diluted earnings (loss) per share 23,182 21,302 22,945 ======= ======== ======= Basic earnings (loss) per share $ 0.11 $ (0.08) $ 0.26 Diluted earnings (loss) per share $ 0.10 $ (0.08) $ 0.25
12. RETIREMENT PLANS The Company has a 401(k) defined contribution benefit plan, whereby employees of the Company may contribute 1% to 15% of their gross pay to the plan subject to limitations set forth by the Internal Revenue Service. The Company may make matching and/or discretionary contributions to the employees' accounts in amounts to be determined annually. Total Company contributions to the plan were $252 in 1998, $208 in 1997 and $243 in 1996. 38 39 13. GEOGRAPHIC DATA AND SIGNIFICANT CUSTOMER Sales to non-domestic customers, located primarily in Western Europe and South America were $2,823 in 1998, $2,497 in 1997 and $2,954 in 1996. A significant amount of revenue from printer operations is derived from one customer. In 1998, 1997 and 1996, approximately 31%, 33% and 30% of the Company's revenue from printer operations was attributable to this customer, respectively. 39 40 SUPPLEMENTARY DATA SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED) (Dollars and shares in thousands, except per share amounts)
FIRST SECOND THIRD FOURTH Quarter Quarter Quarter Quarter 1998 Revenue from printer operations $ 6,614 $ 7,544 $ 7,220 $ 8,470 Gross profit 1,644 1,877 1,849 2,375 Consulting fee income 2 650 964 2 Net income (loss) (1,083) (199) 4,040 (398) Earnings (loss) per share: Basic $ (0.05) $ (0.01) $ 0.18 $ (0.02) Diluted $ (0.05) $ (0.01) $ 0.17 $ (0.02) Weighted average number of shares: Basic 22,029 22,167 22,283 22,277 Diluted 22,029 22,167 23,285 22,277 1997 Revenue from printer operations $ 5,465 $ 5,102 $ 5,545 $ 5,527 Gross profit 1,528 1,313 1,566 1,265 Consulting fee income 598 9 72 2 Net income (loss) 20 (469) (374) (950) Earnings (loss) per share: Basic $ 0.00 $ (0.02) $ (0.02) $ (0.04) Diluted $ 0.00 $ (0.02) $ (0.02) $ (0.04) Weighted average number of shares: Basic 21,363 21,260 21,290 21,294 Diluted 22,259 21,260 21,290 21,294
40 41 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not applicable PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Information required by this item concerning Messrs. Robinson, Prather and Howell, executive officers and directors of the Company, as well as Mr. Erickson, an executive officer of the Company, is incorporated from PART I herein. Information concerning non-employee directors of the registrant is set forth below: Gerald N. Agranoff, age 52, a director of the Company since 1990, is General Counsel to and a general partner of Plaza Securities Company and Edelman Securities Company, L.P., investment firms, having been affiliated with such companies since 1982. He is Vice President, General Counsel and a director of Datapoint Corporation, a hardware and software sales and service company. Mr. Agranoff is also a director of Canal Capital Corporation, Atlantic Gulf Communities Corporation and American Energy Group, Ltd. James W. Busby, age 44, a director of the Company since 1994, is the retired President of Datasouth Computer Corporation, a subsidiary of the Company, having served in that capacity from 1984 to 1997. He was one of the founders of Datasouth in 1977, serving as Secretary from 1977 to 1984. SECTION 16(A) BENEFICIAL OWNERSHIP COMPLIANCE Section 16(a) of the Securities Exchange Act of 1934 requires the Company's directors and executive officers, and persons who own more than 10 percent of the Company's common stock, to file with the Securities and Exchange Commission initial reports of ownership (Form 3) and reports of changes in ownership (Forms 4 and 5) of the Company's common stock. To the Company's knowledge, based solely on review of the copies of such reports furnished to the Company and representations that no other reports were required, during the year ended December 31, 1998 all Section 16(a) filing requirements applicable to the Company's officers, directors and greater than 10 percent beneficial owners were met. 41 42 ITEM 11. EXECUTIVE COMPENSATION EXECUTIVE COMPENSATION The following table summarizes the compensation earned by the Company's President and Chief Executive Officer and the other executive officers earning $100,000 or more for the year ended December 31, 1998 (the "named executive officers"). SUMMARY COMPENSATION TABLE
LONG TERM COMPENSATION AWARDS ------ SECURITIES ANNUAL COMPENSATION UNDERLYING -------------------- RESTRICTED OPTIONS ALL OTHER NAME AND PRINCIPAL POSITION YEAR SALARY BONUS STOCK AWARDS SARS(#) COMPENSATION --------------------------- ---- ------ ----- ------------ ------- ------------- Robert S. Prather, Jr., President and 1998 $339,580 $125,000 - - $ 9,600 (1) Chief Executive Officer of the 1997 $332,018 $100,000 - 300,000 shares $ 9,500 (1) Company 1996 $299,240 $125,000 - - $ 9,000 (1) Frederick J. Erickson, Vice President - 1998 $122,962 $22,450 - - $ 9,600 (1) Finance of the Company and 1997 $112,831 $12,626 - - $ 7,854 (1) Executive Vice President of Datasouth 1996 $100,005 $30,063 - - $ 7,385 (1)
(1) Consists of employer contributions to the defined contribution retirement plan. There were no grants of options by the Company to a named executive officer during the year ended December 31, 1998. In 1998, options for 50,000 shares were granted to all employees as a group. The following table sets forth certain information concerning unexercised options held by the named executive officers as of December 31, 1998. No stock options were exercised by the named executive officers during the year ended December 31, 1998. AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTIONS VALUES
VALUE OF UNEXERCISABLE EXERCISABLE EXERCISABLE UNEXERCISABLE EXERCISE CLOSING PRICE IN-THE-MONEY IN-THE-MONEY NAME OPTIONS OPTIONS PRICE @ 12/31/98 OPTIONS OPTIONS ---- ------- ------- ----- ---------- ------- ------- Robert S. Prather, Jr. 75,000 $ 0.75 $ 3.38 $ - $196,875 75,000 $ 1.48 $ 3.38 - 142,266 200,000 100,000 $ 2.68 $ 3.38 69,375 138,750 -------- -------- ------- -------- 350,000 100,000 $69,375 $477,891 Frederick J. Erickson 72,000 $ 0.88 $ 3.38 $ - $180,000
LONG TERM INCENTIVE PLANS Under the Company's 1994 Long Term Incentive Plan (the "1994 Incentive Plan"), 3,500,000 shares of Common Stock are currently reserved for issuance as restricted stock awards and for issuance upon the exercise of stock options and stock appreciation rights. As of December 31, 1998, options for a total of 1,423,000 shares were issued and outstanding under the 1994 Plan with prices ranging from $.88 to $3.75 per share. Of the 1,423,000 shares issuable upon the exercise of outstanding options, 748,000 vest in 20% annual increments beginning one year following date of grant and are exercisable over a period not to exceed five to 10 years; 525,000 vest in annual increments of 175,000 each, 42 43 beginning one year following the date of grant, and expire in annual increments of 175,000 beginning three years following the date of grant; and the remaining 150,000 were fully vested at the date of grant. Options to purchase 253,500 shares were exercised in 1998 and options for 500 shares were cancelled. The Company's 1987 Non-Qualified Stock Option Plan terminated in 1992. There are currently outstanding options to purchase 75,000 shares of Common Stock at an exercise price of $.75 per share. EMPLOYEE INCENTIVE PLANS The Company's wholly-owned subsidiary, Datasouth, has employee incentive plans covering substantially all Datasouth employees. Payments made to individual employees pursuant to these plans, if any, will vary from year to year as they will be based on "defined operating profits" (income before income taxes, investment income, and interest income/expense) of Datasouth. The plans include one for certain key employees (see "Summary Compensation Table") and one for all other eligible employees. Total incentive plan compensation was approximately $90,000 in 1998. The incentive pool for the plan covering certain key employees is calculated as a percentage (8.5% in 1998) of "defined operating profits" (as defined above) less the incentive pool referred to above. EMPLOYMENT ARRANGEMENTS Robert S. Prather, Jr. is a party to an employment agreement with the Company expiring in December 1999. Mr. Prather's agreement provides that he will serve as President and Chief Executive Officer of the Company at an annual salary of $325,000, subject to increase at the discretion of the Board of Directors. Datasouth has entered into an agreement dated March 31, 1997 with Frederick J. Erickson, Datasouth's Executive Vice President - Finance & Administration, Chief Financial Officer, Treasurer, and Secretary. The agreement is for a term of three years and obligates Datasouth to pay Mr. Erickson 100% of his annual base salary for a 12-month period in the event employment is terminated within 12 months of a "Change in Control" of Datasouth, as defined in the agreement. Furthermore, the agreement obligates Datasouth to continue to provide medical and dental benefits and life insurance coverage to Mr. Erickson for a period of one year following termination. DIRECTORS' COMPENSATION Robert S. Prather, Jr., a director who is also an employee of the Company, receives no fees for his services as a director. Directors who are not employees of the Company or its subsidiaries are paid a fee of $2,250 per quarter for their services as directors and are reimbursed for their expenses for each meeting attended. Directors who are not officers or employees of the Company or its subsidiaries are eligible to receive stock options under the Company's Non-Employee Directors' 1994 Stock Option Plan (the "1994 Non-Employee Directors' Plan"). In 1998, each of Mr. Gerald N. Agranoff and Mr. James W. Busby, directors of the Company, was granted an option to purchase up to 5,000 shares of Common Stock at an exercise price of $4.38 per share, (the market value of the Common Stock on the date of grant) under the 1994 Non-Employee Directors' Plan. In 1997, each of Mr. Alex C. Ritchie (a former director who resigned June 30, 1997) and Mr. Agranoff was granted an option to purchase up to 5,000 shares of Common Stock at an exercise price of $2.38 per share, (the market value of the Common Stock on the date of grant) under the 1994 Non-Employee Directors' Plan. 43 44 COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION J. Mack Robinson, Gerald N. Agranoff and James W. Busby are the members of the Company's Compensation and Stock Option Committee. Mr. Robinson, Chairman of the Company, is also President and Chief Executive Officer of Gray Communications Systems, Inc., the Company's 16.9%-owned affiliate, and serves on the Compensation Committee of Gray. Robert S. Prather, Jr., President, Chief Executive Officer and a director of the Company, is also Executive Vice President and a director of Gray. Hilton H. Howell, Jr., Vice President, Secretary and a director of the Company, is also a director of Gray. Mr. Busby was President of Datasouth Computer Corporation, the Company's wholly owned subsidiary, from 1984 until his retirement in 1997. The Company provides consulting services to Gray from time to time in connection with Gray's acquisitions, dispositions and acquisition financing. During 1998, the Company charged Gray fees totaling $1,980,000 for such services. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Information regarding persons or groups known by the Company to be the beneficial owners of more than five percent of the outstanding shares of the Common Stock as of February 26, 1999 is shown in the following table. Information concerning such security holdings has been furnished by the holders thereof to the Company.
Amount and Name and Address of Nature of Beneficial Owner Beneficial Ownership Percent of Class - -------------------- -------------------- ---------------- Robert S. Prather, Jr. (1) 3,010,598(2)(3) 13.3% J. Mack Robinson (1) 6,531,656(3)(4) 29.6% Robinson-Prather Partnership (1) 2,660,598(3) 11.9% Harriett J. Robinson (1) 6,531,656(3)(4) 29.6% Harriett J. Robinson, Trustee Robin M. Robinson Trust (1) 3,085,598(3) 13.9% Harriett J. Robinson, Trustee Jill E. Robinson Trust (1) 3,158,598(3) 14.2% Gulf Capital Services, Ltd. (1) 2,660,598(3) 11.9% James W. Busby (5) 2,506,956(5) 11.3% Samuel R. Shapiro (6) 3,620,300(6) 16.3% Shapiro Capital Management Company, Inc. (6) 3,535,300(6) 15.9% Hilton H. Howell, Jr. (1) 1,705,000(7) 7.6%
(1) The address of each of these shareholders is 4370 Peachtree Road, N.E., Atlanta, Georgia 30319. (2) Includes 350,000 shares which Mr. Prather has the right to acquire through the exercise of currently exercisable options. (3) Includes 2,660,598 shares owned by Robinson-Prather Partnership. Robinson-Prather Partnership is a Georgia general partnership, the general partners of which are Robert S. Prather, Jr., President, Chief Executive Officer, and a director of the Company; J. Mack Robinson, a director of the Company; Harriett J. Robinson (the wife of Mr. Robinson); Harriett J. Robinson, as trustee for Robin M. Robinson Trust (the "RMR Trust"); Harriett J. Robinson, as trustee for Jill E. Robinson Trust (the "JER Trust"); and Gulf Capital Services, Ltd. The partnership agreement for Robinson-Prather Partnership provides that Messrs. Prather and Robinson have the exclusive control of the day-to-day operations of the partnership, including the power to vote or dispose of the shares of Common Stock 44 45 owned by Robinson-Prather Partnership. Each general partner disclaims beneficial ownership of the shares of Common Stock owned by Robinson-Prather Partnership, except to the extent of his pecuniary interest in such shares of Common Stock, which is less than the amount disclosed. (4) Includes as to each of J. Mack Robinson and his wife, Harriett J. Robinson: 1,073,058 shares owned directly by Mr. Robinson; 295,500 shares owned directly by Mrs. Robinson; 100,000 shares which Mr. Robinson has the right to acquire through the exercise of currently exercisable options; 425,000 shares owned directly by the RMR Trust and 497,500 shares owned directly by the JER Trust, of each of which Mrs. Robinson is the trustee; and an aggregate of 1,580,000 shares owned by Delta Fire & Casualty Insurance Co. ("Delta Fire"), Delta Life Insurance Company ("Delta Life"), Bankers Fidelity Life Insurance Co. ("Bankers Fidelity Life") and Georgia Casualty & Surety Co. ("Georgia Casualty"), Georgia corporations of each of which Mr. Robinson is Chairman of the Board, President and/or principal shareholder (or the subsidiaries of the same). Each of Mr. and Mrs. Robinson disclaims beneficial ownership of the shares of Common Stock owned by the RMR Trust, the JER Trust, Delta Fire, Delta Life, Bankers Fidelity Life, Georgia Casualty and each other. (5) Includes an aggregate of 62,044 shares owned by Mr. Busby's two children and 5,000 shares which Mr. Busby has the right to acquire through the exercise of currently exercisable options. The address for Mr. Busby is 1936 London Lane, Wilmington, North Carolina 28405. (6) Based on Schedule 13G dated February 4, 1999, the address for Mr. Shapiro and Shapiro Capital Management Company, Inc., a Georgia corporation ("Shapiro Capital Management"), is 3060 Peachtree Road, N.W., Atlanta, Georgia 30305. The Schedule 13G reports that Mr. Shapiro is the president, a director and majority shareholder of Shapiro Capital Management, which reported voting and depositive power for 3,013,800 shares of Common Stock. Additionally, the Schedule 13G reported sole voting and depositive power for 521,500 shares owned by The Kaleidoscope Fund, L.P., a Georgia limited partnership, and 85,000 shares owned by Mr. Shapiro's wife. Shapiro Capital Management is an investment adviser under the Investment Advisers Act of 1940, having the authority to direct investments of its advisory clients. Mr. Shapiro disclaims beneficial ownership of all securities reported herein by Shapiro Capital Management. (7) Includes 125,000 shares which Mr. Howell has the right to acquire through the exercise of currently exercisable options; and an aggregate of 1,580,000 shares owned by Delta Fire, Delta Life, Bankers Fidelity Life and Georgia Casualty, Georgia corporations of each of which Mr. Howell is Executive Vice President. Mr. Howell is married to Robin R. Howell, Mr. Robinson's daughter and a beneficiary of the RMR Trust, which is a general partner of Robinson-Prather Partnership. Mr. Howell disclaims beneficial ownership of the shares of Common Stock owned by Delta Fire, Delta Life, Bankers Fidelity Life, Georgia Casualty, Robinson-Prather Partnership and the RMR Trust. Except as noted in the footnotes above, (i) none of such shares is known by the Company to be shares with respect to which such beneficial owner has the right to acquire beneficial ownership and (ii) the Company believes that the beneficial owners above have sole voting and investment power regarding the shares shown as being beneficially owned by them. As of February 26, 1999, all directors and executive officers of the Company as a group (six persons) owned 9,784,385 shares of Common Stock, representing 42.5% of the outstanding shares (including 742,000 shares purchasable on or within 60 days from such date pursuant to the exercise of stock options). 45 46 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The Company leases office space from Delta Life, a company of which J. Mack Robinson, a director of the Company, is Chairman of the Board and principal stockholder. The term of the lease is for 10 years beginning January 1, 1993 and requires total basic rent payments of $164,976 over the 10-year term, plus a pro rata share of expenses. In 1998, the Company purchased under its previously announced Stock Repurchase Program (the "Program"), 40,000 shares of Common Stock from Gerald N. Agranoff, a director of the Company, for $3.69 per share, the market price of the Common Stock on the date of the purchase. Also in 1998, James W. Busby, a director of the Company, exercised an option to purchase 225,000 shares of Common Stock at $.96 per share by exchanging 50,956 shares of Common Stock at its then current market price of $4.25 per share. In 1997, the Company purchased under the Program, 500,000 shares of Common Stock from Mr. Busby for $2.50 per share, the market price of the Common Stock on the date of the purchase. In connection with a commitment to lend up to $42.9 million to the Company, Mr. J. Mack Robinson, the Company's Chairman of the Board, executed a put agreement in favor of the bank, for which he received no compensation. Such agreement provides that if the Company defaults on its bank loan, Mr. Robinson will repay the amount of such loan to the bank. If Mr. Robinson is obligated to pay such amount, he would have the right to any or all of the Company's collateral under such loan as would be necessary for him to recoup his obligation, with such collateral including the Company's investments in Gray Communications Systems, Inc. ("Gray") class A common stock, warrants to purchase Gray class A common stock, and Gray series A and series B preferred stocks; Host Communications, Inc. common stock; Capital Sports Properties, Inc. common stock; and, Rawlings Sporting Goods Company, Inc. ("Rawlings") common stock and warrants to purchase Rawlings common stock. Mr. Robinson will be released from the put agreement under certain conditions, which could include repayment of some or all of the debt, and/or appreciation in the value of Gray and Rawlings common stocks (which are publicly-traded securities) in order to achieve the bank's required margin of loan balance to assigned collateral value. 46 47 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) List of documents filed as part of this report: (1) Financial Statements and Related Independent Auditors' Reports: The following consolidated financial statements of the Company and Report of Independent Auditors are included in Item 8: Report of Independent Auditors Consolidated Balance Sheets at December 31, 1998 and 1997 Consolidated Statements of Operations for the years ended December 31, 1998, 1997 and 1996 Consolidated Statements of Stockholders' Equity for the years ended December 31, 1998, 1997 and 1996 Consolidated Statements of Cash Flows for the years ended December 31, 1998, 1997 and 1996 Notes to Consolidated Financial Statements Supplementary Data, Selected Quarterly Financial Data (Unaudited) The following consolidated financial statements of Gray Communications Systems, Inc. and Report of Independent Auditors are included on pages F-1 through F-31 of this report: Report of Independent Auditors Consolidated Balance Sheets at December 31, 1998 and 1997 Consolidated Statements of Operations for the years ended December 31, 1998, 1997 and 1996 Consolidated Statements of Stockholders' Equity for the years ended December 31, 1998, 1997 and 1996 Consolidated Statements of Cash Flows for the years ended December 31, 1998, 1997 and 1996 Notes to Consolidated Financial Statements Report of Independent Auditors on Financial Statement Schedule Schedule II - Valuation and qualifying accounts Independent Auditors' Report on the financial statements of Capital Sports Properties, Inc. for the six months ended June 30, 1996, on page F-32 of this report Independent Auditors' Report on the consolidated financial statements of Host Communications, Inc. as of and for the year ended June 30, 1996, on page F-33 of this report Report of Independent Public Accountants on the consolidated financial statements of Rawlings Sporting Goods Company, Inc. as of and for the year ended August 31, 1998, on page F-34 of this report (2) The following financial statement schedule of Bull Run Corporation and subsidiaries is included in Item 14(d): Schedule II - Valuation and qualifying accounts The following financial statement schedule of Gray Communications Systems, Inc. and subsidiaries is included in Item 14(d): Schedule II - Valuation and qualifying accounts 47 48 All other schedules for which provision is made in the applicable accounting regulation of the Securities and Exchange Commission are not required under the related instructions or are inapplicable and therefore have been omitted. (b) Reports on Form 8-K None (c) Exhibits
Exhibit Numbers Description -------- ----------- (3.1) Articles of Incorporation (b) (3.2) Certificate of Amendment to Articles of Incorporation, filed November 29, 1994 (b) (3.3) By-laws of the Registrant (b) (10.1) Employment Agreement - Robert S. Prather, Jr. (e) (10.2) Employee Agreement - Frederick J. Erickson (d) (10.3) 1994 Long Term Incentive Plan (b) (10.4) Non-Employee Directors' 1994 Stock Option Plan (b) (10.5) 1987 Non-Qualified Stock Option Plan (c) (10.6) Lease Agreement between Delta Life Insurance Company and Bull Run Corporation dated as of January 1, 1993 (a) (10.7) Lease Agreements between Hans L. Lengers and Datasouth Computer Corporation dated November 27, 1981 (d) (10.8) $9,000,000 Amended and Restated Credit Agreement dated as of March 5, 1999 between Datasouth Computer Corporation and Wachovia Bank, N.A. (x) (10.9) Amended and Restated Loan Agreement between Bull Run Corporation and NationsBank, N.A. dated as of March 20, 1998 (h) (10.10) First Amendment of Amended and Restated Loan Agreement between Bull Run Corporation and NationsBank, N.A. dated as of February 24, 1999 (x) (10.11) $10,400,000 First Term Loan Note dated March 20, 1998 (h) (10.12) $32,500,000 Second Term Loan Note dated March 20, 1998 (h) (10.13) $4,000,000 Third Term Loan Note dated February 24, 1999 (x) (10.14) $3,500,000 Revolving Credit Note dated March 20, 1998 (h) (10.15) Gray Communications Systems, Inc. Warrant dated September 24, 1996 (731,250 shares) (e) (10.16) Gray Communications Systems, Inc. Warrant dated September 24, 1996 (375,000 shares) (e) (10.17) Investment Purchase Agreement dated November 21, 1997 by and between Rawlings Sporting Goods Company, Inc. and Bull Run Corporation (f) (10.18) Common Stock Purchase Warrant dated November 21, 1997 issued by Rawlings Sporting Goods Company, Inc. to Bull Run Corporation (f) (10.19) Standstill Agreement dated November 21, 1997 by and between Rawlings Sporting Goods Company, Inc. and Bull Run Corporation (f) (10.20) Registration Rights Agreement dated November 21, 1997 by and between Rawlings Sporting Goods Company, Inc. and Bull Run Corporation (f)
48 49
Exhibit Numbers Description ------- ----------- (10.21) Stock Purchase Agreement dated January 28, 1999 by and between U.S. Trust Company of Florida Savings Bank, as Personal Representative of the Estate of Mary Tarzian and Bull Run Corporation (i) (10.22) Secured Promissory Note dated January 28, 1999 by and between NationsBank, N.A. and Bull Run Corporation (i) (21) List of Subsidiaries of Registrant (x) (23.1) Consent of Ernst & Young LLP - Bull Run Corporation (x) (23.2) Consent of Ernst & Young LLP - Gray Communications Systems, Inc. (x) (23.3) Consent of KPMG LLP - Capital Sports Properties, Inc. (x) (23.4) Consent of KPMG LLP - Host Communications, Inc. (x) (23.5) Consent of Arthur Andersen LLP - Rawlings Sporting Goods Company, Inc. (x) (27) Financial Data Schedule (for SEC use only) - 1999(x) (a) Filed as an exhibit to Form 10-KSB Annual Report for the year ended December 31, 1992 and incorporated by reference herein (b) Filed as an exhibit to Registration Statement on Form S-4 (Registration No. 33-81816), effective November 3, 1994 and incorporated by reference herein (c) Filed as an exhibit to Form 10-K Annual Report for the year ended December 31, 1988 and incorporated by reference herein (d) Filed as an exhibit to Form 10-KSB Annual Report for the year ended December 31, 1994 and incorporated by reference herein (e) Filed as an exhibit to Form 10-KSB Annual Report for the year ended December 31, 1996 and incorporated by reference herein (f) Filed as an exhibit to Form 8-K Current Report dated as of November 21, 1997 and incorporated by reference herein (g) Filed as an exhibit to Form 10-K Annual Report for the year ended December 31, 1997 and incorporated by reference herein (h) Filed as an exhibit to Form 10-Q Quarterly Report for the quarterly period ended March 31, 1998 and incorporated by reference herein (i) Filed as an exhibit to Form 8-K Current Report dated as of January 28, 1999 and incorporated by reference herein (x) Filed herewith
(d) Financial Statement Schedules The response to this section is submitted as part of Item 14(a)(1) and Item 14(a)(2). 49 50 SIGNATURES Pursuant to the requirements of Section 13 of 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on March 29, 1999. BULL RUN CORPORATION BY: /s/ ROBERT S. PRATHER, JR. ---------------------------------- Robert S. Prather, Jr. President and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the date indicated.
Signature Title Date --------- ----- ---- /s/ ROBERT S. PRATHER, JR. President, Chief March 29, 1999 - -------------------------------------- Robert S. Prather, Jr. Executive Officer and Director (Principal Executive Officer) /s/ GERALD N. AGRANOFF Director March 29, 1999 - -------------------------------------- Gerald N. Agranoff /s/ JAMES W. BUSBY Director March 29, 1999 - -------------------------------------- James W. Busby /s/ FREDERICK J. ERICKSON Vice President - Finance March 29, 1999 - -------------------------------------- and Treasurer Frederick J. Erickson (Principal Accounting and Financial Officer) /s/ HILTON H. HOWELL, JR. Vice President, Secretary March 29, 1999 - -------------------------------------- and Director Hilton H. Howell, Jr. /s/ J. MACK ROBINSON Chairman of the Board March 29, 1999 - -------------------------------------- J. Mack Robinson
50 51 REPORT OF INDEPENDENT AUDITORS We have audited the consolidated financial statements of Bull Run Corporation as of December 31, 1998 and 1997, and for each of the three years in the period ended December 31, 1998, and have issued our report thereon dated February 9, 1999 (except for Notes 4 and 7, for which the date is March 24, 1999). Our audits also included the financial statement schedule of Bull Run Corporation listed in Item 14(a). This schedule is the responsibility of the Company's management. Our responsibility is to express an opinion based on our audits. In our opinion, the financial statement schedule referred to above, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. /s/ ERNST & YOUNG LLP Atlanta, Georgia February 9, 1999 51 52 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 DECEMBER 31, 1998 Allowance for doubtful accounts $ 55,000 $ 22,000 $ 50,000 $ 45,000 $ 82,000 YEAR ENDED DECEMBER 31, 1997 Allowance for doubtful accounts $ 45,000 $ 27,000 $ 0 $ 17,000 $ 55,000 YEAR ENDED DECEMBER 31, 1996 Allowance for doubtful accounts $ 50,000 $ 1,000 $ 0 $ 6,000 $ 45,000
(1) Represents amounts recorded in connection with the CodeWriter acquisition. (2) "Deductions" represent write-offs of amounts not considered collectible. 52 53 REPORT OF INDEPENDENT AUDITORS Board of Directors and Stockholders Gray Communications Systems, Inc. We have audited the accompanying consolidated balance sheets of Gray Communications Systems, Inc., as of December 31, 1998 and 1997 and the related consolidated statements of operations, stockholders' equity and cash flows for each of the three years in the period ended December 31, 1998. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Gray Communications Systems, Inc., at December 31, 1998 and 1997, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 1998, in conformity with generally accepted accounting principles. Ernst & Young LLP Atlanta, Georgia January 26, 1999 F-1 54 GRAY COMMUNICATIONS SYSTEMS, INC. CONSOLIDATED BALANCE SHEETS
December 31, --------------------------------- 1998 1997 ------------- ------------- Assets Current assets: Cash and cash equivalents $ 1,886,723 $ 2,367,300 Trade accounts receivable, less allowance for doubtful accounts of $1,212,000 and $1,253,000, respectively 22,859,119 19,527,316 Recoverable income taxes 1,725,535 2,132,284 Inventories 1,191,284 846,891 Current portion of program broadcast rights 3,226,359 2,850,023 Other current assets 741,007 968,180 ------------- ------------- Total current assets 31,630,027 28,691,994 Property and equipment (Notes B and C): Land 2,196,021 889,696 Buildings and improvements 12,812,112 11,951,700 Equipment 65,226,835 52,899,547 ------------- ------------- 80,234,968 65,740,943 Allowance for depreciation (28,463,460) (23,635,256) ------------- ------------- 51,771,508 42,105,687 Other assets: Deferred loan costs (Note C) 8,235,432 8,521,356 Goodwill and other intangibles (Note B) 376,014,972 263,425,447 Other 1,322,483 2,306,143 ------------- ------------- 385,572,887 274,252,946 $ 468,974,422 $ 345,050,627 ============= =============
F-2 55 GRAY COMMUNICATIONS SYSTEMS, INC. CONSOLIDATED BALANCE SHEETS (Continued)
December 31, --------------------------------- 1998 1997 ------------- ------------- Liabilities and stockholders' equity Current liabilities: Trade accounts payable (includes $880,000 and $850,000 payable to Bull Run Corporation, respectively) $ 2,540,770 $ 3,321,903 Employee compensation and benefits 5,195,777 3,239,694 Accrued expenses 1,903,226 2,265,725 Accrued interest 5,608,134 4,533,366 Current portion of program broadcast obligations 3,070,598 2,876,060 Deferred revenue 2,632,564 1,966,166 Current portion of long-term debt 430,000 400,000 ------------- ------------- Total current liabilities 21,381,069 18,602,914 Long-term debt (Notes B and C) 270,225,255 226,676,377 Other long-term liabilities: Program broadcast obligations, less current portion 735,594 617,107 Supplemental employee benefits (Note D) 1,128,204 1,161,218 Deferred income taxes (Note G) 44,147,642 1,203,847 Other acquisition related liabilities (Note B) 4,653,788 4,494,016 ------------- ------------- 50,665,228 7,476,188 Commitments and contingencies (Notes B, C and I) Stockholders' equity (Notes B, C and E) Serial Preferred Stock, no par value; authorized 20,000,000 shares; issued and outstanding 1,350 and 2,060 shares, respectively ($13,500,000 and $20,600,000 aggregate liquidation value, respectively) 13,500,000 20,600,000 Class A Common Stock, no par value; authorized 15,000,000 shares; issued 7,961,574 shares, respectively 10,683,709 10,358,031 Class B Common Stock, no par value; authorized 15,000,000 shares; issued 5,273,046 shares, respectively 66,792,385 66,397,804 Retained earnings 45,737,601 6,603,191 ------------- ------------- 136,713,695 103,959,026 Treasury Stock at cost, Class A Common, 1,129,532 and 1,172,882 shares, respectively (8,578,682) (9,011,369) Treasury Stock at cost, Class B Common, 135,080 and 250,185 shares, respectively (1,432,143) (2,652,509) ------------- ------------- 126,702,870 92,295,148 ------------- ------------- $ 468,974,422 $ 345,050,627 ============= =============
See accompanying notes. F-3 56 GRAY COMMUNICATIONS SYSTEMS, INC. CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended December 31, ------------------------------------------------ 1998 1997 1996 ------------- ------------- ------------ Operating revenues: Broadcasting (less agency commissions) $ 91,006,506 $ 72,300,105 $ 54,981,317 Publishing 29,330,080 24,536,348 22,845,274 Paging 8,552,936 6,711,426 1,478,608 ------------- ------------- ------------ 128,889,522 103,547,879 79,305,199 Expenses: Broadcasting 52,967,142 41,966,493 32,438,405 Publishing 24,197,169 19,753,387 17,949,064 Paging 5,618,421 4,051,359 1,077,667 Corporate and administrative 3,062,995 2,528,461 3,218,610 Depreciation 9,690,757 7,800,217 4,077,696 Amortization of intangible assets 8,425,821 6,718,302 3,584,845 Non-cash compensation paid in common stock (Note D) -0- -0- 880,000 ------------- ------------- ------------ 103,962,305 82,818,219 63,226,287 ------------- ------------- ------------ 24,927,217 20,729,660 16,078,912 Gain on disposition of television stations (net of $780,000 paid to Bull Run Corporation in 1998) (Note B) 70,572,128 -0- 5,671,323 Miscellaneous income and (expense), net (241,522) (30,851) 33,259 ------------- ------------- ------------ 95,257,823 20,698,809 21,783,494 Interest expense 25,454,476 21,861,267 11,689,053 ------------- ------------- ------------ INCOME (LOSS) BEFORE INCOME TAXES AND EXTRAORDINARY CHARGE 69,803,347 (1,162,458) 10,094,441 Federal and state income taxes (Note G) 28,143,981 240,000 4,416,000 ------------- ------------- ------------ INCOME (LOSS) BEFORE EXTRAORDINARY CHARGE 41,659,366 (1,402,458) 5,678,441 Extraordinary charge on extinguishment of debt, net of applicable income tax benefit of $2,157,000 (Note C) -0- -0- 3,158,960 ------------- ------------- ------------ NET INCOME (LOSS) 41,659,366 (1,402,458) 2,519,481 Preferred dividends (Note E) 1,317,830 1,409,690 376,849 ------------- ------------- ------------ NET INCOME (LOSS) AVAILABLE TO COMMON STOCKHOLDERS $ 40,341,536 $ (2,812,148) $ 2,142,632 ============= ============= ============ Average outstanding common shares-basic 11,922,852 11,852,546 8,097,654 Stock compensation awards 481,443 -0- 340,668 ------------- ------------- ------------ Average outstanding common shares-diluted 12,404,295 11,852,546 8,438,322 ============= ============= ============ Basic earnings per common share: Income (loss) before extraordinary charge available to common stockholders $ 3.38 $ (0.24) $ 0.65 Extraordinary charge -0- -0- (0.39) ------------- ------------- ------------ NET INCOME (LOSS) AVAILABLE TO COMMON STOCKHOLDERS $ 3.38 $ (0.24) $ 0.26 ============= ============= ============ Diluted earnings per common share: Income (loss) before extraordinary charge available to common stockholders $ 3.25 $ (0.24) $ 0.62 Extraordinary charge -0- -0- (0.37) ------------- ------------- ------------ NET INCOME (LOSS) AVAILABLE TO COMMON STOCKHOLDERS $ 3.25 $ (0.24) $ 0.25 ============= ============= ============
See accompanying notes F-4 57 GRAY COMMUNICATIONS SYSTEMS, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Class A Class B Preferred Stock Common Stock Common Stock Retained Shares Amount Shares Amount Shares Amount Earnings --------- ----------- ---------- ---------- --------- ----------- ----------- Balance at December 31, 1995 -0- $ -0- 7,624,134 $6,795,976 -0- $ -0- $ 8,827,906 Net Income -0- -0- -0- -0- -0- -0- 2,519,481 Common Stock Cash Dividends: Class A ($0.05 per share) -0- -0- -0- -0- -0- -0- (357,598) Class B ($0.01 per share) -0- -0- -0- -0- -0- -0- (69,000) Purchase of Class B Common Stock (Note E) -0- -0- -0- -0- -0- -0- -0- Issuance of Class A Common Stock (Notes E, F and H): 401(k) Plan -0- -0- 19,837 262,426 -0- -0- -0- Directors' Stock Plan -0- -0- 33,750 228,749 -0- -0- -0- Non-qualified Stock Plan -0- -0- 55,275 358,417 -0- -0- -0- Preferred Stock Dividends -0- -0- -0- -0- -0- -0- (376,849) Issuance of Class A Common Stock Warrants (Notes B and E) -0- -0- -0- 2,600,000 -0- -0- -0- Issuance of Series A Preferred Stock in exchange for Subordinated Note (Notes B and E) 1,000 10,000,000 -0- (2,383,333) -0- -0- -0- Issuance of Series B Preferred Stock (Notes B and E) 1,000 10,000,000 -0- -0- -0- -0- -0- Issuance of Class B Common Stock, net of expenses (Notes B and E) -0- -0- -0- -0- 5,250,000 66,065,762 -0- Income tax benefits relating to stock plans -0- -0- -0- 132,000 -0- -0- -0- ------ ----------- --------- ----------- --------- ----------- ----------- Balance at December 31, 1996 2,000 20,000,000 7,732,996 7,994,235 5,250,000 66,065,762 10,543,940 Net Loss -0- -0- -0- -0- -0- -0- (1,402,458) Common Stock Cash Dividends ($0.05) per share -0- -0- -0- -0- -0- -0- (628,045) Preferred Stock Dividends -0- -0- -0- -0- -0- -0- (1,409,690) Issuance of Class A Common Stock (Notes E and F): Directors' Stock Plan -0- 0- 752 9,645 -0- -0- -0- Non-qualified Stock Plan -0- 0- 44,775 317,151 -0- -0- -0- Stock Award Restricted Stock Plan -0- 0- 183,051 1,200,000 -0- -0- -0- Issuance of Class B Common Stock (Notes E and H): 401(k) Plan -0- -0- -0- -0- 23,046 282,384 -0- Issuance of Series B Preferred Stock (Note E) 60 600,000 -0- -0- -0- -0- -0- Issuance of Treasury Stock (Notes E, F, and H): 401(k) Plan -0- -0- -0- -0- -0- 49,658 -0- Non-qualified Stock Plan -0- -0- -0- -0- -0- -0- (500,556) Purchase of Class A Common Stock (Note E) -0- -0- -0- -0- -0- -0- -0- Income tax benefits relating to stock plans -0- -0- -0- 837,000 -0- -0- -0- ------ ----------- --------- ----------- --------- ----------- =---------- Balance at December 31, 1997 2,060 $20,600,000 7,961,574 $10,358,031 5,273,046 $66,397,804 $ 6,603,191
Class A Class B Treasury Stock Treasury Stock Shares Amount Shares Amount Total --------- ----------- --------- ----------- ---------- Balance at December 31, 1995 (994,770) $(6,638,284) -0- $ -0- $8,985,598 Net Income -0- -0- -0- -0- 2,519,481 Common Stock Cash Dividends: Class A ($0.05 per share) -0- -0- -0- -0- (357,598) Class B ($0.01 per share) -0- -0- -0- -0- (69,000) Purchase of Class B Common Stock (Note E) -0- -0- (258,450) (2,740,137) (2,740,137) Issuance of Class A Common Stock (Notes E, F and H): 401(k) Plan -0- -0- -0- -0- 262,426 Directors' Stock Plan -0- -0- -0- -0- 228,749 Non-qualified Stock Plan -0- -0- -0- -0- 358,417 Preferred Stock Dividends -0- -0- -0- -0- (376,849) Issuance of Class A Common Stock Warrants (Notes B and E) -0- -0- -0- -0- 2,600,000 Issuance of Series A Preferred Stock in exchange for Subordinated Note (Notes B and E) -0- -0- -0- -0- 7,616,667 Issuance of Series B Preferred Stock (Notes B and E) -0- -0- -0- -0- 10,000,000 Issuance of Class B Common Stock, net of expenses (Notes B and E) -0- -0- -0- -0- 66,065,762 Income tax benefits relating to stock plans -0- -0- -0- -0- 132,000 ---------- ---------- -------- ----------- ----------- Balance at December 31, 1996 (994,770) (6,638,284) (258,450) (2,740,137) 95,225,516 Net Loss -0- -0- -0- -0- (1,402,458) Common Stock Cash Dividends ($0.05) per share -0- -0- -0- -0- (628,045) Preferred Stock Dividends -0- -0- -0- -0- (1,409,690) Issuance of Class A Common Stock (Notes E and F): Directors' Stock Plan -0- -0- -0- -0- 9,645 Non-qualified Stock Plan -0- -0- -0- -0- 317,151 Stock Award Restricted Stock Plan -0- -0- -0- -0- 1,200,000 Issuance of Class B Common Stock (Notes E and H): 401(k) Plan -0- -0- -0- -0- 282,384 Issuance of Series B Preferred Stock (Note E) -0- -0- -0- -0- 600,000 Issuance of Treasury Stock (Notes E, F, and H): 401(k) Plan -0- -0- 8,265 87,628 137,286 Non-qualified Stock Plan 81,238 1,082,390 -0- -0- 581,834 Purchase of Class A Common Stock (Note E) (259,350) (3,455,475) -0- -0- (3,455,475) Income tax benefits relating to stock plans -0- -0- -0- -0- 837,000 ---------- ----------- -------- ----------- ----------- Balance at December 31, 1997 (1,172,882) $(9,011,369) (250,185) $(2,652,509) $92,295,148
See accompanying notes F-5 58 GRAY COMMUNICATIONS SYSTEMS, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (continued)
Class A Class B Preferred Stock Common Stock Common Stock -------------------- ---------------------- ----------------------- Retained Shares Amount Shares Amount Shares Amount Earnings ------- ----------- ---------- ---------- ---------- ----------- ----------- Balance at December 31, 1997 2,060 $20,600,000 7,961,574 $10,358,031 5,273,046 $66,397,804 $ 6,603,191 Net Income -0- -0- -0- -0- -0- -0- 41,659,366 Common Stock Cash Dividends ($0.06) per share -0- -0- -0- -0- -0- -0- (715,209) Preferred Stock Dividends -0- -0- -0- -0- -0- -0- (1,317,830) Issuance of Treasury Stock (Notes E, F, and H): 401(k) Plan -0- -0- -0- -0- -0- 180,821 -0- Directors' Stock Plan -0- -0- -0- -0- -0- 30,652 -0- Non-qualified Stock Plan -0- -0- -0- -0- -0- 9,597 (491,917) Purchase of Class A Common Stock (Note E) -0- -0- -0- -0- -0- -0- -0- Issuance of Series B Preferred Stock (Note E) 51 509,384 -0- -0- -0- -0- -0- Purchase of Series B Preferred Stock (Note E) (761) (7,609,384) -0- -0- -0- -0- -0- Income tax benefits relating to stock plans -0- -0- -0- 325,678 -0- 173,511 -0- ------- ----------- --------- ----------- --------- ----------- ----------- Balance at December 31, 1998 1,350 $13,500,000 7,961,574 $10,683,709 5,273,046 $66,792,385 $45,737,601 ======= =========== ========= =========== ========= =========== ===========
Class A Class B Treasury Stock Treasury Stock ------------------------ -------------------- Shares Amount Shares Amount Total ---------- ----------- -------- ----------- ----------- Balance at December 31, 1997 (1,172,882) $(9,011,369) (250,185) $(2,652,509) $92,295,148 Net Income -0- -0- -0- -0- 41,659,366 Common Stock Cash Dividends ($0.06) per share -0- -0- -0- -0- (715,209) Preferred Stock Dividends -0- -0- -0- -0- (1,317,830) Issuance of Treasury Stock (Notes E, F, and H): 401(k) Plan -0- -0- 29,305 310,703 491,524 Directors' Stock Plan -0- -0- 84,300 893,763 924,415 Non-qualified Stock Plan 74,100 1,015,254 1,500 15,900 548,834 Purchase of Class A Common Stock (Note E) (30,750) (582,567) -0- -0- (582,567) Issuance of Series B Preferred Stock (Note E) -0- -0- -0- -0- 509,384 Purchase of Series B Preferred Stock (Note E) -0- -0- -0- -0- (7,609,384) Income tax benefits relating to stock plans -0- -0- -0- -0- 499,189 ---------- ----------- -------- ----------- ------------ Balance at December 31, 1998 (1,129,532) $(8,578,682) (135,080) $(1,432,143) $126,702,870 ========== =========== ======== =========== ============
See accompanying notes. F-6 59 GRAY COMMUNICATIONS SYSTEMS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31, ----------------------------------------------- 1998 1997 1996 ------------- ------------ ------------- Operating activities Net income (loss) $ 41,659,366 $ (1,402,458) $ 2,519,481 Items which did not use (provide) cash: Depreciation 9,690,757 7,800,217 4,077,696 Amortization of intangible assets 8,425,821 6,718,302 3,584,845 Amortization of deferred loan costs 1,097,952 1,083,303 270,813 Amortization of program broadcast rights 4,250,714 3,501,330 2,742,712 Amortization of original issue discount on 8% subordinated note -0- -0- 216,667 Write-off of loan acquisition costs from early extinguishment of debt -0- -0- 1,818,840 Gain on disposition of television stations (70,572,128) -0- (5,671,323) Payments for program broadcast rights (4,209,811) (3,629,350) (2,877,128) Compensation paid in Common Stock -0- -0- 880,000 Supplemental employee benefits (252,611) (196,057) (855,410) Common Stock contributed to 401(K) Plan 491,524 419,670 262,426 Deferred income taxes 26,792,795 1,283,000 (44,000) Loss on asset sales 332,042 108,998 201,792 Changes in operating assets and liabilities: Trade accounts receivable (302,905) (369,675) (1,575,723) Recoverable income taxes 406,749 (384,597) (400,680) Inventories (344,393) (101,077) 254,952 Other current assets 342,674 (569,745) (21,248) Trade accounts payable (797,447) (2,825,099) 2,256,795 Employee compensation and benefits 1,283,150 (2,848,092) 2,882,379 Accrued expenses 79,644 1,279,164 (2,936,155) Accrued interest 1,074,768 (325,409) 3,794,284 Deferred revenue 625,149 201,657 710,286 ------------- ------------ ------------- Net cash provided by operating activities 20,073,810 9,744,082 12,092,301 Investing activities Acquisition of television businesses (122,455,774) (45,644,942) (210,944,547) Disposition of television business 76,440,419 -0- 9,480,699 Purchases of property and equipment (9,270,623) (10,371,734) (3,395,635) Proceeds from asset sales 318,697 24,885 174,401 Deferred acquisition costs -0- (89,056) -0- Payments on purchase liabilities (551,917) (764,658) (243,985) Other 220,390 (652,907) (139,029) ------------- ------------ ------------- Net cash used in investing activities (55,298,808) (57,498,412) (205,068,096) Financing activities Proceeds from borrowings on long-term debt 90,070,000 75,350,000 238,478,310 Repayments of borrowings on long-term debt (46,609,122) (22,678,127) (109,434,577) Deferred loan costs (854,235) (463,397) (9,410,078) Dividends paid (1,642,709) (1,428,045) (426,598) Common Stock transactions 499,189 1,163,796 719,166 Proceeds from equity offering - Class B Common Stock, net of expenses -0- -0- 66,065,762 Proceeds from offering of Series B Preferred Stock -0- -0- 10,000,000 Proceeds from settlement of interest rate swap agreement -0- -0- 215,000 Proceeds from sale of treasury shares 1,473,249 581,834 -0- Purchase of Class A Common Stock (582,567) (3,455,475) -0- Purchase of Class B Common Stock -0- -0- (2,740,137) Redemption of Preferred Stock (7,609,384) -0- -0- ------------- ------------ ------------- Net cash provided by financing activities 34,744,421 49,070,586 193,466,848 ------------- ------------ ------------- Increase (decrease) in cash and cash equivalents (480,577) 1,316,256 491,053 Cash and cash equivalents at beginning of year 2,367,300 1,051,044 559,991 ------------- ------------ ------------- Cash and cash equivalents at end of year $ 1,886,723 $ 2,367,300 $ 1,051,044 ============= ============ =============
See accompanying notes. F-7 60 GRAY COMMUNICATIONS SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS A. Summary of Significant Accounting Policies Description of Business The Company's operations, which are located in ten southeastern and midwestern states, include ten television stations, a transportable satellite uplink business, three daily newspapers, a weekly advertising only publication and paging operations. Principles of Consolidation The consolidated financial statements include the accounts of the Company and its subsidiaries. All significant intercompany accounts and transactions have been eliminated. Revenue Recognition The Company recognizes revenues as services are performed. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. Cash and Cash Equivalents Cash and cash equivalents include cash on deposit with a bank. Deposits with the bank are generally insured in limited amounts. Inventories Inventories, principally newsprint and supplies, are stated at the lower of cost or market. The Company uses the last-in, first-out ("LIFO") method of determining costs for substantially all of its inventories. Current cost exceeded the LIFO value of inventories by approximately $13,000 and $15,000 at December 31, 1998 and 1997, respectively. Program Broadcast Rights Rights to programs available for broadcast under program license agreements are initially recorded at the beginning of the license period for the amounts of total license fees payable under the license agreements and are charged to operating expense on the basis of total programs available for use on the straight-line method. The portion of the unamortized balance expected to be charged to operating expense in the succeeding year is classified as a current asset, with the remainder classified as a non-current asset. The liability for the license fees payable under the program license agreements is classified as current or long-term, in accordance with the payment terms of the various license agreements. The capitalized costs of the rights are recorded at the lower of unamortized costs or estimated net realizable value. Property and Equipment Property and equipment are carried at cost. Depreciation is computed principally by the straight-line method for financial reporting purposes and by accelerated methods for income tax purposes. Buildings, F-8 61 GRAY COMMUNICATIONS SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) A. Summary of Significant Accounting Policies (Continued) Property and Equipment (Continued) improvements and equipment are depreciated over estimated useful lives of approximately 35 years, 10 years and 5 years, respectively. Intangible Assets Intangible assets are stated at cost and are amortized using the straight-line method. Goodwill is amortized over 40 years. Loan acquisition fees are amortized over the life of the applicable indebtedness. Non-compete agreements are amortized over the life of the specific agreement. Accumulated amortization of intangible assets resulting from business acquisitions was $21.2 million and $11.5 million as of December 31, 1998 and 1997, respectively. If facts and circumstances indicate that the goodwill, property and equipment or other assets may be impaired, an evaluation of continuing value would be performed. If an evaluation is required, the estimated future undiscounted cash flows associated with these assets would be compared to their carrying amount to determine if a write down to fair market value or discounted cash flow value is required. Income Taxes Deferred income taxes are provided on the differences between the financial statement and income tax basis of assets and liabilities. The Company and its subsidiaries file a consolidated federal income tax return. Consolidated state income tax returns are filed when appropriate and separate state tax returns are filed when consolidation is not available. Local tax returns are filed separately. Capital Stock On August 20, 1998, the Board of Directors declared a 50% stock dividend, payable on September 30, 1998, to stockholders of record of the Class A Common Stock and Class B Common Stock on September 16, 1998. This stock dividend effected a three for two stock split. All applicable share and per share data have been adjusted to give effect to the stock split. Stock Based Compensation The Company has elected to follow Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25") and related interpretations in accounting for its stock options. Under APB 25, if the exercise price of the stock options granted by the Company equals the market price of the underlying stock on the date of the grant, no compensation expense is recognized. Concentration of Credit Risk The Company provides print advertising and advertising air time to national, regional and local advertisers within the geographic areas in which the Company operates. Credit is extended based on an evaluation of the customer's financial condition, and generally advance payment is not required. Credit losses are provided for in the financial statements and consistently have been within management's expectations. F-9 62 GRAY COMMUNICATIONS SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) A. Summary of Significant Accounting Policies (Continued) Fair Value of Financial Instruments The estimated fair value of long-term debt at December 31, 1998 and 1997 exceeded book value by $10.4 million and $13.2 million, respectively. The fair value of the Preferred Stock at December 31, 1998 and 1997 approximates its carrying value at that date. The Company does not anticipate settlement of long-term debt or preferred stock at other than book value. The fair value of other financial instruments classified as current assets or liabilities approximates their carrying values due to the short-term maturities of these instruments. Reclassifications Certain amounts in the accompanying consolidated financial statements have been reclassified to conform to the 1998 format. B. Business Acquisitions and Dispositions The Company's acquisitions have been accounted for under the purchase method of accounting. Under the purchase method of accounting, the results of operations of the acquired businesses are included in the accompanying consolidated financial statements as of their respective acquisition dates. The assets and liabilities of acquired businesses are included based on an allocation of the purchase price. Recent and Pending Acquisitions On March 1, 1999, the Company acquired substantially all of the assets of The Goshen News from News Printing Company, Inc. and affiliates thereof, for aggregate cash consideration of approximately $16.7 million including a non-compete agreement. The Goshen News is a 17,000 circulation afternoon newspaper published Monday through Saturday and serves Goshen, Indiana and surrounding areas. The Company financed the acquisition through its $200.0 million bank loan agreement (the "Senior Credit Facility"). On January 28, 1999, Bull Run Corporation ("Bull Run"), a principal stockholder of the Company, acquired 301,119 shares of the outstanding common stock of Sarkes Tarzian, Inc. ("Tarzian") from the Estate of Mary Tarzian (the "Estate") for $10.0 million. The acquired shares (the "Tarzian Shares") represent 33.5% of the total outstanding common stock of Tarzian (both in terms of the number of shares of common stock outstanding and in terms of voting rights), but such investment represents 73% of the equity of Tarzian for purposes of dividends as well as distributions in the event of any liquidation, dissolution or other termination of Tarzian. Tarzian has filed a complaint in the United States District Court for the Southern District of Indiana, claiming that it had a binding contract with the Estate to purchase the Tarzian Shares from the Estate prior to Bull Run's purchase of the shares, and requests judgment providing that the Estate be required to sell the Tarzian Shares to Tarzian. Bull Run believes that a binding contract between Tarzian and the Estate did not exist, prior to Bull Run's purchase of the Tarzian Shares from the Estate, and in any case, Bull Run's purchase agreement with the Estate provides that in the event that a court of competent jurisdiction awards title to the Tarzian Shares to a person or entity other than Bull Run, the purchase agreement is rescinded and the Estate is required to pay Bull Run the full $10.0 million purchase price, plus interest. Tarzian owns and operates two television stations and four radio stations: WRCB-TV Channel 3 in Chattanooga, Tennessee, an NBC affiliate; KTVN-TV Channel 2 in Reno, Nevada, a CBS affiliate; WGCL-AM and WTTS-FM in Bloomington, Indiana; and WAJI-FM and WLDE-FM in Fort Wayne, Indiana. The Chattanooga and Reno markets rank as the 87th and the 108th largest television markets in the United States, respectively, as ranked by A. C. Nielsen Company. F-10 63 GRAY COMMUNICATIONS SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) B. Business Acquisitions and Dispositions (Continued) Recent and Pending Acquisitions (Continued) The Company has executed an option agreement with Bull Run, whereby the Company has the option of acquiring the Tarzian investment from Bull Run. Upon exercise of the option, the Company will pay Bull Run an amount equal to Bull Run's purchase price for the Tarzian investment and related costs. The option agreement currently expires on May 31, 1999; however, the Company may extend the option period at an established fee. In connection with the option agreement, the Company granted to Bull Run warrants to purchase up to 100,000 shares of the Company's Class B Common Stock at $13.625 per share. The warrants vest immediately upon the Company's exercise of its option to purchase the Tarzian investment. Neither Bull Run's investment nor the Company's potential investment is presently attributable under the ownership rules of the Federal Communications Commission ("FCC"). If the Company successfully exercises the option agreement, the Company plans to fund the acquisition through its Senior Credit Facility. 1998 Acquisitions and Disposition On July 31, 1998, the Company completed the purchase of all of the outstanding capital stock of Busse Broadcasting Corporation ("Busse"). The purchase price was $120.5 million less the accreted value of Busse's 11 5/8% Senior Secured Notes due 2000 ("Busse Senior Notes"). The purchase price of the capital stock consisted of the contractual purchase price of $112.0 million, associated transaction costs of $2.9 million and Busse's cash and cash equivalents of $5.6 million. Immediately following the acquisition of Busse, the Company exercised its right to satisfy and discharge the Busse Senior Notes, effectively prefunding the Busse Senior Notes at the October 15, 1998 call price of 106 plus accrued interest. The amount necessary to satisfy and discharge the Busse Senior Notes was approximately $69.9 million. Based on the preliminary allocation of the purchase price, the excess of the purchase price over the fair value of net tangible assets acquired was approximately $122.8 million. Immediately prior to the Company's acquisition of Busse, Cosmos Broadcasting Corporation acquired the assets of WEAU-TV ("WEAU") from Busse and exchanged them for the assets of WALB-TV, Inc. ("WALB"), the Company's NBC affiliate in Albany, Georgia. In exchange for the assets of WALB, the Company received the assets of WEAU, which were valued at $66.0 million, and approximately $12.0 million in cash for a total value of $78.0 million. The Company recognized a pre-tax gain of approximately $70.6 million and estimated deferred income taxes of approximately $27.5 million in connection with the exchange of WALB. The Company funded the remaining costs of the acquisition of Busse's capital stock through its Senior Credit Facility. As a result of these transactions, the Company added the following television stations to its existing broadcast group: KOLN-TV ("KOLN"), the CBS affiliate serving the Lincoln-Hastings-Kearney, Nebraska market; its satellite station KGIN-TV ("KGIN"), the CBS affiliate serving Grand Island, Nebraska; and WEAU, an NBC affiliate serving the La Crosse-Eau Claire, Wisconsin market. These transactions also satisfied the FCC's requirement for the Company to divest itself of WALB. The transactions described above are referred to herein as the "Busse-WALB Transactions." The Company's Board of Directors has agreed to pay Bull Run a fee of approximately $2.0 million for services performed in connection with the Busse-WALB Transactions. Of this fee, $1.1 million had been paid to Bull Run and $880,000 remained in accounts payable at December 31, 1998. Unaudited pro forma operating data for the years ended December 31 , 1998 and 1997 are presented below and assumes that the Busse-WALB Transactions and the 1997 Broadcasting Acquisitions (as F-11 64 GRAY COMMUNICATIONS SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) B. Business Acquisitions and Dispositions (Continued) 1998 Acquisitions and Disposition (Continued) defined in 1997 Acquisitions) were completed on January 1, 1997. The above described unaudited pro forma operating data excludes a pre-tax gain of approximately $70.6 million and estimated deferred income taxes of approximately $27.5 million in connection with the disposition of WALB. This unaudited pro forma operating data does not purport to represent the Company's actual results of operations had the Busse-WALB Transactions and the 1997 Broadcasting Acquisitions been completed on January 1, 1997, and should not serve as a forecast of the Company's operating results for any future periods. The pro forma adjustments are based solely upon certain assumptions that management believes are reasonable under the circumstances at this time. Unaudited pro forma operating data for the years ended December 31, 1998 and 1997, are as follows (in thousands, except per common share data):
December 31, ------------------------------ 1998 1997 -------------- ----------- (Unaudited) Revenues, net $ 133,661 $ 117,981 ============== =========== Net loss available to common stockholders $ (4,562) $ (6,647) ============== =========== Loss per share available to common stockholders: Basic $ (0.38) $ (0.56) ============== =========== Diluted $ (0.38) $ (0.56) ============== ===========
The pro forma results presented above include adjustments to reflect (i) the incurrence of interest expense to fund the respective acquisitions, (ii) depreciation and amortization of assets acquired, (iii) the elimination of the corporate expense allocation net of additional accounting and administrative expenses and (iv) the income tax effect of such pro forma adjustments. 1997 Acquisitions On August 1, 1997, the Company purchased the assets of WITN-TV ("WITN"). The purchase price of approximately $41.7 million consisted of $40.7 million cash, $600,000 in acquisition related costs, and approximately $400,000 in liabilities which were assumed by the Company. The excess of the purchase price over the fair value of net tangible assets acquired was approximately $37.4 million. The Company funded the costs of this acquisition through its Senior Credit Facility. WITN operates on Channel 7 and is the NBC affiliate in the Greenville-New Bern-Washington, North Carolina market. In connection with the purchase of the assets of WITN ("WITN Acquisition"), the Company paid Bull Run a fee of $400,000 for services performed. On April 24, 1997, the Company acquired all of the issued and outstanding common stock of GulfLink Communications, Inc. ("GulfLink") of Baton Rouge, Louisiana. The GulfLink operations included nine transportable satellite uplink trucks. The purchase price of approximately $5.2 million consisted of $4.1 million cash, $127,000 in acquisition related costs, and approximately $1.0 million in liabilities which were assumed by the Company. The excess of the purchase price over the fair value of net tangible assets acquired was approximately $3.6 million. The Company funded the costs of this acquisition through its Senior Credit Facility. In connection with the purchase of the common stock of GulfLink Communications, Inc. (the "GulfLink Acquisition"), the Company paid Bull Run a fee equal to F-12 65 GRAY COMMUNICATIONS SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) B. Business Acquisitions and Dispositions (Continued) 1997 Acquisitions (Continued) $58,000 for services performed. The WITN Acquisition and the GulfLink Acquisition are hereinafter referred to as the "1997 Broadcasting Acquisitions." Unaudited pro forma operating data for the year ended December 31, 1997 and 1996 are presented below and assumes that the 1997 Broadcasting Acquisitions, the First American Acquisition (as defined in 1996 Acquisitions and Disposition) and the KTVE Sale (as defined in 1996 Acquisitions and Disposition) occurred on January 1, 1996. This unaudited pro forma operating data does not purport to represent the Company's actual results of operations had these transactions occurred on January 1, 1996, and should not serve as a forecast of the Company's operating results for any future periods. The pro forma adjustments are based solely upon certain assumptions that management believes are reasonable under the circumstances at this time. Unaudited pro forma operating data for the years ended December 31, 1997 and 1996, are as follows (in thousands, except per common share data):
December 31, ------------------------------ 1997 1996 -------------- ----------- (Unaudited) Revenues, net $ 109,099 $ 108,908 ============== =========== Net loss available to common stockholders $ (3,769) $ (2,397) ============== =========== Loss per share available to common stockholders: Basic $ (0.32) $ (0.20) ============== =========== Diluted $ (0.32) $ (0.20) ============== ===========
The pro forma results presented above include adjustments to reflect (i) the incurrence of interest expense to fund the 1997 Broadcasting Acquisitions, and the First American Acquisition (as defined in 1996 Acquisitions and Disposition), (ii) depreciation and amortization of assets acquired, (iii) the reduction of employee compensation related to severance and vacation compensation for 1996, (iv) the elimination of the corporate expense allocation net of additional accounting and administrative expenses for the WITN Acquisition and the First American Acquisition, (v) increased pension expense for the First American Acquisition, and (vi) the income tax effect of such pro forma adjustments. Average outstanding shares used to calculate pro forma earnings per share data for 1996 include the 5,250,000 Class B Common shares issued in connection with the First American Acquisition. 1996 Acquisitions and Disposition On September 30, 1996, the Company purchased from First American Media, Inc. substantially all of the assets used in the operation of two CBS-affiliated television stations, WCTV-TV ("WCTV") serving Tallahassee, Florida-Thomasville, Georgia and WKXT-TV ("WKXT") in Knoxville, Tennessee, as well as those assets used in the operations of a satellite uplink and production services business and a communications and paging business (the "First American Acquisition"). Subsequent to the First American Acquisition, the Company rebranded WKXT with the call letters WVLT ("WVLT"). The purchase price of approximately $183.9 million consisted of $175.5 million cash, $1.8 million in acquisition related costs, and the assumption of approximately $6.6 million of liabilities. The excess of the purchase price over the fair value of net tangible assets acquired was approximately $160.2 million. The Company paid Bull Run, a fee equal to approximately $1.7 million for services performed in F-13 66 GRAY COMMUNICATIONS SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) B. Business Acquisitions and Dispositions (Continued) 1996 Acquisitions and Disposition (Continued) connection with this acquisition. The First American Acquisition and the early retirement of the Company's existing bank credit facility and other senior indebtedness, were funded as follows: net proceeds of $66.1 million from the sale of 5,250,000 shares of the Company's Class B Common Stock; net proceeds of $155.2 million from the sale of $160.0 million principal amount of the Company's 10 5/8% Senior Subordinated Notes due 2006; $16.9 million of borrowings under the Senior Credit Facility; and $10.0 million net proceeds from the sale of 1,000 shares of the Company's Series B Preferred Stock with warrants to purchase 750,000 shares of the Company's Class A Common Stock at $16 per share. The shares of Series B Preferred Stock were issued to Bull Run and to J. Mack Robinson, Chairman of the Board of Bull Run and President and Chief Executive Officer of the Company, and certain of his affiliates. The Company obtained an opinion from an investment banker as to the fairness of the terms of the sale of such Series B Preferred Stock with warrants. In connection with the First American Acquisition, the FCC ordered the Company to divest itself of WALB in Albany, Georgia and WJHG-TV ("WJHG") in Panama City, Florida by March 31, 1997 to comply with regulations governing common ownership of television stations with overlapping service areas. The FCC is currently reexamining these regulations, and if it revises them in accordance with the interim policy it has adopted, divestiture of WJHG would not be required. Accordingly, the Company requested and in July of 1997 received an extension of the divestiture deadline with regard to WJHG conditioned upon the outcome of the rulemaking proceedings. It can not be determined when the FCC will complete its rulemaking on this subject. On July 31, 1998, the assets of WALB were exchanged for the assets of WEAU. This exchange transaction satisfied the FCC's divestiture requirement for WALB. Condensed unaudited balance sheets of WALB and WJHG are as follows (in thousands):
WJHG WALB December 31, December 31, ---------------- 1997 1998 1997 ------------ ------- ------ (Unaudited) (Unaudited) Current assets $2,379 $1,163 $1,053 Property and equipment 1,473 1,323 848 Other assets 471 148 346 ----------- ------ ------ Total assets $4,323 $2,634 $2,247 =========== ====== ====== Current liabilities $ 994 $ 583 $ 350 Other liabilities 215 118 127 Stockholder's equity 3,114 1,933 1,770 ----------- ------ ------ Total liabilities and stockholder's equity $4,323 $2,634 $2,247 =========== ====== ======
F-14 67 GRAY COMMUNICATIONS SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) B. Business Acquisitions and Dispositions (Continued) 1996 Acquisitions and Disposition (Continued) Condensed unaudited income statement data of WALB and WJHG are as follows (in thousands):
WALB WJHG ----------------------------------------- --------------------------------- Seven Months Year Ended December 31, Year Ended December 31, Ended ------------------------ --------------------------------- July 31, 1998 1997 1996 1998 1997 1996 ------------- -------- ------- ------ ------ ------- (Unaudited) Broadcasting revenues $6,773 $10,090 $10,611 $5,057 $4,896 $5,217 Expenses 3,130 4,770 5,070 4,038 3,757 4,131 ------- ------- ------- ------ ------- ------ Operating income 3,643 5,320 5,541 1,019 1,139 1,086 Other income (expense) (33) 3 7 1 (5) 6 ------- ------- ------- ------ ------ ------ Income before income taxes $ 3,610 $ 5,323 $ 5,548 $1,020 $1,134 $1,092 ======= ======= ======= ====== ====== ====== Net income $ 2,238 $ 3,295 $ 3,465 $ 632 $ 737 $ 685 ======= ======= ======= ====== ====== ======
On January 4, 1996, the Company purchased substantially all of the assets of WRDW-TV, a CBS television affiliate serving the Augusta, Georgia television market (the "Augusta Acquisition"). The purchase price of approximately $37.2 million which included assumed liabilities of approximately $1.3 million, was financed primarily through long-term borrowings. The assets acquired consisted of office equipment and broadcasting operations located in North Augusta, South Carolina. The excess of the purchase price over the fair value of net tangible assets acquired was approximately $32.5 million. In connection with the Augusta Acquisition, the Company paid a fee of $360,000 to Bull Run for services performed. Funds for the Augusta Acquisition were obtained from the modification of the Company's existing bank debt on January 4, 1996 (the "Bank Loan") to a variable rate reducing revolving credit facility (the "Old Credit Facility") and the sale to Bull Run of an 8% subordinated note due January 3, 2005 in the principal amount of $10.0 million (the "8% Note"). In connection with the sale of the 8% Note, the Company also issued warrants to Bull Run to purchase 731,250 shares of Class A Common Stock at $11.92 per share. Of these warrants, 450,000 vested upon issuance with the remaining warrants vesting in five equal annual installments commencing on the first anniversary of the date of issuance. Approximately $2.6 million of the $10.0 million of proceeds from the 8% Note was allocated to the warrants and increased Class A Common Stock. The Old Credit Facility provided for a credit line up to $54.2 million. This transaction also required a modification of the interest rate of the Company's $25.0 million senior secured note with an institutional investor (the "Senior Note") from 10.08% to 10.7%. As part of the financing arrangements for the First American Acquisition, the Old Credit Facility and the Senior Note were retired and the Company issued to Bull Run, in exchange for the 8% Note, 1,000 shares of Series A Preferred Stock. The warrants issued with the 8% Note were retired and the warrants issued with the Series A Preferred Stock will vest in accordance with the same schedule described above provided the Series A Preferred Stock remains outstanding. The Company recorded an extraordinary charge of $5.3 million ($3.2 million after taxes or $0.39 per basic common share and $0.37 per diluted common share for 1996) in connection with the early retirement of the $25.0 million Senior Note and the write-off of loan acquisition costs from the early extinguishment of debt. The Company sold the assets of KTVE Inc. (the "KTVE Sale"), its NBC-affiliated television station, in Monroe, Louisiana-El Dorado, Arkansas on August 20, 1996. The sales price included $9.5 million in F-15 68 GRAY COMMUNICATIONS SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) B. Business Acquisitions and Dispositions (Continued) 1996 Acquisitions and Disposition (Continued) cash plus the amount of the accounts receivable on the date of closing to the extent collected by the buyer, to be paid to the Company within 150 days following the closing date (approximately $829,000). The Company recognized a pre-tax gain of approximately $5.7 million and estimated income taxes of approximately $2.8 million in connection with the sale. Unaudited pro forma operating data for the years ended December 31, 1996 and 1995 is presented below and assumes that the Augusta Acquisition, the First American Acquisition, and the KTVE Sale occurred on January 1, 1995. This unaudited pro forma operating data does not purport to represent the Company's actual results of operations had the Augusta Acquisition, the First American Acquisition, and the KTVE Sale occurred on January 1, 1995, and should not serve as a forecast of the Company's operating results for any future periods. The pro forma adjustments are based solely upon certain assumptions that management believes are reasonable under the circumstances at this time. Unaudited pro forma operating data for the years ended December 31, 1996 and 1995, are as follows (in thousands, except per common share data):
December 31, ------------------------------ 1996 1995 -------------- ----------- (Unaudited) Revenues, net $ 97,540 $ 90,637 ============== =========== Net loss available to common stockholders $ (1,388) $ (6,073) ============== =========== Loss per share available to common stockholders: Basic $ (0.11) $ (0.51) ============== =========== Diluted $ (0.11) $ (0.51) ============== ===========
The pro forma results presented above include adjustments to reflect (i) the incurrence of interest expense to fund the First American Acquisition and the WRDW Acquisition, (ii) depreciation and amortization of assets acquired, (iii) the reduction of employee compensation related to severance and vacation compensation for 1996, (iv) the elimination of the corporate expense allocation net of additional accounting and administrative expenses for the First American Acquisition, (v) increased pension expense for the First American Acquisition, and (vi) the income tax effect of such pro forma adjustments. Average outstanding shares used to calculate pro forma earnings per share data for 1996 and 1995 include the 5,250,000 Class B Common shares issued in connection with the First American Acquisition. C. Long-term Debt Long-term debt consists of the following (in thousands):
December 31, ------------------------------ 1998 1997 -------------- ----------- 10 5/8% Senior Subordinated Notes due 2006 $ 160,000 $ 160,000 Senior Credit Facility 109,500 65,630 Other 1,155 1,446 -------------- ----------- 270,655 227,076 Less current portion (430) (400) -------------- ----------- $ 270,225 $ 226,676 ============== ===========
F-16 69 GRAY COMMUNICATIONS SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) C. Long-term Debt (Continued) On September 20, 1996, the Company sold $160.0 million principal amount of the Company's 10 5/8% Senior Subordinated Notes (the "Senior Subordinated Notes") due 2006. The net proceeds of $155.2 million from this offering, along with the net proceeds from (i) the KTVE Sale, (ii) the issuance of Class B Common Stock, (iii) the issuance of Series B Preferred Stock and (iv) borrowings under the Senior Credit Facility, were used in financing the First American Acquisition as well as the early retirement of the Senior Note and the Old Credit Facility. Interest on the Senior Subordinated Notes is payable semi-annually on April 1 and October 1, commencing April 1, 1997. The Senior Credit Facility included scheduled reductions in the $125.0 million credit limit which commenced on March 31, 1997, interest rates based upon a spread over LIBOR and/or the lender's prime rate, an unused commitment fee of 0.50% applied to available funds and a maturity date of June 30, 2003. Effective September 17, 1997, the Senior Credit Facility was modified to reinstate the original credit limit of $125.0 million which had been reduced by the scheduled reductions. The modification also reduced the interest rate spread over LIBOR and/or Prime. The modification also extended the maturity date from June 30, 2003 to June 30, 2004. The modification required a one-time fee of $250,000. Effective July 31, 1998, the Senior Credit Facility was modified to increase the committed credit limit from $125.0 million to $200.0 million. This modification also allows for an additional uncommitted $100.0 million in available credit which is in addition to the committed $200.0 million credit limit. This $100.0 million in uncommitted available credit can be borrowed by the Company only after approval of the bank consortium. The modification also extended the maturity date from June 30, 2004 to June 30, 2005. The modification required a one-time fee of approximately $750,000. At December 31, 1998, the Company had approximately $109.5 million borrowed under the Senior Credit Facility with approximately $90.5 million available under the agreement. The interest rate on the outstanding balance was based on the lender's prime rate and a spread over LIBOR of 1.75%. Additionally, the effective interest rate of the Senior Credit Facility can be changed based upon the Company's maintenance of certain operating ratios as defined by the Senior Credit Facility, not to exceed the lender's prime rate plus 0.50% or LIBOR plus 2.25%. The effective interest rate on the Senior Credit Facility at December 31, 1998 and 1997 was 7.1% and 7.9%, respectively. The Company is charged a commitment fee on the excess of the aggregate average daily available credit limit less the amount outstanding. At December 31, 1998, the commitment fee was 0.50% per annum. The Company's $200.0 million Senior Credit Facility, as amended, is comprised of a term loan (the "Term Commitment") of $100.0 million and a revolving credit facility (the "Revolving Commitment") of $100.0 million. As of December 31, 1998, the Company had $9.5 million borrowed under the Senior Credit Facility's Revolving Commitment. The Revolving Commitment will automatically reduce as follows: 10% in 2000, 15% in 2001, 15% in 2002, 20% in 2003, 25% in 1994 and 15% in 2005. As of December 31, 1998, the Company had $100.0 million borrowed under the Senior Credit Facility's Term Commitment. The amount outstanding under the Term Commitment will become fixed as of December 30, 1999 and it will be reduced as follows: 2.5% in 1999, 10.0% in 2000, 10.0% in 2001, 17.5% in 2002, 17.5% in 2003, 21.2% in 2004 and 21.3% in 2005. The agreement pursuant to which the Senior Credit Facility was issued contains certain restrictive provisions, which, among other things, limit additional indebtedness and require minimum levels of cash flows. The Senior Subordinated Notes also contained similar restrictive provisions as well as limitations on restricted payments. F-17 70 GRAY COMMUNICATIONS SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) C. Long-term Debt (Continued) The Senior Subordinated Notes are jointly and severally guaranteed (the "Subsidiary Guarantees") by all of the Company's subsidiaries (the "Subsidiary Guarantors"). The obligations of the Subsidiary Guarantors under the Subsidiary Guarantees is subordinated, to the same extent as the obligations of the Company in respect of the Senior Subordinated Notes, to the prior payment in full of all existing and future senior debt of the Subsidiary Guarantors (which will include any guarantee issued by such Subsidiary Guarantors of any senior debt). The Company is a holding company with no material independent assets or operations, other than its investment in its subsidiaries. The aggregate assets, liabilities, earnings and equity of the Subsidiary Guarantors are substantially equivalent to the assets, liabilities, earnings and equity of the Company on a consolidated basis. The Subsidiary Guarantors are, directly or indirectly, wholly-owned subsidiaries of the Company and the Subsidiary Guarantees are full, unconditional and joint and several. All of the current and future direct and indirect subsidiaries of the Company will be guarantors of the Senior Subordinated Notes. Accordingly, separate financial statements and other disclosures of each of the Subsidiary Guarantors are not presented because management has determined that they are not material to investors. The Senior Subordinated Notes and the Senior Credit Facility are secured by substantially all of the Company's existing and hereafter acquired assets. Aggregate minimum principal maturities on long-term debt as of December 31, 1998, were as follows (in thousands):
Minimum Principal Year Maturities ------------------- ----------------- 1999 $ 430 2000 330 2001 209 2002 62 2003 27,067 Thereafter 242,557 $ 270,655
The Company made interest payments of approximately $22.9 million, $21.3 million, and $7.6 million during 1998, 1997 and 1996, respectively. In the year ended December 31, 1996, the Company recorded an extraordinary charge of $5.3 million ($3.2 million after taxes or $0.39 per basic common share or $0.37 per diluted common share) in connection with the early retirement of the Senior Note and the write-off of unamortized loan acquisition costs of the Senior Note and the Old Credit Facility resulting from the early extinguishment of debt. D. Supplemental Employee Benefits and Other Agreements The Company had an employment agreement with its former President, Ralph W. Gabbard, which provided for an award of 183,051 shares of the Company's Class A Common Stock if his employment with the Company continued until September 1999. Mr. Gabbard died unexpectedly in September 1996. The Company awarded these shares to the estate of Mr. Gabbard. Approximately $880,000 of expense was recorded in 1996. The Company has entered into supplemental retirement benefit and other agreements with certain key employees. These benefits are to be paid primarily in equal monthly amounts over the employees' life for a period not to exceed 15 years after retirement. The Company charges against operations F-18 71 GRAY COMMUNICATIONS SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) D. Supplemental Employee Benefits and Other Agreements (Continued) amounts sufficient to fund the present value of the estimated lifetime supplemental benefit over each employee's anticipated remaining period of employment. The following summarizes activity relative to certain officers' agreements and the supplemental employee benefits (in thousands):
Year Ended December 31, ------------------------------- 1998 1997 1996 ------- ------- ------- Beginning liability $ 1,526 $ 3,158 $ 2,938 ------- ------- ------- Provision 180 161 918 Forfeitures (61) -0- -0- ------- ------- ------- Net expense 119 161 918 Payments (202) (1,793) (698) ------- ------- ------- Net change (83) (1,632) 220 ------- ------- ------- Ending liability 1,443 1,526 3,158 Less current portion (315) (365) (1,801) ------- ------- ------- $ 1,128 $ 1,161 $ 1,357 ======= ======= =======
E. Stockholders' Equity During 1996, the Company amended its Articles of Incorporation to increase to 50,000,000 the number of shares of all classes of stock which the Company has the authority to issue, of which, 15,000,000 shares are designated Class A Common Stock, 15,000,000 shares are designated Class B Common Stock, and 20,000,000 shares are designated "blank check" preferred stock for which the Board of Directors has the authority to determine the rights, powers, limitations and restrictions. The rights of the Company's Class A and Class B Common Stock are identical, except that the Class A Common Stock has 10 votes per share and the Class B Common Stock has one vote per share. The Class A and Class B Common Stock receive cash dividends on an equal per share basis. As part of the financing for the Augusta Acquisition in 1996, funding was obtained from the 8% Note, which included the issuance of detachable warrants to Bull Run to purchase 731,250 shares of Class A Common Stock at $11.92 per share. Of these warrants 450,000 vested upon issuance, with the remaining warrants vesting in five equal annual installments commencing on the first anniversary of the date of issuance. Approximately $2.6 million of the $10.0 million of proceeds from the 8% Note was allocated to the warrants and increased Class A Common Stock. This allocation of the proceeds was based on an estimate of the relative fair values of the 8% Note and the warrants on the date of issuance. The Company amortized the original issue discount on a ratable basis in accordance with the original terms of the 8% Note through September 30, 1996. The Company recognized approximately $217,000 in amortization costs for the $2.6 million original issue discount. In September 1996, the Company exchanged the 8% Note with Bull Run for 1,000 shares of liquidation preference Series A Preferred Stock yielding 8%. The warrants issued with the 8% Note were retired and the warrants issued with the Series A Preferred Stock will vest in accordance with the same schedule described above provided the Series A Preferred Stock remains outstanding. The holder of the Series A Preferred Stock will receive cash dividends at an annual rate of $800 per share. The liquidation or redemption price of the Series A Preferred Stock is $10,000 per share. As part of the financing for the First American Acquisition in 1996, the Company also issued 1,000 shares of Series B Preferred Stock, with warrants to purchase an aggregate of 750,000 shares of Class A Common Stock at an exercise price of $16.00 per share. Of these warrants 450,000 vested upon issuance, with the remaining warrants vesting in five equal annual installments commencing on the first anniversary F-19 72 GRAY COMMUNICATIONS SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) E. Stockholders' Equity (Continued) of the date of issuance. The shares of Series B Preferred Stock were issued to Bull Run and to J. Mack Robinson, Chairman of the Board of Bull Run and President and Chief Executive Officer of the Company, and certain of his affiliates. The Company obtained a written opinion from an investment banker as to the fairness of the terms of the sale of such Series B Preferred Stock with warrants. The holders of the Series B Preferred Stock will receive dividends at an annual rate of $600 per share, except the Company at its option may pay these dividends in cash or in additional shares. The liquidation or redemption price of the Series B Preferred Stock is $10,000 per share. In August 1998 and September 1997, the Company issued 50.9 shares and 60.0 shares of Series B Preferred Stock, respectively, as payment of dividends to the holders of its then outstanding Series B Preferred Stock. During 1998, the Company redeemed 760.9 shares of Series B Preferred Stock at a cost of $7.6 million. On September 24, 1996, the Company completed a public offering of 5.25 million shares of its Class B Common Stock at an offering price of $13.67 per share. The proceeds, net of expenses, from this public offering of approximately $66.1 million were used in the financing of the First American Acquisition. The Company is authorized by its Board of Directors to purchase up to two million shares of the Company's Class A or Class B Common Stock to either be retired or reissued in connection with the Company's benefit plans, including the Capital Accumulation Plan and the Incentive Plan. During 1998, 1997 and 1996, the Company purchased 30,750 Class A Common Stock Shares, 259,350 Class A Common Stock shares and 258,450 Class B Common Stock shares, respectively, under this authorization. The 1998, 1997 and 1996 treasury shares were purchased at prevailing market prices with an average effective price of $18.95, $13.33 and $10.60 per share, respectively, and were funded from the Company's operating cash flow. F. Long-term Incentive Plan and Stock Purchase Plan The Company has elected to follow Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" (APB 25) and related Interpretations in accounting for its employee stock options because, as discussed below, the alternative fair value accounting provided for under SFAS No. 123 "Accounting for Stock-Based Compensation" ("Statement 123") requires use of option valuation models that were not developed for use in valuing employee stock options. Under APB 25, because the exercise price of the Company's employee stock options equals the market price of the underlying stock on the date of the grant, no compensation expense is recognized. The Company has a long-term incentive plan (the "Incentive Plan") under which 300,000 shares of the Company's Class A Common Stock and 600,000 shares of the Company's Class B Common Stock are reserved for grants to key personnel for (i) incentive stock options, (ii) non-qualified stock options, (iii) stock appreciation rights, (iv) restricted stock and (v) performance awards, as defined by the Incentive Plan. Shares of Common Stock underlying outstanding options or performance awards are counted against the Incentive Plan's maximum shares while such options or awards are outstanding. Under the Incentive Plan, the options granted typically vest after a two year period and expire three years after full vesting. Options granted through December 31, 1998, have been granted at a price which approximates fair market value on the date of the grant. On December 11, 1998, the Company repriced certain Class B Common Stock grants made under the Incentive Plan, at a price which approximated the market price of the Class B Common Stock on that day. The Company also has a Stock Purchase Plan which grants outside directors up to 7,500 shares of the Company's Common Stock. Under this Stock Purchase Plan, the options granted vest at the beginning of the upcoming calendar year and expire at the end of January following that calendar year. F-20 73 GRAY COMMUNICATIONS SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) F. Long-term Incentive Plan and Stock Purchase Plan (Continued) Prior to 1996, grants under the Incentive Plan and the Stock Purchase Plan were made with the Company's Class A Common Stock. In 1996, the Company amended its Incentive Plan and Stock Purchase Plan for grants to be made with Class A or Class B Common Stock. Pro forma information regarding net income and earnings per share is required by Statement 123, which also requires that the information be determined as if the Company has accounted for its employee stock options granted subsequent to December 31, 1994 under the fair value method of Statement 123. The fair value for these options was estimated at the date of grant using a Black-Scholes option pricing model with the following weighted-average assumptions for 1998, 1997 and 1996, respectively: risk-free interest rates of 4.57%, 5.82% and 5.43%; dividend yields of 0.55%, 0.32% and 0.50%; volatility factors of the expected market price of the Company's Class A Common Stock of 0.28, 0.28 and 0.33; and a weighted-average expected life of the options of 4.0, 4.5 and 2.0 years. The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions and which are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because the Company's employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options. For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options' vesting period. The Company's pro forma information follows (in thousands, except per common share data):
Year Ended December 31, -------------------------------- 1998 1997 1996 -------- -------- -------- Pro forma income (loss) before extraordinary charge available to common stockholders $39,523 $ (3,174) $ 5,190 Pro forma income (loss) before extraordinary charge per common share: Basic $ 3.31 $ (0.27) $ 0.64 Diluted $ 3.20 $ (0.27) $ 0.62
F-21 74 GRAY COMMUNICATIONS SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) F. Long-term Incentive Plan and Stock Purchase Plan (Continued) A summary of the Company's stock option activity for Class A Common Stock, and related information for the years ended December 31, 1998, 1997, and 1996 is as follows (in thousands, except weighted average data):
Year Ended December 31, ------------------------------------------------------------------------- 1998 1997 1996 ---------------------- ---------------------- ---------------------- Weighted Weighted Weighted Average Average Average Exercise Exercise Exercise Options Price Options Price Options Price ---------- --------- -------- ----------- -------- ----------- Stock options outstanding - beginning of year 92 $7.43 297 $ 8.74 394 $ 8.26 Options granted 19 17.81 -0- -0- Options exercised (74) 7.08 (127) 7.17 (78) 6.62 Options forfeited (1) 8.89 -0- (9) 8.29 Options expired -0- (78) 12.83 (10) 6.78 ---------- -------- ------- Stock options outstanding - 36 $13.71 92 $ 7.43 297 $ 8.74 end of year ========== ======== ------- Exercisable at end of year 16 $8.89 92 $ 7.43 246 $ 8.71 Weighted-average fair value of options granted during the year $5.59
Exercise prices for Class A Common Stock options outstanding as of December 31, 1998, ranged from $8.89 to $17.81 for the Incentive Plan. The weighted-average remaining contractual life of the Class A Common Stock options outstanding for the Incentive Plan is 3.2 years. A summary of the Company's stock option activity for Class B Common Stock, and related information for the years ended December 31, 1998, 1997, and 1996 is as follows (in thousands, except weighted average data):
Year Ended December 31, ------------------------------------------------------------------------ 1998 1997 1996 --------------------- -------------------- ---------------------- Weighted Weighted Weighted Average Average Average Exercise Exercise Exercise Options Price Options Price Options Price -------- -------- ------- -------- ------- ---------- Stock options outstanding - beginning of year 630 $15.80 102 $10.58 -0- Options granted 589 14.43 528 16.80 102 $ 10.58 Options exercised (86) 11.05 -0- -0- Options forfeited (474) 16.95 -0- -0- ------- --- --- Stock options outstanding - end of year 659 $14.36 630 $15.80 102 $ 10.58 ======= ===== === Exercisable at end of year 84 $14.65 79 $10.58 -0- Weighted-average fair value of options granted during the year $ 3.95 $ 5.40 $ 2.15
F-22 75 GRAY COMMUNICATIONS SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) F. Long-term Incentive Plan and Stock Purchase Plan (Continued) Exercise prices for Class B Common Stock options outstanding as of December 31, 1998, ranged from $10.58 to $14.50 for the Incentive Plan and $14.00 to $16.13 for the Stock Purchase Plan. The weighted-average remaining contractual life of the Class B Common Stock options outstanding for the Incentive Plan and Stock Purchase Plan is 4.0 and 0.5 years, respectively. G. Income Taxes The Company uses the liability method in accounting for income taxes. Under this method, deferred tax assets and liabilities are determined based on differences between financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. Federal and state income tax expense (benefit) included in the consolidated financial statements are summarized as follows (in thousands):
Year Ended December 31, ------------------------------ 1998 1997 1996 ------- ------- ------- Current Federal $ 414 $(1,620) $ 1,462 State and local 937 577 841 Deferred 26,793 1,283 (44) ------- ------- ------- $28,144 $ 240 $ 2,259 ======= ======= =======
The total provision for income taxes for 1998 included a deferred tax charge of $27.5 million which related to the exchange of WALB's assets for the assets of WEAU. For income tax purposes, the gain on the exchange of WALB qualified for deferred capital gains treatment under the "like-kind exchange" provision of Section 1031 of the Internal Revenue Code of 1986. The total provision for income taxes for 1996 included a tax benefit of $2.2 million which related to an extraordinary charge on extinguishment of debt. F-23 76 GRAY COMMUNICATIONS SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) G. Income Taxes (Continued) Significant components of the Company's deferred tax liabilities and assets are as follows (in thousands):
December 31, ------------------------------ 1998 1997 ------------ ----------- Deferred tax liabilities: Net book value of property and equipment $ 6,597 $ 2,670 Goodwill and other intangibles 45,546 6,281 Other 122 120 ------------ ----------- Total deferred tax liabilities 52,265 9,071 Deferred tax assets: Liability under supplemental retirement plan 528 526 Allowance for doubtful accounts 465 499 Difference in basis of assets held for sale 1,106 941 Federal operating loss carryforwards 3,825 4,412 State and local operating loss carryforwards 2,534 1,952 Other 457 290 ------------ ----------- Total deferred tax assets 8,915 8,620 Valuation allowance for deferred tax assets (798) (753) ------------ ----------- Net deferred tax assets 8,117 7,867 ------------ ----------- Deferred tax liabilities, net $ 44,148 $ 1,204 ============ ===========
Approximately $11.3 million in federal operating loss carryforwards will expire by the year ended December 31, 2012. Additionally, the Company has approximately $56.0 million in state operating loss carryforwards. A reconciliation of income tax expense at the statutory federal income tax rate and income taxes as reflected in the consolidated financial statements is as follows (in thousands):
Year Ended December 31, ----------------------------------------- 1998 1997 1996 ----------- ----------- ----------- Statutory rate applied to income (loss) $ 24,431 $ (395) $ 1,625 State and local taxes, net of federal tax benefits 3,472 572 (7) Permanent difference relating to sale of KTVE -0- -0- 602 Other items, net 241 63 39 ---------- ----------- --------- $ 28,144 $240 $2,259 ========== =========== =========
The Company made income tax payments of approximately $1.5 million, $275,000 and $3.6 million during 1998, 1997 and 1996, respectively. At December 31, 1998 and 1997, the Company had current recoverable income taxes of approximately $1.7 million and $2.1 million, respectively. H. Retirement Plans Pension Plan The Company has a retirement plan covering substantially all full-time employees. Retirement benefits are based on years of service and the employees' highest average compensation for five F-24 77 GRAY COMMUNICATIONS SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) H. Retirement Plans (Continued) Pension Plan (Continued) consecutive years during the last ten years of employment. The Company's funding policy is to contribute annually the minimum amounts deductible for federal income tax purposes. The following summarizes the plan's funded status and related assumptions (dollars in thousands):
December 31, ---------------------- 1998 1997 --------- --------- Change in benefit obligation Benefit obligation at beginning of year $ 7,053 $ 6,483 Service cost 616 429 Interest cost 496 443 Actuarial losses 203 31 Change in benefit obligation due to change in discount rate 303 -0- Benefits paid (349) (333) ------- ------- Benefit obligation at end of year $ 8,322 $ 7,053 ======= ======= Change in plan assets Fair value of plan assets at beginning of year $ 6,926 $ 6,241 Actual return on plan assets 618 644 Company contributions 212 374 Benefits paid (349) (333) ------- ------- Fair value of plan assets at end of year $ 7,407 $ 6,926 ======= ======= Components of accrued benefit costs Underfunded status of the plan $ (915) $ (134) Unrecognized net actuarial (gain) loss 297 (58) Unrecognized net transition amount (188) (242) Unrecognized prior service cost (3) (4) ------- ------- Accrued benefit cost $ (809) $ (438) ======= ======= Weighted-average assumptions as of December 31 Discount rate 6.8% 7.0% Expected long-term rate of return on plan assets 6.8% 7.0% Estimated rate of increase in compensation levels 5.0% 5.0%
The net periodic pension cost includes the following components (in thousands):
Year Ended December 31, ------------------------------------ 1998 1997 1996 ---------- ----------- -------- Components of net periodic pension cost Service cost $ 616 $ 429 $360 Interest cost 496 443 409 Expected return on plan assets (475) (433) (393) Amortization of prior service cost (1) (1) (1) Amortization of transition (asset) or obligation (54) (54) (54) ----- ----- ---- Pension cost $ 582 $ 384 $321 ===== ===== ====
F-25 78 GRAY COMMUNICATIONS SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) H. Retirement Plans (Continued) Capital Accumulation Plan Effective October 1, 1994, the Company adopted the Gray Communications Systems, Inc. Capital Accumulation Plan (the "Capital Accumulation Plan") for the purpose of providing additional retirement benefits for substantially all employees. The Capital Accumulation Plan is intended to meet the requirements of section 401(k) of the Internal Revenue Code of 1986. On November 14, 1996, the Company amended its Capital Accumulation Plan to allow an investment option in the Company's Class B Common Stock. The amendment also allowed for the Company's percentage match to be made by a contribution of the Company's Class B Common Stock, effective in 1997. On December 13, 1996, the Company reserved 300,000 shares of the Company's Class B Common Stock for issuance under the Capital Accumulation Plan. Employee contributions to the Capital Accumulation Plan, not to exceed 6% of the employees' gross pay, are matched by Company contributions. Until 1997, the Company's percentage match was made by a contribution of the Company's Class A Common Stock. Since 1997, the Company's percentage match has been made by a contribution of the Company's Class B Common Stock. The Company's percentage match amount is declared by the Company's Board of Directors before the beginning of each plan year. The Company's percentage match was 50% for the three years ended December 31, 1998. The Company contributions vest, based upon each employee's number of years of service, over a period not to exceed five years. Company matching contributions aggregating $491,524, $419,670 and $262,426 were charged to expense for 1998, 1997 and 1996, respectively, for the issuance of 29,305 and 31,311 Class B shares and 19,837 Class A shares, respectively. I. Commitments and Contingencies The Company has various operating lease commitments for equipment, land and office space. The Company has also entered into commitments for various television film exhibition rights for which the license periods have not yet commenced. Rent expense resulting from operating leases for the years ended December 31, 1998, 1997 and 1996 were $1.8 million, $1.4 million and $501,000, respectively. Future minimum payments under operating leases with initial or remaining noncancelable lease terms in excess of one year and obligations under film exhibition rights for which the license period have not yet commenced are as follows (in thousands):
Lease Film Total -------- --------- -------- 1999 $1,411 $1,550 $ 2,961 2000 877 3,656 4,533 2001 661 2,428 3,089 2002 344 1,535 1,879 2003 137 302 439 Thereafter 714 421 1,135 -------- -------- -------- $4,144 $9,892 $14,036 ======== ======== =======
The Company is subject to legal proceedings and claims which arise in the normal course of its business. In the opinion of management, the amount of ultimate liability, if any, with respect to these actions will not materially affect the Company's financial position. F-26 79 GRAY COMMUNICATIONS SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) J. Information on Business Segments The Company operates in three business segments: broadcasting, publishing and paging. The broadcasting segment operates ten television stations located in the southeastern and midwestern United States at December 31, 1998. The publishing segment operates three daily newspapers in three different markets, and an area weekly advertising only publication in Georgia. The paging operations are located in Florida, Georgia, and Alabama. The following tables present certain financial information concerning the Company's three operating segments (in thousands):
Year Ended December 31, ------------------------------------- 1998 1997 1996 --------- --------- --------- (In thousands) Operating revenues: Broadcasting $ 91,007 $ 72,300 $ 54,981 Publishing 29,330 24,536 22,845 Paging 8,553 6,712 1,479 --------- --------- -------- $ 128,890 $ 103,548 $ 79,305 ========= ========= ======== Operating income: Broadcasting (1) $ 21,113 $ 17,509 $ 14,106 Publishing 2,867 2,206 1,980 Paging 947 1,015 (7) --------- --------- -------- Total operating income (1) 24,927 20,730 16,079 Gain on disposition of television stations 70,572 -0- 5,671 Miscellaneous income and (expense), net (242) (31) 33 Interest expense (25,454) (21,861) (11,689) --------- --------- -------- Income (loss) before income taxes $ 69,803 $ (1,162) $ 10,094 ========= ========= ========
Operating income is total operating revenue less operating expenses, excluding gain on disposition of television stations, miscellaneous income and expense (net) and interest. Corporate and administrative expenses are allocated to operating income based on net segment revenues.
Year Ended December 31, ---------------------------- 1998 1997 1996 ------- ------- ------ (In thousands) Depreciation and amortization expense: Broadcasting $14,713 $11,024 $5,554 Publishing 1,554 1,973 1,730 Paging 1,773 1,480 329 ------- ------- ------ 18,040 14,477 7,613 Corporate 77 42 50 ------- ------- ------ Total depreciation and amortization expense $18,117 $14,519 $7,663 ======= ======= ======
F-27 80 GRAY COMMUNICATIONS SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) J. Information on Business Segments (Continued)
Year Ended December 31, ---------------------------------- 1998 1997 1996 -------- -------- -------- (In thousands) Media cash flow: Broadcasting $ 38,446 $ 30,519 $ 22,594 Publishing 5,214 4,856 4,957 Paging 2,964 2,686 401 -------- -------- -------- $ 46,624 $ 38,061 $ 27,952 ======== ======== ======== Media cash flow reconciliation: Operating income (1) $ 24,927 $ 20,730 $ 16,079 Add: Amortization of program license rights 4,251 3,501 2,743 Depreciation and amortization 18,117 14,519 7,663 Corporate overhead 3,063 2,528 3,219 Non-cash compensation and contribution to 401(k) Plan, paid in Common Stock 476 412 1,125 Less: Payments for program license liabilities (4,210) (3,629) (2,877) -------- -------- -------- $ 46,624 $ 38,061 $ 27,952 ======== ======== ======== Capital expenditures: Broadcasting $ 6,718 $ 5,000 $ 2,674 Publishing 934 4,235 692 Paging 1,461 975 -0- -------- -------- -------- 9,113 10,210 3,366 Corporate 158 162 30 -------- -------- -------- Total capital expenditures $ 9,271 $ 10,372 $ 3,396 ======== ======== ======== December 31, ---------------------------------- 1998 1997 1996 -------- -------- -------- (In thousands) Identifiable assets: Broadcasting $410,039 $287,254 $245,614 Publishing 17,196 19,818 16,301 Paging 25,563 23,950 23,764 -------- -------- -------- 452,798 331,022 285,679 Corporate 16,176 14,029 12,985 -------- -------- -------- Total identifiable assets $468,974 $345,051 $298,664 ======== ======== ========
(1) Operating income excludes gain on disposition of television stations of $70.6 million recognized for the exchange of WALB in 1998 and $5.7 million recognized for the KTVE Sale in 1996. F-28 81 GRAY COMMUNICATIONS SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) K. Selected Quarterly Financial Data (Unaudited)
Fiscal Quarters ------------------------------------------ First Second Third Fourth -------- ------- -------- -------- (In thousands, except for per share data) Year Ended December 31, 1998: Operating revenues $ 27,982 $32,061 $ 31,845 $ 37,002 Operating income (1) 4,868 7,210 5,020 7,829 Net income (loss) (1,483) 837 41,830 475 Net income (loss) available to common stockholders (1,842) 478 41,484 221 Basic income (loss) per share (0.16) 0.04 3.48 0.02 Diluted income (loss) per share $ (0.16) $ 0.04 $ 3.31 $ 0.02 Year Ended December 31, 1997: Operating revenues $ 22,761 $25,499 $ 25,984 $ 29,304 Operating income 4,337 6,124 4,271 5,998 Net income (loss) (461) 622 (1,162) (401) Net income (loss) available to common stockholders (811) 272 (1,513) (760) Basic income (loss) per share (0.07) 0.02 (0.13) (0.06) Diluted income (loss) per share $ (0.07) $ 0.02 $ (0.13) $ (0.06)
(1) Operating income excludes $70.6 million gain on exchange of television station recognized from the disposition of WALB. Because of the method used in calculating per share data, the quarterly per share data will not necessarily add to the per share data as computed for the year. The third quarter of 1998 includes the Busse-WALB Transactions. As a result of the exchange of WALB for WEAU, the Company recognized a pre-tax gain of approximately $70.6 million and estimated deferred income taxes of approximately $27.5 million (See Note B). On August 20, 1998, the Board of Directors declared a 50% stock dividend, payable on September 30, 1998, to stockholders of record of the Class A Common Stock and Class B Common Stock on September 16, 1998. This stock dividend effected a three for two stock split. All applicable share and per share data have been adjusted to give effect to the stock. F-29 82 REPORT OF INDEPENDENT AUDITORS We have audited the consolidated financial statements of Gray Communications Systems, Inc. as of December 31, 1998 and 1997, and for each of the three years in the period ended December 31, 1998, and have issued our report thereon dated January 26, 1999. Our audits also included the financial statement schedule of Gray Communications Systems, Inc. listed in Item 14(a). This schedule is the responsibility of the Company's management. Our responsibility is to express an opinion based on our audits. In our opinion, the financial statement schedule referred to above, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. /s/ ERNST & YOUNG LLP Atlanta, Georgia January 26, 1999 F-30 83 GRAY COMMUNICATIONS SYSTEMS, INC. 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 DECEMBER 31, 1998 Allowance for doubtful accounts $1,253,000 $831,000 $ 61,000 $933,000 $1,212,000 YEAR ENDED DECEMBER 31, 1997 Allowance for doubtful accounts $1,450,000 $188,000 $ 31,000 $416,000 $1,253,000 YEAR ENDED DECEMBER 31, 1996 Allowance for doubtful accounts $ 450,000 $894,000 $583,000 $477,000 $1,450,000
(1) Represents amounts recorded in connection with acquisitions. (2) Deductions are write-offs of amounts not considered collectible. F-31 84 INDEPENDENT AUDITORS' REPORT The Board of Directors Capital Sports Properties, Inc.: We have audited the statements of earnings, changes in stockholders' equity and cash flows of Capital Sports Properties, Inc. for the six-months ended June 30, 1996, not separately presented herein. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the results of operations and cash flows of Capital Sports Properties, Inc. for the six-months ended June 30, 1996, in conformity with generally accepted accounting principles. /s/ KPMG LLP Stamford, Connecticut February 10, 1997 F-32 85 INDEPENDENT AUDITORS' REPORT The Board of Directors Host Communications, Inc.: We have audited the consolidated balance sheet of Host Communications, Inc. and subsidiaries as of June 30, 1996, and the related consolidated statements of earnings, stockholders' equity, and cash flows for the year then ended, not separately presented herein. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Host Communications, Inc. and subsidiaries at June 30, 1996, and the results of their operations and their cash flows for the year then ended in conformity with generally accepted accounting principles. As discussed in notes 1 and 3 to the consolidated financial statements, the Company changed its method of accounting for license fee revenues and rights fee expenses. /s/ KPMG LLP Cincinnati, Ohio October 11, 1996 F-33 86 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To The Stockholders of Rawlings Sporting Goods Company, Inc.: We have audited the consolidated balance sheets of Rawlings Sporting Goods Company, Inc. (a Delaware corporation) and subsidiaries (the Company) as of August 31, 1998 and 1997, and the related consolidated statements of income, stockholders' equity and cash flows for each of the three years in the period ended August 31, 1998, not presented separately herein. These financial statements are the responsibility of Rawlings' management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Rawlings Sporting Goods Company, Inc. and subsidiaries as of August 31, 1998 and 1997, and the results of their operations and their cash flows for each of the three years in the period ended August 31, 1998, in conformity with generally accepted accounting principles. /s/ ARTHUR ANDERSEN LLP St. Louis, Missouri October 7, 1998 F-34 EX-10.8 2 $9,000,000 AMENDED & RESTATED CREDIT AGREEMENT 1 EXHIBIT 10.8 $9,000,000 AMENDED AND RESTATED CREDIT AGREEMENT DATED AS OF MARCH 5, 1999 BETWEEN DATASOUTH COMPUTER CORPORATION AND WACHOVIA BANK, N.A. 2 $9,000,000.00 AMENDED AND RESTATED CREDIT AGREEMENT DATED AS OF MARCH 5, 1999 BETWEEN DATASOUTH COMPUTER CORPORATION AND WACHOVIA BANK, N.A. 3 TABLE OF CONTENTS [Not a part of the Agreement] ARTICLE I. DEFINITIONS.........................................................................................1 SECTION 1.01. Definitions...............................................................................1 SECTION 1.02. Accounting Terms and Determinations......................................................13 SECTION 1.03. References...............................................................................13 ARTICLE II. THE CREDITS........................................................................................13 SECTION 2.01. Commitment to Lend.......................................................................13 SECTION 2.02 Method of Borrowing......................................................................14 SECTION 2.03. Letters of Credit........................................................................15 SECTION 2.04 Notes....................................................................................17 SECTION 2.05. Maturity of Advances.....................................................................18 SECTION 2.06. Interest Rates...........................................................................18 SECTION 2.07. Commitment Fee...........................................................................20 SECTION 2.08. Optional Termination or Reduction of Facility B Commitment...............................20 SECTION 2.09. Mandatory Reduction and Termination of Commitments.......................................20 SECTION 2.10. Optional Prepayments.....................................................................20 SECTION 2.11. Mandatory Prepayments....................................................................21 SECTION 2.12. General Provisions Concerning Payments...................................................21 SECTION 2.13. Computation of Interest and Fees.........................................................21 ARTICLE III. CHANGE IN CIRCUMSTANCES; COMPENSATION..............................................................21 SECTION 3.01. Basis for Determining Interest Rate Inadequate or Unfair.................................21 SECTION 3.02. Illegality...............................................................................22 SECTION 3.03. Increased Cost and Reduced Return........................................................22 SECTION 3.04. Base Rate Loans Substituted for Affected Euro-Dollar Loans...............................23 SECTION 3.05. Compensation.............................................................................24 ARTICLE IV. CONDITIONS TO BORROWINGS...........................................................................24 SECTION 4.01. Conditions to First Borrowing............................................................24 SECTION 4.02. Conditions to All Borrowings.............................................................25 ARTICLE V. REPRESENTATIONS AND WARRANTIES.....................................................................26 SECTION 5.01. Corporate Existence and Power............................................................26 SECTION 5.02. Corporate and Governmental Authorization; Contravention..................................26 SECTION 5.03. Binding Effect...........................................................................26 SECTION 5.04. Financial Information....................................................................27 SECTION 5.05. Litigation...............................................................................27 SECTION 5.06. Compliance with ERISA....................................................................27 SECTION 5.07. Taxes....................................................................................27 SECTION 5.08. Subsidiaries.............................................................................27 SECTION 5.09. Not an Investment Company................................................................28
ii 4 SECTION 5.10. Ownership of Property; Liens.............................................................28 SECTION 5.11. No Default...............................................................................28 SECTION 5.12. Full Disclosure..........................................................................28 SECTION 5.13. Environmental Matters....................................................................28 SECTION 5.14. Compliance with Laws.....................................................................29 ARTICLE VI. COVENANTS..........................................................................................29 SECTION 6.01. Information..............................................................................29 SECTION 6.02. Inspection of Property, Books and Records................................................31 SECTION 6.03. Ratio of Consolidated Funded Debt to EBITDA..............................................31 SECTION 6.04. Minimum Stockholders' Equity.............................................................31 SECTION 6.05. Fixed Charges Coverage...................................................................31 SECTION 6.06. Investments..............................................................................32 SECTION 6.07. Negative Pledge..........................................................................32 SECTION 6.08. Maintenance of Existence.................................................................32 SECTION 6.09. Dissolution..............................................................................32 SECTION 6.10. Consolidations, Mergers and Sales of Assets..............................................32 SECTION 6.11. Use of Proceeds..........................................................................33 SECTION 6.12. Compliance with Laws; Payment of Taxes...................................................33 SECTION 6.13. Insurance................................................................................33 SECTION 6.14. Change in Fiscal Year....................................................................33 SECTION 6.15. Maintenance of Property..................................................................33 SECTION 6.16. Environmental Notices....................................................................33 SECTION 6.17. Environmental Matters....................................................................33 SECTION 6.18. Environmental Release....................................................................34 SECTION 6.19. Debt.....................................................................................34 SECTION 6.20. Collateral Maintenance...................................................................34 SECTION 6.21 Interest Rate Protection.................................................................34 SECTION 6.22 Interest Coverage........................................................................34 ARTICLE VII. DEFAULTS...........................................................................................35 SECTION 7.01. Events of Default........................................................................35 SECTION 7.02. Remedies on Default......................................................................37 SECTION 7.03. Security.................................................................................37 ARTICLE VIII. MISCELLANEOUS......................................................................................38 SECTION 8.01. Notices..................................................................................38 SECTION 8.02. No Waivers...............................................................................38 SECTION 8.03. Expenses; Documentary Taxes..............................................................38 SECTION 8.04. Amendments and Waivers...................................................................39 SECTION 8.05. Successors and Assigns...................................................................39 SECTION 8.06. Confidentiality..........................................................................40 SECTION 8.07. Interest Limitation......................................................................41 SECTION 8.08. Governing Law............................................................................41 SECTION 8.09. Counterparts.............................................................................41 SECTION 8.10. Consent to Jurisdiction..................................................................41 SECTION 8.11. Severability.............................................................................41 SECTION 8.12. Captions.................................................................................42
iii 5 EXHIBIT A Form of Facility A Note EXHIBIT B Form of Facility B Note EXHIBIT C Form of Assignment and Acceptance EXHIBIT D Form of Opinion of Counsel
iv 6 AMENDED AND RESTATED CREDIT AGREEMENT THIS AMENDED AND RESTATED CREDIT AGREEMENT, made as of the 5th day of March, 1999, by and between DATASOUTH COMPUTER CORPORATION, a Delaware corporation (together with its successors, the "Borrower"), and WACHOVIA BANK, N.A., a national banking association (together with endorsees, successors and assigns, the "Bank"). BACKGROUND The Borrower and the Bank entered into an Amended and Restated Credit Agreement dated as of February 20, 1998 (the "1998 Credit Agreement") pursuant to which the Bank agreed to provide to the Borrower revolving loans of up to $5,000,000.00 from time to time outstanding and a term loan in the principal amount of $5,000,000.00, all as therein provided. The Borrower and the Bank desire to amend and restate the 1998 Credit Agreement in order, among other things, to rearrange the existing revolving loan facility and to rearrange and decrease the existing term loan to the principal amount of $4,000,000.00, subject to the terms and conditions hereinafter set forth. NOW, THEREFORE, in consideration of the premises and the promises herein contained, and each intending to be legally bound hereby, the parties agree as follows: ARTICLE I. DEFINITIONS SECTION I.1. Definitions. The terms as defined in this Section 1.01 shall, for all purposes of this Agreement and any amendment hereto (except as herein otherwise expressly provided or unless the context otherwise requires), have the meanings set forth herein (terms defined in the singular to have the same meanings when used in the plural and vice versa): "Adjusted London Interbank Offered Rate" applicable to any Interest Period means a rate per annum equal to the quotient obtained (rounded upwards, if necessary, to the next higher 1/100th of 1%) by dividing (i) the applicable London Interbank Offered Rate for such Interest Period by (ii) 1.00 minus the Euro-Dollar Reserve Percentage. "Advance" means any advance by the Bank under the Commitments. "Affiliate" of any Person means (i) any other Person which directly, or indirectly through one or more intermediaries, controls such Person, (ii) any other Person which directly, or indirectly through one or more intermediaries, is controlled by or is under common control with such Person, or (iii) any other Person of which such Person owns, directly or indirectly, 20% or more of the common stock or equivalent equity interests. As used herein, the term "control" means possession, directly or indirectly, of the power to direct or cause the direction of the management or policies of a Person, whether through the ownership of voting securities, by contract or otherwise. "Agreement" means this Amended and Restated Credit Agreement, together with all amendments and supplements hereto. 7 "Applicable Margin" means (x) for any Base Rate Loan, for any day a number equal to one-fourth of one percent (0.25%), and (y) for any Euro-Dollar Loan, the applicable percentage determined in accordance with Section 2.06(c). "Assignee" has the meaning set forth in Section 8.05(c). "Assignment and Acceptance" means an Assignment and Acceptance executed in accordance with Section 8.05(c) in the form attached hereto as Exhibit C. "Authority" has the meaning set forth in Section 3.02. "Bank Guarantee" means a Guarantee for Payment of Sums Due to the Commissioners of H.M. Customs and Excise, or similar agreement in form and substance satisfactory to the Bank. "Base Rate" means for any Base Rate Loan for any day, the rate per annum equal to the higher as of such day of (i) the Prime Rate, and (ii) one-half of one percent above the Federal Funds Rate for such day. For purposes of determining the Base Rate for any day, changes in the Prime Rate and/or the Federal Funds Rate shall be effective on the date of each such change. "Base Rate Loan" means an Advance made or to be made as a Base Rate Loan pursuant to the applicable Notice of Borrowing or Article III. "Borrowing" shall mean a borrowing under either of the Commitments consisting of an Advance by the Bank. A Borrowing is a "Euro-Dollar Borrowing" if the Advance is made as a Euro-Dollar Loan and a "Base Rate Borrowing" if the Advance is made as a Base Rate Loan. "Bull Run" means Bull Run Corporation, a Georgia corporation of which the Borrower is a Wholly Owned Subsidiary. "Capital Stock" means any nonredeemable capital stock of the Borrower or any Consolidated Subsidiary of the Borrower (to the extent issued to a Person other than the Borrower), whether common or preferred. "CERCLA" means the Comprehensive Environmental Response Compensation and Liability Act. "CERCLIS" means the Comprehensive Environmental Response Compensation and Liability Inventory System established pursuant to CERCLA. "Change of Law" shall have the meaning set forth in Section 3.02. "Closing Date" means March 5, 1999. "Code" means the Internal Revenue Code of 1986, as amended, or any successor Federal tax code. "Commitments" means, collectively, the Facility A Commitment and the Facility B Commitment. 2 8 "Commitment Fee Payment Date" means the first day of each June, September, December and March, commencing June 1, 1999; provided that if any such day is not a Domestic Business Day, the Commitment Fee Payment Date shall be on the next succeeding Domestic Business Day. "Commitment Fee Rate" means one half of one-percent (0.500%) per annum. "Consolidated Debt" means at any date the Debt of the Borrower and its Consolidated Subsidiaries, determined on a consolidated basis as of such date. "Consolidated Fixed Charges" for any period means the sum (without duplication) of Consolidated Interest Expense for such period, plus scheduled principal payments on Consolidated Debt for such period, excluding, however, the $1,000,000.00 principal payment required on Facility B on the Facility B Commitment Reduction Date. "Consolidated Funded Debt" means Funded Debt of the Borrower and its Consolidated Subsidiaries in accordance with GAAP applied on a consistent basis. "Consolidated Interest Expense" for any period means interest, whether expensed or capitalized, in respect of Debt of the Borrower or any of its Consolidated Subsidiaries outstanding during such period; provided, however, that Consolidated Interested Expense shall not include any interest or similar expenses relating to any lease transaction in which the Borrower or any of its Consolidated Subsidiaries is a party. "Consolidated Operating Profits" means, for any period, the Operating Profits of the Borrower and its Consolidated Subsidiaries. "Consolidated Subsidiary" means as to Bull Run or the Borrower, as the context hereof may require, at any date, any Subsidiary or other entity the accounts of which, in accordance with GAAP, would be consolidated with those of Bull Run or the Borrower, as applicable, in its consolidated financial statements as of such date. "Consolidated Total Assets" means, at any time, the total assets of the Borrower and its Consolidated Subsidiaries, determined on a consolidated basis, as set forth or reflected on the most recent consolidated balance sheet of the Borrower and its Consolidated Subsidiaries, prepared in accordance with GAAP. "Controlled Group" means all members of a controlled group of corporations and all trades or businesses (whether or not incorporated) under common control which, together with the Borrower, are treated as a single employer under Section 414 of the Code. "Debt" of any Person means at any date, without duplication, (i) all obligations of such Person for borrowed money, (ii) all obligations of such Person evidenced by bonds, debentures, notes or other similar instruments, (iii) all obligations of such Person to pay the deferred purchase price of property or services, except trade accounts payable arising in the ordinary course of business, (iv) all obligations of such Person as lessee under capital leases, (v) all obligations of such Person to reimburse any bank or other Person in respect of amounts payable under a banker's acceptance, (vi) all Redeemable Preferred Stock of such Person (in the event such Person is a corporation), (vii) all obligations of such Person to reimburse any bank or other Person in respect of amounts paid under a standby letter of credit or similar instrument, (viii) all Debt of others secured by a Lien on any asset of such Person, whether or not such Debt is assumed by such Person, and (ix) all Debt of others 3 9 Guaranteed by such Person; provided, however, that the amount of such Debt shall, in the case of clause (viii), be deemed to be the lesser of the fair market value of such asset or the amount of the Debt so secured, and provided further that for purposes of any calculation of the Debt of the Borrower and its Consolidated Subsidiaries, Debt of Bull Run shall be excluded for purposes of clauses (viii) and (ix) of this definition. "Default" means any condition or event which constitutes an Event of Default or which with the giving of notice or lapse of time or both would, unless cured or waived, become an Event of Default. "Depreciation" means for any Person for any period the sum of all depreciation expenses of such Person for such period, as determined in accordance with GAAP. "Dollars" or "$" means dollars in lawful currency of the United States of America. "Domestic Business Day" means any day except a Saturday, Sunday or other day on which commercial banks in Charlotte, North Carolina are authorized by law to close. "EBITDA" means, without duplication, for any fiscal period, as applied to the Borrower and its Consolidated Subsidiaries, the sum of the amounts for such fiscal period of: (i) Net Income (Loss), (ii) Depreciation, (iii) amortization expense and non cash charges, less any non cash gains, (iv) all interest expense determined in accordance with GAAP during such period on Debt, (v) all taxes paid, accrued or deferred, during such period, all as determined and computed in accordance with GAAP, and (vi) the Borrower's pretax gain (or loss) attributable to shares of common stock of Gray Communications Systems, Inc. "Environmental Authority" means any foreign, federal, state, local or regional government that exercises any form of jurisdiction or authority under any Environmental Requirement. "Environmental Authorizations" means all licenses, permits, orders, approvals, notices, registrations or other legal prerequisites for conducting the business of the Borrower required by any Environmental Requirement. "Environmental Judgments and Orders" means all judgments, decrees or orders arising from or in any way associated with any Environmental Requirements, whether or not entered upon consent or written agreements with an Environmental Authority or other entity arising from or in any way associated with any Environmental Requirement, whether or not incorporated in a judgment, decree or order. "Environmental Liabilities" means any liabilities, whether accrued, contingent or otherwise, arising from and in any way associated with any Environmental Requirements. "Environmental Notices" means notice from any Environmental Authority or by any other person or entity, of possible or alleged noncompliance with any Environmental Requirement, including without limitation any complaints, citations, demands or requests from any Environmental Authority or from any other person or entity for correction of any violation of any Environmental Requirement or any investigations concerning any violation of any Environmental Requirement. 4 10 "Environmental Proceedings" means any judicial or administrative proceedings arising from or in any way associated with any Environmental Requirement. "Environmental Releases" means releases as defined in CERCLA or under any applicable state or local environmental law or regulation. "Environmental Requirements" means any legal requirement relating to health, safety or the environment and applicable to the Borrower, any Subsidiary of the Borrower or the Properties, including but not limited to any such requirement under CERCLA or similar state legislation. "ERISA" means the Employee Retirement Income Security Act of 1974, as amended from time to time, or any successor law, including any rules or regulations promulgated thereunder. Any reference to any provision of ERISA shall also be deemed to be a reference to any successor provision or provisions thereof. "Euro-Dollar Business Day" means any Domestic Business Day on which dealings in Dollar deposits are carried out in the London interbank market. "Euro-Dollar Loan" means an Advance made or to be made (pursuant to the applicable Notice of Borrowing) as a Euro-Dollar Loan. "Euro-Dollar Reserve Percentage" means for any day that percentage (expressed as a decimal) which is in effect on such day, as prescribed by the Board of Governors of the Federal Reserve System (or any successor) for determining the maximum reserve requirement for a member bank of the Federal Reserve System in respect of "Eurocurrency liabilities" (or in respect of any other category of liabilities which includes deposits by reference to which the interest rate on Euro-Dollar Loans is determined or any category of extensions of credit or other assets which includes loans by a non-United States office of the Bank to United States residents). The Adjusted London Interbank Offered Rate shall be adjusted automatically on and as of the effective date of any change in the Euro-Dollar Reserve Percentage. "Event of Default" shall have the meaning assigned to such term in Section 7.01. "Existing Letters of Credit" means collectively, (i) the Guarantee for Payment of Sums Due to the Commissioners of H.M. Customs and Excise dated December 14, 1998, executed by Wachovia Bank, N.A., London Branch for the account of the Borrower, as applicant, under which Wachovia Bank, N.A., London Branch guaranteed payment of certain duties, taxes, levies, charges, amounts and deposits in respect of the same, with liability limited to 60,000 pounds sterling; (ii) Documentary Letter of Credit number 968-107242 dated December 17, 1998, in the original face amount of 4,500,000 Japanese yen, issued for the benefit of OKI Electric Industry Co. Ltd., having an expiration date of August 27, 1999; (iii) Documentary Letter of Credit number 968-106365 dated November 4, 1998, in the original face amount of 2,253,000 Japanese yen issued for the benefit of OKI Customer Adtech Co., Ltd. (OCA), having an expiration date of July 16, 1999; and (iv) Documentary Letter of Credit number 968-107241 dated December 17, 1998, in the original face amount of 2,080,000 Japanese yen issued for the benefit of OKI Electric Industry Co. Ltd., having an expiration date of August 5, 1999. 5 11 "Facility A Commitment" shall have the meaning assigned to it in Section 2.01(a). "Facility A Commitment Reduction Date" shall mean the last day of each March, June, September and December commencing March 31, 1999 and continuing through the Facility A Maturity Date; provided that if any such day is not a Domestic Business Day, the Facility A Commitment Reduction Date shall be on the next succeeding Domestic Business Day. "Facility A Maturity Date" shall mean September 5, 2000. "Facility A Note" shall mean a promissory note of the Borrower payable to the order of the Bank, in substantially the form of Exhibit A hereto, evidencing the maximum principal indebtedness of the Borrower to the Bank under the Facility A Commitment, either as originally executed or as it may be from time to time supplemented, modified, amended, renewed or extended. "Facility B Commitment" shall have the meaning assigned to it in Section 2.01(b). "Facility B Commitment Reduction Date" shall mean June 30, 1999, provided that if such day is not a Domestic Business Day, the Facility B Commitment Reduction Date shall be the next succeeding Domestic Business Day. "Facility B Note" shall mean a promissory note of the Borrower payable to the order of the Bank, in substantially the form of Exhibit B hereto, evidencing the maximum principal indebtedness of the Borrower to the Bank under the Facility B Commitment, either as originally executed or as it may be from time to time supplemented, modified, amended, renewed or extended. "Facility B Termination Date" shall mean September 5, 2000. "Federal Funds Rate" means, for any day, the rate per annum (rounded upward, if necessary, to the next higher 1/100th of 1%) equal to the weighted average of the rates on overnight Federal funds transactions with members of the Federal Reserve System arranged by Federal funds brokers on such day, as published by the Federal Reserve Bank of New York on the Domestic Business Day next succeeding such day, provided that (i) if the day for which such rate is to be determined is not a Domestic Business Day, the Federal Funds Rate for such day shall be such rate on such transactions on the next preceding Domestic Business Day as so published on the next succeeding Domestic Business Day, and (ii) if such rate is not so published for any day, the Federal Funds Rate for such day shall be the average rate charged to Wachovia on such day on such transactions. "Fiscal Quarter" means any fiscal quarter of the Borrower. "Fiscal Year" means any fiscal year of the Borrower. "Fixed Charges Coverage Ratio" has the meaning set forth in Section 6.05(b). "Funded Debt" means as of the end of each Fiscal Quarter, without duplication, the sum of Long-Term Debt (excluding for purposes of this definition of Funded Debt any indebtedness of Bull Run Corporation) plus the principal portion of all obligations of the Borrower and its Consolidated Subsidiaries 6 12 under capital leases plus current maturities of Long-Term Debt and notes payable of the Borrower and its Consolidated Subsidiaries. "GAAP" means generally accepted accounting principles applied on a basis consistent with those which, in accordance with Section 1.02, are to be used in making the calculations for purposes of determining compliance with the terms of this Agreement. "Guarantee" by any Person means any obligation, contingent or otherwise, of such Person directly or indirectly guaranteeing any Debt or other obligation of any other Person and, without limiting the generality of the foregoing, any obligation, direct or indirect, contingent or otherwise, of such Person (i) to secure, purchase or pay (or advance or supply funds for the purchase or payment of) such Debt or other obligation (whether arising by virtue of partnership arrangements, by agreement to keep-well, to purchase assets, goods, securities or services, to provide collateral security, to take-or-pay, or to maintain financial statement conditions or otherwise) or (ii) entered into for the purpose of assuring in any other manner the obligee of such Debt or other obligation of the payment thereof or to protect such obligee against loss in respect thereof (in whole or in part), provided that the term Guarantee shall not include endorsements for collection or deposit in the ordinary course of business. The term "Guarantee" used as a verb has a corresponding meaning. "Hazardous Materials" includes, without limitation, (a) solid or hazardous waste, as defined in the Resource Conservation and Recovery Act of 1980, or in any applicable state or local law or regulation, (b) hazardous substances, as defined in CERCLA, or in any applicable state or local law or regulation, (c) gasoline, or any other petroleum product or by-product, (d) toxic substances, as defined in the Toxic Substances Control Act of 1976, or in any applicable state or local law or regulation or (e) insecticides, fungicides, or rodenticides, as defined in the Federal Insecticide, Fungicide, and Rodenticide Act of 1975, or in any applicable state or local law or regulation, as each such Act, statute or regulation may be amended from time to time. "Income Available for Fixed Charges" for any period means EBITDA as determined with respect to the Borrower and its Consolidated Subsidiaries on a consolidated basis for such period and in accordance with GAAP and less the aggregate amount of capital expenditures for the Borrower and its Consolidated Subsidiaries for such period in accordance with GAAP. "Interest Coverage Ratio" has the meaning set forth in Section 6.22(b). "Interest Period" means: with respect to each Euro-Dollar Borrowing under the Facility A Commitment, the period commencing on the date of such Borrowing and ending on the numerically corresponding day in the third calendar month thereafter, and with respect to Euro-Dollar Borrowings under the Facility B Commitment, the period commencing on the date of such Borrowing and ending on the numerically corresponding day in the first, second, third or sixth calendar month thereafter, as the Borrower may elect in the applicable Notice of Borrowing; provided that: (a) any Interest Period (other than an Interest Period determined pursuant to clause (c) or (d) below) which would otherwise end on a day which is not a Euro-Dollar Business Day shall be extended to the next succeeding Euro-Dollar Business Day unless such Euro-Dollar Business Day falls in another calendar month, in which case such Interest Period shall end on the next preceding Euro-Dollar Business Day; 7 13 (b) any Interest Period which begins on the last Euro-Dollar Business Day of a calendar month (or on a day for which there is no numerically corresponding day in the appropriate subsequent calendar month) shall, subject to clauses (c) and (d) below, end on the last Euro-Dollar Business Day of the appropriate subsequent calendar month; (c) any Interest Period which begins before the Facility B Termination Date and would otherwise end after the Facility B Termination Date shall end on the Facility B Termination Date; and (d) any Interest Period which begins before the Facility A Maturity Date and would otherwise end after the Facility A Maturity Date shall end on the Facility A Maturity Date. "Investment" means any investment in any Person, whether by means of purchase or acquisition of obligations or securities of such Person, capital contribution to such Person, loan or advance to such Person, making of a time deposit with such Person, Guarantee or assumption of any obligation of such Person or otherwise. "Lending Office" means the Bank's office located at its address set forth on the signature pages hereof (or identified on the signature pages hereof as its Lending Office) or such other office as the Bank may hereafter designate as its Lending Office by notice to the Borrower. "Letter of Credit" means collectively, the Existing Letters of Credit and any irrevocable stand-by letter of credit or irrevocable sight documentary letter of credit or Bank Guarantee (and all amendments thereto) issued by the Bank, or in the case of Bank Guarantees, issued by the Bank or an affiliate of the Bank, for the account of the Borrower, in each case as issued pursuant to Section 2.03. "Letter of Credit Availability Period" means the period from and including the Closing Date to but excluding the Facility B Termination Date. "Letter of Credit Commitment" has the meaning set forth in Section 2.03(a). "Letter of Credit Exposure" means at any time the sum of (a) the aggregate undrawn amount of all outstanding Letters of Credit, plus (b) the aggregate amount of all Letter of Credit disbursements not yet reimbursed by the Borrower as provided in Section 2.03. "Lien" means, with respect to any asset, any mortgage, lien, pledge, charge, security interest or encumbrance of any kind in respect of such asset. For the purposes of this Agreement, the Borrower or any Subsidiary of the Borrower shall be deemed to own subject to a Lien any asset which it has acquired or holds subject to the interest of a vendor or lessor under any conditional sale agreement, capital lease or other title retention agreement relating to such asset. "Loan Access Agreement" means the Financial Management Account Investment/Commercial Loan Access Agreement dated March 5, 1999 between the Borrower and the Bank, together with all amendments and supplements thereto. 8 14 "Loan Documents" means this Agreement, the Notes, the Security Agreement, the Pledge Agreement and any other document evidencing or securing the Advances. "London Interbank Offered Rate" applicable to any Euro-Dollar Loan means for the Interest Period of such Euro-Dollar Loan the rate per annum determined on the basis of the rate for deposits in Dollars of amounts equal or comparable to the principal amount of such Euro-Dollar Loan offered for a term comparable to such Interest Period, which rate appears on the display designated as Page "3750" of the Telerate Service (or such other page as may replace page 3750 of that service or such other service or services as may be nominated by the British Bankers' Association for the purpose of displaying London interbank offered rates for U.S. dollar deposits), determined as of 1:00 p.m. (Charlotte, North Carolina time), 2 Euro-Dollar Business Days prior to the first day of such Interest Period. "Long-Term Debt" means at any date any Consolidated Debt which matures (or the maturity of which may at the option of the Borrower or any Consolidated Subsidiary be extended such that it matures) more than one year after such date, excluding any Consolidated Debt which is subordinated to Debt outstanding under this Agreement. "Margin Stock" means "margin stock" as defined in Regulations T, U or X of the Board of Governors of the Federal Reserve System, as in effect from time to time, together with all official rulings and interpretations issued thereunder. "Multiemployer Plan" shall have the meaning set forth in Section 4001(a)(3) or ERISA. "Net Income (Loss)" means, as applied to any Person for any period, net income or loss of such Person as determined in accordance with GAAP. "Notes" means collectively the Facility A Note and the Facility B Note. "Notice of Borrowing" shall have the meaning assigned to it in Section 2.02. "Obligations" means all indebtedness, obligations and liabilities to the Bank existing on the date of this Agreement or arising thereafter, direct or indirect, joint or several, absolute or contingent, matured or unmatured, liquidated or unliquidated, secured or unsecured, arising by contract, operation of law or otherwise, of the Borrower under this Agreement or any other Loan Document. "Operating Profits" means, as applied to any Person for any period, the operating income of such Person for such period, as determined in accordance with GAAP. "Participant" has the meaning set forth in Section 8.05(b). "PBGC" means the Pension Benefit Guaranty Corporation or any entity succeeding to any or all of its functions under ERISA. "Permitted Encumbrances" means: (a) Liens existing on the date of this Agreement; 9 15 (b) any Lien existing on any asset of any Person at the time such Person becomes a Consolidated Subsidiary of the Borrower and not created in contemplation of such event; (c) any Lien on any asset securing Debt incurred or assumed for the purpose of financing all or any part of the cost of acquiring or constructing such asset, provided that such Lien attaches to such asset concurrently with or within 18 months after the acquisition or completion of construction thereof; (d) any Lien on any asset of any Person existing at the time such Person is merged or consolidated with or into the Borrower or a Consolidated Subsidiary of the Borrower and not created in contemplation of such event; (e) any Lien existing on any asset prior to the acquisition thereof by the Borrower or a Consolidated Subsidiary of the Borrower and not created in contemplation of such acquisition; (f) Liens securing Debt owing by any Subsidiary of the Borrower to the Borrower; (g) any Lien arising out of the refinancing, extension, renewal or refunding of any Debt secured by any Lien permitted by any of the foregoing clauses of this Section, provided that (i) such Debt is not secured by any additional assets, and (ii) the amount of such Debt secured by any such Lien is not increased; (h) Liens incidental to the conduct of its business or the ownership of its assets which (i) do not secure Debt and (ii) do not in the aggregate materially detract from the value of its assets or materially impair the use thereof in the operation of its business; (i) any Lien on Margin Stock; and (j) Liens in favor of the Bank. "Person" means any individual, joint venture, corporation, company, voluntary association, partnership, trust, joint stock company, limited liability company, unincorporated organization, association, government, or any agency, instrumentality, or political subdivision thereof, or any other form of entity or organization. "Plan" means at any time an employee pension benefit plan which is covered by Title IV of ERISA or subject to the minimum funding standards under Section 412 of the Code and is either (i) maintained by a member of the Controlled Group for employees of any member of the Controlled Group or (ii) maintained pursuant to a collective bargaining agreement or any other arrangement under which more than one employer makes contributions and to which a member of the Controlled Group is then making or accruing an obligation to make contributions or has within the preceding five plan years made contributions. "Pledge Agreement" means the Pledge Agreement of even date herewith executed by the Borrower for the benefit of the Bank, together with all amendments and supplements thereto, covering certain capital stock of Gray Communications Systems, Inc. 10 16 "Prime Rate" refers to that interest rate so denominated and set by Wachovia from time to time as an interest rate basis for borrowings. The Prime Rate is but one of several interest rate bases used by Wachovia. Wachovia lends at interest rates above and below the Prime Rate. A change in the Prime Rate shall be effective on the date of such change. "Properties" means all real property owned, leased or otherwise used or occupied by the Borrower or any Subsidiary of the Borrower, wherever located. "Rate Determination Date" has the meaning given such term in Section 2.06(c). "Redeemable Preferred Stock" of any Person means any preferred stock issued by such Person which is at any time prior to the Facility A Maturity Date either (i) mandatorily redeemable (by sinking fund or similar payments or otherwise) or (ii) redeemable at the option of the holder thereof. "Reportable Event" has the meaning given such term in Section 4043(b) of Title V of ERISA. "Reported Net Income" means, for any period, the Net Income (Loss) of the Borrower and its Consolidated Subsidiaries determined on a consolidated basis. "Security Agreement" means the General Security Agreement of even date herewith executed by the Borrower for the benefit of the Bank, together with all amendments and supplements thereto. "Stockholders' Equity" means, at any time, the shareholders' equity of the Borrower and its Consolidated Subsidiaries, as set forth or reflected on the most recent consolidated balance sheet of the Borrower and its Consolidated Subsidiaries prepared in accordance with GAAP, but excluding any Redeemable Preferred Stock of the Borrower or any of its Consolidated Subsidiaries. Shareholders' Equity would generally include, but not be limited to (i) the par or stated value of all outstanding Capital Stock, (ii) capital surplus, (iii) retained earnings, and (iv) various deductions such as (A) purchases of treasury stock, (B) receivables due from an employee stock ownership plan, (C) employee stock ownership plan debt guarantees, and (D) translation adjustments for foreign currency transactions. "Subsidiary" of a Person means any corporation or other entity of which securities or other ownership interests having ordinary voting power to elect a majority of the board of directors or other persons performing similar functions are at the time directly or indirectly owned by such Person. Unless otherwise indicated, all references herein to Subsidiaries refer to Subsidiaries of Bull Run or the Borrower as the context may require. "Third Parties" means all lessees, sublessees, licenses and other users of the Properties, excluding those users of the Properties in the ordinary course of the Borrower's business and on a temporary basis. "Transferee" has the meaning set forth in Section 8.05(d). "Unused Commitment" means at any date an amount equal to the Facility B Commitment less the sum of (a) the aggregate outstanding principal amount of the Advances made pursuant to the Facility B Commitment, plus (b) the Letter of Credit Exposure. 11 17 "Wachovia" means Wachovia Bank, N.A., a national banking association, together with its successors. "Wholly Owned Subsidiary" means any Subsidiary all of the shares of capital stock or other ownership interests of which (except directors' qualifying shares) are at the time directly or indirectly owned by Bull Run or the Borrower, as the context of this Agreement may require. SECTION I.2. Accounting Terms and Determinations. Unless otherwise specified herein, all terms of an accounting character used herein shall be interpreted, all accounting determinations hereunder shall be made, and all financial statements required to be delivered hereunder shall be prepared in accordance with GAAP, applied on a basis consistent (except for changes concurred in by Bull Run's independent public accountants) with the most recent audited consolidating and consolidated financial statements of Bull Run and its Consolidated Subsidiaries delivered to the Bank. SECTION I.3. References. Except as otherwise expressly provided in this Agreement: the words "herein," "hereof," "hereunder" and other words of similar import refer to this Agreement as a whole, including the Schedule hereto which is a part hereof, and not to any particular Section, Article, paragraph or other subdivision; the singular includes the plural and the plural includes the singular; "or" is not exclusive; the words "include," "includes" and "including" are not limiting; a reference to any agreement or other contract includes past and future permitted supplements, amendments, modifications and restatements thereto or thereof; a reference to an Article, Section, paragraph or other subdivision is a reference to an Article, Section, paragraph or other subdivision of this Agreement; a reference to any law includes any amendment or modification to such law and any rules and regulations promulgated thereunder; a reference to a Person includes its permitted successors and assigns; any right may be exercised at any time and from time to time; and, except as otherwise expressly provided therein, all obligations under any agreement or other contract are continuing obligations throughout the term of such agreement or contract. ARTICLE II. THE CREDITS SECTION II.1. Commitment to Lend. (a) The Bank agrees, in addition to the funds to be advanced under subsection (b) below and on the terms and conditions set forth herein, to make Advances to the Borrower on the Closing Date in an aggregate principal amount equal to $4,000,000.00 (as such figure may be reduced from time to time as provided in this Agreement, the "Facility A Commitment"). Funds advanced under the Facility A Commitment may not be reborrowed. The Bank shall have no obligation to advance funds in excess of the amount of the Facility A Commitment under this Section 2.01(a). (b) The Bank agrees, in addition to the funds to be advanced under subsection (a) above and on the terms and conditions set forth herein, to make Advances to the Borrower from time to time before the Facility B Termination Date; provided that, immediately after each such Advance is made, the aggregate principal amount of outstanding Advances (exclusive of all Advances made in respect of the Facility A Commitment) plus the Letter of Credit Exposure shall not exceed $5,000,000.00 (as such figure may be reduced from time to time as provided in this Agreement, the "Facility B Commitment"). Within the foregoing limits, the Borrower may borrow under this Section, repay or, to the extent permitted by Section 2.10, prepay Advances and reborrow under this Section at any time before the Facility B Termination Date. The Bank shall have no obligation to advance funds in excess of the amount of the Facility B Commitment. 12 18 (c) Each Euro-Dollar Borrowing under this Section shall be in an aggregate principal amount of $100,000.00 or any larger multiple of $50,000.00. SECTION II.2 Method of Borrowing. (a) The Borrower shall give the Bank notice (a "Notice of Borrowing") at least three Euro-Dollar Business Days before each Euro-Dollar Borrowing and at least one Domestic Business Day before each Base Rate Borrowing, specifying: (i) the date of such Borrowing, which shall be a Euro-Dollar Business Day for Euro-Dollar Borrowings or a Domestic Business Day for Base Rate Borrowings, (ii) the aggregate amount of such Borrowing, and (iii) the duration of the Interest Period applicable thereto, subject to the provisions of the definition of Interest Period, for Euro-Dollar Borrowings; (b) A Notice of Borrowing, once given, shall be irrevocable. The Bank shall be entitled to rely on any telephonic Notice of Borrowing which it believes in good faith to have been given by a duly authorized officer of the Borrower and any Advances made by the Bank based on such telephonic notice shall, when credited by the Bank to the regular deposit account maintained by the Borrower with the Bank, be an Advance for all purposes hereunder. Not later than 2:00 p.m., Charlotte, North Carolina time, on the date specified for the Borrowing in the Notice of Borrowing, the Bank shall credit, in immediately available funds, the amount of such Borrowing to the regular deposit account maintained by the Borrower with the Bank. (c) Notwithstanding the foregoing provisions of this Section 2.02, all Advances under the Facility B Commitment shall be funded by the Bank in accordance with the Loan Access Agreement. (d) If the Bank makes a new Advance hereunder on a day on which the Borrower is to repay all or any part of an outstanding Advance, the Bank shall apply the proceeds of its new Advance to make such repayment and only an amount equal to the difference (if any) between the amount being borrowed and the amount being repaid shall be made available by the Bank to the Borrower as provided in subsection (b) or (c) of this Section, or remitted by the Borrower to the Bank as provided in Section 2.12, as the case may be. (e) Notwithstanding anything to the contrary contained in this Agreement, no Euro-Dollar Borrowing may be made if there shall have occurred a Default or an Event of Default, which Default or Event of Default shall not have been cured or waived. (f) If the Borrower is otherwise entitled under this Agreement to repay any Advance maturing at the end of an Interest Period applicable thereto with the proceeds of a new Borrowing, and the Borrower fails to repay such Advance using its own moneys and fails to give a Notice of Borrowing in connection with such new Borrowing, a new Borrowing shall be deemed to be made on the date such Advance matures in an amount equal to the principal amount of the Advance so maturing, and the Advance comprising such new Borrowing shall be a Base Rate Loan. SECTION II.3. Letters of Credit. (a) The Borrower may request the issuance of Letters of Credit, in form and substance reasonably acceptable to Wachovia, for the account of the Borrower, at any time and from time to time during the Letter of Credit Availability Period; provided that any Letter of Credit shall 13 19 be issued only if, and each request by the Borrower for the issuance of any Letter of Credit shall be deemed a representation and warranty of the Borrower that, immediately following the issuance of such Letter of Credit, (i) the Letter of Credit Exposure shall not exceed $1,000,000.00 (the "Letter of Credit Commitment") and (ii) the sum of the Letter of Credit Exposure and the aggregate principal amount of outstanding Facility B Loans shall not exceed the Facility B Commitment at the time. (b) Each Letter of Credit shall expire at 5:00 p.m., Charlotte, North Carolina time, on the last day of the Letter of Credit Availability Period, unless such Letter of Credit expires by its terms (or is required by Section 2.03(c) to expire) on an earlier date. (c) Each issuance of any Letter of Credit shall be made on at least two Business Days' prior irrevocable written or telecopy notice (such notice to be delivered by 10:00 a.m., Charlotte, North Carolina time) from the Borrower (or such shorter notice as shall be acceptable to Wachovia) to Wachovia, specifying whether such Letter of Credit is to be a standby letter of credit, a documentary letter of credit or a Bank Guarantee, the date of issuance, the date on which such Letter of Credit is to expire (which shall not be later than the earlier of the last day of the Letter of Credit Availability Period or, in the case of documentary letters of credit, 180 days after the date of issuance), the amount of such Letter of Credit, the name and address of the beneficiary of such Letter of Credit, and such other information as may be necessary or desirable to complete such Letter of Credit. Each Letter of Credit issued hereunder will be subject to the Uniform Customs and Practices for Documentary Credits, as in effect from time to time. (d) The Borrower shall pay to Wachovia on the date of each issuance of a Letter of Credit, Wachovia's usual and customary issuance fee then in effect for each Letter of Credit issued on such day. In addition, the Borrower shall pay to Wachovia from time to time in connection with each Letter of Credit issued hereunder the usual and customary fees charged by Wachovia and as in effect from time to time for document examination services, courier services, amendment fees and other customary fees and charges imposed by Wachovia for letter of credit services. The Borrower shall also pay to the Bank on the last day of each March, June, September and December in each year and on the Facility B Termination Date a fee on the average daily aggregate amount available to be drawn under all standby letters of credit during the preceding quarter (or shorter period commencing with the Closing Date or ending on the Facility B Termination Date) at a rate per annum equal to the Applicable Margin for Euro-Dollar Loans from time to time in effect during such period pursuant to Section 2.06, which fees shall be computed on the basis of the actual number of days elapsed in a year of 360 days and shall accrue from the Closing Date to but excluding the last day of the Letter of Credit Availability Period. (e) The Borrower hereby agrees to reimburse Wachovia for any payment or disbursement made by Wachovia under any Letter of Credit, by making payment in immediately available funds to Wachovia within one Business Day after receipt of notice of such payment or disbursement, in an amount equal to the amount of such payment or disbursement, plus interest on the amount so paid or disbursed by Wachovia, to the extent not reimbursed prior to 3:00 p.m. (Charlotte, North Carolina time) on the date of such payment or disbursement, from and including the date paid or disbursed to but excluding the date Wachovia is reimbursed by the Borrower therefor, at a rate per annum equal to the rate applicable to Base Rate Loans during such period pursuant to Section 2.06. Wachovia shall give the Borrower prompt notice of each drawing under any Letter of Credit, provided that the failure to give any such notice shall in no way affect, impair or diminish the Borrower's obligations hereunder. 14 20 (f) The Borrower's obligations to reimburse Letter of Credit disbursements as provided in Section 2.03(e) shall be absolute, unconditional and irrevocable and shall be performed strictly in accordance with the terms of this Agreement under any and all circumstances, including the following: (i) any lack of validity or enforceability of any Letter of Credit or any other Loan Document; (ii) The existence of any claim, setoff, defense or other right which the Borrower, any Subsidiary or any other person may at any time have against the beneficiary under any Letter of Credit, Wachovia or any other person in connection with this Agreement, any other Loan Document or any other related or unrelated agreement or transaction; (iii) any draft or other document presented under a Letter of Credit proving to be forged, fraudulent, invalid or insufficient in any respect or failing to comply with the Uniform Customs and Practices for Documentary Credits, as in effect from time to time, or any statement therein being untrue or inaccurate in any respect; provided that any payment under a Letter of Credit by Wachovia was not wrongfully made as a result of the gross negligence or willful misconduct of Wachovia; (iv) payment by Wachovia under a Letter of Credit against presentation of a draft or other document which does not comply with the terms of such Letter of Credit; provided that such payment was not wrongfully made as a result of the gross negligence or willful misconduct of Wachovia; (v) any amendment, waiver or consent in respect of this Agreement or any other Loan Document; and (vi) any other act or omission or delay of any kind or any other circumstance or event whatsoever, whether or nor similar to any of the foregoing and whether or not foreseeable, that might, but for the provisions of this Section 2.03(f), constitute a legal or equitable discharge of the Borrower's obligations hereunder; provided that any payment under a Letter of Credit by Wachovia was not wrongfully made as a result of the gross negligence or willful misconduct of Wachovia. (g) It is expressly understood and agreed that, for purposes of determining whether a wrongful payment under a Letter of Credit resulted from Wachovia's gross negligence or willful misconduct, (i) Wachovia's acceptance of documents that are in strict compliance with the terms of the applicable Letter of Credit, without responsibility for further investigation, regardless of any notice or information to the contrary, and (ii) Wachovia's exclusive reliance on the documents presented to it under such Letter of Credit as to any and all matters set forth therein, including the amount of any draft presented under such Letter of Credit, whether or not the amount due to the beneficiary thereunder equals the amount of such draft and whether or not any document presented pursuant to such Letter of Credit proves to be insufficient in any respect (so long as such document is in strict compliance with the terms of the applicable Letter of Credit), and whether or not any other statement or any other document presented pursuant to such Letter of Credit proves to be forged or invalid or any statement therein proves to be inaccurate or untrue in any respect whatsoever shall, in each case, be deemed not to constitute willful misconduct or gross negligence of Wachovia. It is further understood and agreed that, notwithstanding the proviso to clause (iv) of Section 2.03(f), the Borrower's obligation hereunder to reimburse Letter of Credit disbursements will not be excused by the gross negligence or willful misconduct of Wachovia to the extent that such Letter of Credit disbursement actually discharged 15 21 a liability of, or otherwise benefitted, or was recovered by, the Borrower; provided that the foregoing shall not be construed to excuse Wachovia from liability to the Borrower to the extent of any direct damages suffered by the Borrower that are caused by Wachovia's gross negligence or willful misconduct in determining whether drafts and other documents presented under a Letter of Credit comply with the terms thereof. (h) Wachovia shall, promptly following its receipt thereof, examine all documents purporting to represent a demand for payment under a Letter of Credit. Wachovia shall as promptly as possible give telephonic notification, confirmed by telex or telecopy, to the Borrower of such demand for payment and whether Wachovia has made or will make a Letter of Credit disbursement thereunder; provided that the failure to give such notice shall not relieve the Borrower of its obligation to reimburse any such Letter of Credit disbursement in accordance with this Section 2.03. (i) For purposes of calculating the Letter of Credit Exposure, all Letters of Credit issued in a foreign currency shall be counted in U.S. Dollars at current exchange rates from time to time in effect. If the aggregate Letter of Credit Exposure and the outstanding Facility B Loans ever exceed the Facility B Commitment as in effect from time to time, the Borrower shall immediately prepay a portion of the Facility B Loans then outstanding sufficient to reduce the aggregate Letter of Credit Exposure plus the outstanding Facility B Loans to an amount less than or equal to the Facility B Commitment then in effect. SECTION II.4 Notes. The Advances under the Facility A Commitment shall be evidenced by the Facility A Note payable to the order of the Bank for the account of its Lending Office in an amount equal to the original principal amount of the Facility A Commitment. The Advances under the Facility B Commitment shall be evidenced by the Facility B Note payable to the order of the Bank for the account of its Lending Office in an amount equal to the original principal amount of the Facility B Commitment. The Bank shall record, and prior to any transfer of either Note shall endorse on the schedule forming a part thereof appropriate notations to evidence, the date, amount and maturity of, and effective interest rate for, each Advance made by it, the date and amount of each payment of principal made by the Borrower with respect thereto and whether such Advance is a Base Rate Loan or a Euro-Dollar Loan, and such recordations and endorsements shall constitute rebuttable presumptive evidence of the principal amount owing and unpaid on the Notes; provided that the failure of the Bank to make any such recordation or endorsement shall not affect the obligation of the Borrower hereunder or under the Notes. The Bank is hereby irrevocably authorized by the Borrower so to endorse the Notes and to attach to and make a part of either Note a continuation of any such schedule as and when required. SECTION II.5. Maturity of Advances. Each Advance included in any Euro-Dollar Borrowing shall mature, and the principal amount thereof shall be due and payable, on the last day of the Interest Period applicable to such Euro-Dollar Borrowing. Each Advance included in any Base Rate Borrowing shall finally mature on the Facility A Maturity Date or the Facility B Termination Date, as applicable, and the principal amount thereof shall be due and payable from time to time as herein provided or as provided in the Loan Access Agreement, if applicable to such Advance. 16 22 SECTION II.6. Interest Rates. (a) Each Advance made as a Base Rate Loan shall bear interest on the outstanding principal amount thereof, for each day from the date such Advance is made until it becomes due, at a rate per annum equal to the Base Rate for such day plus the Applicable Margin. Such interest on Advances under the Facility B Commitment shall be payable as provided in the Loan Access Agreement, or if the Loan Access Agreement shall have terminated as provided therein, monthly on the first Domestic Business Day of each month. Such interest on Advances under the Facility A Commitment shall be payable monthly on the first Domestic Business Day of each month. Any overdue principal of and, to the extent permitted by applicable law, overdue interest on any Advance so made as a Base Rate Loan shall bear interest, payable on demand, for each day until paid at a rate per annum equal to the sum of 2% plus the rate otherwise applicable to such Advance, so made as a Base Rate Loan, for such day. (b) Each Advance made as a Euro-Dollar Loan shall bear interest on the outstanding principal amount thereof, for the Interest Period applicable thereto, at a rate per annum equal to the sum of the Applicable Margin plus the applicable Adjusted London Interbank Offered Rate for such Interest Period; provided that if any Advance made as a Euro-Dollar Loan shall, as a result of clauses (1)(c) or 1(d) of the definition of Interest Period, have an Interest Period of less than one month, such Advance so made as a Euro-Dollar Loan shall bear interest during such Interest Period at the rate applicable to Advances made as Base Rate Loans during such period. Such interest on Advances under the Facility B Commitment shall be payable as provided in the Loan Access Agreement, or if the Loan Access Agreement shall have terminated as therein provided, for each Interest Period on the last day thereof and if such Interest Period is longer than three months, at intervals of three months after the first day thereof. Such interest on Advances under the Facility A Commitment shall be payable for each Interest Period on the last day thereof and, if such Interest Period is longer than three months, at intervals of three months after the first day thereof. Any overdue principal of and, to the extent permitted by law, overdue interest on any Euro-Dollar Loan shall bear interest, payable on demand, for each day until paid at a rate per annum equal to the sum of 2% plus the higher of (x) the sum of the Applicable Margin plus the Adjusted London Interbank Offered Rate applicable to such Euro-Dollar Loan or (y) the rate which would be applicable for such day to such Advance if it had been made as Base Rate Loan. (c) The Applicable Margin for any Euro-Dollar Loan for any day shall be the rate per annum set forth below as determined to be applicable based on the applicable ratio of Consolidated Funded Debt to EBITDA: (i) if the ratio of Consolidated Funded Debt to EBITDA is greater than or equal to 4.00 to 1.00, then the Applicable Margin for Euro-Dollar Loans shall be 3.00% per annum; (ii) if the ratio of Consolidated Funded Debt to EBITDA is less than 4.00 to 1.00 but greater than 3.00 to 1.00, then the Applicable Margin for Euro-Dollar Loans shall be 2.75% per annum; (iii) if the ratio of Consolidated Funded Debt to EBITDA is less than 3.00 to 1.00 but greater than 2.00 to 1.00, then the Applicable Margin for Euro-Dollar Loans shall be 2.50% per annum; and (iv) if the ratio of Consolidated Funded Debt to EBITDA is less than or equal to 2.00 to 1.00, then the Applicable Margin for Euro-Dollar Loans shall be 2.25% per annum. 17 23 The Applicable Margin for Euro-Dollar Loans shall be determined and adjusted quarterly on the date (each a "Rate Determination Date") five (5) Domestic Business Days after the date by which the annual and quarterly compliance certificates and related financial statements and information are required in accordance with the provisions of Sections 6.01(a), (b) and (c), as appropriate; provided that (A) the initial Applicable Margin for Euro-Dollar Loans shall be three percent (3.00%) and shall remain in effect until the first Rate Determination Date to occur after the Closing Date, and (B) in the event an annual or quarterly compliance certificate and related financial statements and information are not delivered timely to the Bank by the date required by Sections 6.01(a), (b) and (c), as appropriate, the Applicable Margin shall be three percent (3.00%) until such time as such an appropriate compliance certificate and related financial statements and information are delivered, whereupon the Applicable Margin shall be adjusted based on the information contained in such compliance certificate and related financial statements and information. Each Applicable Margin shall be effective from a Rate Determination Date until the next such Rate Determination Date, and shall be effective as to existing Advances as well as new Advances made thereafter. (d) Notwithstanding anything herein to the contrary, if one or more Facility A Commitment Reduction Dates are scheduled to occur during an Interest Period in which the Facility A Advances are Euro-Dollar Loans other than on the last day of such Interest Period, then during such Interest Period a portion of the outstanding balance of the Facility A Advances which is equal to the aggregate amount of the principal payment due under the Facility A Commitment on such Facility A Commitment Reduction Dates shall be Base Rate Loans, and only the remaining portion of the outstanding principal of the Advances under the Facility A Commitment shall constitute Euro-Dollar Loans. SECTION II.7. Commitment Fee. From and after the date hereof up to and including the Facility B Termination Date, the Borrower shall pay to the Bank a commitment fee at the Commitment Fee Rate (calculated from the date hereof on the basis of a year of 360 days and payable for the actual number of days elapsed) on the average daily balance of the Unused Commitment (the "Commitment Fee"). The Commitment Fee shall be payable by the Borrower quarterly in arrears on each Commitment Fee Payment Date and on the Facility B Termination Date, provided that should the Facility B Commitment be terminated at any time prior to the Facility B Termination Date (whether by termination of the Facility B Commitment as provided in Section 2.08 or Section 2.09, refinancing of the Advances or otherwise), the entire accrued and unpaid Commitment Fee shall be paid on the date of such termination. SECTION II.8. Optional Termination or Reduction of Facility B Commitment. The Borrower may, upon at least three Domestic Business Days' notice to the Bank, terminate the Facility B Commitment at any time, or reduce the Facility B Commitment from time to time by an aggregate minimum amount of at least $500,000.00 or an integral multiple of $100,000.00 in excess thereof. If the Facility B Commitment is so reduced, such reduction shall be accounted for in determining the fees due under Section 2.07. If the Facility B Commitment is so terminated in its entirety, all accrued fees (as provided under Section 2.07) shall be payable on the effective date of such termination. A notice of reduction or termination of the Facility B Commitment hereunder, once given, shall not thereafter be revocable by the Borrower. SECTION II.9. Mandatory Reduction and Termination of Commitments. 18 24 (a) The Facility A Commitment shall terminate and the unpaid principal balance and all accrued and unpaid interest on the Facility A Note will be due and payable upon the first of the following dates or events to occur: (i) acceleration of the maturity of the Facility A Note in accordance with the remedies contained in Section 7.02; or (ii) the Facility A Maturity Date. (b) The amount of the Facility A Commitment shall be reduced on each Facility A Commitment Reduction Date by an amount equal to $250,000.00. (c) The Facility B Commitment shall terminate and the unpaid principal balance and all accrued and unpaid interest on the Facility B Note will be payable upon the first of the following dates or events to occur: (i) acceleration of the maturity of the Facility B Note in accordance with the remedies contained in Section 7.02; or (ii) upon the expiration of the Facility B Commitment on the Facility B Termination Date. (d) The amount of the Facility B Commitment shall be reduced on the Facility B Commitment Reduction Date by an amount equal to $1,000,000.00. SECTION II.10. Optional Prepayments. (a) The Borrower may, upon at least one Domestic Business Days' notice to the Bank, prepay any Base Rate Borrowing in whole at any time, or from time to time in part, by paying the principal amount to be prepaid together with accrued interest thereon to the date of prepayment. (b) Except as provided in Section 3.05, the Borrower may not prepay all or any portion of the principal amount of any Euro-Dollar Loan prior to the maturity thereof. (c) A notice of prepayment pursuant to this Section, once given, shall not thereafter be revocable by the Borrower. SECTION II.11. Mandatory Prepayments. On each date on which the Commitments are reduced or terminated pursuant to Section 2.08 and 2.09, the Borrower shall repay or prepay such principal amount of the outstanding Advances, if any (together with interest accrued thereon), as may be necessary so that after such payment the aggregate unpaid principal amount of the outstanding Advances does not exceed the aggregate amount of the respective Commitments as then reduced. Each such mandatory prepayment shall be applied to reduce the Facility A Commitment or the Facility B Commitment, as the case may be, on the applicable Facility A Commitment Reduction Date or the Facility B Commitment Reduction Date or on the date on which either of the Facility A Commitment or the Facility B Commitment is terminated, as applicable. SECTION II.12. General Provisions Concerning Payments. (a) All payments of principal of, or interest on, the Notes, and of the Commitment Fee, shall be made in Federal or other funds immediately available to the Bank at its office in Charlotte, North Carolina not later than 11:00 a.m., Charlotte, North Carolina time. Funds received after 11:00 a.m. shall be deemed to have been paid on the next following Domestic Business Day. (b) Whenever any payment of principal of, or interest on, the Base Rate Loans or of the Commitment Fees shall be due on a day which is not a Domestic Business Day, the date for payment thereof shall be extended to the next succeeding Domestic Business Day. Whenever any payment of principal of, or interest on, the Euro-Dollar Loans shall be due on a day which is not a Euro-Dollar Business Day, the date for payment thereof shall be extended to the next succeeding Euro-Dollar Business Day unless such Euro-Dollar 19 25 Business Day falls in another calendar month, in which case the date for payment thereof shall be the next preceding Euro-Dollar Business Day. If the date for any payment of principal is extended by operation of law or otherwise, interest thereon shall be payable for such extended time. SECTION II.13. Computation of Interest and Fees. Interest on Base Rate Loans and Euro-Dollar Loans shall be computed on the basis of a year of 360 days and paid for the actual number of days elapsed, in the case of Base Rate Loans as provided in the Loan Access Agreement and in the case of Euro-Dollar Loans, as to each Interest Period from and including the first day thereof to but excluding the last day thereof. Commitment fees hereunder shall be computed on the basis of a year of 360 days and paid for the actual number of days elapsed (including the first day but excluding the last day). ARTICLE III. CHANGE IN CIRCUMSTANCES; COMPENSATION SECTION III.1. Basis for Determining Interest Rate Inadequate or Unfair. If on or prior to the first day of any Interest Period: (a) the Bank determines that deposits in Dollars (in the applicable amounts) are not being offered in the relevant market for such Interest Period, or (b) the Bank determines that the Interbank Offered Rate as determined by the Bank will not adequately and fairly reflect the cost to the Bank of funding Euro-Dollar Loans for such Interest Period, the Bank shall forthwith give notice thereof to the Borrower, whereupon until the Bank notifies the Borrower that the circumstances giving rise to such suspension no longer exist, the obligations of the Bank to make or maintain Euro-Dollar Loans shall be suspended. Unless the Borrower notifies the Bank at least two Domestic Business Days before the date of any Borrowing of or the commencement of any Interest Period for Euro-Dollar Loans for which a Notice of Borrowing has previously been given that it elects not to borrow on such date, such Borrowing shall instead be made as a Base Rate Borrowing. SECTION III.2. Illegality. If, after the date hereof, the adoption of any applicable law, rule or regulation, or any change therein, or any change in the interpretation or administration thereof by any governmental authority, central bank or comparable agency charged with the interpretation or administration thereof (any such authority, bank or agency being referred to as an "Authority" and any such event being referred to as a "Change of Law"), or compliance by the Bank (or its Lending Office) with any request or directive (whether or not having the force of law) of any Authority shall make it unlawful or impossible for the Bank (or its Lending Office) to make, maintain or fund its Euro-Dollar Loans and the Bank shall so notify the Borrower, whereupon until the Bank notifies the Borrower that the circumstances giving rise to such suspension no longer exist, the obligation of the Bank to make Euro-Dollar Loans shall be suspended. Before giving any notice pursuant to this paragraph, the Bank shall designate a different Lending Office if able to do so and if such designation will avoid the need for giving such notice and will not, in the judgment of the Bank, be otherwise disadvantageous to the Bank. If the Bank shall determine that it may not lawfully continue to maintain and fund any of its outstanding Euro-Dollar Loans to maturity and shall so specify in such notice, the Borrower shall immediately prepay in full the then outstanding principal amount of each Euro-Dollar Loan, together with accrued interest thereon. Concurrently with prepaying each such Advance, the Borrower shall borrow an Advance as a Base Rate Loan in an equal principal amount from the Bank and the Bank shall make such an Advance. 20 26 SECTION III.3. Increased Cost and Reduced Return. (a) If after the date hereof, a Change of Law or compliance by the Bank (or its Lending Office) with any request or directive (whether or not having the force of law) of any Authority: (i) shall subject the Bank (or its Lending Office) to any tax, duty or other charge with respect to its Euro-Dollar Loans, the Notes or its obligation to make or maintain Euro-Dollar Loans, or shall change the basis of taxation of payments to the Bank (or its Lending Office) of the principal of or interest on its Euro-Dollar Loans or any other amounts due under this Agreement in respect of its Euro-Dollar Loans or its obligation to make or maintain Euro-Dollar Loans (except for changes in the rate of tax on the overall net income of the Bank or its Lending Office imposed by the jurisdiction in which the Bank's principal executive office or Lending Office is located); or (ii) shall impose, modify or deem applicable any reserve, special deposit or similar requirement (including, without limitation, any such requirement imposed by the Board of Governors of the Federal Reserve System, but excluding with respect to any Euro-Dollar Loan any such requirement included in an applicable Euro-Dollar Reserve Percentage) against assets of, deposits with or for the account of, or credit extended by, the Bank (or its Lending Office); or (iii) shall impose on the Bank (or its Lending Office) or the London interbank market any other condition affecting its Euro-Dollar Loans, its Notes or its obligation to make or maintain Euro-Dollar Loans; and the result of any of the foregoing is to increase the cost to the Bank (or its Lending Office) of making or maintaining any Euro-Dollar Loan, or to reduce the amount of any sum received or receivable by the Bank (or its Lending Office) under this Agreement or under the Notes with respect thereto, by an amount deemed by the Bank to be material, then, within 15 days after demand by the Bank, the Borrower shall pay to the Bank such additional amount or amounts as will compensate the Bank for such increased cost or reduction. (b) If the Bank shall have determined that after the date hereof the adoption of any applicable law, rule or regulation regarding capital adequacy, or any change therein, or any change in the interpretation or administration thereof, or compliance by the Bank (or its Lending Office) with any request or directive regarding capital adequacy (whether or not having the force of law) of any Authority, has or would have the effect of reducing the rate of return on the Bank's capital as a consequence of its obligations under this Agreement with respect to any Advance to a level below that which the Bank could have achieved but for such adoption, change or compliance (taking into consideration the Bank's policies with respect to capital adequacy) by an amount deemed by the Bank to be material, then from time to time, within 15 days after demand by the Bank, the Borrower shall pay to the Bank such additional amount or amounts as will compensate the Bank for such reduction. (c) The Bank will promptly notify the Borrower of any event of which it has knowledge, occurring after the date hereof, which will entitle the Bank to compensation pursuant to this Section and will designate a different Lending Office if such designation will avoid the need for, or reduce the amount of, such compensation and will not, in the judgment of the Bank, be otherwise disadvantageous to the Bank. A certificate of the Bank claiming compensation under this Section and setting forth the additional amount or 21 27 amounts to be paid to it hereunder shall be conclusive in the absence of manifest error. In determining such amount, the Bank may use any reasonable averaging and attribution methods. (d) The provisions of this Section shall be applicable with respect to any Participant in, or Assignee or other Transferee of, the obligations of the Borrower hereunder to the Bank, and any calculations required by such provisions shall be made based upon the circumstances of such Participant, Assignee or other Transferee. SECTION III.4. Base Rate Loans Substituted for Affected Euro-Dollar Loans. If (i) the obligation of the Bank to make or maintain Euro-Dollar Loans has been suspended pursuant to Section 3.01 or Section 3.02, or (ii) the Bank has demanded compensation under Section 3.03, and if in either case the Borrower, by at least one Domestic Business Day's prior notice to the Bank shall have elected that the provisions of this Section shall apply, then, unless and until the Bank notifies the Borrower that the circumstances giving rise to such suspension or demand for compensation no longer apply: (a) all Advances which would otherwise be made by the Bank as Euro-Dollar Loans shall be made instead as Base Rate Loans, and (b) after each of its Euro-Dollar Loans has been repaid, all payments of principal which would otherwise be applied to repay such Euro-Dollar Loans shall be applied to repay its Base Rate Loans instead. SECTION III.5. Compensation. Upon the request of the Bank, delivered to the Borrower, the Borrower shall pay to the Bank such amount or amounts as shall compensate the Bank for any loss, cost or expense actually incurred by the Bank as a result of: (a) any optional or mandatory payment or prepayment (pursuant to Section 3.02 or otherwise) of a Euro-Dollar Loan on a date other than the last day of an Interest Period for such Euro-Dollar Loan; or (b) any failure by the Borrower to prepay a Euro-Dollar Loan on the date for such prepayment specified in the relevant notice of prepayment of or notice of reduction of either Commitment hereunder, as the case may be; or (c) any failure by the Borrower to borrow an Advance as a Euro-Dollar Loan on the date for the Borrowing specified in the applicable Notice of Borrowing delivered pursuant to Section 2.02; such compensation to include, without limitation, but only to the extent such loss, cost or expense is actually incurred by the Bank, an amount equal to the excess, if any, of (x) the amount of interest which would have accrued on the amount so paid or prepaid or not prepaid or borrowed, for the period from the date of such payment, prepayment or failure to prepay or borrow to the last day of the then current Interest Period for such Euro-Dollar Loan (or, in the case of a failure to prepay or borrow, the Interest Period for such Euro-Dollar Loan which would have commenced on the date of such failure to prepay or borrow) at the applicable rate of interest for such Euro-Dollar Loan provided for herein over (y) the amount of interest (as reasonably determined by the Bank) the Bank would have paid on deposits in Dollars of comparable amounts having terms comparable to such period placed with it by leading banks in the London interbank market. 22 28 ARTICLE IV. CONDITIONS TO BORROWINGS SECTION IV.1. Conditions to First Borrowing. The obligation of the Bank to make an Advance on the occasion of the first Borrowing is subject to the satisfaction of the conditions set forth in Section 4.02 and the following additional conditions: (a) receipt by the Bank from the Borrower of a duly executed counterpart of this Agreement signed by the Borrower; (b) receipt by the Bank of the duly executed Notes complying with the provisions of Section 2.03; (c) receipt by the Bank of the duly executed Security Agreement, Pledge Agreement and related financing statements in form and substance satisfactory to the Bank; (d) receipt by the Bank of a certificate, dated the date of the first Borrowing, signed by a principal financial officer of the Borrower to the effect that (i) no Default hereunder has occurred and is continuing on the date of the first Borrowing and (ii) the representations and warranties of the Borrower contained in Article V are true on and as of the date of the first Borrowing hereunder; (e) receipt by the Bank of all documents which the Bank may reasonably request relating to the existence of the Borrower, the corporate authority for and the validity of this Agreement and the Notes, and any other matters relevant hereto, all in form and substance satisfactory to the Bank, including without limitation a certificate of incumbency of the Borrower, signed by the Secretary or an Assistant Secretary of the Borrower, certifying as to the names, true signatures and incumbency of the officer or officers of the Borrower authorized to execute and deliver the Loan Documents, and certified copies of the following items: (i) the Borrower's Certificate of Incorporation, (ii) the Borrower's Bylaws, (iii) a certificate of the Secretary of State (or other appropriate office) of the jurisdiction of the Borrower's incorporation as to the good standing of the Borrower as a corporation of such jurisdiction, and (iv) the action taken by the Board of Directors of the Borrower authorizing the Borrower's execution, delivery and performance of this Agreement, the Notes and the other Loan Documents to which the Borrower is a party; (f) receipt by the Bank of an opinion of counsel of Alston & Bird LLP, counsel for the Borrower, substantially in the form of Exhibit D hereto, and covering such additional matters relating to the transactions contemplated hereby as the Bank may reasonably request; and (g) all indebtedness of the Borrower to the Bank under the 1998 Credit Agreement shall have been repaid in full (or shall be repaid in full with proceeds from the initial Advances hereunder). SECTION IV.2. Conditions to All Borrowings. The obligation of the Bank to make an Advance on the occasion of each Borrowing is subject to the satisfaction of the following conditions: 23 29 (a) receipt by the Bank of Notice of Borrowing if required by Section 2.02; (b) the fact that, immediately after such Borrowing, no Default shall have occurred and be continuing; (c) the fact that the representations and warranties of the Borrower contained in Article V shall be true on and as of the date of such Borrowing; and (d) the fact that, immediately after such Borrowing, the aggregate outstanding principal amount of the Advances under the respective Commitments will not exceed the amount of the respective Commitments. Each Borrowing hereunder shall be deemed to be a representation and warranty by the Borrower on the date of such Borrowing as to the facts specified in clauses (b), (c) and (d) of this Section; provided that such Borrowing shall not be deemed to be such a representation and warranty to the effect set forth in Section 5.04(b) as to any material adverse change which has theretofore been disclosed in writing by the Borrower to the Bank if the aggregate outstanding principal amount of the Advances immediately after such Borrowing will not exceed the aggregate outstanding principal amount of Advances immediately before such Borrowing. ARTICLE V. REPRESENTATIONS AND WARRANTIES The Borrower represents and warrants that: SECTION V.1. Corporate Existence and Power. The Borrower is a corporation duly organized, validly existing and in good standing under the laws of the jurisdiction of its incorporation, is duly qualified to transact business in every jurisdiction where, by the nature of its business, such qualification is necessary, and has all corporate powers and all governmental licenses, authorizations, consents and approvals required to carry on its business as now conducted. SECTION V.2. Corporate and Governmental Authorization; Contravention. The execution, delivery and performance by the Borrower of this Agreement, the Notes and the other Loan Documents (i) are within the Borrower's corporate powers, (ii) have been duly authorized by all necessary corporate action, (iii) require no action by or in respect of, or filing with, any governmental body, agency or official, (iv) do not contravene, or constitute a default under, any provision of applicable law or regulation or of the certificate of incorporation or by-laws of the Borrower or of any agreement, judgment, injunction, order, decree or other instrument binding upon the Borrower or any of its Subsidiaries, and (v) do not result in the creation or imposition of any Lien on any asset of the Borrower or any of its Subsidiaries except for Permitted Encumbrances. SECTION V.3. Binding Effect. This Agreement constitutes a valid and binding agreement of the Borrower enforceable in accordance with its terms, and the Notes and the other Loan Documents, when executed and delivered in accordance with this Agreement, will constitute valid and binding obligations of the Borrower enforceable in accordance with their respective terms, provided that the enforceability hereof and thereof is subject in each case to general principles of equity and to bankruptcy, insolvency and similar laws affecting the enforcement of creditors' rights generally. 24 30 SECTION V.4. Financial Information. (a) The consolidating and consolidated balance sheet of Bull Run and its Consolidated Subsidiaries as of December 31, 1997 and the related consolidating and consolidated statements of income, shareholders' equity and cash flows for the Fiscal Year then ended, reported on (in the case of the consolidated balance sheet and consolidated statements of income, shareholders' equity and cash flows only) by Ernst & Young LLP, copies of which have been delivered to the Bank, and the unaudited consolidating and consolidated financial statements of Bull Run and its Consolidated Subsidiaries for the interim period ended September 30, 1998, copies of which have been delivered to the Bank, fairly present, in conformity with GAAP, the consolidating and consolidated financial position of Bull Run and its Consolidated Subsidiaries as of such dates and their consolidating results of operations and cash flows for such periods stated. (b) Since September 30, 1998 there has been no material adverse change in the business, financial position, results of operations or prospects of Bull Run and its Consolidated Subsidiaries. SECTION V.5. Litigation. Except as disclosed on Schedule 5.05 hereto, there is no action, suit or proceeding pending, or to the knowledge of the Borrower threatened, against or affecting Bull Run, the Borrower or any of their respective Subsidiaries before any court or arbitrator or any governmental body, agency or official which could materially adversely affect the business, consolidated financial position or consolidated results of operations of Bull Run, the Borrower and their respective Consolidated Subsidiaries, or which in any manner draws into question the validity of, or could impair the ability of the Borrower to perform its obligations under, this Agreement, the Notes or any of the other Loan Documents. SECTION V.6. Compliance with ERISA. (a) The Borrower and each member of the Controlled Group have fulfilled their obligations under the minimum funding standards of ERISA and the Code with respect to each Plan and are in compliance in all material respects with the presently applicable provisions of ERISA and the Code, and have not incurred any liability to the PBGC or a Plan under Title IV of ERISA. (b) Neither the Borrower nor any member of the Controlled Group is or ever has been obligated to contribute to any Multiemployer Plan. SECTION V.7. Taxes. There have been filed on behalf of Bull Run, the Borrower and their respective Subsidiaries all Federal, state and local income, excise, property and other tax returns which are required to be filed by them and all taxes due pursuant to such returns or pursuant to any assessment received by or on behalf of Bull Run, the Borrower or any Subsidiary of Bull Run or the Borrower have been paid except for those which are in good faith being contested by such Person and for which adequate reserves have been provided in accordance with GAAP. The charges, accruals and reserves on the books of Bull Run, the Borrower and their respective Subsidiaries in respect of taxes or other governmental charges are, in the opinion of the Borrower, adequate. United States income tax returns of Bull Run, the Borrower and their respective Subsidiaries have been examined and closed through the Fiscal Year ended December 31, 1997. SECTION V.8. Subsidiaries. Each of Bull Run's Subsidiaries is a corporation duly organized, validly existing and in good standing under the laws of its jurisdiction of incorporation, and has all corporate powers and all governmental licenses, authorizations, consents and approvals required to carry on its business as now conducted except where the failure to have such licenses, authorizations, consents and approvals could not reasonably be expected to have a material adverse effect on such Subsidiaries, taken as a whole. 25 31 SECTION V.9. Not an Investment Company. The Borrower is not an "investment company" within the meaning of the Investment Company Act of 1940, as amended. SECTION V.10. Ownership of Property; Liens. Each of the Borrower and its Consolidated Subsidiaries has title to its properties sufficient for the conduct of its business, and none of such property is subject to any Lien except for Permitted Encumbrances. SECTION V.11. No Default. Neither the Borrower nor any of its Consolidated Subsidiaries is in default under or with respect to any agreement, instrument or undertaking to which it is a party or by which it or any of its property is bound which will be materially adverse to the business, operations, property or financial or other condition of the Borrower and its Consolidated Subsidiaries, or which will materially adversely affect the ability of the Borrower to perform its obligations under the Loan Documents. No Default has occurred and is continuing (except for the Defaults existing on the date of this Agreement described in Section 7.01(f)). SECTION V.12. Full Disclosure. All information heretofore furnished by the Borrower to the Bank for purposes of or in connection with this Agreement or any transaction contemplated hereby is, and all such information hereafter furnished by the Borrower to the Bank will be, true, accurate and complete in every material respect or based on reasonable estimates on the date as of which such information is stated or certified. The Borrower has disclosed to the Bank in writing any and all facts which materially and adversely affect or may affect (to the extent the Borrower can now reasonably foresee), the business, operations, prospects or condition, financial or otherwise, of the Borrower and its Consolidated Subsidiaries or the ability of the Borrower to perform its obligations under this Agreement. SECTION V.13. Environmental Matters. (a) Neither the Borrower nor any Subsidiary of the Borrower is subject to any Environmental Liability which is likely to have a material adverse effect on the business, financial position, results of operations or prospects of the Borrower or any of its Subsidiaries and neither the Borrower nor any of its Subsidiaries has been designated as a potentially responsible party under CERCLA or under any state statute similar to CERCLA. None of the Properties have been identified on any current or proposed (i) National Priorities List under 40 C.F.R. ss. 300, (ii) CERCLIS list or (iii) any list arising from a state statute similar to CERCLA. (b) No Hazardous Materials have been or are being used, produced, manufactured, processed, generated, stored, disposed of, managed at, or shipped or transported to or from the Properties or are otherwise present at, on, in or under the Properties, or, to the best of the knowledge of the Borrower, at or from any adjacent site or facility, except for Hazardous Materials, such as cleaning solvents, pesticides and other materials used, produced, manufactured, processed, generated, stored, disposed of, and managed in the ordinary course of business in compliance with all applicable Environmental Requirements. (c) The Borrower and each of its Subsidiaries has procured all Environmental Authorizations necessary for the conduct of its business, and is in compliance with all Environmental Requirements in connection with the operation of the Properties and the Borrower's and each of its Subsidiary's and Affiliate's respective businesses except, in either case, where the failure to procure such Environmental Authorizations or to be in compliance with such Environmental Requirements could not reasonably be expected to have a material adverse effect on the Borrower and its Subsidiaries, taken as a whole. SECTION V.14. Compliance with Laws. The Borrower and each Subsidiary of the Borrower is in compliance with all applicable laws, except where any failure to comply with any such laws 26 32 could not, alone or in the aggregate, be reasonably expected to have a material adverse effect on the business, financial position, results of operations or prospects of the Borrower or any of its Subsidiaries, taken as a whole. ARTICLE VI. COVENANTS The Borrower agrees that, so long as the Commitments are in effect hereunder or any amount payable under this Agreement remains unpaid: SECTION VI.1. Information. The Borrower will deliver or cause to be delivered to the Bank: (a) as soon as available and in any event within 90 days after the end of each Fiscal Year, a consolidating and consolidated balance sheet of Bull Run and its Consolidated Subsidiaries as of the end of such Fiscal Year and the related consolidating and consolidated statements of income, shareholders' equity and cash flows for such Fiscal Year, setting forth in each case in comparative form the figures for the previous fiscal year, and in the case of the consolidated balance sheet and consolidated statements of income, shareholders' equity and cash flows certified by Ernst & Young LLP or other independent public accountants of nationally recognized standing, with such certification to be free of exceptions and qualifications not acceptable to Bank, and in the case of the consolidating balance sheet and the consolidating statements of income, shareholders' equity and cash flows certified by the chief financial officer or the chief accounting officer of Bull Run or the Borrower as to fairness of presentation, GAAP and consistency. (b) as soon as available and in any event within 60 days after the end of each of the first three quarters of each Fiscal Year, a consolidating and consolidated balance sheet of Bull Run and its Consolidated Subsidiaries as of the end of such quarter and the related consolidating and consolidated statement of income and statement of cash flows for such quarter and for the portion of the Fiscal Year ended at the end of such quarter, all certified (subject to normal year-end adjustments) as to fairness of presentation, GAAP and consistency by the chief financial officer or the chief accounting officer of Bull Run or the Borrower; (c) as soon as available and in any event within thirty days after the end of each calendar month, a balance sheet of the Borrower as of the end of such month and the related statement of income and statement of cash flows for such month and for the portion of the fiscal year ended at the end of such month, all certified (subject to normal year-end adjustments) as to fairness of presentation, GAAP and consistency by the chief financial officer or the chief accounting officer of the Borrower. (d) simultaneously with the delivery of each set of financial statements referred to in clauses (a), (b) and (c) above, a certificate of the chief financial officer or the chief accounting officer of Bull Run or the Borrower (i) setting forth in reasonable detail the calculations required to establish whether the Borrower was in compliance with the requirements of 27 33 Sections 6.03 through 6.07, inclusive, on the date of such financial statements and (ii) stating whether any Default exists on the date of such certificate and, if any Default then exists, setting forth the details thereof and the action which the Borrower is taking or proposes to take with respect thereto; (e) within five Domestic Business Days after the Borrower becomes aware of the occurrence of any Default, a certificate of the chief financial officer or the chief accounting officer of the Borrower setting forth the details thereof and the action which the Borrower is taking or proposes to take with respect thereto; (f) promptly upon the mailing thereof to the shareholders of Bull Run or the Borrower generally, copies of all financial statements, reports and proxy statements so mailed; (g) promptly upon the filing thereof, copies of all registration statements (other than the exhibits thereto and any registration statements on Form S-8 or its equivalent) and annual, quarterly or monthly reports which the Borrower or Bull Run shall have filed with the Securities and Exchange Commission; (h) if and when any member of the Controlled Group (i) gives or is required to give notice to the PBGC of any Reportable Event with respect to any Plan which might constitute grounds for a termination of such Plan under Title IV of ERISA, or knows that the plan administrator of any Plan has given or is required to give notice of any such Reportable Event, a copy of the notice of such Reportable Event given or required to be given to the PBGC; (ii) receives notice of complete or partial withdrawal liability under Title IV of ERISA, a copy of such notice; or (iii) receives notice from the PBGC under Title IV of ERISA of an intent to terminate or appoint a trustee to administer any Plan, a copy of such notice; and (i) from time to time such additional information regarding the financial position or business of Bull Run, the Borrower and their respective Subsidiaries as the Bank may reasonably request. SECTION VI.2. Inspection of Property, Books and Records. The Borrower will keep, and will cause each of its Subsidiaries to keep, proper books of record and account in which full, true and correct entries in conformity with GAAP shall be made of all dealings and transactions in relation to its business and activities; and will permit, and will cause each of its Subsidiaries to permit, representatives of the Bank at the Bank's expense prior to the occurrence of an Event of Default and at the Borrower's expense after the occurrence of an Event of Default to visit and inspect any of their respective properties, to examine and make abstracts from any of their respective books and records and to discuss their respective affairs, finances and accounts with their respective officers, employees and independent public accountants. The Borrower agrees to cooperate and assist in such visits and inspections, in each case at such reasonable times and as often as may reasonably be desired. SECTION VI.3. Ratio of Consolidated Funded Debt to EBITDA. (a) At the end of each Fiscal Quarter, commencing with the Fiscal Quarter ending June 30, 1999, the ratio of Consolidated Funded Debt to EBITDA will not at any time exceed the following limits: 28 34 (i) from June 30, 1999 through December 31, 1999, the ratio of Consolidated Funded Debt to EBITDA will not exceed 4.00 to 1.00; and (ii) from January 1, 2000 through December 31, 2000, the ratio of Consolidated Funded Debt to EBITDA will not exceed 2.50 to 1.00. (b) The ratio of Consolidated Funded Debt to EBITDA shall be determined at the end of each Fiscal Quarter, commencing with the Fiscal Quarter ending June 30, 1999, and shall be the ratio of Consolidated Funded Debt as at the end of the applicable Fiscal Quarter to EBITDA for the twelve months then ended. SECTION VI.4. Minimum Stockholders' Equity. Stockholders' Equity will at no time be less than $28,000,000.00 plus the sum of 50% of the cumulative Reported Net Income of the Borrower and its Consolidated Subsidiaries during any period after December 31, 1998 (taken as one accounting period), calculated monthly beginning January 31, 1999 and monthly thereafter but excluding from such calculations any month in which the Net Income of the Borrower and its Consolidated Subsidiaries is negative. SECTION VI.5. Fixed Charges Coverage. (a) At the end of each Fiscal Quarter, commencing with the Fiscal Quarter ending June 30, 1999, the Fixed Charges Coverage Ratio, as determined in accordance with Section 6.05(b), shall not be less than the following limits: (i) from June 30, 1999 through December 31, 1999, the Fixed Charges Coverage Ratio shall not be less than 1.00 to 1.00; and (ii) from January 1, 2000 through December 31, 2000, the Fixed Charges Coverage Ratio shall not be less than 2.00 to 1.00. (b) The Fixed Charges Coverage Ratio shall be determined at the end of each Fiscal Quarter, commencing with the Fiscal Quarter ending June 30, 1999, and shall be the ratio of Income Available for Fixed Charges for the twelve months then ended to Consolidated Fixed Charges for the twelve months then ended. SECTION VI.6. Investments. The Borrower shall not make Investments in any Person except (a) Investments in (i) direct obligations of the United States Government maturing within one year, (ii) certificates of deposit issued by a commercial bank whose credit is satisfactory to the Bank, (iii) commercial paper rated A-1 or the equivalent thereof by Standard & Poor's Corporation or P-1 or the equivalent thereof by Moody's Investors Service, Inc. and in either case maturing within 6 months after the date of acquisition and/or (iv) tender bonds the payment of the principal of and interest on which is fully supported by a letter of credit issued by a United States bank whose long-term certificates of deposit are rated at least AA or the equivalent thereof by Standard & Poor's Corporation and Aa or the equivalent thereof by Moody's Investors Service, Inc. and (b) other Investments to the extent such Investments do not cause the Borrower to be in violation of any other provision of this Agreement, including, without limitation, Section 6.04. SECTION VI.7. Negative Pledge. Neither the Borrower nor any Consolidated Subsidiary of the Borrower will create, assume or suffer to exist any Lien on any asset now owned or hereafter acquired by it, except for Permitted Encumbrances. 29 35 SECTION VI.8. Maintenance of Existence. The Borrower shall, and shall cause each of its Subsidiaries to, maintain its corporate existence and carry on its business in substantially the same manner and in substantially the same fields as such business is now carried on and maintained. SECTION VI.9. Dissolution. Neither the Borrower nor any of its Subsidiaries shall suffer or permit dissolution or liquidation either in whole or in part or redeem or retire any shares of its own stock or that of any of its Subsidiaries, except through corporate reorganization to the extent permitted by Section 6.10. SECTION VI.10. Consolidations, Mergers and Sales of Assets. The Borrower will not, nor will it permit any of its Subsidiaries to, consolidate or merge with or into, or sell, lease or otherwise transfer all or any substantial part of its assets to, any other Person, or discontinue or eliminate any business line or segment, provided that (a) the Borrower may merge with another Person if (i) such Person was organized under the laws of the United States of America or one of its states, (ii) the Borrower is the corporation surviving such merger and (iii) immediately after giving effect to such merger, no Default shall have occurred and be continuing, and (b) Subsidiaries of the Borrower may merge with one another. SECTION VI.11. Use of Proceeds. No portion of the proceeds of the Advances will be used by the Borrower (i) in connection with any tender offer for, or other acquisition of, stock of any corporation with a view towards obtaining control of such other corporation, (ii) directly or indirectly, for the purpose, whether immediate, incidental or ultimate, of purchasing or carrying any Margin Stock, or (iii) for any purpose in violation of any applicable law or regulation. SECTION VI.12. Compliance with Laws; Payment of Taxes. The Borrower will, and will cause each of its Subsidiaries and each member of the Controlled Group to, comply with applicable laws (including but not limited to ERISA), regulations and similar requirements of governmental authorities (including but not limited to PBGC), except where the necessity of such compliance is being contested in good faith through appropriate proceedings or where the failure to comply could not reasonably be expected to have a material adverse effect on the Borrower or any of its Consolidated Subsidiaries. The Borrower will, and will cause each of its Subsidiaries to, pay promptly when due all taxes, assessments, governmental charges, claims for labor, supplies, rent and other obligations which, if unpaid, might become a lien against the property of the Borrower or any of its Subsidiaries, except liabilities being contested in good faith and against which, if requested by the Bank, the Borrower will set up reserves satisfactory to the Bank. SECTION VI.13. Insurance. The Borrower will maintain, and will cause each of its Subsidiaries to maintain (either in the name of the Borrower or in such Subsidiary's own name), with financially sound and reputable insurance companies, insurance on all its property in at least such amounts and against at least such risks as are usually insured against in the same general area by companies of established repute engaged in the same or similar business. SECTION VI.14. Change in Fiscal Year. The Borrower will not change its Fiscal Year without the consent of the Bank. 30 36 SECTION VI.15. Maintenance of Property. The Borrower shall, and shall cause each of its Subsidiaries to, maintain all of its properties and assets in good condition, repair and working order, ordinary wear and tear excepted. SECTION VI.16. Environmental Notices. The Borrower shall furnish to the Bank prompt written notice of all Environmental Liabilities, pending, threatened or anticipated Environmental Proceedings, Environmental Notices, Environmental Judgments and Orders, and Environmental Releases at, on, in, under or in any way affecting the Properties or any adjacent property, and all facts, events, or conditions that could lead to any of the foregoing. SECTION VI.17. Environmental Matters. The Borrower will not, and will not permit any Third Party to, use, produce, manufacture, process, generate, store, dispose of, manage at, or ship or transport to or from the Properties any Hazardous Materials except for Hazardous Materials such as cleaning solvents, pesticides and other similar materials used, produced, manufactured, processed, generated, stored, disposed or managed in the ordinary course of business in compliance with all applicable Environmental Requirements. SECTION VI.18. Environmental Release. The Borrower agrees that upon the occurrence of an Environmental Release it will act immediately to investigate the extent of, and to take appropriate remedial action to eliminate, such Environmental Release, whether or not ordered or otherwise directed to do so by any Environmental Authority. SECTION 6.19. Debt. The Borrower will not, and will not permit any of its Consolidated Subsidiaries to, incur, borrow, assume or suffer to exist any Debt other than Debt outstanding under this Agreement and other Debt outstanding on the date of this Agreement and reflected in the financial statements referenced in Section 5.04 (but not increases of any such other Debt outstanding on the date of this Agreement). SECTION 6.20. Collateral Maintenance. The Obligations are secured by personal property described in the Security Agreement and certain investment securities described in the Pledge Agreement. The Borrower agrees that the Borrower will at all times maintain collateral in which the Bank shall have a first priority perfected security interest having an aggregate value (as determined quarterly based on the value reflected for such collateral in the financial statements furnished to the Bank pursuant to Section 6.01(a) and (b)) at least equal to the aggregate amount of the Obligations at the time of determination; provided that in determining the value of collateral pledged to the Bank to secure the Obligations as provided in this Section, the investment securities pledged to the Bank pursuant to the Pledge Agreement shall be excluded. SECTION 6.21 Interest Rate Protection. The Borrower shall enter into on or before the Closing Date and maintain so long as any Obligations under the Facility A Commitment remain outstanding an interest rate protection agreement or other interest rate hedge or arrangement in form and substance satisfactory to the Bank fixing the interest rate on Advances under the Facility A Commitment. The Bank acknowledges that the International Swap Dealers Association Master Agreement and related documentation dated January 15, 1998 executed by the Borrower and the Bank satisfy the requirements of this Section so long as such documentation remains in effect. SECTION 6.22 Interest Coverage. (a) At the end of each Fiscal Quarter, commencing with the Fiscal Quarter ending March 31, 1999, the Interest Coverage Ratio, as determined in accordance with Section 6.22(b), shall not be less than the following limits: 31 37 (i) at March 31, 1999, the Interest Coverage Ratio shall not be less than 1.60 to 1.00; (ii) from June 30, 1999 through December 31, 1999, the Interest Coverage Ratio shall not be less than 1.85 to 1.00; and (iii) from January 1, 2000 through December 31, 2000, the Interest Coverage Ratio shall not be less than 2.75 to 1.00. (b) The Interest Coverage Ratio shall be determined at the end of each Fiscal Quarter, commencing with the Fiscal Quarter ending March 31, 1999, and shall be the ratio of EBITDA for the twelve months then ended to Consolidated Interest Expense for the twelve months then ended. ARTICLE VII. DEFAULTS SECTION VII.1. Events of Default. The occurrence of any one or more of the following events shall constitute an Event of Default by the Borrower under this Agreement: (a) the Borrower shall fail to pay when due any principal of any Advance or shall fail to pay any interest on any Advance within five Domestic Business Days after such interest shall become due, or shall fail to pay any fee or other amount payable hereunder within five Domestic Business Days after such fee or other amount becomes due; or (b) the Borrower shall fail to observe or perform any covenant contained in Sections 6.03 through 6.11, inclusive; or (c) the Borrower shall fail to observe or perform any covenant or agreement contained in this Agreement (other than those covered by clause (a) or (b) above) for thirty days after the earlier of (i) the first day on which a responsible officer of the Borrower has knowledge of such failure, or (ii) written notice thereof has been given to the Borrower by the Bank; or (d) any representation, warranty, certification or statement made by the Borrower in Article V or in any certificate, financial statement or other document delivered pursuant to this Agreement shall prove to have been incorrect in any material respect when made (or deemed made); or (e) Bull Run shall fail to make any payment in respect of any Debt outstanding in the aggregate in excess of $500,000 when due or within any applicable grace period or the Borrower or any Subsidiary of Bull Run or the Borrower shall fail to make any payment in respect of any Debt outstanding (other than the Notes) in the aggregate in excess of $250,000 when due or within any applicable grace period; or (f) (i) any event or condition shall occur which results in the acceleration of the maturity of Debt outstanding of Bull Run in the aggregate in excess of $500,000 or of Debt of the Borrower or any Subsidiary of Bull Run or the Borrower in the aggregate in excess of $250,000 or the purchase of such Debt in the aggregate in excess of $500,000 by Bull Run (or its designees) prior to the scheduled maturity thereof, or the purchase of such Debt in the aggregate in excess of $250,000 by the Borrower (or its designee) or such Subsidiary of Bull 32 38 Run (or its designee) or such Subsidiary of the Borrower (or its designee) prior to the scheduled maturity thereof or (ii) enables (or, with the giving of notice or lapse of time or both, would enable) the holders of such Debt or any Person acting on such holders' behalf to accelerate the maturity of Debt in the aggregate in excess of $500,000 or require the purchase thereof by Bull Run (or its designee) prior to the scheduled maturity thereof, or enables (or, with the giving of notice or lapse of time or both, would enable) the holders of such Debt or any Person acting on such holders' behalf to accelerate the maturity of Debt in the aggregate in excess of $250,000 or require the purchase thereof by the Borrower (or its designee) or such Subsidiary of Bull Run (or its designee) or such subsidiary of the Borrower (or its designee) prior to the scheduled maturity thereof, without regard to whether such holders or other Person shall have exercised or waived their right to do so; provided, however, that if the holder of any such Debt shall have waived its right to accelerate the maturity of such Debt or require the purchase of such Debt prior to its scheduled maturity and the Bank shall not have declared the Notes to be due and payable pursuant to Section 7.02, Bank shall be deemed to have waived any Event of Default (and its right to declare an Event of Default) arising by reason of this subsection (ii). (g) Bull Run, the Borrower or any Subsidiary of Bull Run or the Borrower shall commence a voluntary case or other proceeding seeking liquidation, reorganization or other relief with respect to itself or its debts under any bankruptcy, insolvency or other similar law now or hereafter in effect or seeking the appointment of a trustee, receiver, liquidator, custodian or other similar official of it or any substantial part of its property, or shall consent to any such relief or to the appointment of or taking possession by any such official in an involuntary case or other proceeding commenced against it, or shall make a general assignment for the benefit of creditors, or shall fail generally to pay its debts as they become due, or shall take any corporate action to authorize any of the foregoing; or (h) an involuntary case or other proceeding shall be commenced against Bull Run, the Borrower or any Subsidiary of Bull Run or the Borrower seeking liquidation, reorganization or other relief with respect to it or its debts under any bankruptcy, insolvency or other similar law now or hereafter in effect or seeking the appointment of a trustee, receiver, liquidator, custodian or other similar official of it or any substantial part of its property, and such involuntary case or other proceeding shall remain undismissed and unstayed for a period of 60 days; or an order for relief shall be entered against Bull Run, the Borrower or any Subsidiary of Bull Run or the Borrower under the federal bankruptcy laws as now or hereafter in effect; or (i) the Borrower or any member of the Controlled Group shall fail to pay when due any material amount which it shall have become liable to pay to the PBGC or to a Plan under Title IV of ERISA; or the PBGC shall institute proceedings under Title IV of ERISA to terminate or to cause a trustee to be appointed to administer any such Plan or Plans or a proceeding shall be instituted by a fiduciary of any such Plan or Plans to enforce Section 515 or 4219(c)(5) of ERISA and such proceeding shall not have been dismissed within 60 days thereafter; or a condition shall exist by reason of which the PBGC would be entitled to obtain a decree adjudicating that any such Plan or Plans must be terminated; or 33 39 (j) one or more judgments or orders for the payment of money in an aggregate amount in excess of $250,000.00 (exclusive of any amounts covered by insurance as to which the insurance carrier is not disputing its obligations with respect to such insurance) shall be rendered against the Borrower or any Subsidiary of the Borrower and such judgment or order shall continue unsatisfied and unstayed for a period of 30 days; or (k) a federal tax lien shall be filed against the Borrower under Section 6323 of the Code or a lien of the PBGC shall be filed against the Borrower under Section 4068 of ERISA and in either case such lien shall remain undischarged for a period of 60 days after the date of filing; or (l) any Person or two or more Persons acting in concert shall have acquired beneficial ownership (within the meaning of Rule 13d-3 of the Securities and Exchange Commission under the Securities Exchange Act of 1934) of 20% or more of the outstanding shares of the voting stock of Bull Run or the Borrower; or (ii) as of any date a majority of the Board of Directors of Bull Run or the Borrower consists of individuals who were not either (A) directors of Bull Run or the Borrower as of the corresponding date of the previous year, (B) selected or nominated to become directors by the Board of Directors of Bull Run or the Borrower of which a majority consisted of individuals described in clause (A), or (C) selected or nominated to become directors by the Board of Directors of Bull Run or the Borrower of which a majority consisted of individuals described in clause (A) and individuals described in clause (B). SECTION 7.02. Remedies on Default. Upon the occurrence of an Event of Default, the Bank may, by notice to the Borrower, terminate the Commitments which shall thereupon terminate, and by notice to the Borrower declare the Notes (together with accrued interest thereon) to be, and the Notes and all outstanding Advances shall thereupon become, immediately due and payable without presentment, demand, protest or other notice of any kind, all of which are hereby waived by the Borrower; provided that if any Event of Default specified in clause (g) or (h) above occurs with respect to the Borrower, without any notice to the Borrower or any other act by the Bank, the Commitments shall thereupon terminate and the Notes and all outstanding Advances (together with accrued interest thereon) and fees shall become immediately due and payable without presentment, demand, protest or other notice of any kind, all of which are hereby waived by the Borrower. SECTION 7.03. Security Interest; Offset. In addition to, and not in limitation of, all rights of offset that the Bank or other holder of either Note may have under applicable law, the Borrower hereby grants to the Bank, and to each Participant, Assignee or other Transferee, as security for the full and punctual payment and performance of the obligations to pay to the Bank the principal of and interest on the Advances and other amounts due hereunder, a continuing lien on and security interest in all deposits and other sums credited by or due from the Bank (or such Participant, Assignee or other Transferee) to the Borrower or subject to withdrawal by the Borrower; and regardless of the adequacy of any collateral or other means of obtaining repayment of the Obligations, the Bank (and each such Assignee and, to the extent permitted by applicable law, each such Participant and other Transferee) may, at any time after the occurrence of an Event of Default and without notice to the Borrower, set off the whole or any portion or portions of any or all such deposits and other sums against the amounts owing under this Agreement and the Notes, whether or not any other Person or Persons could also withdraw money therefrom. 34 40 ARTICLE VIII. MISCELLANEOUS SECTION VIII.1. Notices. All notices, requests and other communications to any party hereunder shall be in writing (including facsimile transmission or similar writing) and shall be given to such party at its address set forth below or such other address as such party may hereafter specify for the purpose by notice to the other party: (a) If to the Borrower: Datasouth Computer Corporation P. O. Box 240947 Charlotte, North Carolina 28224 Attention: Frederick J. Erickson Fax number: (704) 525-1301 (b) If to the Bank: Wachovia Bank, N.A. P. O. Box 31608 Charlotte, North Carolina 28231-6071 Attention: Christopher L. Fincher Fax number: (704) 378-5035 Each such notice, request or other communication shall be effective (i) if given by mail, 72 hours after such communication is deposited in the mails with first class postage prepaid, addressed as aforesaid or (ii) if given by any other means, when delivered at the address specified in this Section; provided that notices to the Bank under Article II or Article III shall not be effective until received. SECTION VIII.2. No Waivers. No failure or delay by the Bank in exercising any right, power or privilege hereunder or under the Notes shall operate as a waiver thereof nor shall any single or partial exercise thereof preclude any other or further exercise thereof or the exercise of any other right, power or privilege. The rights and remedies herein provided shall be cumulative and not exclusive of any rights or remedies provided by law. SECTION VIII.3. Expenses; Documentary Taxes. (a) The Borrower shall pay (i) all out-of-pocket expenses of the Bank, including fees and disbursements of counsel for the Bank, in connection with the preparation of this Agreement and the other Loan Documents, any waiver or consent hereunder or any amendment hereof or any actual or alleged Default hereunder and (ii) if an Event of Default occurs, all out-of-pocket expenses incurred by the Bank, including fees and disbursements of counsel, in connection with such Event of Default and collection and other enforcement proceedings resulting therefrom, including out-of-pocket expenses incurred in enforcing this Agreement and the other Loan Documents. The Borrower shall indemnify the Bank against any transfer taxes, documentary taxes, assessments or charges made by any Authority by reason of the execution and delivery of this Agreement or the other Loan Documents. (b) The Borrower shall indemnify the Bank and each Affiliate thereof and their respective directors, officers, employees and agents from, and hold each of them harmless against, any and all losses, liabilities, claims or damages to which any of them may become subject, insofar as such losses, liabilities, 35 41 claims or damages arise out of or result from any actual or proposed use by the Borrower of the proceeds of any extension of credit by the Bank hereunder or breach by the Borrower of this Agreement or any other Loan Document or from investigation, litigation (including, without limitation, any actions taken by the Bank to enforce this Agreement or any of the other Loan Documents) or other proceeding (including, without limitation, any threatened investigation or proceeding) relating to the foregoing, and the Borrower shall reimburse the Bank, and each Affiliate thereof and their respective directors, officers, employees and agents, upon demand for any expenses (including, without limitation, legal fees) incurred in connection with any such investigation or proceeding; but excluding any such losses, liabilities, claims, damages or expenses incurred by reason of the gross negligence or willful misconduct of the Person to be indemnified. SECTION VIII.4. Amendments and Waivers. Any provision of this Agreement, the Notes or any other Loan Documents may be amended or waived if, but only if, such amendment or waiver is in writing and is signed by the Borrower and the Bank. SECTION VIII.5. Successors and Assigns. (a) The provisions of this Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns; provided that the Borrower may not assign or otherwise transfer any of its rights under this Agreement. (b) The Bank may at any time sell to one or more Persons (each a "Participant") participating interests in any Advance, the Notes, the Commitments hereunder or any other interest of the Bank hereunder. In the event of any such sale by the Bank of a participating interest to a Participant, the Bank's obligations under this Agreement shall remain unchanged, the Bank shall remain solely responsible for the performance thereof, the Bank shall remain the holder of the Notes for all purposes under this Agreement, and the Borrower shall continue to deal solely and directly with the Bank in connection with the Bank's rights and obligations under this Agreement. In no event shall the Bank be obligated to the Participant to take or refrain from taking any action hereunder except that the Bank may agree that it will not (except as provided below), without the consent of the Participant, agree to (i) the change of any date fixed for the payment of principal of or interest on the related Advance or Advances, (ii) the change of the amount of any principal, interest or fees due on any date fixed for the payment thereof with respect to the related Advance or Advances, (iii) the change of the principal of the related Advance or Advances, (iv) any change in the rate at which either interest is payable thereon or (if the Participant is entitled to any part thereof) commitment fee is payable hereunder from the rate at which the Participant is entitled to receive interest or commitment fee (as the case may be) in respect of such participation, (v) the release or substitution of all or any substantial part of the collateral (if any) held as security for the Advances, or (vi) the release of any guaranty given to support payment of the Advances. The Bank shall, within ten Domestic Business Days after selling a participating interest in any Advance, the Notes, the Commitments or other interest under this Agreement, provide the Borrower with written notification stating that such sale has occurred and identifying the Participant and the interest purchased by such Participant. The Borrower agrees that each Participant shall be entitled to the benefits of Article III and Section 7.03 with respect to its participation in Advances outstanding from time to time. (c) The Bank may at any time assign to one or more banks or financial institutions (each an "Assignee") all, or a proportionate part of all, of its rights and obligations under this Agreement and one or both Notes, and such Assignee shall assume all such rights and obligations, pursuant to an Assignment and Acceptance in the form attached hereto as Exhibit C executed by such Assignee, the Bank and the Borrower; provided that (i) no interest may be sold by the Bank pursuant to this paragraph (c) unless the Assignee shall agree to assume ratably equivalent portions of the respective Commitment, and (ii) no interest may be sold by the Bank pursuant to this paragraph (c) to any Assignee which is not an Affiliate of the Bank without the consent of the Borrower, which consent shall not be unreasonably withheld or delayed. Upon (A) execution 36 42 of the Assignment and Acceptance by the Bank, such Assignee, and the Borrower, (B) delivery of an executed copy of the Assignment and Acceptance to the Borrower, and (C) payment by such Assignee to the Bank of an amount equal to the purchase price agreed between the Bank and such Assignee, such Assignee shall for all purposes be a Bank party to this Agreement and shall have all the rights and obligations of a Bank under this Agreement to the same extent as if it were an original party hereto with a Commitment as set forth in such instrument of assumption, and the Bank shall be released from its obligations hereunder to a corresponding extent, and no further consent or action by the Borrower or the Bank shall be required. Upon the consummation of any transfer to an Assignee pursuant to this paragraph (c), the Bank and the Borrower shall make appropriate arrangements so that, if required, a new Note or Notes are issued to such Assignee. (d) Subject to the provisions of Section 8.06, the Borrower authorizes the Bank to disclose to any Participant, Assignee or other transferee (each a "Transferee") and any prospective Transferee any and all financial information in the Bank's possession concerning the Borrower which has been delivered to the Bank by the Borrower pursuant to this Agreement or which has been delivered to the Bank by the Borrower in connection with the Bank's credit evaluation prior to entering into this Agreement. (e) No Transferee shall be entitled to receive any greater payment under Section 3.03 than the transferor Bank would have been entitled to receive with respect to the rights transferred, unless such transfer is made with the Borrower's prior written consent or by reason of the provisions of Section 3.02 or 3.03 requiring the Bank to designate a different Lending Office under certain circumstances or at a time when the circumstances giving rise to such greater payment did not exist. (f) Anything in this Section 8.05 to the contrary notwithstanding, the Bank may assign and pledge all or any portion of the loans and/or obligations owing to it to any Federal Reserve Bank or the United States Treasury as collateral security pursuant to Regulation A of the Board of Governors of the Federal Reserve System and Operating Circular issued by such Federal Reserve Bank, provided that any payment in respect of such assigned Loan and/or obligations made by the Borrower to the Bank in accordance with the terms of this Agreement shall satisfy the Borrower's obligations hereunder in respect of such assigned Loan and/or obligations to the extent of such payment. No such assignment shall release the Bank from its obligations hereunder. SECTION VIII.6. Confidentiality. The Bank agrees to exercise its best efforts to keep any information delivered or made available by the Borrower to it which is clearly indicated to be confidential information, confidential from any one other than persons employed or retained by the Bank who are or are expected to become engaged in evaluating, approving, structuring or administering the Advances; provided, however, that nothing herein shall prevent the Bank from disclosing such information (i) upon the order of any court or administrative agency, (ii) upon the request or demand of any regulatory agency or authority having jurisdiction over the Bank, (iii) which has been publicly disclosed, (iv) to the extent reasonably required in connection with any litigation to which the Bank or their respective Affiliates may be a party, (v) to the extent reasonably required in connection with the exercise of any remedy hereunder, (vi) to the Bank's legal counsel and independent auditors and (vii) to any actual or proposed Participant, Assignee or other Transferee of all or part of its rights hereunder which has agreed in writing to be bound by the provisions of this Section. SECTION VIII.7. Interest Limitation. Notwithstanding any other term of this Agreement, the Notes or any other Loan Document, the maximum amount of interest which may be charged to or collected from any person liable hereunder or under the Notes by the Bank shall be absolutely limited to, and shall in no event exceed, the maximum amount or interest which could lawfully be charged or collected under applicable 37 43 law (including, to the extent applicable, the provisions of section 5197 of the Revised Statutes of the United States of America, as amended, 12 U.S.C. ss.85, as amended), so that the maximum of all amounts constituting interest under applicable law, howsoever computed, shall never exceed as to any Person liable therefor such lawful maximum, and any term of this Agreement, the Notes or any other Loan Document which could be construed as providing for interest in excess of such lawful maximum shall be and hereby is made expressly subject to and modified by the provisions of this paragraph. SECTION VIII.8. Governing Law. This Agreement and the Notes shall be construed in accordance with and governed by the law of the State of North Carolina. This Agreement and the Notes are intended to be effective as instruments executed under seal. SECTION VIII.9. Counterparts. This Agreement may be signed in any number of counterparts, each of which shall be an original, with the same effect as if the signatures thereto and hereto were upon the same instrument. SECTION VIII.10. Consent to Jurisdiction. The Borrower (a) submits to personal jurisdiction in the State of North Carolina, the courts thereof and the United States District Courts sitting therein, for the enforcement of this Agreement, the Notes and the other Loan Documents, (b) waives any and all personal rights under the law of any jurisdiction to object on any basis (including, without limitation, inconvenience of forum) to jurisdiction or venue within the State of North Carolina for the purpose of litigation to enforce this Agreement, the Notes or the other Loan Documents, and (c) agrees that service of process may be made upon it in the manner prescribed in Section 8.01 for the giving of notice to the Borrower. Nothing herein contained, however, shall prevent the Bank from bringing any action or exercising any rights against any security and against the Borrower personally, and against any assets of the Borrower, within any other state or jurisdiction. SECTION VIII.11. Severability. If any provisions of this Agreement shall be held invalid under any applicable laws, such invalidity shall not affect any other provision of this Agreement that can be given effect without the invalid provision, and, to this end, the provisions hereof are severable. 38 44 SECTION VIII.12. Captions. Captions in this Agreement are for the convenience of reference only and shall not affect the meaning or interpretation of the provisions hereof. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed as of the year and day first above written. BORROWER: DATASOUTH COMPUTER CORPORATION ATTEST: /s/ K. NICK WALLER By: /s/ FREDERICK J. ERICKSON --------------------------------------- Assistant Secretary Title: Executive VP - Finance & Administration --------------------------------------- [CORPORATE SEAL] BANK: Lending Office WACHOVIA BANK, N.A. Wachovia Bank, N.A. P. O. Box 31608 Charlotte, North Carolina 28231-6071 By: /s/ CHRISTOPHER L. FINCHER ---------------------------------------- Title: Senior Vice President ----------------------------------------
EX-10.10 3 FIRST AMENDMENT/AMENDED & RESTATED LOAN AGREEMENT 1 EXHIBIT 10.10 FIRST AMENDMENT OF AMENDED AND RESTATED LOAN AGREEMENT BETWEEN BULL RUN CORPORATION AND NATIONSBANK, N.A., DATED AS OF FEBRUARY 24, 1999 2 FIRST AMENDMENT OF AMENDED AND RESTATED LOAN AGREEMENT THIS AMENDMENT is made as of this 24th day of February, 1999, by and between BULL RUN CORPORATION, a Georgia corporation ("Borrower"), and NATIONSBANK, N.A. ("Lender"). RECITALS WHEREAS, Lender and Borrower are parties to that certain Amended and Restated Loan Agreement, dated as of March 20, 1998 (the "Loan Agreement"), pursuant to which Lender has agreed to make one or more loans from time to time to the Borrower in accordance with the terms and conditions thereof; and WHEREAS, Borrower has requested and Lender has agreed to provide an additional term loan (the "Third Term Loan") to finance the acquisition of shares of common and preferred stock of Total Sports, Inc., a Delaware corporation ("Total Sports"), and Lender and Borrower desire to modify the Loan Agreement in order to provide for the Third Term Loan, and in certain other respects in accordance with the terms and conditions set forth herein. NOW, THEREFORE, in consideration of the premises, the covenants and agreements contained herein, and other good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, Borrower and Lender do hereby agree that all capitalized terms used herein shall have the meanings ascribed thereto in the Loan Agreement as amended hereby (except as otherwise expressly defined or limited herein) and do hereby further agree as follows: 1. AMENDMENTS OF LOAN AGREEMENT. Subject to the fulfillment of the conditions precedent to the effectiveness of this Modification which are set forth below, the Loan Agreement shall be amended as follows: (a) Section 1.01 of the Loan Agreement is hereby amended by adding to Section 1.01 the following new definitions in the appropriate alphabetical order: "First Amendment" shall mean that certain First Amendment of Loan Agreement dated as of February 24, 1999, by and between Borrower and Lender. "Third Term Loan" shall mean any and all advances made by Lender to Borrower under the Third Term Loan Facility. "Third Term Loan Facility" shall mean the term loan facility provided by Lender to Borrower under Section 3.2A hereof. "Third Term Loan Facility Expiration Date" shall mean May 28, 1999 (as such date may be extended, accelerated or amended from time to time pursuant to this Agreement). "Third Term Loan Maturity Date" shall mean August 23, 1999. "Third Term Loan Maximum Availability" shall mean $4,000,000. "Third Term Loan Note" shall mean the Third Term Loan Note executed by the Borrower and payable to the order of the Lender as evidence of the Third Term Loan, and any extension, renewal, modification or replacement thereof or therefor. 3 "Third Term Loan Obligations" shall mean, collectively, any and all Obligations of Borrower to pay Lender the principal of, interest or fees on, collection costs for, or any other sums owing in respect of the Third Term Loans or the Third Term Loan Notes. "Total Sports" shall mean Total Sports, Inc., a Delaware corporation. "Total Sports Shares" shall mean all shares of common and preferred stock of Total Sports now owned or hereafter acquired by Borrower and all cash and non-cash proceeds thereof. (b) Section 1.1 of the Loan Agreement is hereby further amended by deleting from Section 1.1 the terms "Term Loan Facilities," "Term Loan Notes," and "Term Loans" and by substituting in lieu thereof the following new definitions of such terms: "Term Loan Facilities" shall mean, collectively, the First Term Loan Facility, the Second Term Loan Facility and the Third Term Loan Facility. "Term Loan Notes" shall mean, collectively, the First Term Loan Note, the Second Term Loan Note and the Third Term Loan Note. "Term Loans" shall mean, collectively, the First Term Loan, the Second Term Loan and the Third Term Loan. (c) The Loan Agreement is hereby further amended by adding the following new Section 3.2A after the existing Section 3.2 and before the existing Section 3.3: "SECTION 3.2A. THIRD TERM LOAN FACILITY. (a) Subject to the terms and conditions of this Agreement, including, without limitation, the conditions precedent set forth in Section 5.3 hereof, the Lender agrees to advance to the Borrower, from time to time on or prior to the Third Term Loan Facility Expiration Date and upon the Borrower's request therefor, a Third Term Loan in the principal amount of the Third Term Loan Maximum Availability. The Third Term Loan Facility may be disbursed in one or more advances but the Lender's commitment under the Third Term Loan Facility shall be reduced by each advance thereunder and any sums advanced under the Third Term Loan Facility may not be repaid and then re-borrowed thereunder. (b) The proceeds of the Third Term Loan shall be used to purchase shares of common and preferred stock of Total Sports." (d) The Loan Agreement is hereby further amended by adding a new Section 3.4(b-1) immediately following the existing Section 3.4(b): "(b-1) The Borrower's obligation to pay the Lender the principal of and interest on the Third Term Loan shall be evidenced by the records of the Lender (subject to Section 4.5 hereof) and by the Third Term Loan Note. The principal balance of the Third Term Loan shall be payable on the Third Term Loan Maturity Date in an amount equal to the entire remaining unpaid balance of the Third Term Loan." 2 4 (e) The Loan Agreement is hereby further amended by deleting Section 3.3(a) in its entirety and by substituting in lieu thereof, the following new Section 3.3(a): "(a) The unpaid principal balance of each of the Term Loans shall bear interest from time to time at a rate per annum equal to the Prime Rate plus the Applicable Term Loan Margin therefor as then in effect; provided, however, that Borrower may, by written notice (or by telephonic notice promptly confirmed in writing) delivered to the Lender not later than 10:00 a.m. (Atlanta time) on the second Business day prior to any Interest Period designated by the Borrower in such notice, direct that interest accrue on the unpaid principal balance of any Term Loan other than the Third Term Loan (or any portion of any Term Loan (other than the Third Term Loan) which when added to all other LIBOR Advances then outstanding under any of the Loans and which have the same Interest Period totals an amount of not less than $100,000 or any greater integral multiple thereof) outstanding from time to time during such Interest Period at a rate per annum equal to the sum of the Adjusted LIBOR for such Interest Period plus the Applicable Term Loan Margin therefor as then in effect; provided, further, however, that (i) upon the occurrence and during the continuation of any Event of Default under Section 9.1(i), (ii) or (iii) hereof, the Lender may, upon notice to the Borrower, suspend Borrower's right to use the aforesaid Adjusted LIBOR option, (ii) Borrower may not have more than six (6) Adjusted LIBOR-based interest rates in effect under this Section at any one time, and (iii) the interest rate applicable to the Term Loans shall be subject to adjustment as provided in paragraph (b) below." (f) The Loan Agreement is hereby further amended by deleting Section 4.4(a) in its entirety and by substituting in lieu thereof the following new Section 4.4(a), the purpose of which is to add a reference to the Total Sport Shares and to reflect the appropriate number of shares of Class A Common Stock of Gray pledged to the Lender under the Subsidiary Pledge Agreement after a three-to-two stock split effected in September of 1998: "(a) The Obligations shall be secured by (i) the Borrower's first priority and perfected pledge to the Lender of (A) one hundred percent of the outstanding capital stock of Datasouth, (B) 51.5 shares of common stock of Capital Sports Properties, Inc., (C) the Host Shares (other than 4,682 shares of common stock of Host Communications which secure the Second Term Loan Obligations), and (D) the Total Sports Shares, all pursuant to the Borrower Pledge Agreement, and (ii) the Partnership's first priority and perfected pledge to the Lender of 1,284,000 shares of common stock of the Borrower pursuant to the Partnership Pledge Agreement. The Obligations (other than the Third Term Loan Obligations) shall also be secured by Datasouth's first priority and perfected pledge to the Lender of 457,944 shares of Class A Common Stock of Gray pursuant to the Subsidiary Pledge Agreement." (g) The Loan Agreement is hereby further amended by deleting the number "906,924" from the second line of Section 4.4(b) and inserting in lieu thereof, the number "1,359,441", the purpose of which is to reflect the appropriate number of shares of Class A Common Stock of Gray pledged to the Lender under Purpose Credit Subsidiary Pledge Agreement after a three-to-two stock split effected in September of 1998. (h) the Loan Agreement is hereby further amended by deleting Section 7.5(c) in its entirety and by substituting in lieu thereof, the following new Section 7.5(c): 3 5 "(c) As of the last day of each calendar quarter ending on or after December 31, 1998, Borrower's Debt Service Ratio for the four quarter period then ended shall not be less than 1.1 to 1.0; provided, however, for the purpose of calculating such Debt Service Ratio for the calendar quarters ending December 31, 1998, March 31, 1999 and June 30, 1999, the Cash Flow component of such Debt Service Ratio shall include proceeds received by Borrower during the four quarter period then ended from the redemption of shares of preferred stock of Gray." (i) The Loan Agreement is hereby further amended by deleting Sections 9.1(xiv) and 9.1(xv) in their entireties and by substituting in lieu thereof, the following new Sections 9.1(xiv) and 9.1(xv): "(xiv) the aggregate value of all of J. Mack Robinson's unpledged and non-affiliated Marketable Securities shall be less than $35,000,000; or (xv) the aggregate value of J. Mack Robinson's unpledged and non-affiliated Marketable Securities which constitute capital stock of Wachovia Bank shall be less than $20,000,000." 2. NO OTHER AMENDMENTS. Except for the amendments expressly set forth and referred to in Section 1 above, the Loan Agreement shall remain unchanged and in full force and effect. Nothing in this Amendment or any of the other Supplemental Credit Documents (as defined below) is intended, or shall be construed, to constitute a novation or an accord and satisfaction of any of the Obligations or to modify, affect or impair the perfection or continuity of Lender's security interests in, security titles to or other Liens on any Collateral for the Obligations. 3. REPRESENTATIONS AND WARRANTIES. To induce Lender to enter into this Amendment, the Borrower does hereby warrant, represent and covenant to Lender that: (a) each representation or warranty of the Borrower set forth in the Loan Agreement is hereby restated and reaffirmed as true and correct on and as of the date hereof as if such representation or warranty were made on and as of the date hereof (except to the extent that any such representation or warranty expressly relates to a prior specific date or period), and no Default or Event of Default has occurred and is continuing as of this date under the Loan Agreement as amended by this Amendment; and (b) each of the Borrower, the Guarantor and the Partnership has the power and is duly authorized to enter into, deliver and perform the Supplemental Credit Documents to which it is a party, and each of the Supplemental Credit Documents is the legal, valid and binding obligation of each Credit Party enforceable against such Credit Party in accordance with its terms. 4. REIMBURSEMENT OF COSTS AND EXPENSES. The Borrower hereby agrees to reimburse Lender on demand for all costs (including reasonable attorneys' fees) incurred by Lender in negotiating, documenting and consummating this Amendment, the other documents referred to herein, and the transactions contemplated hereby and thereby. 5. CONDITIONS PRECEDENT TO EFFECTIVENESS OF THIS AMENDMENT. The effectiveness of this Amendment and the amendments provided in Section 1 above are subject to the truth and accuracy in all material respects of the representations and warranties of the Borrower contained in Section 3 above and to the fulfillment of the following additional conditions precedent (all documents described below shall be in form and substance satisfactory to Lender, and are herein collectively called the "Supplemental Credit Documents"): 4 6 (a) Lender shall have received one or more duly executed counterparts of this Amendment, a Third Term Loan Note, the First Amendment of Borrower Pledge Agreement, the First Amendment of Subsidiary Stock Pledge Agreement, the First Amendment of Purpose Credit Subsidiary Stock Pledge Agreement and the First Amendment of Option Agreement; (b) Lender shall have received stock certificates evidencing all Total Sports Shares, together with undated blank stock transfer powers for the same duly executed by the appropriate Credit Parties; (c) Lender shall have received a duly executed Datasouth Reaffirmation and Consent to First Amendment of Loan Agreement from Datasouth, a duly executed Purchaser Reaffirmation and Consent to First Amendment of Loan Agreement from the Purchaser and a duly executed Partnership Reaffirmation and Consent to First Amendment of Loan Agreement from the Partnership; and (d) Lender shall have received a duly executed and completed Federal Reserve Form U-1 relating to the Third Term Loan. 6. REFERENCE TO AND EFFECT ON THE CREDIT DOCUMENTS. Upon the effectiveness of this Amendment, each reference in the Loan Agreement to "this Agreement," "hereunder," "hereof" or words of like import referring to the Loan Agreement, and each reference in the other Credit Documents to "the Loan Agreement," "thereunder," "thereof" or words of like import referring to the Loan Agreement, shall mean and be a reference to the Loan Agreement as amended hereby. 7. COUNTERPARTS. This Amendment may be executed in multiple counterparts, each of which shall be deemed to be an original and all of which when taken together shall constitute one and the same instrument. 8. GOVERNING LAW. This Amendment shall be governed by, and construed in accordance with, the internal laws of the State of Georgia applicable to contracts made and performed in such state. 5 7 IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be duly executed and delivered as of the day and year specified at the beginning hereof. BORROWER: BULL RUN CORPORATION By: /s/ FREDERICK J. ERICKSON Name: Frederick J. Erickson Title: VP-Finance LENDER: NATIONSBANK, N.A. By: /s/ DAVID B. JACKSON Name: David B. Jackson Title: Senior Vice President EX-10.13 4 $4,000,000 THIRD TERM LOAN NOTE 1 EXHIBIT 10.13 $4,000,000 THIRD TERM LOAN NOTE DATED AS OF FEBRUARY 24, 1999 2 THIRD TERM LOAN NOTE $4,000,000 FEBRUARY 24, 1999 FOR VALUE RECEIVED, the undersigned, BULL RUN CORPORATION, a Georgia corporation (the "Borrower"), hereby promises to pay to the order of NATIONSBANK, N.A., (herein, together with any subsequent holder hereof, called the "Lender"), the principal sum of FOUR MILLION AND NO/100 DOLLARS ($4,000,000), or the outstanding principal amount of the Third Term Loan made to the Borrower by the Lender pursuant to the Loan Agreement referred to below, which principal sum shall be payable (i) in installments on the due dates and in the amounts set forth in the Loan Agreement or (ii) on any earlier date on which all amounts outstanding under this Third Term Loan Note (this "Note") have become due and payable pursuant to the provisions of Section 9.2 of the Loan Agreement. The Borrower likewise promises to pay interest on the outstanding principal balance of the Third Term Loan made by the Lender to the Borrower, at such interest rates, payable at such times, and computed in such manner, as are specified in the Loan Agreement in strict accordance with the terms thereof. This Note is issued pursuant to, and is the Third Term Loan Note referred to in the Amended and Restated Loan Agreement dated as of March 20, 1998, between the Borrower and the Lender (as the same may be amended or supplemented from time to time, the "Loan Agreement"), and the Lender is and shall be entitled to all benefits thereof and of all the other Credit Documents executed and delivered to the Lender in connection therewith. Terms defined in the Loan Agreement are used herein with the same meaning. The Loan Agreement, among other things, contains provisions for acceleration of the maturity hereof upon the happening of certain Events of Default, provisions relating to prepayments on account of principal hereof prior to the maturity hereof, and provisions for post-default interest rates. The Borrower agrees to make payments of principal and interest hereon on the dates and in the amounts specified in the Loan Agreement in strict accordance with the terms thereof. In case an Event of Default shall occur and be continuing, the principal and all accrued interest of this Note may automatically become, or may be declared, immediately due and payable in the manner and with the effect provided in the Loan Agreement. The Borrower agrees to pay, and save the Lender harmless against any liability for the payment of, all costs and expenses, including actual and reasonable attorneys' fees, arising in connection with the enforcement by the Lender of any of its rights or remedies under this Note or the Loan Agreement. This Note has been delivered in Atlanta, Georgia, and the rights and obligations of the Lender and the Borrower hereunder shall be construed in accordance with and governed by the laws of the State of Georgia (without giving effect to its conflicts of law rules). The Borrower expressly waives any presentment, demand, protest or notice in connection with this Note, whether now or hereafter required by applicable law. This Note is intended to be an instrument under seal. 3 IN WITNESS WHEREOF, the Borrower has caused this Note to be executed, sealed and delivered by its duly authorized officer as of the date first above written. BULL RUN CORPORATION (CORPORATE SEAL) By: /s/ FREDERICK J. ERICKSON Name: Frederick J. Erickson Title: VP-Finance EX-21 5 LIST OF SUBSIDIARIES 1 EXHIBIT 21 LIST OF SUBSIDIARIES OF REGISTRANT Datasouth Computer Corporation, a Delaware corporation Datasouth International Sales Corporation, a U.S. Virgin Islands corporation, and a subsidiary of Datasouth Computer Corporation Datasouth International, Limited, a corporation organized under the laws of England, and a subsidiary of Datasouth Computer Corporation EX-23.1 6 CONSENT OF ERNST & YOUNG/BULL RUN 1 EXHIBIT 23.1 We consent to the incorporation by reference in the Registration Statements (Form S-8 No.33-91296 and Form S-8 No. 333-56125) pertaining to the Bull Run Corporation 1994 Long Term Incentive Plan and the Registration Statement (Form S-8 No. 33-91298) pertaining to the Bull Run Corporation Non-Employee Directors' 1994 Stock Option Plan of our reports dated February 9, 1999, except as to Notes 4 and 7 to the financial statements, for which the date is March 24, 1999, with respect to the consolidated financial statements and schedule of Bull Run Corporation included herein or incorporated by reference in the Annual Report (Form 10-K) of Bull Run Corporation for the year ended December 31, 1998, filed with the Securities and Exchange Commission. /s/ ERNST & YOUNG LLP Atlanta, Georgia March 26, 1999 EX-23.2 7 CONSENT ERNST & YOUNG/GRAY COMMUNICATIONS 1 EXHIBIT 23.2 We consent to the incorporation by reference of our reports dated January 26, 1999, with respect to the consolidated financial statements and schedule of Gray Communications Systems, Inc. included in the Annual Report (Form 10-K) of Bull Run Corporation, in the Registration Statements (Form S-8 No. 33-91296 and Form S-8 No. 333-56125) pertaining to the Bull Run Corporation 1994 Long Term Incentive Plan and the Registration Statement (Form S-8 No. 33-91298) pertaining to the Bull Run Corporation Non-Employee Directors' 1994 Stock Option Plan. /s/ ERNST & YOUNG LLP Atlanta, Georgia March 26, 1999 EX-23.3 8 CONSENT OF KPMG/CAPITAL SPORTS 1 EXHIBIT 23.3 To the Board of Directors Bull Run Corporation: We consent to the incorporation by reference in the Registration Statements (Nos. 33-91296, 33-91298 and 333-56125) on Form S-8 of Bull Run Corporation of our report dated February 10, 1997 with respect to the statements of earnings, changes in stockholders' equity, and cash flows of Capital Sports Properties, Inc. for the six-months ended June 30, 1996, which report appears in the December 31, 1998 annual report on Form 10-K of Bull Run Corporation. /s/ KPMG LLP Stamford, Connecticut March 26, 1999 EX-23.4 9 CONSENT OF KPMG/HOST COMMUNICATIONS 1 EXHIBIT 23.4 Independent Auditors' Consent The Board of Directors Bull Run Corporation: We consent to the incorporation by reference in the Registration Statements (Nos. 33-91296, 33-91298 and 333-56125) on Form S-8 of Bull Run Corporation of our report dated October 11, 1996 with respect to the consolidated balance sheet of Host Communications, Inc. and subsidiaries as of June 30, 1996, and the related consolidated statements of earnings, stockholders' equity, and cash flows for the year then ended, which report appears in the December 31, 1998 annual report on Form 10-K of Bull Run Corporation. Our report refers to a change in the method of accounting for license fee revenues and rights fee expenses. /s/ KPMG LLP Cincinnati, Ohio March 26, 1999 EX-23.5 10 CONSENT OF ARTHUR ANDERSEN 1 EXHIBIT 23.5 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation of our report dated October 7, 1998, to the Stockholders of Rawlings Sporting Goods Company, Inc. included in this Form 10-K, into Bull Run Corporation's previously filed Form S-8 Registration Statement File No. 33-91296, 33-91298 and 333-56125. /s/ ARTHUR ANDERSEN LLP St. Louis, Missouri March 26, 1999 EX-27 11 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FINANCIAL STATEMENTS OF BULL RUN CORPORATION FOR THE YEAR ENDED DECEMBER 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. YEAR DEC-31-1998 JAN-31-1998 DEC-31-1998 57,579 0 6,062,351 82,000 5,166,925 11,436,363 5,046,515 2,423,612 95,171,531 8,123,580 51,848,547 0 0 228,362 29,562,381 95,171,531 29,848,101 31,466,021 22,102,544 0 2,323,289 21,941 4,246,693 (2,520,123) 1,854,204 2,359,558 0 0 0 2,359,558 .11 .11
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