-----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, KauRSHoD7QeIyZdFatk42+Kdacq3ulk298JraZ13Dm4XLL5kNBQtRGpspSzc86So OGGWx5rcJYSu+lH3p40Rag== 0000950168-98-000991.txt : 19980401 0000950168-98-000991.hdr.sgml : 19980401 ACCESSION NUMBER: 0000950168-98-000991 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 10 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980331 SROS: NASD 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: 98582330 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 ANNUAL REPORT 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, 1997 [ ] 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 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 27, 1998 was $41,613,845, 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 27, 1998, was 22,090,223. DOCUMENTS INCORPORATED BY REFERENCE Portions of the following documents are incorporated by reference: Documents Form 10-K Reference 1997 Annual Report to Shareholders Part II, Items 6, 7 and 8 Proxy Statement to be dated April 3, 1998 Part III, Items 10, 11, 12 and 13 BULL RUN CORPORATION FORM 10-K INDEX PART I Page ---- Item 1. Business......................................................... 3 Item 2. Properties....................................................... 8 Item 3. Legal Proceedings................................................ 8 Item 4. Submission of Matters to a Vote of Security Holders.............. 8 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters......................................... 9 Item 6. Selected Financial Data.......................................... 9 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations................................... 9 Item 8. Financial Statements and Supplementary Data...................... 9 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.................................... 10 PART III Item 10. Directors and Executive Officers of the Registrant............... 10 Item 11. Executive Compensation........................................... 10 Item 12. Security Ownership of Certain Beneficial Owners and Management.................................................. 10 Item 13. Certain Relationships and Related Transactions................... 10 PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K................................................. 11 Signatures....................................................... 14 2 PART I Item 1. Business General Bull Run Corporation (the "Company"), a Georgia corporation, was originally incorporated under the laws of the State of Washington under the name of Bull Run Gold Mines, Ltd. The Company changed its name and state of incorporation in December 1992, relocating its corporate office to Atlanta. Prior to selling its interest in a joint venture in November 1990 for $6,000,000 in cash and the discharge of its outstanding debt, the Company was a mineral resource company which had been engaged in the business of developing and mining in Nevada through the joint venture with another mining company. 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. In January 1998, Datasouth acquired all of the outstanding common stock and membership interests of CodeWriter Industries, Inc. and its affiliate, CW Technologies L.L.C. (collectively referred to as "CodeWriter). CodeWriter, which was immediately merged into Datasouth, manufactures and sells thermal barcode label printers used in industrial applications. The Company, through Datasouth, owns approximately 17.0% of the class A common stock ("Class A Common Stock") of Gray Communications Systems, Inc. ("Gray"), representing 27.6% of the voting interest in Gray, as of December 31, 1997. The Company also owns shares of series A and series B preferred stock of Gray and warrants to purchase additional Gray Class A 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 12.7% of Gray's outstanding Class A Common Stock as of December 31, 1997, representing an additional 21.0% voting interest in Gray. Gray is a communications company located in Albany, Georgia which currently operates: (i) three NBC-affiliated television stations - WALB-TV in Albany, Georgia; WJHG-TV in Panama City, Florida; WITN-TV, in the Greenville-Washington-New Bern, North Carolina market, which was acquired during 1997; (ii) five CBS-affiliated television stations - WCTV-TV in Tallahassee, Florida; WVLT-TV in Knoxville, Tennessee; WKYT-TV in Lexington, Kentucky; WYMT-TV in Hazard, Kentucky; and WRDW-TV in Augusta, Georgia; (iii) three daily newspapers, The Albany Herald in Albany, Georgia; The Rockdale Citizen in Conyers, Georgia; and The Gwinnett Daily Post in Lawrenceville, Georgia; (iv) two advertising weekly shoppers in Southwest Georgia and North Florida; (v) Lynqx Communications, a satellite transmission and production services business, which includes GulfLink Communications, Inc. in Baton Rouge, Louisiana, acquired during 1997; and (vi) PortaPhone Paging, a communications and paging business in the Southeast. Gray has also executed a definitive agreement to purchase all of the outstanding common stock of Busse Broadcasting Corporation, the owner and operator of KOLN-TV, a CBS affiliate in the Lincoln-Hastings-Kearney, Nebraska market; its satellite station, KGIN-TV, a CBS affiliate in Grand Island, Nebraska; and WEAU-TV, an NBC affiliate in the Eau Claire-La Crosse, Wisconsin market. The acquisition is pending FCC approval. Gray reported revenue of $103.5 million in 1997 and had total assets of $345.0 million as of December 31, 1997. J. Mack Robinson, the Company's Chairman of the Board, Robert S. Prather, Jr., the Company's President, chief executive officer and a director, and Hilton H. Howell, Jr., the Company's Vice President, Secretary and a director, are members of Gray's Board of Directors. Mr. Robinson is President and the chief executive officer of Gray, and Mr. Prather is Executive Vice President - Acquisitions of Gray. Frederick J. Erickson, the Company's Vice President - Finance and chief financial officer, is the interim chief financial officer of Gray. 3 The Company owns 51.5% of the outstanding common stock of Capital Sports Properties, Inc. ("CSP"). CSP's assets consist of all of the outstanding 8% cumulative preferred stock of Host Communications, Inc. ("HCI") and approximately 49.0% of HCI's outstanding common stock. Since 1995, the Company has also acquired HCI common stock in a series of transactions, resulting in direct ownership of approximately 5.0% of HCI's outstanding common stock as of December 31, 1997. When combined with the Company's pro rata ownership of HCI common stock through CSP, the Company has an aggregate ownership of 30.2% of HCI common stock as of December 31, 1997, effectively making it HCI's largest stockholder. HCI, based in Lexington, Kentucky, provides multimedia, promotional marketing and event management services to universities, athletic conferences and associations, the most prominent of which is the National Collegiate Athletic Association ("NCAA (R)"). HCI's total revenue for its most recently completed fiscal year ended June 30, 1997 was $40.0 million and total assets were $25.7 million as of such date. In 1995, the Company purchased, for $650,000, convertible preferred stock of Universal Sports America, Inc. ("USA"), representing 13.3% of USA's outstanding preferred stock. The preferred stock owned by the Company is convertible into USA common stock, representing approximately 3% of USA's outstanding common stock after giving effect to such conversion. USA offers corporate sponsorships, advertising and other promotional opportunities involving college athletics and participatory sporting events, such as the Hoop-It-Up(TM) 3-on-3 basketball tournaments. HCI owns approximately 33.8% of USA's outstanding common stock. Mr. Prather is a director of HCI, CSP and USA. 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 through January 1998, of which, 5.0% was acquired through December 31, 1997. Simultaneously with the execution of the Investment Purchase Agreement, Rawlings and HCI entered into a five year strategic marketing alliance, under which HCI and Rawlings 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, 1997 was $147.6 million and total assets were $101.3 million as of such date. As of December 31, 1997, Datasouth represented 18.8% of the Company's total assets; investments in Gray represented 56.9%; investments in HCI, CSP and USA, collectively represented 15.7%; and investments in Rawlings represented 7.6%. 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. It has historically targeted the heavy-duty, multipart forms segment of the serial matrix impact printer market in vertical markets such as transportation/travel, healthcare and manufacturing/distribution, but has also entered the industrial thermal printer market through the development of a new Automated Ticket / Boarding Pass version 2 ("ATB2") printer for the travel industry, as well as the thermal barcode label printer market, through its line of portable and desktop printers, some of which were added as a result of the acquisition of Codewriter in January 1998. The printer business is not seasonal to any significant degree. 4 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 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 which 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. In 1996, the Company began shipping 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 since 1994, with the introduction of the 4-inch wide portable "FreeLiner", and added a desktop version of the printer, the "FreeLiner DT" in 1995. The Company has filed a trademark application for "FreeLiner". In 1996, the Company began shipments of the "WinLiner," its first internally developed and manufactured thermal printer, a portable 2-inch wide printer targeted at label and receipt applications which also take advantage of "liner-free" label adaptations. "Liner-free" labels has 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. In January 1998, Datasouth acquired CodeWriter, which designs and manufactures a line of direct thermal and thermal transfer desktop and portable bar code label printers. CodeWriter's product line includes the new 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. Datasouth will continue to market CodeWriter's products under the "CodeWriter" name, which 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 thermal printing technology, was designed to be small, easy to use, and to have a simpler design than currently available airline ticket printers, with features such as a jam free paper path and a simpler method to load ticket stock. Additional information concerning the Company's airline ticket printer is set forth under the caption "Sales and Distribution" below in this Item 1. Competition Competition in the computer printer industry is generally quite intense 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. 5 Manufacturing and Quality Control The Company believes that its printer manufacturing capabilities provide a strategic advantage over most competitors. Focusing on customer response time and high quality customer service, the Company's goal is to provide quick, on-time product delivery while maintaining low finished goods inventories. Product configurations are scheduled daily based on customer orders. Raw materials and manufactured assemblies, including 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 which would adversely affect its business. Product design reflects an awareness of the practical aspects of manufacturing high quality products. Commonality of components and subassemblies across product lines provides efficiencies in quality control, productivity, material cost and inventory control. The Company utilizes automated component insertion, wave soldering and automated test equipment to reduce labor costs while maintaining high quality. The Company verifies the quality of its products by thorough testing at various stages of the assembly process. 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 Website. The Company's warranty experience over the past three years has ranged from approximately .3% to .6% of revenue. Total warranty expense for 1997, 1996 and 1995 was approximately $124,000, $104,000, and $88,000, 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 1997, finished product sales to distributors represented 28% of total revenue, and finished product sales to major accounts represented 48%, compared to 31% and 46% in 1996, 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. Since 1993, the Company has been supplying Documax printers to The SABRE Group under a five year contract. The contract is, however, 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 contract. Sales to The 6 SABRE Group were approximately $7,200,000 in 1997, $7,200,000 in 1996 and $7,800,000 in 1995, representing 33%, 30% and 30% of total sales of Datasouth, respectively. As mentioned above under "Principal Products and Markets," in 1997 the Company completed the development of a new ATB2 airline ticket printer, "Journey". 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. Priced at less than $2,000, Journey will provide an attractively priced alternative to traditional ATB2 printers and will be affordable for even small travel agencies. Additionally, the Company intends to promote the use of this printer for satellite ticket printing applications in remote locations, such as corporate offices and hotels/motels. The SABRE Group has the exclusive right to Journey through June 1998, after which time the Company will be entitled to sell the product to other Computer Reservation Systems ("CRSs"), airlines and selected distributors. The Company intends to continue aggressively pursuing new major account business in 1998, 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, 1997, the Company had unfilled cancelable purchase orders with an aggregate selling price of approximately $1,724,000, compared with $1,821,000 and $755,000 as of December 31, 1996 and 1995, 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 co-operative advertising arrangements with distributors. It also advertises its products in publications serving the industrial markets targeted by its products. Advertising costs were approximately $130,000, $227,000 and $198,000 in 1997, 1996, and 1995, respectively. Research and Development The Company employs over 20 engineers, technicians and support personnel to engage in basic and applied research. In 1997, the Company's engineering team developed and released the new ATB2 airline ticket printer, "Journey". In 1998, the Company's primary product development focus will be on complementary products to Journey, and additional products to broaden the "CodeWriter" line acquired in January 1998. 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. As opportunities arise, new markets and technologies will also be explored in conjunction with strategic business partners, where the Company believes it can add value through design, manufacturing or distribution capabilities. Total research and development expense was $2,417,000, $1,568,000 and $1,872,000 in 1997, 1996 and 1995, respectively. 7 Patents, Trademarks and Related Contracts The Company's business is not dependent upon the existence of any patents, trademarks or related contracts. Employees As of December 31, 1997, the Company had 123 full-time employees, most of whom 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 $2,497,000 in 1997, $2,954,000 in 1996, and $2,361,000 in 1995. Item 2. Properties The Company's executive offices are located in Atlanta, Georgia in approximately 2,000 square feet of office space leased from Delta Life Insurance Company, an affiliate of J. Mack Robinson, the Company's Chairman of the Board. The lease expires in December 2002, subject to several renewal options on the part of the Company. Datasouth's administrative offices and operations are located in Charlotte, North Carolina in approximately 74,000 square feet of fully-utilized leased facilities. Although present facilities are suitable and adequate for its current needs, the Company owns approximately eight acres of land contiguous to its Charlotte facility for future expansion, if necessary. Datasouth's main administrative and manufacturing facility is leased through December 1998 having a three year renewal option, and additional office and warehousing space is leased through December 2000. The Company expects that the lease expiring in 1998 will be renewed on terms similar to the existing lease. Datasouth acquired CodeWriter in January 1998. CodeWriter currently operates in a 19,584 square foot fully-utilized facility in Vista, California leased from CodeWriter's former shareholders on a month-to-month basis. Upon moving CodeWriter's printer manufacturing operation to Charlotte, Datasouth will relocate its remaining west coast operation to smaller space in the Vista, California area. Item 3. Legal Proceedings The Company is not currently a party to any legal proceedings. Item 4. Submission of Matters to a Vote of Security Holders None 8 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 ---- --- 1996 First Quarter 2.94 2.44 Second Quarter 3.44 2.44 Third Quarter 2.88 2.13 Fourth Quarter 2.81 2.06 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 Holders As of March 6, 1998, there were 2,798 holders of record of Common Stock. Dividends 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 has never declared or paid a cash dividend on its Common Stock. The Company's future dividend policy will depend upon its earnings, capital requirements, financial condition and other relevant factors. Item 6. Selected Financial Data The information required by this item is set forth under the caption "Selected Financial Data" in the Company's 1997 Annual Report, which is incorporated herein by reference. Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations The information required by this item is set forth under the caption "Management's Discussion and Analysis" in the Company's 1997 Annual Report, which is incorporated herein by reference. Item 8. Financial Statements and Supplementary Data Financial statements of the Company required by this item are set forth in the Company's 1997 Annual Report, and the supplementary data required by this item is set forth under the caption "Selected Quarterly Financial Data (Unaudited)" in the Company's 1997 Annual Report, which is incorporated herein by reference. Financial statements and the 9 financial statement schedule of Gray as of December 31, 1997 and 1996 and for the three years in the period ended December 31, 1997 are included on pages F-1 through F-32 of this report. 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 Except for the information stated below, the information required by this item is set forth under the caption "Election of Directors - General" in the Company's Proxy Statement to be dated April 3, 1998, which is incorporated herein by reference. In addition to Messrs. Prather, Howell and Robinson, listed in the Company's Proxy Statement to be dated April 3, 1998, which is incorporated herein by reference, the Company has the following executive officer: FREDERICK J. ERICKSON, 39, has been Vice President - Finance, Treasurer and Chief Financial Officer of the Company since 1994; Executive Vice President - Finance & Administration of Datasouth since March 1997; Vice President - Finance & Administration of Datasouth from 1993 to March 1997; Chief Financial Officer, Treasurer and Secretary of Datasouth since 1993; and interim Chief Financial Officer of Gray since March 1998. He was employed by Coopers & Lybrand from 1981 to 1993 as a certified public accountant. Item 11. Executive Compensation The information required by this item is set forth beginning under the caption "Executive Compensation" in the Company's Proxy Statement to be dated April 3, 1998, which is incorporated herein by reference. Item 12. Security Ownership of Certain Beneficial Owners and Management The information required by this item is set forth under the caption "Election of Directors General" in the Company's Proxy Statement to be dated April 3, 1998, which is incorporated herein by reference. Item 13. Certain Relationships and Related Transactions The information required by this item is set forth under the caption "Certain Relationships and Related Transactions" in the Company's Proxy Statement to be dated April 3, 1998, which is incorporated herein by reference. 10 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 incorporated by reference in Item 8 from the Company's 1997 Annual Report, set forth as Exhibit 13 to this report: Report of Independent Auditors Consolidated Balance Sheets as of December 31, 1997 and 1996 Consolidated Statements of Operations for the years ended December 31, 1997, 1996 and 1995 Consolidated Statements of Stockholders' Equity for the years ended December 31, 1997, 1996 and 1995 Consolidated Statements of Cash Flows for the years ended December 31, 1997, 1996 and 1995 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-32 of this report: Report of Independent Auditors Consolidated Balance Sheets as of December 31, 1997 and 1996 Consolidated Statements of Operations for the years ended December 31, 1997, 1996 and 1995 Consolidated Statements of Stockholders' Equity for the years ended December 31, 1997, 1996 and 1995 Consolidated Statements of Cash Flows for the years ended December 31, 1997, 1996 and 1995 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. as of June 30, 1996 and December 31, 1995, and the six months ended June 30, 1996 and the year ended December 31, 1995 on page F-33 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 and 1995 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 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. 11 (b) Reports on Form 8-K The Company filed a Form 8-K Current Report dated November 21, 1997 regarding its announcement relating to the execution of an Investment Purchase Agreement between the Company and Rawlings Sporting Goods Company, Inc. (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. (f) (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) Datasouth Key Employee Bonus and Employee Incentive Bonus Plan (e) (10.7) Lease Agreement between Delta Life Insurance Company and Bull Run Corporation dated as of January 1, 1993 (a) (10.8) Lease Agreements between Hans L. Lengers and Datasouth Computer Corporation dated November 27, 1981 (d) (10.9) $10,000,000 Amended and Restated Credit Agreement dated as of February 20, 1998 between Datasouth Computer Corporation and Wachovia Bank, N.A. (h) (10.10) Gray Communications Systems, Inc. Warrant dated September 24, 1996 (487,500 shares) (f) (10.11) Gray Communications Systems, Inc. Warrant dated September 24, 1996 (250,000 shares) (f) (10.12) Investment Purchase Agreement dated November 21, 1997 by and between Rawlings Sporting Goods Company, Inc. and Bull Run Corporation (g) (10.13) Common Stock Purchase Warrant dated November 21, 1997 issued by Rawlings Sporting Goods Company, Inc. to Bull Run Corporation (g) (10.14) Standstill Agreement dated November 21, 1997 by and between Rawlings Sporting Goods Company, Inc. and Bull Run Corporation (g) (10.15) Registration Rights Agreement dated November 21, 1997 by and between Rawlings Sporting Goods Company, Inc. and Bull Run Corporation (g) (13) 1997 Annual Report to Shareholders (h) (21) List of Subsidiaries of Registrant (e) (23.1) Consent of Ernst & Young LLP - Bull Run Corporation (h) (23.2) Consent of Ernst & Young LLP - Gray Communications Systems, Inc. (h) 12 Exhibit Numbers Description ------- ----------- (23.3) Consent of KPMG Peat Marwick LLP - Capital Sports Properties, Inc. (h) (23.4) Consent of KPMG Peat Marwick LLP - Host Communications, Inc. (h) (27.1) Financial Data Schedule - 1997 (h) (27.2) Financial Data Schedule - 1996 Restated (h) (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, 1995 and incorporated by reference herein (f) Filed as an exhibit to Form 10-KSB Annual Report for the year ended December 31, 1996 and incorporated by reference herein (g) Filed as an exhibit to Form 8-K Current Report dated as of November 21, 1997 and incorporated by reference herein (h) 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). 13 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 27, 1998. 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 27, 1998 - -------------------------------------- Executive Officer and Robert S. Prather, Jr. Director (Principal Executive Officer) /s/ GERALD N. AGRANOFF Director March 27, 1998 - -------------------------------------- Gerald N. Agranoff /s/ JAMES W. BUSBY Director March 27, 1998 - -------------------------------------- James W. Busby /s/ FREDERICK J. ERICKSON Vice President - Finance March 27, 1998 - -------------------------------------- and Treasurer Frederick J. Erickson (Principal Accounting and Financial Officer) /s/ HILTON H. HOWELL, JR. Director March 27, 1998 - -------------------------------------- Hilton H. Howell, Jr. /s/ J. MACK ROBINSON Chairman of the Board March 27, 1998 - -------------------------------------- J. Mack Robinson
14 REPORT OF INDEPENDENT AUDITORS We have audited the consolidated financial statements of Bull Run Corporation as of December 31, 1997 and 1996, and for each of the three years in the period ended December 31, 1997, and have issued our report thereon dated February 10, 1998 (except for Note 5, for which the date is March 20, 1998). 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 10, 1998 15 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 Deductions* Period - ----------- --------- ---------- ---------- ----------- ---------- 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 Year ended December 31, 1995 Allowance for doubtful accounts $ 60,000 $ 58,000 $ 0 $ 68,000 $ 50,000
* "Deductions" represent write-offs of amounts not considered collectible 16 EX-10.9 2 AMENDED AND RESTATED CREDIT AGREEMENT EXHIBIT 10.9 $10,000,000.00 Amended and Restated Credit Agreement dated as of February 20, 1998 between Datasouth Computer Corporation and Wachovia Bank, N.A. 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.............................9 SECTION 1.03. References.....................................................10 ARTICLE II. THE CREDITS.......................................................10 SECTION 2.01. Commitment to Lend.............................................10 SECTION 2.02 Method of Borrowing............................................10 SECTION 2.03. Notes..........................................................11 SECTION 2.04. Maturity of Advances...........................................11 SECTION 2.05. Interest Rates.................................................12 SECTION 2.06. Commitment Fee.................................................13 SECTION 2.07. Optional Termination or Reduction of Facility B Commitment.....14 SECTION 2.08. Mandatory Reduction and Termination of Commitments.............14 SECTION 2.09. Optional Prepayments...........................................14 SECTION 2.10. Mandatory Prepayments..........................................14 SECTION 2.11. General Provisions Concerning Payments.........................14 SECTION 2.12. Computation of Interest and Fees...............................15 ARTICLE III. CHANGE IN CIRCUMSTANCES; COMPENSATION...........................15 SECTION 3.01. Basis for Determining Interest Rate Inadequate or Unfair.......15 SECTION 3.02. Illegality.....................................................15 SECTION 3.03. Increased Cost and Reduced Return..............................16 SECTION 3.04. Base Rate Loans Substituted for Affected Euro-Dollar Loans.....16 SECTION 3.05. Compensation...................................................17 ARTICLE IV. CONDITIONS TO BORROWINGS..........................................17 SECTION 4.01. Conditions to First Borrowing..................................17 SECTION 4.02. Conditions to All Borrowings...................................18 ARTICLE V. REPRESENTATIONS AND WARRANTIES....................................18 SECTION 5.01. Corporate Existence and Power..................................18 SECTION 5.02. Corporate and Governmental Authorization; Contravention........19 SECTION 5.03. Binding Effect.................................................19 SECTION 5.04. Financial Information..........................................19 SECTION 5.05. Litigation.....................................................19 SECTION 5.06. Compliance with ERISA..........................................19 SECTION 5.07. Taxes..........................................................19 SECTION 5.08. Subsidiaries...................................................20 SECTION 5.09. Not an Investment Company......................................20 SECTION 5.10. Ownership of Property; Liens...................................20 SECTION 5.11. No Default.....................................................20 SECTION 5.12. Full Disclosure................................................20 SECTION 5.13. Environmental Matters.........................................20 SECTION 5.14. Compliance with Laws. ........................................21 ARTICLE VI. COVENANTS........................................................21 SECTION 6.01. Information....................................................21 SECTION 6.02. Inspection of Property, Books and Records......................22 SECTION 6.03. Ratio of Consolidated Funded Debt to EBITDA. .................22 SECTION 6.04. Minimum Stockholders' Equity...................................22 i SECTION 6.05. Fixed Charges Coverage.........................................22 SECTION 6.06. Investments. .................................................23 SECTION 6.07. Negative Pledge. .............................................23 SECTION 6.08. Maintenance of Existence. ....................................23 SECTION 6.09. Dissolution. .................................................23 SECTION 6.10. Consolidations, Mergers and Sales of Assets. .................23 SECTION 6.11. Use of Proceeds. .............................................23 SECTION 6.12. Compliance with Laws; Payment of Taxes. ......................23 SECTION 6.13. Insurance. ...................................................24 SECTION 6.14. Change in Fiscal Year. .......................................24 SECTION 6.15. Maintenance of Property. .....................................24 SECTION 6.16. Environmental Notices. .......................................24 SECTION 6.17. Environmental Matters. .......................................24 SECTION 6.18. Environmental Release. .......................................24 SECTION 6.19. Debt...........................................................24 SECTION 6.20. Collateral Maintenance.........................................24 SECTION 6.21 Interest Rate Protection........................................25 ARTICLE VII. DEFAULTS........................................................25 SECTION 7.01. Events of Default..............................................25 SECTION 7.02. Remedies on Default............................................27 SECTION 7.03. Security.......................................................27 ARTICLE VIII. MISCELLANEOUS..................................................27 SECTION 8.01. Notices........................................................27 SECTION 8.02. No Waivers.....................................................28 SECTION 8.03. Expenses; Documentary Taxes....................................28 SECTION 8.04. Amendments and Waivers.........................................28 SECTION 8.05. Successors and Assigns.........................................28 SECTION 8.06. Confidentiality................................................30 SECTION 8.07. Interest Limitation............................................30 SECTION 8.08. Governing Law..................................................30 SECTION 8.09. Counterparts...................................................30 SECTION 8.10. Consent to Jurisdiction........................................30 SECTION 8.11. Severability...................................................30 SECTION 8.12. Captions.......................................................30 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 ii AMENDED AND RESTATED CREDIT AGREEMENT THIS AMENDED AND RESTATED CREDIT AGREEMENT, made as of the 20th day of February, 1998, 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 October 9, 1997 (the "1997 Credit Agreement") pursuant to which the Bank agreed to provide to the Borrower revolving loans of up to $5,500,000.00 from time to time outstanding as therein provided. The Borrower and the Bank desire to amend and restate the 1997 Credit Agreement in order, among other things, to decrease the maximum amount of revolving loans which may at any time be outstanding to $5,000,000.00 and to provide for a term loan in the principal amount of $5,000,000.00, 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 1.01 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. "Applicable Margin" means (x) for any Base Rate Loan, for any day a number equal to zero percent (0.0%), and (y) for any Euro-Dollar Loan, the applicable percentage determined in accordance with Section 2.05(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. 1 "Authority" has the meaning set forth in Section 3.02. "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 February 20, 1998. "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. "Commitment Fee Payment Date" means the first day of each June, September, December and March, commencing March 1, 1998; 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" has the meaning set forth in Section 2.06(b) and is expressed as a percentage "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 capital lease expense for the Borrower and its Consolidated Subsidiaries for such period, plus operating lease expense for the Borrower and its Consolidated Subsidiaries for all leases which require aggregate lease payments during the term of such lease of $2,500.00 or more, plus scheduled principal payments on Consolidated Debt for such period. "Consolidated Funded Debt" means Funded Debt of the Borrower and its Consolidated Subsidiaries in accordance with GAAP applied on a consistent basis. 2 "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. "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 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 3 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. "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. "Facility A Commitment" shall have the meaning assigned to it in Section 2.01(a). 4 "Facility A Commitment Reduction Date" shall mean the last day of each March, June, September and December commencing March 31, 1998 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 December 31, 2002. "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 February 1, 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 February 20, 2001 or such later date as to which the Borrower and the Bank may agree pursuant to Section 2.04(b). "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 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 5 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 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; (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 6 Borrower. "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 February 20, 1998 between the Borrower and the Bank, together with all amendments and supplements thereto. "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 A3750@ 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 G, 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. 7 "Permitted Encumbrances" means: (a) Liens existing on the date of this Agreement; (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. "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. 8 "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 2.05(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 aggregate outstanding principal amount of the Advances made pursuant to the Facility B Commitment. "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 1.02. 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 9 audited consolidating and consolidated financial statements of Bull Run and its Consolidated Subsidiaries delivered to the Bank. SECTION 1.03. 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 2.01. 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 $5,000,000.00 (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) 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 2.09, 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. (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 2.02. 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 10 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 2.11, 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 2.03. 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 2.04. Maturity of Advances. (a) 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. (b) Upon written request of Borrower, which may be made from time to time and which shall be made in writing and delivered to the Bank on a Domestic Business Day no fewer than 11 60 days prior to the third and fourth anniversary of the Closing Date, the Bank in its sole and absolute discretion may (but shall not be obligated to) extend the then effective Facility B Termination Date for a period of 1 year; provided that in no event shall the Facility B Termination Date be extended later than February 20, 2003. In the event that the Bank chooses to extend the Facility B Termination Date for such a 1 year period, notice shall be given by the Bank to the Borrower not more than 45, nor fewer than 30, days prior to the next succeeding anniversary of the Closing Date. SECTION 2.05. 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 2.00 to 1.00, then the Applicable Margin for Euro-Dollar Loans shall be 2.75% per annum; (ii) if the ratio of Consolidated Funded Debt to EBITDA is less than 2.00 to 1.00 but greater than 1.00 to 1.00, then the Applicable Margin for Euro-Dollar Loans shall be 2.50% per annum; and (iii) if the ratio of Consolidated Funded Debt to EBITDA is less than or equal to 1.00 to 1.00, then the Applicable Margin for Euro-Dollar Loans shall be 2.25% per annum. 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 12 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 2.75% 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 two and three quarters percent (2.75%) 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 2.06. Commitment Fee. (a) 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, as determined in accordance with Section 2.06(b) (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 2.07 or Section 2.08, refinancing of the Advances or otherwise), the entire accrued and unpaid Commitment Fee shall be paid on the date of such termination. (b) The Commitment Fee Rate for any day shall be the percentage 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 2.00 to 1.00, then the Commitment Fee Rate shall be 0.500% per annum; (ii) if the ratio of Consolidated Funded Debt to EBITDA is less than 2.00 to 1.00 but greater than 1.00 to 1.00, then the Commitment Fee Rate shall be 0.400% per annum; and (iii) if the ratio of Consolidated Funded Debt to EBITDA is less than or equal to 1.00 to 1.00, then the Commitment Fee Rate shall be 0.300% per annum. The Commitment Fee Rate shall be determined and adjusted quarterly on each Rate Determination Date; provided that (A) the initial Commitment Fee Rate shall be 0.500% 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 Commitment Fee Rate shall be one-half of one percent (0.500%) until such time as such an appropriate compliance certificate and related financial statements and information are delivered, whereupon the Commitment Fee Rate shall be adjusted based on the information contained in such compliance certificate and related financial statements and information. Each Commitment Fee Rate shall be effective from a Rate Determination Date until the next such Rate Determination Date. 13 SECTION 2.07. 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 2.06. If the Facility B Commitment is so terminated in its entirety, all accrued fees (as provided under Section 2.06) 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 2.08. Mandatory Reduction and Termination of Commitments. (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 2.09. 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 2.10. Mandatory Prepayments. On each date on which the Commitments are reduced or terminated pursuant to Section 2.07 and 2.08, 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 2.11. 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 14 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 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 2.12. 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 3.01. 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 3.02. 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. 15 SECTION 3.03. 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 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 3.04. Base Rate Loans Substituted for Affected Euro-Dollar Loans. If (i) the 16 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 3.05. 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. ARTICLE IV. CONDITIONS TO BORROWINGS SECTION 4.01. 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; 17 (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; and (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. SECTION 4.02. 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: (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 5.01. 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. 18 SECTION 5.02. 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 5.03. 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. SECTION 5.04. Financial Information. (a) The consolidating and consolidated balance sheet of Bull Run and its Consolidated Subsidiaries as of December 31, 1996 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, 1997, 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, 1997 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 5.05. 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 5.06. 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 5.07. 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 19 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, 1996. SECTION 5.08. 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. SECTION 5.09. Not an Investment Company. The Borrower is not an "investment company" within the meaning of the Investment Company Act of 1940, as amended. SECTION 5.10. 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 5.11. 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 5.12. 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 5.13. 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. Sec. 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 20 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 5.14. 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 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 6.01. 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) simultaneously with the delivery of each set of financial statements referred to in clauses (a) and (b) 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 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; (d) 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; (e) 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; 21 (f) 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; (g) 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 (h) 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 6.02. 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 6.03. Ratio of Consolidated Funded Debt to EBITDA. The ratio of Consolidated Funded Debt to EBITDA will not at any time exceed the following limits: (a) from December 31, 1998 through December 31, 1999, the ratio of Consolidated Funded Debt to EBITDA will not exceed 4.00 to 1.00; (b) from January 1, 2000 through December 31, 2000, the ratio of Consolidated Funded Debt to EBITDA will not exceed 2.50 to 1.00; and (c) from January 1, 2001 until the Facility A Maturity Date, the ratio of Consolidated Funded Debt to EBITDA will not exceed 2.00 to 1.00. SECTION 6.04. Minimum Stockholders' Equity. Stockholders' Equity will at no time be less than $22,456,681.00 plus the sum of 50% of the cumulative Reported Net Income of the Borrower and its Consolidated Subsidiaries during any period after December 31, 1996 (taken as one accounting period), calculated quarterly beginning March 31, 1998 and quarterly thereafter but excluding from such calculations any quarter in which the Net Income of the Borrower and its Consolidated Subsidiaries is negative. SECTION 6.05. Fixed Charges Coverage. (a) At the end of each Fiscal Quarter, commencing with the Fiscal Quarter ending December 31, 1998, the Fixed Charges Coverage Ratio, as determined in accordance with Section 6.05(b), shall not be less than the following limits: (i) from December 31, 1998 through December 31, 1999, the Fixed Charges Coverage Ratio shall not be less than 1.00 to 1.00; (ii) from January 1, 2000 through December 31, 2000, the Fixed Charges Coverage 22 Ratio shall not be less than 2.00 to 1.00; (iii) from January 1, 2001 and thereafter, the Fixed Charges Coverage Ratio shall not be less than 2.50 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 December 31, 1998, 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 6.06. 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 6.07. 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. SECTION 6.08. 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 6.09. 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 6.10. 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 6.11. 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 6.12. 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 23 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 6.13. 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 6.14. Change in Fiscal Year. The Borrower will not change its Fiscal Year without the consent of the Bank. SECTION 6.15. 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 6.16. 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 6.17. 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 6.18. 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. 24 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. ARTICLE VII. DEFAULTS SECTION 7.01. 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 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 25 (and its right to declare an Event of Default) arising by reason of this subsection (ii); and provided further that the defaults under the financing agreements between Bull Run and NationsBank, N.A. existing on the date of this Agreement resulting from violations of the leverage ratio and debt service coverage covenants shall not constitute Events of Default hereunder so long as (A) NationsBank, N.A. does not accelerate the maturity of the Debt outstanding thereunder or exercise any other remedies in connection therewith, (B) such defaults have been cured or waived on or before April 20, 1998 and no other defaults under such financing agreements shall then be in existence, and (C) the Borrower shall certify to the Bank no later than April 20, 1998 that the conditions specified in clauses (A) and (B) above have been satisfied and furnish to the Bank no later than April 20, 1998 copies of the documents executed by NationsBank, N.A. and Bull Run evidencing the waiver and/or modification of the existing covenant defaults. (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 (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 26 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. ARTICLE VIII. MISCELLANEOUS SECTION 8.01. 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, 27 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 8.02. 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 8.03. 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, 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 8.04. 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 8.05. 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 28 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 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. 29 SECTION 8.06. 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 8.07. 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 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. Sec. 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 8.08. 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 8.09. 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 8.10. 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 8.11. 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. SECTION 8.12. Captions. Captions in this Agreement are for the convenience of reference only and shall not affect the meaning or interpretation of the provisions hereof. 30 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/ FREDERICK J. ERICKSON By: /s/ FREDERICK J. ERICKSON - ------------------------- ---------------------------------- 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/ JOHN S. GRAHAM ---------------------------------- Title: Banking Officer -------------------------------- 31 EX-13 3 1997 ANNUAL REPORT TO SHAREHOLDERS EXHIBIT 13 1997 ANNUAL REPORT TO SHAREHOLDERS BULL RUN Corporation [BULL RUN LOGO APPEARS HERE) 1997 Annual Report
BULL RUN CORPORATION 30.2% HOST COMMUNICATIONS, INC. Fiscal Year End: 6/30/97 Revenue: $39,591,000 Net Income: $1,626,000 Total Assets: $25,707,000 17.0% 100% 33.8% 10.4% (27.6% voting) (plus a warrant to purchase 10%) GRAY DATASOUTH UNIVERSAL RAWLINGS COMMUNICATIONS COMPUTER SPORTS AMERICA, SPORTING GOODS SYSTEMS, INC. CORPORATION INC. COMPANY, INC. Fiscal Year End: 12/31/97 Fiscal Year End: 12/31/97 Fiscal Year End: 6/30/97 Fiscal Year End: 8/31/97 Revenue: $103,548,000 Revenue: $21,639,000 Revenue: $52,872,000 Revenue: $147,600,000 Net Loss: $(1,402,000) Total Assets: $10,092,000 Net Income: $1,597,000 Net Income: $5,470,000 Total Assets: $345,051,000 Total Assets: $26,073,000 Total Assets: $101,264,000 *Market Value: $205,028,000 *Market Value: $92,340,000
*Based on 12/31/97 closing price per share as quoted by a national stock exchange. [COMPANY LOGOS APPEAR HERE] LETTER TO STOCKHOLDERS Fellow Stockholders of Bull Run Corporation, We are very pleased with the progress we have made on your behalf in 1997, strategically laying a foundation for continued success. 1997 was a year of investment, strengthening and diversifying your Company for continued growth in stockholder value. The addition of Rawlings Sporting Goods Company, Inc. to the Bull Run family provides us a "name brand" company, and Rawlings new five-year marketing agreement with Host Communications, Inc. ("HCI") provides both companies some exciting opportunities for growth. We are encouraged by the growth and prospects for Gray Communications Systems, Inc., and as a result, we increased our investment position in Gray by $3.1 million in 1997. Datasouth Computer Corporation developed a revolutionary new airline ticket printer which began shipping in December, and significantly broadened its thermal printer product line with a recent acquisition. FINANCIAL RESULTS We reported a net loss for 1997, but we believe that there is more to the story than simply the bottom line as determined by generally accepted accounting principles. Three factors need to be considered when evaluating our 1997 financial performance. First, our Company and our affiliated companies are very acquisition - oriented. As a result of acquisitions, traditional accounting rules require us and our affiliates to report, and amortize, goodwill. We attribute this goodwill to such intangibles as strategic customer relationships, brand names and FCC broadcasting licenses. Even though we believe that many of these intangible assets actually appreciate over time, goodwill amortization is required to be charged against our earnings for financial statement purposes. Our 1997 pretax results were negatively impacted by over $2 million in non-cash goodwill amortization charges. Second, Datasouth embarked on, and completed, a very significant product development project in 1997. In concert with The SABRE Group, Datasouth's largest customer, a new low cost airline ticket printer was designed and introduced to the market. This development project, costing us more than $2 million, not only substantially increased our R&D expense in 1997, but also consumed virtually all of Datasouth's engineering resources at the expense of generating any new product revenue. Third, the value of our common stock investments in Gray Communications and Rawlings, based on the publicly-reported per share closing prices, appreciated more than $9.4 million in 1997, none of which could be included as 1997 earnings under generally accepted accounting principles. RAWLINGS SPORTING GOODS COMPANY, INC. On November 21, 1997 we entered into an Investment Agreement with Rawlings, whereby we acquired from Rawlings a warrant to purchase, under certain conditions, up to 10% of Rawlings common stock at $12.00 per share. Additionally, we were afforded the right to acquire additional Rawlings' outstanding common stock through open market purchases. We completed the open market purchases in January, and as a result, now hold 10.4% of Rawlings outstanding common stock. I was elected to the Rawlings' board of directors in January and have been appointed to their committee conducting a search for a new President and CEO. Simultaneously with the execution of the Investment Agreement, Rawlings' entered into a five-year Strategic Marketing Agreement with HCI. The combination of HCIs marketing prowess and position as manager of the NCAA's Corporate Partner Program, with Rawlings' products and brand appeal, should be 1 very formidable and mutually beneficial. We believe Rawlings has outstanding growth potential given the right tools,such as HCI's marketing expertise, and given the right strategic direction, in which we will actively participate. HOST COMMUNICATIONS, INC. The affiliation with Rawlings was clearly one of HCI's many highlights in 1997. A new five-year contract with the NCAA(R) kicked off in September, which provides HCI exclusive corporate partners promotional licensing, championship event radio broadcasts, as well as publication and distribution of championship event programs. This contract extends what is currently HCI's 23-year business relationship with the NCAA. In 1997, HCI signed several major companies to NCAA corporate sponsorships, including Compaq Computer, General Motors Corporation, Gillette, Marriott, Nabisco, Phoenix Home Mutual and Tricon Global Restaurants. In 1997, HCI's association management business grew significantly as a result of its acquisition of Wayne Smith Company last January. Additionally, "Hoop-It-Up" 3-on-3 basketball tournaments, which are operated by HCI's 33.8%-owned affiliate, Universal Sports America, Inc., continue to grow in world-wide popularity. We increased our common stock investment position in privately-held HCI during 1997 to effectively 30.2% of HCI's common equity. GRAY COMMUNICATIONS SYSTEMS, INC. In part due to the 1997 acquisition of WITN-TV, an NBC-affiliate in the Greenville-Washington-New Bern, North Carolina market, Gray's "Media Cash Flow", a commonly-used statistic and valuation measurement in the broadcasting industry, increased 36% for 1997 to $38.1 million, from $28 million in 1996. In 1997, Gray also acquired GulfLink Communications, Inc., a business providing transportable uplink satellite services for on-site satellite broadcasts. By virtue of this acquisition, Gray is now the largest single provider of such services in the United States. In February 1998, Gray announced the signing of a definitive purchase agreement to acquire Busse Broadcasting Corporation, the owner and operator of three television stations, KOLN-TV in the Lincoln-Hastings-Kearney, Nebraska television market, its satellite station KGIN-TV in Grand Island, Nebraska, and WEAU-TV serving the Eau Claire-La Crosse, Wisconsin market. The purchase is subject to FCC approval. The stations are the highest rated stations in their respective markets and are also the local news leaders. Mack Robinson and I continue to be actively involved in Gray's management. We continue to conduct a search for a President and CEO, however we have the utmost confidence in those who manage the day-to-day operations of the business, and do not presently feel that the absence of a chief executive has been, or will be in the foreseeable future, a detriment or deterrent to Gray's continued growth. In 1997, we invested an additional $3.1 million in Gray's common stock, increasing our investment position in Gray's common equity to 17.0%, and increasing our voting rights to 27.6%. 2 DATASOUTH COMPUTER CORPORATION Datasouth, Bull Run's wholly-owned subsidiary, recently achieved two very significant milestones, the successful completion of its "Journey" product development project and acquisition of a printer manufacturer. In December, Datasouth began shipping "Journey", a low cost airline ticket printer designed for travel agencies, city ticket offices, and satellite ticket printing locations. The printer includes specifications provided by Datasouth's largest customer, The SABRE Group, accommodating all facets of the travel agency and airline business and complementing electronic ticketing. In January 1998, Datasouth acquired CodeWriter Industries, Inc. and its affiliate, CW Technologies, LLC, which design and manufacture thermal bar code printers. We are very excited about Datasouth adding the CodeWriter products to its line, and leveraging its design and manufacturing capabilities through consolidation of product manufacturing at Datasouth's facility. The CodeWriter products, like Datasouth's, are designed for industrial applications, and can therefore be sold through Datasouth's existing distribution channels. PLANS FOR 1998 There are plenty of challenges and opportunities ahead. In 1998, we plan to actively participate in Rawlings' management and strategic direction, and oversee the development of an effective business relationship with HCI. We intend to manage Gray for continued growth through internal improvement of operations, assist with the successful integration of newly-acquired properties, and seek possible acquisitions of new properties which meet our criteria. We plan to manage an effective roll out of Datasouth's new airline ticket printer and begin development of complementary products for the travel industry, along with managing an efficient integration of the CodeWriter operations. We believe that we are strategically building shareholder value through the acquisition and development of well managed operating companies having excellent growth potential. We appreciate the continued support of our shareholders, business partners and employees, all of whom play a vital role in our success. Sincerely, Robert S. Prather, Jr. President and CEO 3 [CHART APPEARS BELOW WITH THE FOLLOWING INFORMATION:] SIGNIFICANT EVENTS 1992 July - Robinson-Prather Partnership acquires 30% of Bull Run Gold Mines, Ltd., subsequently reincorporated as "Bull Run Corporation". 1993 April - Bull Run acquires 43.6% of Datasouth Computer Corporation for $7.5 million. August - Bull Run invests initial $11.1 million in Gray Communciations Systems, Inc. 1994 May - Gray acquires The Rockdale Citizen, a daily newspaper, for $4.8 million. September - Gray acquires WKYT-TV in Lexington, KY and WYMT-TV in Hazard, KY for $42.5 million. October - Gray acquires weekly shoppers in SW Georgia for $1.5 million. November - Bull Run acquires remaining 56.4% of Datasouth for $15.2 million of Bull Run common stock. 1995 January - Bull Run invests initial $900,000 in Host Communications, Inc. ("HCI"). January - Gray acquires the Gwinnett Daily Post (then the Gwinnett Post Tribune), for $3.7 million. March - Bull Run acquires 50% of Capital Sports Properties ("CSP"), whose assets consists solely of investments in HCI, for $9.7 million. October - HCI sells certain operating assets to Universal Sports America, Inc. ("USA") in return for a 33.8% ownership position. November - Bull Run acquires USA convertible preferred stock for $650,000. 1996 January - Gray acquires WRDW-TV, in Augusta, GA, for $37.2 million. January - Bull Run invests $10 million in Gray series A preferred stock, plus warrants to purchase additional Gray class A common stock August - HCI acquires AdCraft Sports Marketing for $1.6 million. August - CSP exercises warrants for approximately 48% of the outstanding HCI common stock. September - Gray raises $220 million from public offerings of class B common stock and 10 5/8% senior subordinated notes. September - Bull Run invests $5 million in Gray series B preferred stock, plus warrants to purchase additional Gray class A common stock. September - Gray acquires, for $183.9 million, WCTV-TV in Tallahassee, WVLT-TV in Knoxville, TN and other communications businesses. 1997 April - Gray acquires GulfLink Communications, Inc., a transportable satellite uplink business, for $5.2 million. August - Gray acquires WITN-TV in Greenville-Washington-New Bern, NC market for $41.7 million. September - HCIs new 5-year contract with the NCAA takes effect. November - Rawlings Sporting Goods Company, Inc. and HCI announce 5-year Strategic Marketing Agreement. November - Investment Purchase Agreement with Rawlings announced, providing for Bull Run's acquisition of approximately 20% of Rawlings common stock. December - Datasouth begins shipping Journey, a new airline ticket printer. 1998 January - Datasouth acquires CodeWriter, a designer and manufacturer of thermal bar code printers, for $6.2 million. February - Gray signs agreement to acquire Busse Broadcasting, owner of three TV stations, for an estimated $112 million, subject to FCC approval. 4 [CHART APPEARS BELOW WITH THE FOLLOWING INFORMATION:] INVESTMENTS IN SUBSIDIARIES and AFFILIATES Since Robinson-Prather Partnership's investment in Bull Run in July 1992, management has embarked on a strategy to acquire significant and/or controlling interests in operating companies. In addition to its own investments in Datasouth, Gray, HCI and Rawlings presented below, Bull Run has generated consulting fees of over $2.6 million in connection with assistance provided to Gray on over $310 million in acquisitions made by Gray. Cumulative investments by Bull Run (in 000,000's) 1993 - Datasouth $7.5; Gray $11.1; Total $18.6 1994 - Datasouth $22.7; Gray $12.1; Total $34.8 1995 - Datasouth $22.7; Gray $14.0; HCI $11.6; Total $48.3 1996 - Datasouth $22.7; Gray $29.2; HCI $11.9; Total $63.8 1997 - Datasouth $22.7; Gray $32.3; HCI $12.1; Rawlings $5.8; Total $72.9 1998*- Datasouth $25.2; Gray $32.3; HCI $12.1; Rawlings $10.7; Total $80.3 Annual investments by Bull Run (in 000,000's) 1993 - Datasouth $7.5; Gray $11.1; Total $18.6 1994 - Datasouth $15.2; Gray $1.0; Total $16.2 1995 - Gray $1.9; Gray $11.6; Total $13.5 1996 - Gray $15.2; HCI $0.3; Total $15.5 1997 - Gray $3.1; HCI $0.2; Rawlings $5.8; Total $9.1 1998* - Datasouth $2.5; Rawlings $4.9; Total $7.4 * through February 28, 1998 5 [CHART APPEARS BELOW WITH THE FOLLOWING INFORMATION:] HIGH/LOW/CLOSING MARKET PRICE PER SHARE AS OF AND FOR THE YEARS ENDED DECEMBER 31 Compounded Annual Growth Rate from 6/30/92 to 12/31/97 = 37.4% 1991 High - $0.53 Low - $0.38 Closing - $0.38 1992 High - $1.31 Low - $0.38 Closing - $1.19 $0.66 (1) 1993 High - $1.94 Low - $0.78 Closing - $1.56 1994 High - $1.91 Low - $1.19 Closing - $1.63 1995 High - $4.25 Low - $1.63 Closing - $2.89 1996 High - $3.44 Low - $2.06 Closing - $2.13 1997 High - $3.84 Low - $2.00 Closing - $3.84 1998* High - $4.25 Low - $2.88 Closing - $4.06 (1) Closing price as of June 30, 1992, the first quarterly period following Robinson-Prather Partnership's investment in the Company. * through March 25, 1998 TOTAL MARKET VALUE AS OF DECEMBER 31 Compounded Annual Growth Rate from 6/30/92 to 12/31/97 = 60% 1991 - $3.4 million 1992 - $12.7 million $6.0 million (1) 1993 - $19.5 million 1994 - $36.0 million 1995 - $64.0 million 1996 - $46.2 million 1997 - $81.8 million 1998* - $89.7 million (1) Total market value as of June 30, 1992, the first quarterly period following Robinson-Prather Partnership's investment in the Company. * through March 25, 1998 6 SELECTED FINANCIAL DATA (Dollars and shares in thousands, except per share amounts)
Operating results for the years ended: 1997 1996 1995 1994 1993 Revenue from printer operations $ 21,639 $ 23,810 $ 26,432 $ 2,751 Cost of goods sold 15,967 17,170 18,649 1,853 ------ ------ ------ ----- Gross profit 5,672 6,640 7,783 898 Other operating revenue 681 844 721 323 $ 464 Operating expenses (6,852) (6,255) (6,764) (1,174) (595) ------ ------ ------ ----- ------ Income (loss) from operations (499) 1,229 1,740 47 (131) Equity in earnings (losses) of affiliated companies (599) 1,731 107 266 243 Gain on issuance of common shares by affiliated company 8,179 Interest and dividend income (expense), net (1,614) (1,250) (944) (11) 116 ------ ------ ------ ----- ------ Income (loss) before income taxes, extraordinary item and cumulative effect of accounting change (2,712) 9,889 903 302 228 Income tax benefit (provision) 939 (4,012) (180) (86) (48) ------ ------ ------ ----- ------ Income (loss) before extraordinary item and cumulative effect of accounting change (1,773) 5,877 723 216 180 Extraordinary loss (295) Cumulative effect of accounting change (274) ------ ------ ------ ----- ------ Net income (loss) $ (1,773) $ 5,308 $ 723 $ 216 $ 180 ======== ========= ======== ======== ====== Earnings (loss) per share - Basic: Income (loss) before extraordinary item and cumulative effect of accounting change $ (.08) $ .26 $ .03 $ .02 $ .01 Net income (loss) $ (.08) $ .24 $ .03 $ .02 $ .01 Weighted average shares - Basic 21,302 22,013 22,127 13,350 12,377 Earnings (loss) per share Diluted: Income (loss) before extraordinary item and cumulative effect of accounting change $ (.08) $ .25 $ .03 $ .02 $ .01 Net income (loss) $ (.08) $ .23 $ .03 $ .02 $ .01 Weighted average shares-Diluted 21,302 22,945 23,236 13,534 12,503 FINANCIAL POSITION AS OF DECEMBER 31: 1997 1996 1995 1994 1993 Working capital $ 2,513 $ 3,990 $ 3,739 $ 4,813 $ 400 Investment in affiliated companies 61,551 53,752 29,246 15,709 7,798 Total assets 76,832 67,851 44,300 30,756 8,250 Long-term obligations 41,998 31,364 14,896 2,775 Stockholders equity 25,056 28,318 24,079 23,584 8,151 Current ratio 1.4 2.1 1.9 2.6 8.9 Book value per share $ 1.18 $ 1.30 $ 1.09 $ 1.07 $ 0.65
The changes in financial position from 1996 to 1997 were due to the Company's investments in affiliated companies, primarily Rawlings. The changes in financial position from 1995 to 1996 were due to the purchase of $15,000 in Gray preferred stock, as well as the result of an $8,179 increase in the Company's investment in affiliated companies resulting from Gray's public offering of its class B common stock. The changes in financial position from 1994 to 1995 were due to the Company's investments in CSP, HCI and USA. The changes in financial position from 1993 to 1994, and the changes in operating results from 1993 to 1994 to 1995, were due to the investment in a 43.6% interest in Datasouth in 1993 and merger with Datasouth in 1994. No dividends were declared or paid during the periods presented. The earnings per share amounts prior to 1997 have been restated as required to comply with Statement of Financial Accounting Standards No. 128, "Earnings Per Share". For further discussion of earnings per share and the impact of Statement No. 128, see the Notes to Consolidated Financial Statements. 7 [Gray Communications Systems, Inc. Photos appear here] 8 Gray Communications Systems, Inc. ("Gray") is a 101-year old communications company headquartered in Albany, Georgia. Gray's class A and class B common stocks are traded on the New York Stock Exchange under the symbols "GCS" and "GCS.B", respectively. In 1997, Bull Run increased its ownership in Gray to 17.0% of Gray's total outstanding common stock, representing 27.6% of the voting power. Gray operates eight television stations - WKYT-TV, the CBS affiliate in Lexington, Kentucky; WYMT-TV, a CBS affiliate in Hazard, Kentucky, acquired by Gray along with WKYT-TV in 1994; WRDW-TV, a CBS affiliate in Augusta, Georgia, acquired in 1996; WCTV-TV, a CBS affiliate, in the Tallahassee, Florida / Thomasville, Georgia market, acquired in 1996; WVLT-TV (formerly, WKXT-TV), a CBS affiliate in Knoxville, Tennessee acquired with WCTV-TV in 1996; WALB-TV, an NBC affiliate established over 40 years ago, in Albany, Georgia; WJHG-TV, an NBC affiliate in the Panama City, Florida market; and, WITN-TV, an NBC affiliate in the Greenville-Washington-New Bern, North Carolina market, acquired in 1997. Six of the eight stations are currently the highest ranked station in their markets. Gray also operates three daily newspapers - The Albany Herald, established in 1897, a Southwest Georgia daily newspaper having a daily circulation of approximately 32,000 and approximately 37,000 on Sundays; The Rockdale Citizen, acquired by Gray in 1994, a Conyers, Georgia daily newspaper established in 1953, having a circulation of approximately 10,000; and, The Gwinnett Daily Post, acquired by Gray in 1995, a daily newspaper in Lawrenceville, Georgia having a circulation of 49,000 in the fast growing Gwinnett County market. In addition, Gray publishes advertising weekly shoppers in Southwest Georgia and North Florida, having a total circulation of 55,000. Gray also operates two businesses acquired in 1996, Satellite & Production Services in Tallahassee, and PortaPhone Paging, a communications and paging business in the Southeast, and one acquired in 1997, GulfLink Communications, Inc., a transportable satellite uplink business, headquartered in Baton Rouge, Louisiana. Satellite Production Services and GulfLink operate under the name Lynqx Communications. In February 1998, Gray executed a definitive purchase agreement to acquire Busse Broadcasting Corporation, owner and operator of CBS-affiliates KOLN-TV, the Lincoln-Hastings-Kearney, Nebraska market leader; its satellite station, KGIN-TV in Grand Island, Nebraska; and NBC-affiliate WEAU-TV, the Eau Claire-La Crosse, Wisconsin market leader. 9 [Datasouth Computer Corporation Photos appear here] 10 Datasouth Computer Corporation ("Datasouth"), Bull Run's wholly-owned subsidiary, designs, manufactures and markets heavy-duty dot matrix and thermal printers for industrial applications. Datasouth sells its products through a network of approximately 60 distributors worldwide and direct to high volume major accounts primarily in the transportation/travel, healthcare and manufacturing/distribution industries. Based in Charlotte, North Carolina, Datasouth has historically targeted the heavy-duty, multipart forms segment of the serial matrix impact printer market. 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. In December 1997, Datasouth's DS Travel Automation Group began shipping its new Automated Ticket/Boarding Pass Version 2 ("ATB2") printer, "Journey" to The SABRE Group, the Company's largest customer. Journey establishes a new price/performance benchmark for ATB2 printers, which provides excellent value to travel agencies and city ticket offices. Journey will primarily be sold to Computer Reservation Systems ("CRSs"), such as The SABRE Group, and airlines worldwide. It is an excellent complement to Electronic Ticketing, and, priced at under $2,000, it makes satellite ticket printing a more feasible and cost effective option. Datasouth acquired Vista, California-based CodeWriter Industries, Inc. and its affiliate, CW Technologies, LLC, in January 1998. CodeWriter designs and manufactures a line of direct thermal and thermal transfer desktop and portable bar code label printers. Datasouth will manufacture CodeWriter products at its Charlotte facility, but is retaining a presence on the west coast to offer service repair, product distribution, and label conversion. The acquisition enables Datasouth's Printer Products Group to provide its customers a broader line of industrial printers. Datasouth's manufacturing capabilities provide a strategic advantage over most competitors. Focusing on customer response time and high quality customer service, Datasouth can provide quick, on-time product delivery while maintaining low finished goods inventories by scheduling product configuration each day to meet changing order requirements. Raw materials and assemblies, including PC boards assembled by Datasouth, are pulled through to replenish stock consumed, thereby eliminating unnecessary inventories and scheduling. Datasouth's warranty expense is well under 1% of revenue, evidencing Datasouth's quality workmanship and designs. 11 [Host Communications, Inc./Universal Sports America, Inc. Photos appear here] 12 Privately-held Host Communications, Inc. ("HCI"), based in Lexington, Kentucky, provides multimedia, promotional marketing and event management services to universities, athletic conferences and associations, the most prominent of which is the National Collegiate Athletic Association (NCAA(R)). In 1997, Bull Run increased its effective ownership in HCI's common stock to 30.2%, plus 51.5% of HCI's outstanding preferred stock. Most of Bull Run's investment in HCI is held through its 51.5%-owned affiliate, Capital Sports Properties, Inc., whose assets consist solely of HCI common stock and HCI preferred stock. HCI's operations include: Sports Marketing - HCI manages the production, sales and syndication of basketball and football radio and television broadcasts, as well as the publishing and printing of award-winning sports magazines for an impressive list of client universities and conferences. HCI's new five-year agreement with the NCAA, an HCI client since 1975, took effect in 1997, providing HCI the exclusive rights to NCAA corporate partners promotional licensing marks, championship radio broadcasts, publication and distribution of championship event programs and associated materials, as well as exclusive marketing rights to market NCAA fan festivals in conjunction with championship events. Audio / Video Services - HCI's MainStreet Productions operates recording studios equipped to handle live broadcast productions and soundtracks for radio, video and multi-range presentations such as the NCAA Today broadcasts on ESPN, producing video presentations from concept to completion. Publishing and Printing - Among the 400-plus annual publications produced by HCI are NCAA basketball championship programs, including the high-profile NCAA Men's and Women's Final Four programs. HCI provides services to over 600 clients annually, ranging from graphic design, typesetting and image assembly, to printing and binding. Such services were provided to Bull Run in connection with the printing of this 1997 Annual Report. Management Services - HCI manages the affairs of the National Tour Association, Quest Association (i.e., the national J. D. Edwards users group), International Spa and Fitness Association, National Limousine Association and United Motor Coach Association, by providing services in the areas of marketing, publishing, government affairs, business, education and membership growth. HCI's 33.8%-owned affiliate, Universal Sports America, Inc. ("USA"), provides sponsorship and promotional opportunities involving college athletics and participatory sporting events to corporate sponsors and advertisers. Bull Run also directly owns USA preferred stock, which is convertible to approximately 3% of USA's fully-diluted common stock. USA's operations include: Collegiate Sports - - USA provides management and marketing services to athletic departments and conferences, including the development and marketing of corporate sponsor programs, providing print, publication, and video production services (generally outsourced to HCI). Events - USA manages and/or operates participatory sporting events, on the local, collegiate, national and international levels, such as the Hoop-It-Up(TM) three-on-three basketball tournaments. Properties - USA develops and markets trademarks that currently include the Historically Black Collegiate Coalition (HBCC(TM)), Pepito Ball(TM) and Tradition Bowl games, such as the Dr Pepper Red River Shoot-out(TM), the annual football contest between the University of Texas and the University of Oklahoma. 13 [Rawlings Sporting Goods Company, Inc. Photos appear here] 14 In November 1997, Bull Run acquired from Rawlings Sporting Goods Company, Inc. ("Rawlings"), a warrant to purchase, under certain conditions, up to 10% of Rawlings common stock. Bull Run also accumulated additional shares of Rawlings common stock in the open market totaling 5.0% of Rawling's currently outstanding shares by December 31, 1997, and 10.4% by January 31, 1998. Rawlings common stock is traded on the Nasdaq Stock Market under the symbol RAWL. Rawlings, headquartered near St. Louis, Missouri, is a leading supplier of team sports equipment in North America. It offers a wide range of quality products for baseball and softball (gloves, baseballs, bats, helmets, protective gear, team uniforms, accessories), basketball (balls, team uniforms, warm-ups, accessories), football (balls, shoulder pads, protective gear, team uniforms), hockey (sticks, protective gloves, pads) and other sports. The company operates eight manufacturing facilities throughout the United States, Canada and Latin America, as well as distribution centers in the United States and Canada. For more than 100 years, Rawlings products have been recognized as The Finest in the Field. For nearly 20 years, Rawlings has been the exclusive supplier of baseballs to Major League Baseball, and since 1994, has been the official supplier to all 18 Minor Leagues. It has established a long-standing tradition of innovation in team sports equipment and uniforms, including the development of the first football shoulder pads in 1902, the original deep pocket baseball glove in 1920 and double knit nylon and cotton uniforms for Major League Baseball in 1970. More recently, Rawlings introduced a new power forged aluminum bat and a speed sensing baseball. Since 1958, Rawlings has annually presented the Rawlings Gold Glove Award(R) to the best fielder at each position in the National and American Leagues. Since 1986, Rawlings has been the exclusive supplier of basketballs for the NCAA Men's and Women's Division I, II and III championship games (including the Final Four), and is also the exclusive supplier of basketballs to the National Association of Intercollegiate Athletics ("NAIA"). Since 1987, Rawlings has been the exclusive supplier of footballs for the NCAA Division IAA, II and III championship games, and also supplies the official football to the NAIA. In September 1997, Rawlings acquired the Victoriaville hockey business which includes the Vic, Victoriaville and McMartin brands for hockey sticks and protective equipment. Since 1996, Rawlings has offered a full line of protective equipment for ice, roller and street hockey. Rawlings entered into a five year Strategic Marketing Agreement with HCI in November 1997. Under this agreement, Rawlings and HCI will jointly market and sell Rawlings products primarily through corporate promotions, grass roots events and international programs. 15 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. 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 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. The Company provides consulting services to Gray Communications Systems, Inc. ("Gray") in connection with Gray's acquisitions 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. Consulting fee income of $681,000 was recognized in 1997 compared to $844,000 in 1996. There can be no assurance that the Company will recognize any consulting fees in the future, other than the recognition of currently deferred fees. The Company's consolidated operating expenses of $6,852,000 in 1997 represented a $597,000, or 9.5%, increase from 1996, due to the cost of research and development efforts incurred for the design of a new printer introduced in the fourth quarter of 1997 and 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, totaling ($599,000) in 1997 and $1,731,000 in 1996, includes the Company's proportionate share of the earnings of Gray, Host Communications, Inc. ("HCI") and Capital Sports Properties, Inc. ("CSP"), 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 Universal Sports America, Inc. ("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. Interest and dividend income in 1997 of $1,102,000 was primarily derived from dividends accrued on the Company's investment in Gray's series A and series B preferred stock. Interest expense, totaling $2,716,000 in 1997, was incurred primarily in connection with bank term loans, the proceeds of which were used to finance the Company's investments in Gray, HCI, CSP, USA and Rawlings Sporting Goods Company, Inc. ("Rawlings"). As of December 31, 1997, the Company has 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 has a business credit carryforward of approximately $125,000 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 from 40.6% in 1996 to 34.5% in 1997. 16 Results of Operations - 1996 as compared to 1995 Total revenue for 1996, primarily from the printer manufacturing operations of Datasouth, was $24,654,000 compared to $27,153,000 in 1995. Revenue from Datasouth's printer operations of $23,810,000 in 1996 represented a 10% decrease from such revenue in 1995 of $26,432,000. Printer sales to the Company's largest customer were approximately $7,200,000 in 1996 compared to $7,800,000 in 1995. Sales to a large distributor were approximately $1,500,000 lower in 1996 than in 1995, as a result of a significant printer installation project by the distributor's customer maturing in 1995. Short term revenue trends in the Company's printer business fluctuate due to variable ordering patterns of these and other large customers. Gross profit from printer operations of 27.9% for 1996 decreased from the 29.4% realized in 1995, primarily due to a different mix of products sold and greater manufacturing overhead efficiencies gained in 1995 as a result of higher unit volumes. The Company provides consulting services to Gray Communications Systems, Inc. ("Gray") in connection with Gray's acquisitions and acquisition financing. Consulting fee income of $844,000 was recognized in 1996 compared to $721,000 in 1995. Due to the reduction in the Company's equity investment from 27.1% to 15.2% of Gray's outstanding common shares (primarily as a result of Gray's public offering of stock in 1996 described below), $174,000 of previously deferred fees were recognized as consulting fee income in 1996. There can be no assurance that the Company will recognize any consulting fees in the future. The Company's consolidated operating expenses of $6,255,000 in 1996 represented a $509,000, or 7.5%, decrease from 1995, due to reductions in certain project-specific research and development expenses and certain general and administrative expenses. Operating expenses include non-cash goodwill amortization associated with the acquisition of Datasouth of $292,000 in 1996 and $309,000 in 1995. Equity in earnings of affiliated companies, totaling $1,731,000 in 1996 and $107,000 in 1995 included the Company's proportionate share of the earnings of Gray, Host Communications, Inc. ("HCI") and Capital Sports Properties, Inc. ("CSP"), net of goodwill amortization totaling $487,000 and $378,000, respectively. Approximately $975,000 of the increase from 1995 to 1996 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 Universal Sports America, Inc. ("USA"). In 1996, Gray consummated a public offering of 3.5 million shares of its newly-issued class B common stock at $20.50 per share, resulting in net proceeds of $67.1 million. 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 $8.2 million (approximately $5.0 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 of a material nature will occur in the future. Interest and dividend income in 1996 of $874,000 was primarily derived from an 8% Subordinated Note due from Gray in the principal amount of $10 million (the "8% Note") and dividends accrued on the Company's investment in Gray's series A and series B preferred stock. Interest expense, totaling $2,124,000 in 1996 was incurred primarily in connection with bank term loans, the proceeds of which were used to finance the Company's investments in Gray, HCI, CSP and USA. 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 was 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 $4,559,000 charge against its earnings, representing the after-tax cumulative effect of the accounting change. The Company reported 9.1% of such 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, 17 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, 1996, the Company had an Alternative Minimum Tax ("AMT") credit carryforward of $341,000 to reduce future regular Federal tax liabilities. As a result of recognizing approximately $79,000 and $58,000 in AMT credits in 1996 and 1995, respectively, and a change in judgment regarding the realizability of the remaining AMT credit carryforward, the valuation allowance on deferred tax assets was reduced in the fourth quarter of 1996, thereby reducing the 1996 income tax provision and goodwill by approximately $47,000 and $131,000, respectively. Liquidity and Capital Resources The Company amended all of its long-term debt agreements with two banks subsequent to December 31, 1997. Under an agreement amended February 20, 1998, the Company entered into a $5,000,000 term note, payable to a bank in quarterly installments of $250,000 through December 2002, bearing interest at the London Interbank Offered Rate ("LIBOR") plus 2.75%, and, a revolving bank credit facility for borrowings of up to $5,000,000 expiring February 2001, bearing interest principally at LIBOR plus 2.75%, with a mandatory reduction in February 1999 to $4,000,000 in available borrowings. The $5,000,000 revolving credit facility replaced a previous $5,500,000 facility under which $5,472,000 was outstanding as of December 31, 1997. Under an agreement amended March 20, 1998, the Company has outstanding two term notes for bank borrowings of up to $42,900,000, requiring no principal payments prior to maturity on January 1, 2003, bearing interest at LIBOR plus 1.75%, and, a revolving bank credit facility for borrowings of up to $3,500,000 expiring May 1, 1999, bearing interest at the bank's prime rate, under which $3,183,000 was outstanding as of December 31, 1997. The Company also has a demand bank note for borrowings of up to $2.0 million under which $1,500,000 was outstanding as of December 31, 1997, bearing interest at the bank's prime rate. In January 1998, the Company executed two interest rate swap agreements, which effectively modify the interest characterics of $24,750,000 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 $4,750,000 of floating rate debt to a fixed rate basis under two separate agreements. Under the first agreement, $20,000,000 of long-term debt is subject to a one-year forward swap arrangement, 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, $4,750,000 of long-term debt will be subject to a fixed rate of no more than 8.9% beginning March 31, 1998, instead of LIBOR plus 2.75%, the rate in effect until then. The notional amount on the $4,750,000 interest rate swap agreement amortizes $250,000 per quarter through December 31, 2002. Dividends on the series B preferred stock of Gray owned by the Company are payable in cash at an annual rate of $600 per share or, at Gray's option, payable in additional shares of series B preferred stock. The Company anticipates that dividends on the series B preferred stock will continue to be paid in additional shares of series B preferred stock for the foreseeable future. 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 1997, the Company repurchased 706,010 shares at a total cost of $1,751,000. Since the program's inception in November 1994, 1,286,510 shares have been repurchased at an average cost of $2.48 per share. Inventories as of December 31, 1997 increased to $3,757,000 from $3,315,000 as of December 31, 1996, due to an increase in raw materials on hand associated with the initial production of a new printer beginning in December 1997. As of December 31, 1997, the Company had open purchase commitments totaling approximately $8,000,000 primarily for raw materials inventories. The Company's total working capital of $2,513,000 as of December 31, 1997 decreased from $3,990,000 as of December 31, 1996, as a result of borrowings under the bank demand notes and a $1,000,000 increase in the current portion of long-term debt, net of the increase in inventories. Effective January 2, 1998, the Company acquired all of the outstanding common stock of CodeWriter Industries, 18 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, of which $5,000,000 million 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 and CWT products and services during each calendar quarter through December 31, 2001, but in no event will the aggregate amount of such payments exceed $1,200,000. The cash acquisition price was financed under the $5,000,000 term note previously described. 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 and 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 (of which, 5.0% was acquired as of December 31, 1997 at a cost of $4,382,000). Investments in Rawlings were financed with borrowings under the $42,900,000 term loans previously described. Capital spending for 1998, excluding assets acquired from CodeWriter and CWT, is expected to be approximately $600,000. The Company anticipates that its current working capital, funds available under its revolving credit facilities, quarterly cash dividends on the Gray series A preferred stock and Gray class A common stock, 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. 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. The Company has completed an assessment and will have to modify or replace portions of its software so that its computer systems will function properly with respect to dates in the year 2000 and thereafter. The total Year 2000 project cost is estimated to be less than $200,000, including the cost of upgraded computer hardware and software. Most of this cost will be realized over the estimated useful lives of the new hardware and software. To date, the Company has not incurred significant expenses associated with the Year 2000 issue. The project is estimated to be completed not later than December 31, 1998, which is prior to any anticipated impact on its operating systems. The Company believes that with modifications to existing software and conversions to new software, the Year 2000 issue will not pose significant operational problems for its computer systems. However, if such modifications and conversions are not made, or are not completed timely, the Year 2000 issue could have a material impact on the operations of the Company. 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 ability to locate and correct all relevant computer codes, and similar uncertainties. 19 CONSOLIDATED BALANCE SHEETS (Dollars and shares in thousands)
December 31 1997 1996 ASSETS Current assets: Cash and cash equivalents $ 142 $ 81 Accounts receivable 4,600 4,074 Inventories 3,757 3,315 Other 193 198 --------- --------- Total current assets 8,692 7,668 Property and equipment, net 2,638 2,251 Investment in affiliated companies 61,551 53,752 Goodwill 3,589 3,890 Other assets 362 290 --------- --------- $ 76,832 $ 67,851 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Notes payable and current portion of long-term debt $ 2,500 $ 500 Accounts payable 2,462 2,116 Accrued and other liabilities: Employee compensation and related taxes 430 542 Interest 553 308 Other 234 212 --------- --------- Total current liabilities 6,179 3,678 Long-term debt 41,998 31,364 Deferred income taxes 3,599 4,491 Stockholders' equity: Common stock, $.01 par value (authorized 100,000 shares; issued 22,583 and 22,325 shares as of December 31, 1997 and 1996, respectively) 226 223 Additional paid-in capital 20,800 20,541 Treasury stock, at cost (1,287 and 581 shares as of December 31, 1997 and 1996, respectively) (3,188) (1,437) Retained earnings 7,218 8,991 --------- --------- Total stockholders' equity 25,056 28,318 --------- --------- $ 76,832 $ 67,851 ======== ========
The accompanying notes are an integral part of these consolidated financial statements. 20 CONSOLIDATED STATEMENTS 0F OPERATIONS (Dollars and shares in thousands except per share amounts)
Years Ended December 31 1997 1996 1995 Revenue from printer operations $ 21,639 $ 23,810 $ 26,432 Cost of goods sold 15,967 17,170 18,649 ------ ------ ------ Gross profit 5,672 6,640 7,783 Consulting fee income 681 844 721 Operating expenses: Research and development 2,418 1,568 1,872 Selling, general and administrative 4,434 4,687 4,892 ------ ------ ------ 6,852 6,255 6,764 ------ ------ ------ Income (loss) from operations (499) 1,229 1,740 Other income (expense): Equity in earnings (losses) of affiliated companies (599) 1,731 107 Gain on issuance of common shares by affiliated company 8,179 Interest and dividend income 1,102 874 40 Interest expense (2,716) (2,124) (984) ------ ------ ------ Income (loss) before income taxes, extraordinary item and cumulative effect of accounting change (2,712) 9,889 903 Income tax benefit (provision) 939 (4,012) (180) ------ ------ ------ Income (loss) before extraordinary item and cumulative effect of accounting change (1,773) 5,877 723 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) $ (1,773) $ 5,308 $ 723 ------ ------ ------ Earnings (loss) per share - Basic: Income (loss) before extraordinary item and cumulative effect of accounting change $ (.08) $ .26 $ .03 Extraordinary loss (.01) Cumulative effect of accounting change (.01) ------ ------ ------ Net income (loss) $ (.08) $ .24 $ .03 ------ ------ ------ Earnings (loss) per share - Diluted: Income (loss) before extraordinary item and cumulative effect of accounting change $ (.08) $ .25 $ .03 Extraordinary loss (.01) Cumulative effect of accounting change (.01) ------ ------ ------ Net income (loss) $ (.08) $ .23 $ .03 ------ ------ ------ Weighted average number of shares outstanding: Basic 21,302 22,013 22,127 Diluted 21,302 22,945 23,236
The accompanying notes are an integral part of these consolidated financial statements. 21 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, January 1, 1995 22,137 $ 221 $20,403 $ 0 $ 2,960 $ 23,584 Purchase of treasury stock (330) (330) Exercise of stock options 143 2 100 102 Net income 723 723 ------ ------ ------- -------- ------- -------- 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 ====== ====== ======== ======== ======= ========
The accompanying notes are an integral part of these consolidated financial statements. 22 CONSOLIDATED STATEMENTS OF CASH FLOW (Dollars in thousands)
Years Ended December 31 1997 1996 1995 Cash flows from operating activities: Net income (loss) $ (1,773) $ 5,308 $ 723 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 27 1 58 Depreciation and amortization 1,001 950 1,124 Equity in (earnings) losses of affiliated companies 599 (1,731) (107) Deferred income taxes (892) 3,553 (211) Preferred stock dividend income (300) Change in operating assets and liabilities: Accounts receivable (553) (166) (158) Inventories (442) 440 (1,146) Other current assets (6) 74 (111) Accounts payable and accrued expenses 501 600 34 Accrued income taxes 11 (478) 204 ------ ------ ------ Net cash provided by (used in) operating activities (1,827) 1,267 410 ------ ------ ------ Cash flows from investing activities: Sale of marketable securities 500 Capital expenditures (1,160) (366) (920) Investments in affiliated companies (9,099) (5,566) (13,586) Note purchased from affiliated company (10,000) Dividends received from affiliated companies 1,002 73 92 ------ ------ ------ Net cash used in investing activities (9,257) (15,859) (13,914) ------ ------ ------ Cash flows from financing activities: Borrowings on notes payable 1,500 Borrowings on revolving lines of credit 15,232 11,339 12,014 Repayments on revolving lines of credit (9,941) (10,656) (10,729) Proceeds from long-term debt 5,843 15,000 15,152 Repayments on long-term debt (3,257) Loan commitment fees (87) (126) Issuance of common stock 262 38 102 Repurchase of common stock (1,751) (1,107) (330) ------- -------- -------- Net cash provided by financing activities 11,145 14,527 12,826 ------- -------- -------- Net increase (decrease) in cash and cash equivalents 61 (65) (678) Cash and cash equivalents, beginning of year 81 146 824 ------ ------ ------ Cash and cash equivalents, end of year $ 142 $ 81 $ 146 ------ ------ ------ Supplemental cash flow disclosures: Interest paid $ 2,460 $ 1,917 $ 794 Income taxes paid (recovered), net (58) 612 187
The accompanying notes are an integral part of these consolidated financial statements. 23 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands except per share amounts) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Principles of Consolidation - The accompanying consolidated financial statements include the accounts of Bull Run Corporation ("Bull Run") and its wholly-owned subsdiary, Datasouth Computer Corporation ("Datasouth", and collectively, the "Company"), 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 sells computer printers and provides service worldwide to distributors, value-added resellers and large volume end users. 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 Communications Systems, Inc. ("Gray"), an investee, for the performance of services in connection with Gray's acquisitions. As of December 31, 1997 and 1996, fees of $850 and $1,000, respectively, were receivable from Gray. The allowance for doubtful accounts was $55 as of December 31, 1997 and $45 as of December 31, 1996. 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 $614 in 1997, $590 in 1996, and $783 in 1995. Investment in Affiliated Companies - The Company accounts for its investments in Gray, Host Communications, Inc. ("HCI") and Capital Sports Properties, Inc. ("CSP") by the equity method, and its investment in Rawlings Sporting Goods Company, Inc. ("Rawlings") and Universal Sports America, Inc. ("USA") by the cost method. The excess of the Company's investments over the underlying equity of Gray and HCI, totaling $24,221 as of December 31, 1997, is being amortized over 40 years, with such amortization (totaling $610, $487, and $378 in 1997, 1996, and 1995, respectively) reported as a reduction in the Company's equity in earnings of affiliated companies. The equity in earnings of HCI is recognized by the Company on a six month lag basis, in order to align HCI's fiscal year ending each June 30 with the Company's fiscal year. Goodwill and Other Long-Lived Assets - Goodwill associated with Bull Run's acquisition of Datasouth's common stock is being amortized over 15 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 $301 in 1997, $292 in 1996 and $309 in 1995, and accumulated amortization was $928 and $627 as of December 31, 1997 and 1996, 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. Included in other accrued liabilities is $60 and $65 for future warranty costs as of December 31, 1997 and 1996, respectively. 24 Research and Development - Research and development costs of the printer operations, including the costs of software developed internally, 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 - In 1997, the Financial Accounting Standards Board issued Statement No. 128, "Earnings Per Share". Statement No. 128 replaced the calculation of primary and fully-diluted earnings per share with basic and diluted earnings per share. Unlike primary earnings per share, basic earnings per share excludes any dilutive effects of options. Diluted earnings per share is very similar to the previously reported primary earnings per share. All earnings (loss) per share amounts for all periods have been presented, and where appropriate, restated to conform to the Statement No. 128 requirements. In periods where they are anti-dilutive, dilutive effects of options are excluded from the calculation of diluted earnings (loss) per share. 2. INVESTMENT IN AFFILIATED COMPANIES Investment in Rawlings - On November 21, 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. Fifty percent of the purchase price, or $1,421, was paid to Rawlings on November 21, 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 and 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 (of which, 5.0% was acquired as of December 31, 1997 at a cost of $4,382). 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 the shares issuable upon exercise of the warrants (and the additional warrants, if any) registered under the Securities Act of 1933 under certain circumstances. Investment in Gray and Gain on Issuance of Common Shares - In 1996, Gray consummated a public offering of 3.5 million shares of its newly-issued class B common stock at $20.50 per share, 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 27.6% to 15.2%, (subsequently increasing to 17.0% as of December 31, 1997, as a result of additional investments in Gray made by the Company), resulting in a pretax gain for the Company of $8,179 in 1996. Such offering also reduced the Company's common equity voting power in Gray from 27.1% to 25.1% (subsequently increasing to 27.1% as of December 31, 1997). Gray is a communications company, based in Albany, Georgia, that operates eight network affiliated television stations, three daily newspapers, advertising weekly shoppers, plus 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). 25 The Company provides consulting services to Gray from time to time in connection with Gray's acquisitions 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 $681, $844, and $721 in 1997, 1996, and 1995, respectively, for services rendered in connection with certain of Gray's acquisitions. As of December 31, 1997 and 1996, income from additional consulting fees of $400 and $272, respectively, has been deferred and will be recognized as Gray amortizes goodwill associated with the 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 487,500 shares of Gray's class A common stock at $17.88 per share. 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. 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 $1,100 and $293 was recognized by the Company in 1997 and 1996, respectively, on Gray series A and B preferred stock. In connection with the Company's acquisition of series B preferred stock, Gray issued to the Company warrants to purchase up to 250,000 shares of Gray's class A common stock at $24.00 per share. Of the total warrants owned by the Company to purchase 737,500 shares of Gray's class A common stock, 457,500 are fully vested, with the remaining warrants vesting periodically through 2001. Such warrants are exercisable beginning in January 1998 and expire in 2006. 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 its 1996 financial statements. 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 ownership in HCI, plus the Company's indirect common equity ownership in HCI through its investment in CSP, was increased to 30.2% as of December 31, 1997. Additionally, the Company owns indirectly, through CSP, 51.5% of HCI's 8% series B preferred stock having a face value of $3,750. HCI, based in Lexington, Kentucky, and HCI's 33.8%-owned affiliate, Universal Sports America, Inc. ("USA"), provide media and marketing services to universities, athletic conferences and various associations representing collegiate sports and, in addition, market and operate amateur participatory sporting events. 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 revised 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 has reported 9.1% of such charge, or $415, less a $141 deferred tax benefit, as a charge against its 1996 earnings. In September 1995, 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. 26 Summarized Aggregate Financial Information - The summarized aggregate financial information of affiliated companies, in which the Company accounts by the equity method, follows: Aggregate financial position (reflecting Gray and CSP as of December 31, 1997 and 1996 combined with HCI as of June 30, 1997 and 1996): 1997 1996 Current assets $ 37,253 $ 39,062 Property and equipment 47,508 41,184 Total assets 370,758 328,053 Current liabilities 31,275 40,635 Long-term debt 229,200 174,985 Total liabilities 271,118 225,116 Stockholders' equity 99,640 102,937 Aggregate operating results (reflecting Gray and CSP for the years ended December 31, 1997, 1996 and 1995, combined with HCI for the years ended June 30, 1997, 1996 and 1995): 1997 1996 1995 Operating revenue $ 143,139 $ 120,759 $ 105,726 Income from operations 23,042 18,026 9,441 Net income (loss) (20) 3,442 2,196 Cumulative distributions exceed cumulative earnings of investments accounted for by the equity method by approximately $100 as of December 31, 1997. Estimate of Aggregate Fair Value - As of December 31, 1997, the aggregate value of the Company's investment in affiliated companies was approximately $73,000, based on, in the case of publicly-traded Gray and Rawlings, quoted market prices on the New York Stock Exchange and The Nasdaq Stock Market, respectively, and in the case of privately-held HCI and CSP, recent transactions in HCI common stock and management estimates. 3. INVENTORIES Inventories related to the Company's printer operations consist of the following as of December 31: 1997 1996 Raw materials $ 2,734 $ 2,356 Work-in-process 711 673 Finished goods 312 286 ------- ------- $ 3,757 $ 3,315 ------- ------- 4. PROPERTY AND EQUIPMENT The Company's property and equipment consist of the following as of December 31: 1997 1996 Land $ 750 $ 750 Production equipment 2,797 2,060 Research and development equipment 534 366 Office furniture and equipment 568 477 ------- ------- 4,649 3,653 Accumulated depreciation and amortization 2,011 1,402 ------- ------- $ 2,638 $ 2,251 ------- ------- 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 1998, having a renewal option for an additional three year period, and leases additional office and warehouse space under operating leases expiring in 2000. The Company's total rental expense was $328, $309, and $317 in 1997, 1996, and 1995, respectively. The minimum annual rental commitments under these and other leases with an original lease term exceeding one year are approximately $367 for 1998, $167 for each of 1999 and 2000, and $17 for each of 2001 and 2002. 27 5. LONG-TERM DEBT AND NOTE PAYABLE The Company amended all of its long-term debt agreements with two banks subsequent to December 31, 1997. An agreement amended February 20, 1998 (the "February Agreement") provides: (a) a $5,000 term note, payable $250 per quarter beginning March 31, 1998, bearing interest at the London Interbank Offered Rate ("LIBOR") plus 2.75%; and, (b) a revolving bank credit facility for borrowings of up to $5,000 expiring in February 2001, bearing interest principally at LIBOR plus 2.75%, with a mandatory reduction in February 1999 to $4,000 in available borrowings. This revolving bank credit facility replaced a similar $5,500 facility under which $5,472 was outstanding as of December 31, 1997 and $1,865 was outstanding as of December 31, 1996. An agreement amended March 20, 1998 (the "March Agreement") provides: (a) term notes for borrowings of up to $42,900 requiring no principal payments prior to maturity on January 1, 2003, bearing interest at LIBOR plus 1.75%, under which $34,343 was outstanding as of December 31, 1997 and $28,500 was outstanding as of December 31, 1996; and, (b) a revolving bank credit facility for borrowings of up to $3,500 expiring May 1, 1999, bearing interest at the bank's prime rate, under which $3,183 was outstanding as of December 31, 1997 and $1,499 was outstanding as of December 31, 1996. Loans made under the February Agreement are collateralized by Datasouth's accounts receivable, inventories and property and equipment. Loans made under the March Agreement are collateralized by all of the common stocks of Gray (except for certain shares of Gray common stock pledged under the note payable discussed below), HCI, CSP and Rawlings owned by the Company; the preferred stock of Gray owned by the Company; warrants to purchase Gray's and Rawlings' common stock owned 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 cash flow coverage ratio of at least 1.1 to 1.0 beginning December 31, 1998. In January 1998, the Company executed two interest rate swap agreements, which effectively modify the interest characteristics of $24,750 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 $4,750 of floating rate debt to a fixed rate basis under two separate agreements. Under the first agreement, $20,000 of long-term debt is subject to a one-year forward swap arrangement, 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, $4,750 of long-term debt will be subject to a fixed rate of no more 8.9% beginning March 31, 1998, instead of LIBOR plus 2.75%, the rate in effect until then. The notional amount on the $4,750 interest rate swap agreement amortizes $250 per quarter through December 31, 2002. The fair value of the swap agreements 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 income coincident with the extinguishment. The Company also has a demand bank note for borrowings of up to $2,000 under which $1,500 was outstanding as of December 31, 1997, bearing interest at the bank's prime rate, collateralized by certain shares of Gray common stock owned by the Company. As of December 31, 1996, $500 of the Company's long-term debt was presented as a short-term obligation, even though there was no obligation to repay any amounts outstanding. The banks' prime rate as of December 31, 1997 was 8.5%. The interest rate on the Company's LIBOR-based borrowings of $34,343 for the 120-day period including December 31, 1997 was approximately 7.56%. The interest rate on the Company's LIBOR-based borrowings of $2,500 for the 90-day period including December 31, 1997 was approximately 8.13%. The carrying amount of long-term debt approximates fair value. 28 6. INCOME TAXES The Company's income tax benefit (provision) for the years ending December 31 consists of the following: 1997 1996 1995 Current: Federal $ 50 $ (67) $ (300) State (3) (66) (91) ----- -------- ------ Total - current 47 (133) (391) Deferred 892 (3,879) 211 ----- -------- ------ Total benefit (provision) $ 939 $ (4,012) $ (180) ----- -------- ------ Deferred tax liabilities (assets) are comprised of the following as of December 31: 1997 1996 Property and equipment $ 204 $ 228 Investment in affiliated companies 4,420 4,984 ------- ------ Gross deferred tax liabilities 4,624 5,212 ------- ------ Deferred consulting fee income (141) (92) Allowance for doubtful accounts (21) (17) Inventory costs and reserves (154) (154) Employee benefits (40) (32) Warranty reserve (23) (25) Business credit carryforward (129) Alternative Minimum Tax credit carryforward (503) (341) Other, net (14) (60) ------- ----- Gross deferred tax assets (1,025) (721) ------ ------- Total deferred taxes, net $3,599 $ 4,491 ------ ------- The principal differences between the federal statutory tax rate and the effective tax rate are as follows: 1997 1996 1995 Federal statutory tax rate 34.0% 34.0% 34.0% Realization of Alternative Minimum Tax credit carryforward (6.4) Reduction in valuation allowance (0.5) (28.1) Goodwill amortization (3.8) 1.0 11.6 State income taxes, net of federal benefit 1.7 4.6 6.7 Other, net 2.6 1.5 2.1 ---- ---- ---- Effective tax rate 34.5% 40.6% 19.9% ---- ---- ---- A valuation allowance was provided principally to offset a portion of the deferred tax asset associated with Alternative Minimum Tax ("AMT") credit carryforward as of 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. In 1995, the Company reduced its valuation allowance resulting in a tax benefit of $250. 29 7. STOCK OPTIONS In 1994, the Company adopted the 1994 Long Term Incentive Plan (the "1994 Plan") under which 2,500,000 shares of the Company's common stock have been reserved for issuance of stock options, restricted stock awards and stock appreciation rights. Under terms of the Merger with Datasouth, all outstanding stock options to purchase Datasouth common stock were converted to Bull Run stock options under the 1994 Plan. Certain options granted under the 1994 Plan are fully vested at the date of grant, and others vest over three to five year periods. Options granted under the 1994 Plan have terms ranging from three to ten years Shares available for future option grants under the 1994 Plan as of December 31, 1997 and 1996 were 567,000 and 662,000, respectively. Also in 1994, the Company adopted the Non-Employee Directors' 1994 Stock Option Plan (the "1994 Directors' Plan") under which 350,000 shares of the Company's common stock have been reserved 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, 1997 and 1996 were 180,000 and 190,000, respectively. The weighted average fair value of options granted was $1.26 in 1997 and $1.03 in 1996. Information with respect to the Company's stock option plans follows: Option Option Shares Price Range Outstanding as of January 1, 1995 1,794,000 $ 0.42 - $ 1.66 Exercised (143,000) $ 0.42 - $ 0.88 Forfeited (10,000) $ 0.88 --------- Outstanding as of December 31, 1995 1,641,000 $ 0.75 - $ 1.66 Grants 535,000 $ 2.44 - $ 2.68 Exercised (45,000) $ 0.88 Forfeited (96,000) $ 0.88 --------- Outstanding as of December 31, 1996 2,035,000 $ 0.75 - $ 2.68 Grants 135,000 $ 2.31 - $ 2.44 Exercised (258,000) $ 0.75 - $ 1.48 Forfeited (30,000) $ 2.44 --------- Outstanding as of December 31, 1997 1,882,000 $ 0.75 - $ 2.68 --------- Exercisable as of December 31: 1995 930,000 $ 0.42 - $ 1.66 1996 1,120,000 $ 0.75 - $ 2.44 1997 1,287,000 $ 0.75 - $ 2.68 As of December 31, 1997, 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 4.8 years; 867,000 shares at $.90 per share, expiring in 4.2 years (717,000 shares of which are exercisable); 300,000 exercisable shares at $1.46 per share, expiring in 6.5 years; 535,000 shares at $2.64 per share, expiring in 2.4 years (185,000 shares of which are exercisable); and, 105,000 shares at $2.40 per share, expiring in 8.8 years (none of which are exerciseable). 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 5.93%, dividend yield of 0.0%, a volatility factor of .469, and a weighted-average expected life for the options of four to six years. Had compensation cost been measured based on the fair value based accounting of FAS 123, net loss for 1997 would have been $(1,900), or $(.09) per share (basic and diluted), and net income for 1996 would have been $5,225, or $.24 per share (basic) and $.23 per share (diluted). These pro forma results are provided for comparative purposes only and do not purport to be indicative of what would 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 be fully reflected until future years. 30 8. EARNINGS (LOSS) PER SHARE The following table sets forth the computation of basic and diluted earnings (loss) per share: 1997 1996 1995 Income (loss) before extraordinary item and cumulative effect of accounting change $ (1,773) $ 5,877 $ 723 Weighted average shares for basic earnings -------- ------- ------ (loss) per share 21,302 22,013 22,127 Effect of dilutive employee stock options 0 932 1,109 Adjusted weighted average shares and -------- ------- ------ assumed conversions for diluted earnings (loss) per share 21,302 22,945 23,236 ------ ------ ------ Basic earnings (loss) per share $ (.08) $ .26 $ .03 Diluted earnings (loss) per share $ (.08) $ .25 $ .03 9. 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 $208 in 1997, $243 in 1996 and $255 in 1995. 10. GEOGRAPHIC DATA AND SIGNIFICANT CUSTOMER Sales to non-domestic customers, located principally in Western Europe and South America, were $2,497 in 1997, $2,954 in 1996 and $2,361 in 1995. A significant amount of revenue from printer operations is derived from one customer. In 1997, 1996 and 1995, 33%, 30% and 30% of such revenue was attributable to this customer, respectively. 11. ACQUISITION OF PRINTER MANUFACTURER 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 CodeWriters affiliate, CW Technologies, LLC ("CWT"), in a transaction valued at approximately $6,200, of which $5,000 was paid at closing in the form of $2,500 cash and $2,500 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 and CWT products and services during each calendar quarter through December 31, 2001, but in no event will the aggregate amount of such payments exceed $1,200. The transaction will be accounted for as a purchase. 31 SELECTED QUARTERLY FINANCIAL DATA (Unaudited) (Dollars and shares in thousands, except per share amounts)
First Second Third Fourth Quarter Quarter Quarter Quarter ------- ------- ------- ------- 1997 Revenue from printer operations $ 5,465 $ 5,102 $ 5,545 $ 5,527 Gross profit 1,528 1,313 1,566 1,265 Other operating revenue 598 9 72 2 Net income (loss) 20 (469) (374) (950) Earnings (loss) per share - Basic $ .00 $ (.02) $ (.02) $ (.04) Earnings (loss) per share - Diluted $ .00 $ (.02) $ (.02) $ (.04) Weighted average number of shares: Basic 21,363 21,260 21,290 21,294 Diluted 22,259 21,260 21,290 21,294 1996 Revenue from printer operations $ 6,044 $ 5,810 $ 5,988 $ 5,968 Gross profit 1,775 1,658 1,597 1,610 Other operating revenue 368 2 473 1 Income before extraordinary item and cumulative effect of accounting change 49 293 5,480 55 Net income (loss) (225) 293 5,185 55 Earnings per share - Basic: Income before extraordinary item and cumulative effect of accounting change $ .00 $ .01 $ .25 $ .00 Net income (loss) $ (.01) $ .01 $ .24 $ .00 Earnings per share - Diluted: Income before extraordinary item and cumulative effect of accounting change $ .00 $ .01 $ .24 $ .00 Net income (loss) $ (.01) $ .01 $ .23 $ .00 Weighted average number of shares: Basic 22,123 22,079 21,971 21,879 Diluted 23,113 23,084 22,851 22,721
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, 1997 and 1996, and the related consolidated statements of operations, stockholders equity and cash flows for each of the three years in the period ended December 31, 1997. 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 Host Communications, Inc. ("HCI") and Capital Sports Properties, Inc. ("CSP") as of and for the year ended June 30, 1996 and 1995 and as of and for the six months ended June 30, 1996 and the year ended December 31, 1995, respectively, 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 1996 in the method of recognizing certain revenue and related expenses. Our opinion, insofar as it relates to data included for HCI and CSP for their respective periods in 1996 and 1995, is based solely on the reports of the other auditors. In the consolidated financial statements, 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 HCI and CSP is stated at $762,000 and $245,000 for the years ended December 31, 1996 and 1995, respectively; and the Company's cumulative effect of accounting change recognized by affiliate 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 1996 and 1995, 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, 1997 and 1996, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 1997, in conformity with generally accepted accounting principles. As discussed in Note 2 to the Consolidated Financial Statements, during 1996 HCI changed its method of recognizing certain revenue and related expenses. Ernst & Young LLP Atlanta, Georgia February 10, 1998, except as to Note 5, for which the date is March 20, 1998. 32 (INSIDE BACK COVER) DIRECTORS J. MACK ROBINSON - Chairman of the Board of Bull Run Corporation; Chairman and President of Delta Life Insurance Company since 1958; Chairman of Atlantic American Corporation, an insurance holding company, since 1974, and President from 1988 to 1995; President and CEO of Gray Communications Systems, Inc. and a director; director emeritus of Wachovia Corporation. GERALD N. AGRANOFF - Affiliated with Plaza Securities Company and Edelman Securities Company L.P., investment firms, since 1982, and currently General Counsel and a general partner; Vice President, General Counsel and a director of Datapoint Corporation; director of Canal Capital Corporation and American Energy Group, Ltd. JAMES W. BUSBY - Retired; President of Datasouth Computer Corporation from 1984 through June 1997 and one of its founders in 1977. HILTON H. HOWELL, JR. - Vice President and Secretary of Bull Run Corporation; President of Atlantic American Corporation since 1995 and Executive Vice President from 1992 to 1995; Executive Vice President and General Counsel of Delta Life and Delta Fire & Casualty Insurance Companies since 1991; director of Gray Communications Systems, Inc. ROBERT S. PRATHER, JR. - President and Chief Executive Officer of Bull Run Corporation; Executive Vice President - Acquisitions of Gray Communications Systems, Inc. and a director; director of Host Communications, Inc., Capital Sports Properties, Inc., Universal Sports America, Inc., Rawlings Sporting Goods Company, Inc. and The Morgan Group, Inc. OFFICERS J. MACK ROBINSON - Chairman of the Board ROBERT S. PRATHER, JR. - President and Chief Executive Officer HILTON H. HOWELL, JR. - Vice President and Secretary FREDERICK J. ERICKSON - Vice President - Finance, Treasurer and Chief Financial Officer STOCKHOLDER INFORMATION CORPORATION HEADQUARTERS Bull Run Corporation 4370 Peachtree Road, N.E. Atlanta, GA 30319 Phone (404) 266-8333 Fax (404) 261-9607 Internet-http://www.bullruncorp.com TRANSFER AGENT & REGISTRAR TranSecurities International, Inc. 2510 N. Pines Road Spokane, WA 99206-7624 Phone (509) 927-1255 INDEPENDENT AUDITORS Ernst & Young LLP Suite 2800 600 Peachtree Street Atlanta, GA 30308-2215 SUBSIDIARIES & AFFILIATES Datasouth Computer Corporation 4216 Stuart Andrew Boulevard Charlotte, NC 28217 Phone (704) 523-8500 Fax (704) 525-6104 Internet-http://www.datasouth.com Gray Communications Systems, Inc. 126 N. Washington Street Albany, GA 31702 Phone (912) 888-9302 Fax (912) 888-9374 Host Communications, Inc. 546 East Main Street Lexington, KY 40508 Phone (606) 226-4678 Fax (606) 226-4419 Rawlings Sporting Goods Company, Inc. 1859 Intertech Drive Fenton, Missouri 63026 Phone (314) 349-3500 Fax (314) 349-3598 Internet-http://www.rawlings.com STOCK EXCHANGE Bull Run's common stock trades on The Nasdaq Stock Market under the symbol "BULL". Gray's common stocks trade on the New York Stock Exchange under the symbols "GCS" and "GCS.B". Rawlings'common stock trades on The Nasdaq Stock Market under the symbol "RAWL". FORM 10-K A copy of the Company's Annual Report on Form 10-K submitted to the U.S. Securities and Exchange Commission may be obtained by contacting Investor Relations at the Company's Corporate Headquarters. (BACK COVER) [BULL RUN LOGO APPEARS HERE] BULL RUN CORPORATION 4370 Peachtree Road, N.E. o Atlanta, GA 30319 o 404-266-8333 EX-23.1 4 CONSENTS OF EXPERTS AND COUNSEL EXHIBIT 23.1 We consent to the incorporation by reference in the Registration Statement (Form S-8 No.33-91296) 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 10, 1998, except as to Note 5 to the financial statements, for which the date is March 20, 1998, 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, 1997, filed with the Securities and Exchange Commission. /s/ ERNST & YOUNG LLP Atlanta, Georgia March 25, 1998 EX-23.2 5 CONSENTS OF EXPERTS AND COUNSEL EXHIBIT 23.2 We consent to the incorporation by reference of our reports dated January 27, 1998 (except for the Pending Acquisition of Note C, as to which the date is February 13, 1998), 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 Statement (Form S-8 No. 33-91296) 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 25, 1998 EX-23.3 6 CONSENTS OF EXPERTS AND COUNSEL 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 and 33-91298) on Form S-8 of Bull Run Corporation of our report dated February 10, 1997 with respect to the balance sheets of Capital Sports Properties, Inc. as of June 30, 1996 and December 31, 1995, and the related statements of earnings, changes in stockholders' equity, and cash flows for the six-months ended June 30, 1996 and the year ended December 31, 1995, which report appears in the December 31, 1997 annual report on Form 10-K of Bull Run Corporation. /s/ KPMG PEAT MARWICK LLP Stamford, Connecticut March 25, 1998 EX-23.4 7 INDEPENDENT AUDITORS' CONSENT 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 and 33-91298) on Form S-8 of Bull Run Corporation of our report dated October 11, 1996 with respect to the consolidated balance sheets of Host Communications, Inc. and subsidiaries as of June 30, 1996 and 1995, and the related consolidated statements of earnings, stockholders' equity, and cash flows for the year then ended, which report appears in the December 31, 1997 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 PEAT MARWICK LLP Cincinnati, Ohio March 25, 1998 EX-27 8 EXHIBIT 27.1 FINANCIAL DATA SCHEDULE - 1997
5 12-MOS DEC-31-1997 JAN-01-1997 DEC-31-1997 142,097 0 4,654,548 55,000 3,757,437 8,692,095 4,648,481 2,010,829 76,832,182 6,178,559 41,998,483 0 0 225,827 24,830,046 76,832,182 21,639,299 22,319,835 15,966,801 0 2,417,236 27,315 2,716,261 (2,112,702) (938,981) (1,772,992) 0 0 0 (1,772,992) (.08) (.08)
EX-27 9 EXHIBIT 27.2 FDS - 1996 RESTATED
5 12-MOS DEC-31-1996 JAN-01-1996 DEC-31-1996 81,291 0 4,119,357 45,000 3,315,093 7,667,787 3,652,943 1,402,327 67,851,369 3,678,229 0 0 0 223,247 28,094,850 67,851,369 23,810,276 24,654,666 17,169,915 0 1,567,798 0 2,123,856 8,157,768 4,011,749 5,877,122 0 (295,322) (274,248) 5,307,552 .24 .23
EX-99 10 EXHIBIT 99 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, 1997 and 1996 and the related consolidated statements of operations, stockholders' equity and cash flows for each of the three years in the period ended December 31, 1997. 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, 1997 and 1996, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 1997, in conformity with generally accepted accounting principles. Ernst & Young LLP Atlanta, Georgia January 27, 1998 except for the Pending Acquisition of Note C, as to which the date is February 13, 1998 F-1 GRAY COMMUNICATIONS SYSTEMS, INC. CONSOLIDATED BALANCE SHEETS
December 31, 1997 1996 Assets Current assets: Cash and cash equivalents $ 2,367,300 $ 1,051,044 Trade accounts receivable, less allowance for doubtful accounts of $1,253,000 and $1,450,000, respectively 19,527,316 17,373,839 Recoverable income taxes 2,132,284 1,747,687 Inventories 846,891 624,118 Current portion of program broadcast rights 2,850,023 2,362,742 Other current assets 968,180 379,793 ------------- ------------- Total current assets 28,691,994 23,539,223 Property and equipment (Notes C and D): Land 889,696 785,682 Buildings and improvements 11,951,700 11,253,559 Equipment 52,899,547 41,954,501 ------------- ------------- 65,740,943 53,993,742 Allowance for depreciation (23,635,256) (18,209,891) ------------- ------------- 42,105,687 35,783,851 Other assets: Deferred loan costs (Note D) 8,521,356 9,141,262 Goodwill and other intangibles (Note C) 263,425,447 228,692,018 Other 2,306,143 1,507,488 ------------- ------------- 274,252,946 239,340,768 ------------- ------------- $ 345,050,627 $ 298,663,842 ============= =============
See accompanying notes. F-2 GRAY COMMUNICATIONS SYSTEMS, INC. CONSOLIDATED BALANCE SHEETS (Continued)
December 31, 1997 1996 Liabilities and stockholders' equity Current liabilities: Trade accounts payable (includes $850,000 and $1,000,000 payable to Bull Run Corporation, respectively) $ 3,321,903 $ 6,043,062 Employee compensation and benefits 3,239,694 7,152,786 Accrued expenses 2,265,725 1,059,769 Accrued interest 4,533,366 4,858,775 Current portion of program broadcast obligations 2,876,060 2,362,144 Deferred revenue 1,966,166 1,764,509 Current portion of long-term debt 400,000 140,000 ------------- ------------- Total current liabilities 18,602,914 23,381,045 Long-term debt (Notes C and D) 226,676,377 173,228,049 Other long-term liabilities: Program broadcast obligations, less current portion 617,107 545,889 Supplemental employee benefits (Note E) 1,161,218 1,357,275 Deferred income taxes (Note H) 1,203,847 -0- Deferred interest swap -0- 191,055 Other acquisition related liabilities (Notes C and D) 4,494,016 4,735,013 ------------- ------------- 7,476,188 6,829,232 Commitments and contingencies (Notes C, D and J) Stockholders' equity (Notes C, D and F) Serial Preferred Stock, no par value; authorized 20,000,000 shares; 20,600,000 20,000,000 issued 2,060 and 2,000, respectively ($20,600,000 and $20,000,000 aggregate liquidation value, respectively) Class A Common Stock, no par value; authorized 15,000,000 10,358,031 7,994,235 shares; issued 5,307,716 and 5,155,331 shares, respectively Class B Common Stock, no par value; authorized 15,000,000 66,397,804 66,065,762 shares; issued 3,515,364 and 3,500,000 shares, respectively Retained earnings 6,603,191 10,543,940 ------------- ------------- 103,959,026 104,603,937 Treasury Stock at cost, Class A Common, 781,921 and 663,180 (9,011,369) (6,638,284) shares, respectively Treasury Stock at cost, Class B Common, 166,790 and 172,300 (2,652,509) (2,740,137) shares, respectively ------------- ------------- 92,295,148 95,225,516 ------------- ------------- $ 345,050,627 $ 298,663,842 ============= =============
See accompanying notes. F-3 GRAY COMMUNCIATIONS SYSTEMS, INC. CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended December 31, 1997 1996 1995 Operating revenues: Broadcasting (less agency commissions) $ 72,300,105 $ 54,981,317 $ 36,750,035 Publishing 24,536,348 22,845,274 21,866,220 Paging 6,711,426 1,478,608 -0- ------------- ------------- ------------- 103,547,879 79,305,199 58,616,255 Expenses: Broadcasting 41,966,493 32,438,405 23,201,990 Publishing 19,753,387 17,949,064 20,016,137 Paging 4,051,359 1,077,667 -0- Corporate and administrative 2,528,461 3,218,610 2,258,261 Depreciation 7,800,217 4,077,696 2,633,360 Amortization of intangible assets 6,718,302 3,584,845 1,325,526 Non-cash compensation paid in common stock (Note E) -0- 880,000 2,321,250 ------------- ------------- ------------- 82,818,219 63,226,287 51,756,524 ------------- ------------- ------------- 20,729,660 16,078,912 6,859,731 Miscellaneous income and (expense), net (Note B) (30,851) 5,704,582 143,612 ------------- ------------- ------------- 20,698,809 21,783,494 7,003,343 Interest expense 21,861,267 11,689,053 5,438,374 ------------- ------------- ------------- INCOME (LOSS) BEFORE INCOME TAXES AND EXTRAORDINARY CHARGE (1,162,458) 10,094,441 1,564,969 Federal and state income taxes (Note H) 240,000 4,416,000 634,000 ------------- ------------- ------------- INCOME (LOSS) BEFORE EXTRAORDINARY CHARGE (1,402,458) 5,678,441 930,969 Extraordinary charge on extinguishment of debt, net of applicable income tax benefit of $2,157,000 (Note D) -0- 3,158,960 -0- ------------- ------------- ------------- NET INCOME (LOSS) (1,402,458) 2,519,481 930,969 Preferred dividends (Note F) 1,409,690 376,849 -0- ------------- ------------- ------------- NET INCOME (LOSS) AVAILABLE TO COMMON STOCKHOLDERS $ (2,812,148) $ 2,142,632 $ 930,969 ============= ============= ============= Average outstanding common shares-basic 7,901,697 5,398,436 4,354,183 Average outstanding common shares-diluted 7,901,697 5,625,548 4,481,317 Basic earnings per common share: Income (loss) before extraordinary charge available to common stockholders $ (0.36) $ 0.98 $ 0.21 Extraordinary charge -0- (0.58) -0- ------------- ------------- ------------- NET INCOME (LOSS) AVAILABLE TO COMMON STOCKHOLDERS $ (0.36) $ 0.40 $ 0.21 ============= ============= ============= Diluted earnings per common share: Income (loss) before extraordinary charge available to common stockholders $ (0.36) $ 0.94 $ 0.21 Extraordinary charge -0- (0.56) -0- ------------- ------------- ------------- NET INCOME (LOSS) AVAILABLE TO COMMON STOCKHOLDERS $ (0.36) $ 0.38 $ 0.21 ============= ============= =============
See accompanying notes. F-4 GRAY COMMUNICATIONS SYSTEMS, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Class A Class B Restricted Preferred Stock Common Stock Common Stock Stock Shares Amount Shares Amount Shares Amount Deferrals Balance at December 31, 1994 -0- $ -0- 4,841,785 $ 3,393,747 -0- $ -0- $ -0- Net Income -0- -0- -0- -0- -0- -0- -0- Class A Common Stock Cash Dividends ($0.08) per share -0- -0- -0- -0- -0- -0- -0- Issuance of Class A Common Stock (Notes C, E, F, G and I): 401(k) Plan -0- -0- 18,354 298,725 -0- -0- -0- Directors' Stock Plan -0- -0- 23,500 238,919 -0- -0- -0- Non-qualified Stock Plan -0- -0- 5,000 48,335 -0- -0- -0- Gwinnett Acquisition -0- -0- 44,117 500,000 -0- -0- -0- Restricted Stock Plan -0- -0- 150,000 2,081,250 -0- -0- (2,081,250) Amortization of Restricted Stock Plan deferrals -0- -0- -0- -0- -0- -0- 2,081,250 Income tax benefits relating to stock plans -0- -0- -0- 235,000 -0- -0- -0- Balance at December 31, 1995 -0- -0- 5,082,756 6,795,976 -0- -0- -0- Net Income -0- -0- -0- -0- -0- -0- -0- Common Stock Cash Dividends: Class A ($0.08 per share) -0- -0- -0- -0- -0- -0- -0- Class B ($0.02 per share) -0- -0- -0- -0- -0- -0- -0- Purchase of Class B Common Stock (Note F) -0- -0- -0- -0- -0- -0- -0- Issuance of Class A Common Stock (Notes F, G and I): 401(k) Plan -0- -0- 13,225 262,426 -0- -0- -0- Directors' Stock Plan -0- -0- 22,500 228,749 -0- -0- -0- Non-qualified Stock Plan -0- -0- 36,850 358,417 -0- -0- -0- Preferred Stock Dividends -0- -0- -0- -0- -0- -0- -0- Issuance of Class A Common Stock Warrants (Notes C and F) -0- -0- -0- 2,600,000 -0- -0- -0- Issuance of Series A Preferred Stock in exchange for Subordinated Note (Notes C and F) 1,000 10,000,000 -0- (2,383,333) -0- -0- -0- Issuance of Series B Preferred Stock (Notes C and F) 1,000 10,000,000 -0- -0- -0- -0- -0- Issuance of Class B Common Stock, net of expenses (Notes C and F) -0- -0- -0- -0- 3,500,000 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 5,155,331 $ 7,994,235 3,500,000 $66,065,762 $ -0-
Class A Class B Treasury Stock Treasury Stock Retained Shares Amount Shares Amount Earnings Total Balance at December 31, 1994 (663,180) $(6,638,284) -0- $ -0- $ 8,245,626 5,001,089 Net Income -0- -0- -0- -0- 930,969 930,969 Class A Common Stock Cash Dividends ($0.08) per share -0- -0- -0- -0- (348,689) (348,689) Issuance of Class A Common Stock (Notes C, E, F, G and I): 401(k) Plan -0- -0- -0- -0- -0- 298,725 Directors' Stock Plan -0- -0- -0- -0- -0- 238,919 Non-qualified Stock Plan -0- -0- -0- -0- -0- 48,335 Gwinnett Acquisition -0- -0- -0- -0- -0- 500,000 Restricted Stock Plan -0- -0- -0- -0- -0- -0- Amortization of Restricted Stock Plan deferrals -0- -0- -0- -0- -0- 2,081,250 Income tax benefits relating to stock plans -0- -0- -0- -0- -0- 235,000 Balance at December 31, 1995 (663,180) (6,638,284) -0- -0- 8,827,906 8,985,598 Net Income -0- -0- -0- -0- 2,519,481 2,519,481 Common Stock Cash Dividends: Class A ($0.08 per share) -0- -0- -0- -0- (357,598) (357,598) Class B ($0.02 per share) -0- -0- -0- -0- (69,000) (69,000) Purchase of Class B Common Stock (Note F) -0- -0- (172,300) (2,740,137) -0- (2,740,137) Issuance of Class A Common Stock (Notes F, G and I): 401(k) Plan -0- -0- -0- -0- -0- 262,426 Directors' Stock Plan -0- -0- -0- -0- -0- 228,749 Non-qualified Stock Plan -0- -0- -0- -0- -0- 358,417 Preferred Stock Dividends -0- -0- -0- -0- (376,849) (376,849) Issuance of Class A Common Stock Warrants (Notes C and F) -0- -0- -0- -0- -0- 2,600,000 Issuance of Series A Preferred Stock in exchange for Subordinated Note (Notes C and F) -0- -0- -0- -0- -0- 7,616,667 Issuance of Series B Preferred Stock (Notes C and F) -0- -0- -0- -0- -0- 10,000,000 Issuance of Class B Common Stock, net of expenses (Notes C and F) -0- -0- -0- -0- -0- 66,065,762 Income tax benefits relating to stock plans -0- -0- -0- -0- -0- 132,000 -------- ----------- -------- ----------- ----------- -------------- Balance at December 31, 1996 (663,180) $(6,638,284) (172,300) $(2,740,137) $10,543,940 $ 95,225,516
See accompanying notes. F-5 GRAY COMMUNICATIONS SYSTEMS, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (continued)
Class A Class B Restricted Preferred Stock Common Stock Common Stock Stock Shares Amount Shares Amount Shares Amount Deferrals Balance at December 31, 1996 2,000 $20,000,000 5,155,331 $ 7,994,235 3,500,000 $66,065,762 $ -0- Net Loss -0- -0- -0- -0- -0- -0- -0- Common Stock Cash Dividends ($0.08) per share -0- -0- -0- -0- -0- -0- -0- Preferred Stock Dividends -0- -0- -0- -0- -0- -0- -0- Issuance of Class A Common Stock (Notes F and G): Directors' Stock Plan -0- -0- 501 9,645 -0- -0- -0- Non-qualified Stock Plan -0- -0- 29,850 317,151 -0- -0- -0- Stock Award Restricted Stock Plan -0- -0- 122,034 1,200,000 -0- -0- -0- Issuance of Class B Common Stock (Notes F and I): 401(k) Plan -0- -0- -0- -0- 15,364 282,384 -0- Issuance of Series B Preferred Stock (Note F) 60 600,000 -0- -0- -0- -0- -0- Issuance of Treasury Stock (Notes F, G, and I): 401(k) Plan -0- -0- -0- -0- -0- 49,658 -0- Non-qualified Stock Plan -0- -0- -0- -0- -0- -0- -0- Purchase of Class A Common Stock (Note F): -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 5,307,716 $10,358,031 3,515,364 $66,397,804 $ -0- ===== =========== ========= =========== ========= =========== ======= Class A Class B Treasury Stock Treasury Stock Retained Shares Amount Shares Amount Earnings Total Balance at December 31, 1996 (663,180) (6,638,284) $(172,300) $(2,740,137) $ 10,543,940 $ 95,225,516 Net Loss -0- -0- -0- -0- (1,402,458) (1,402,458 Common Stock Cash Dividends ($0.08) per share -0- -0- -0- -0- (628,045) (628,045 Preferred Stock Dividends -0- -0- -0- -0- (1,409,690) (1,409,690 Issuance of Class A Common Stock (Notes F and G): Directors' Stock Plan -0- -0- -0- -0- -0- 9,645 Non-qualified Stock Plan -0- -0- -0- -0- -0- 317,151 Stock Award Restricted Stock Plan -0- -0- -0- -0- -0- 1,200,000 Issuance of Class B Common Stock (Notes F and I): 401(k) Plan -0- -0- -0- -0- -0- 282,384 Issuance of Series B Preferred Stock (Note F) -0- -0- -0- -0- -0- 600,000 Issuance of Treasury Stock (Notes F, G, and I): 401(k) Plan -0- -0- 5,510 87,628 -0- 137,286 Non-qualified Stock Plan 54,159 1,082,390 -0- -0- (500,556) 581,834 Purchase of Class A Common Stock (Note F): (172,900) (3,455,475) -0- -0- -0- (3,455,475 Income tax benefits relating to stock plans -0- -0- -0- -0- -0- 837,000 -------- ----------- --------- ----------- ---------- ----------- Balance at December 31, 1997 (781,921) $(9,011,369) $(166,790) $(2,652,509) $6,603,191 $92,295,148 ======== =========== ========= =========== ========== ===========
See accompanying notes. F-6 GRAY COMMUNCIATIONS SYSTEMS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31, 1997 1996 1995 Operating activities Net income (loss) $ (1,402,458) $ 2,519,481 $ 930,969 Items which did not use (provide) cash: Depreciation 7,800,217 4,077,696 2,633,360 Amortization of intangible assets 6,718,302 3,584,845 1,325,526 Amortization of deferred loan costs 1,083,303 270,813 -0- Amortization of program broadcast rights 3,501,330 2,742,712 1,647,035 Amortization of original issue discount on 8% subordinated note -0- 216,667 -0- Write-off of loan acquisition costs from early extinguishment of debt -0- 1,818,840 -0- Gain on disposition of television station -0- (5,671,323) -0- Payments for program broadcast rights (3,629,350) (2,877,128) (1,776,796) Compensation paid in Common Stock -0- 880,000 2,321,250 Supplemental employee benefits (196,057) (855,410) (370,694) Common Stock contributed to 401(K) Plan 419,670 262,426 298,725 Deferred income taxes 1,283,000 (44,000) 863,000 Loss on asset sales 108,998 201,792 1,652 Changes in operating assets and liabilities: Trade accounts receivable (369,675) (1,575,723) (852,965) Recoverable income taxes (384,597) (400,680) (1,347,007) Inventories (101,077) 254,952 (181,034) Other current assets (569,745) (21,248) (11,208) Trade accounts payable (2,825,099) 2,256,795 1,441,745 Employee compensation and benefits (2,848,092) 2,882,379 1,011,667 Accrued expenses 1,279,164 (2,936,155) (414,087) Accrued interest (325,409) 3,794,284 78,536 Deferred revenue 201,657 710,286 -0- ------------- ------------- ------------- Net cash provided by operating activities 9,744,082 12,092,301 7,599,674 Investing activities Acquisitions of newspaper businesses -0- -0- (2,084,621) Acquisition of television businesses (45,644,942) (210,944,547) -0- Disposition of television business -0- 9,480,699 -0- Purchases of property and equipment (10,371,734) (3,395,635) (3,279,721) Proceeds from asset sales 24,885 174,401 2,475 Deferred acquisition costs (89,056) -0- (3,330,481) Payments on purchase liabilities (764,658) (243,985) (111,548) Other (652,907) (139,029) (125,356) ------------- ------------- ------------- Net cash used in investing activities (57,498,412) (205,068,096) (8,929,252) Financing activities Proceeds from borrowings: Short-term debt -0- -0- 1,200,000 Long-term debt 75,350,000 238,478,310 2,950,000 Repayments of borrowings: Short-term debt -0- -0- (1,200,000) Long-term debt (22,678,127) (109,434,577) (1,792,516) Deferred loan costs (463,397) (9,410,078) -0- Dividends paid (1,428,045) (426,598) (348,689) Class A Common Stock transactions 1,163,796 719,166 522,254 Proceeds from equity offering B Class B Common Stock, net of expenses -0- 66,065,762 -0- Proceeds from offering of Series B Preferred Stock -0- 10,000,000 -0- Proceeds from settlement of interest rate swap agreement -0- 215,000 -0- Proceeds from sale of treasury shares 581,834 -0- -0- Purchase of Class A Common Stock (3,455,475) -0- -0- Purchase of Class B Common Stock -0- (2,740,137) -0- ------------- ------------- ------------- Net Cash provided by financing activities 49,070,586 193,466,848 1,331,049 ------------- ------------- ------------- Increase in cash and cash equivalents 1,316,256 491,053 1,471 Cash and cash equivalents at beginning of year 1,051,044 559,991 558,520 ------------- ------------- ------------- Cash and cash equivalents at end of year $ 2,367,300 $ 1,051,044 $ 559,991 ============= ============= =============
See accompanying notes. F-7 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 eight southeastern states, include eight television stations, three daily newspapers, two area weekly advertising only publications 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 $15,000 and $13,000 at December 31, 1997, and 1996, 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. F-8 GRAY COMMUNICATIONS SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) A. Summary of Significant Accounting Policies (Continued) 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, 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 $11.5 million and $4.9 million as of December 31, 1997, and 1996, 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 17, 1995, the Board of Directors declared a 50% stock dividend on the Company's Class A Common Stock payable October 2, 1995 to stockholders of record on September 8, 1995, to effect a three for two stock split. All applicable share and per share data have been adjusted to give effect to the stock split. Earnings Per Common Share In 1997, the Financial Accounting Standards Board issued Statement No. 128, Earnings per Share ("Statement 128"). Statement 128 replaced the calculation of primary and fully diluted earnings per share with basic and diluted earnings per share. Unlike primary earnings per share, basic earnings per share excludes any dilutive effects of options, warrants and convertible securities. Diluted earnings per share is very similar to the previously reported fully diluted earnings per share. All earnings per share amounts for all periods have been presented, and where appropriate, restated to conform to Statement 128 requirements. F-9 GRAY COMMUNICATIONS SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) A. Summary of Significant Accounting Policies (Continued) 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. Fair Value of Financial Instruments The Company has adopted FASB Statement No. 107, Disclosure about Fair Value of Financial Instruments, which requires disclosure of fair value, to the extent practical, of certain of the Company's financial instruments. The fair value amounts do not necessarily represent the amount that could be realized in a sale or settlement. The Company's financial instruments are comprised principally of long-term debt and preferred stock. The estimated fair value of long-term debt at December 31, 1997, and 1996 exceeded book value by $13.2 million and $9.6 million, respectively. The fair value of the Preferred Stock at December 31, 1997, and 1996 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 1997 format. B. Business Disposition 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 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. F-10 GRAY COMMUNICATIONS SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) C. Business Acquisitions 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. Pending Acquisition On February 13, 1998, the Company signed a definitive purchase agreement to acquire all of the outstanding capital stock of Busse Broadcasting Corporation ("Busse"). The purchase price is approximately $112.0 million plus Busse's cash and cash equivalents less Busse's indebtedness including its 11 5/8 % Senior Secured Notes due 2000. Busse owns and operates three VHF television stations: KOLN-TV, the CBS-affiliate operating on Channel 10 in the Lincoln-Hastings-Kearney, Nebraska television market, and its satellite station KGIN-TV, the CBS-affiliate operating on Channel 11 serving Grand Island, Nebraska; and WEAU-TV, the NBC-affiliate operating on Channel 13 serving the Eau Claire-La Crosse, Wisconsin market. The purchase of Busse is subject to FCC approval. The acquisition is expected to close on or before September 1, 1998. In connection with the proposed purchase of Busse, the Company will pay Bull Run Corporation ("Bull Run"), a principal stockholder of the Company, a finder's fee equal to 1% of the purchase price for services performed, none of which was due and included in accounts payable at December 31, 1997. 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. 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 $37.4 million. The Company funded the costs of this acquisition through its senior credit facility (the "Senior Credit Facility"). WITN operates on Channel 7 and is the NBC-affiliate in the Greenville-Washington-New Bern, North Carolina market. In connection with the purchase of the assets of WITN ("WITN Acquisition"), the Company will pay Bull Run a fee equal to 1% of the purchase price for services performed, of which $400,000 was due and included in accounts payable at December 31, 1997. 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 include 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. 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 $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 $58,000 for services performed. Unaudited pro forma operating data for the year ended December 31, 1997, and 1996 is presented below and assumes that the WITN Acquisition and the GulfLink Acquisition occurred on January 1, 1996. F-11 GRAY COMMUNICATIONS SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Business Acquisitions (continued) 1997 Acquisitions (continued) This unaudited pro forma operating data does not purport to represent the Company's actual results of operations had the WITN Acquisition and the GulfLink Acquisition 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 year ended December 31, 1997, are as follows (in thousands, except per common share data):
WITN GulfLink Pro forma Adjusted Gray Acquisition Acquisition Adjustments Pro Forma (Unaudited) Revenues, net $ 103,548 $ 4,551 $ 1,000 $ -0- $ 109,099 ========= ======= ======= ===== ========= Net income (loss) available to common stockholders $ (2,812) $ 146 $ 74 $ (1,177) $ (3,769) ======== ===== ==== ======== ======== Income (loss) per share available to common stockholders: Basic $ (0.36) $ (0.48) ======= ======= Diluted $ (0.36) $ (0.48) ======= =======
Unaudited pro forma operating data for the year ended December 31, 1996, are as follows (in thousands, except per common share data):
WITN GulfLink KTVE First Pro forma Adjusted Gray Acquisition Acquisition Sale American Adjustments Pro Forma Acquisition (Unaudited) Revenues, net $ 79,305 $ 8,431 $ 2,937 $ (2,968) $ 21,203 $ -0- $108,908 ======== ======= ======= ======== ======== ===== ======== Net income (loss) available to common stockholders $ 2,143 $ 2,566 $ 197 $ (3,173) $ (1,773) $ (2,357) $ (2,397) ======= ======= ===== ======== ========= ======== ======== Income (loss) per share available to common stockholders: Basic $ 0.40 $ (0.30) ====== ======= Diluted $ 0.38 $ (0.30) ====== =======
The pro forma results presented above include adjustments to reflect (i) the incurrence of interest expense to fund the GulfLink Acquisition, the WITN Acquisition, and the First American Acquisition (as defined in 1996 Acquisitions), (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 3,500,000 Class B Common shares issued in connection with the First American Acquisition. F-12 GRAY COMMUNICATIONS SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) C. Business Acquisitions (continued) 1996 Acquisitions 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") as a component of its strategy to promote the station's upgraded news product. 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's Board of Directors has agreed to pay Bull Run, a fee equal to approximately $1.7 million for services performed in connection with this acquisition. At December 31, 1997, $450,000 of this fee remains payable and is included in accounts payable. The First American Acquisition and the early retirement of the Company's existing bank credit facility and other senior indebtedness (see Notes D and F), were funded as follows: net proceeds of $66.1 million from the sale of 3,500,000 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 500,000 shares of the Company's Class A Common Stock at $24 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 Federal Communications Commission (the "FCC") ordered the Company to apply for FCC approval to divest itself of WALB-TV ("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. Also in July of 1997, the Company obtained FCC approval to transfer control of WALB to a trust with a view towards the trustee effecting (i) a swap of WALB's assets for assets of one or more television stations of comparable value and with comparable broadcast cash flow in a transaction qualifying for deferred capital gains treatment under the "like-kind exchange" provision of Section 1031 of the Internal Revenue Code of 1986, or (ii) a sale of such assets. Under the trust arrangement, the Company relinquished operating control of the station to a trustee while retaining the economic risks and benefits of ownership. If the trustee is required to effect a sale of WALB, the Company would incur a significant gain and related tax liability, the payment of which could have an adverse effect on the Company's ability to acquire comparable assets without incurring additional indebtedness. The FCC allowed up to six months for the trustee to file an application seeking the agency's approval of a swap or sale. This six month period expired in January 1998 without a swap or F-13 GRAY COMMUNICATIONS SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) C. Business Acquisitions (continued) 1996 Acquisitions (continued) sale being executed. The trustee has filed an application requesting a six month extension to effect a swap or sale. The FCC has not yet ruled on this extension application. Condensed unaudited balance sheets of WALB and WJHG are as follows (in thousands):
WALB WJHG December 31, 1997 1996 1997 1996 (Unaudited) Current assets $ 2,379 $ 2,058 $ 1,053 $ 1,079 Property and equipment 1,473 1,579 848 981 Other assets 471 100 346 55 ------- ------- ------- ------- Total assets $ 4,323 $ 3,737 $ 2,247 $ 2,115 ======= ======= ======= ======= Current liabilities $ 994 $ 1,189 $ 350 $ 497 Other liabilities 215 242 127 -0- Stockholder's equity 3,114 2,306 1,770 1,618 ------- ------- ------- ------- Total liabilities and stockholder's equity $ 4,323 $ 3,737 $ 2,247 $ 2,115 ======= ======= ======= =======
Condensed unaudited income statement data for the three years ended December 31, 1997, for WALB and WJHG are as follows (in thousands):
WALB WJHG Year ended December 31, Year ended December 31, 1997 1996 1995 1997 1996 1995 (Unaudited) Broadcasting revenues $ 10,090 $ 10,611 $ 9,445 $ 4,896 $ 5,217 $ 3,843 Expenses 4,770 5,070 4,650 3,757 4,131 3,573 -------- -------- ------- ------- ------- ------- Operating income 5,320 5,541 4,795 1,139 1,086 270 Other income (expense) 3 7 17 (5) 6 60 -------- -------- ------- ------- ------- ------- Income before income taxes $ 5,323 $ 5,548 $ 4,812 $ 1,134 $ 1,092 $ 330 ======== ======== ======= ======= ======= ======= Net income $ 3,295 $ 3,465 $ 2,984 $ 737 $ 685 $ 205 ======== ======== ======= ======= ======= =======
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's Board of Directors approved the payment of a $360,000 fee to Bull Run. 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 F-14 GRAY COMMUNICATIONS SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) C. Business Acquisitions (continued) 1996 Acquisitions (continued) "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 487,500 shares of Class A Common Stock at $17.88 per share, 337,500 shares of which were vested at December 31, 1997. The remainder vests in four equal annual installments of 37,500 shares through 2001. 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 $0.58 per basic common share and $0.56 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. Unaudited pro forma operating data for the year 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 year ended December 31, 1996, are as follows (in thousands, except per common share data):
First KTVE American Pro forma Adjusted Gray Sale Acquisition Adjustments Pro Forma (Unaudited) Revenues, net $ 79,305 $ (2,968) $ 21,203 $ -0- $ 97,540 ======== ======== ======== ===== ======== Net income (loss) before extraordinary charge available to common stockholders $ 5,301 $ (3,173) $ (1,773) $ (1,743) $ (1,388) ======= ======== ======== ======== ======== Income (loss) per share available to common stockholders before extraordinary charge: Basic $ 0.98 $ (0.17) ====== ======= Diluted $ 0.94 $ (0.17) ====== =======
F-15 GRAY COMMUNICATIONS SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) C. Business Acquisitions (continued) 1996 Acquisitions (continued) Unaudited pro forma operating data for the year ended December 31, 1995, are as follows (in thousands, except per common share data):
Augusta KTVE First Pro forma Adjusted Gray Acquisition Sale American Adjustments Pro Forma Acquisition (Unaudited) Revenues, net $ 58,616 $ 8,660 $ (4,188) $ 27,321 $ 228 $ 90,637 ======== ======= ======== ======== ====== ======== Net income (loss) available to common stockholders $ 931 $ 2,242 $ (278) $ 6,348 $ (15,316) $ (6,073) ======= ======= ====== ======= ========= ======== Income (loss) per share available to common stockholders: Basic $ 0.21 $ (0.77) ========= ======= Diluted $ 0.21 $ (0.77) ========= =======
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 3,500,000 Class B Common shares issued in connection with the First American Acquisition. 1995 Acquisitions On January 6, 1995, the Company purchased substantially all of the assets of the Gwinnett Post-Tribune and assumed certain liabilities ( the "Gwinnett Acquisition"). The assets consisted of office equipment and publishing operations located in Lawrenceville, Georgia. The purchase price of $3.7 million, including assumed liabilities of approximately $370,000, was paid by approximately $1.2 million in cash (financed through long-term borrowings and cash from operations), the issuance of 44,117 shares of the Company's Class A Common Stock (having fair value of $500,000), and $1.5 million payable to the sellers pursuant to non-compete agreements. The excess of the purchase price over the fair value of net tangible assets acquired was approximately $3.4 million. In connection with the Gwinnett Acquisition the Company's Board of Directors approved the payment of a $75,000 fee to Bull Run. F-16 GRAY COMMUNICATIONS SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) D. Long-term Debt Long-term debt consists of the following (in thousands): December 31, 1997 1996 10 5/8 % Senior Subordinated Notes due 2006 $ 160,000 $ 160,000 Senior Credit Facility 65,630 12,680 Other 1,446 688 --------- --------- 227,076 173,368 Less current portion (400) (140) --------- --------- $ 226,676 $ 173,228 ========= ========= 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 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 will be full, unconditional and joint and several. All of the current and future direct and indirect subsidiaries of the Company will be guarantors of the 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 Company has a $125.0 million Senior Credit Facility, as amended, which is comprised of a term loan (the "Term Commitment") of $71.5 million and a revolving credit facility (the "Revolving Commitment") of $53.5 million. The agreement pursuant to which the Senior Credit Facility was issued contains certain restrictive provisions, which, among other things, limit capital expenditures and additional indebtedness and require minimum levels of cash flows. The Senior Subordinated Notes also contained similar restrictive provisions. 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 0.5% or LIBOR plus 2.25%. The effective interest rate on the Senior Credit Facility at December 31, 1997, and 1996 was 7.9% and 8.4%, respectively. F-17 GRAY COMMUNICATIONS SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) D. Long-term Debt (continued) The amounts available under the Revolving Commitment will be reduced by $7,356,000 in 1998; $8,025,000 in years 1999, 2000, 2001 and 2002; $9,363,000 in 2003; and $4,681,000 in 2004. The amount borrowed by the Company on December 31, 1999 under the Term Commitment will be converted to a four and one-half year term loan. The principal of the term loan shall be repaid in nineteen consecutive quarterly installments commencing on December 31, 1999. Each of the first five quarterly installments are equal to 2.50% of the principal balance outstanding at December 31, 1999. Each of the next thirteen quarterly installments are equal to 3.75% of the principal balance outstanding at December 31, 1999. The nineteenth and final installment due June 30, 2004 will be equal to the remaining balance outstanding and any outstanding interest due on June 30, 2004. The Company is charged a commitment fee on the excess of the aggregate average daily undisbursed amount of the Revolving Commitment and the Term Commitment over the amount outstanding. At December 31, 1997, the commitment fee was 0.375% per annum. At December 31, 1997, the Company has approximately $65.6 million outstanding on the Senior Credit Facility. At December 31, 1997, the Company's interest rate for the Senior Credit Facility, was based on a spread over LIBOR of 1.75% or Prime. The Senior Subordinated Notes and the Senior Credit Facility are secured by substantially all of the Company's existing and hereafter acquired assets. At December 31, 1997, retained earnings of approximately $1.4 million and $1.0 million were available for dividends to holders of preferred and common stock, respectively. Aggregate minimum principal maturities on long-term debt as of December 31, 1997, were as follows (in thousands): 1998 $ 400 1999 8,593 2000 10,300 2001 11,165 2002 11,058 Thereafter 185,560 --------- $ 227,076 The Company made interest payments of approximately $21.3 million, $7.6 million, and $5.4 million during 1997, 1996 and 1995, respectively. In the quarter ended September 30, 1996, the Company recorded an extraordinary charge of $5.3 million ($3.2 million after taxes or $0.58 per basic common share or $0.56 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. F-18 GRAY COMMUNICATIONS SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) E. 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 122,034 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 and $240,000 of expense was recorded in 1996 and 1995, respectively. In December 1995, the Company amended an existing employment agreement to pay consulting fees to its former chief executive officer. The Company recorded approximately $596,000 of corporate and administrative expenses during the year ended December 31, 1995, in accordance with the terms of the amended employment agreement. Additionally, in December 1995 the Company issued 150,000 shares of the Company's Class A Common Stock to this former chief executive officer in accordance with his employment agreement which was amended to remove certain restrictions, including, among others, a time requirement for continued employment. Compensation expense of approximately $2.1 million was recognized in 1995 for the 150,000 shares of Class A Common Stock issued pursuant to this agreement. 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 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): December 31, 1997 1996 1995 Beginning liability $ 3,158 $ 2,938 $ 2,518 ------- ------- ------- Provision 161 918 976 Forfeitures -0- -0- (169) ------- ------- ------- Net expense 161 918 807 Payments (1,793) (698) (387) ------- ------- ------- Net change (1,632) 220 420 ------- ------- ------- Ending liability 1,526 3,158 2,938 Less current portion (365) (1,801) (725) ------- ------- ------- $ 1,161 $ 1,357 $ 2,213 ======= ======= ======= F. Stockholders' Equity and Earnings Per Share 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 F-19 GRAY COMMUNICATIONS SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) F. Stockholders' Equity and Earnings Per Share (Continued) receive cash dividends on an equal per share basis. In September 1996, the Company issued 1,000 shares each of Series A and Series B Preferred Stock relating to the financing arrangements for the First American Acquisition. As part of the financing for the Augusta Acquisition, funding was obtained from the 8% Note, which included the issuance of detachable warrants to Bull Run to purchase 487,500 shares of Class A Common Stock at $17.88 per share, 337,500 shares of which were vested at December 31, 1997. The remainder vests in four equal annual installments of 37,500 through 2001. 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, the Company also issued 1,000 shares of Series B Preferred Stock, with warrants to purchase an aggregate of 500,000 shares of Class A Common Stock at an exercise price of $24.00 per share. Of these warrants 300,000 vested upon issuance, with the remaining warrants vesting in five equal annual installments commencing on the first anniversary 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 September 1997, the Company issued 60 shares of Series B Preferred Stock as payment of dividends to the holders of its then outstanding Series B Preferred Stock. On September 24, 1996, the Company completed a public offering of 3.5 million shares of its Class B Common Stock at an offering price of $20.50 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 has a Stock Purchase Plan which allows outside directors to purchase up to 7,500 shares of the Company's Common Stock directly from the Company before the end of January following each calendar year. The purchase price per share approximates the market price of the Common Stock at the time of the grant. During 1997, 1996 and 1995, certain directors purchased an aggregate of 501, 22,500, and 23,500 shares of Class A Common Stock, respectively, under this plan. F-20 GRAY COMMUNICATIONS SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) F. Stockholders' Equity and Earnings Per Share (Continued) The Company's Board of Directors authorized the purchase of 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 1997 and the fourth quarter of 1996, the Company purchased 172,900 Class A Common Stock shares and 172,300 Class B Common Stock shares, respectively, under this authorization. The 1997 and 1996 treasury shares were purchased at prevailing market prices with an average effective price of $19.99 and $15.90 per share, respectively, and were funded from the Company's operating cash flow. Statement of Financial Accounting Standards No. 128. "Earnings Per Share" is effective for full-year 1997 and subsequent periods. Statement 128 modifies the method for calculations of net income per share applicable to common stockholders and also requires a reconciliation between basic and diluted per share amounts. The following table presents the effect of Statement 128 (in thousands, except per common share data):
1997 1996 1995 Net income (loss) available to common stockholders $ (2,812) $ 2,143 $ 931 ======== ======== ======== Basic average common shares outstanding 7,902 5,398 4,354 ======== ======== ======== Basic net income (loss) per share available to common stockholders $ (0.36) $ 0.40 $ 0.21 ======== ======== ======== Basic average common shares outstanding 7,902 5,398 4,354 Stock compensation awards -0- 228 127 -------- -------- -------- Diluted average common shares outstanding 7,902 5,626 4,481 ======== ======== ======== Diluted net income (loss) per share available to common stockholders $ (0.36) $ 0.38 $ 0.21 ======== ======== ========
G. 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 200,000 shares of the Company's Class A Common Stock and 400,000 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. F-21 GRAY COMMUNICATIONS SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Long-term Incentive Plan and Stock Purchase Plan (continued) 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, 1997, have been granted at a price which approximates fair market value on the date of the grant. 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. 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 B Common Stock. Therefore, all options granted subsequent to 1995, were made with 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 1997, 1996 and 1995, respectively: risk-free interest rates of 5.82%, 5.43% and 6.06%; dividend yields of 0.32%, 0.50% and 0.53%; volatility factors of the expected market price of the Company's Class A Common Stock of 0.28, 0.33 and 0.26; and a weighted-average expected life of the options of 4.5, 2.0 and 2.7 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): 1997 1996 1995 Pro forma income (loss) before extraordinary charge available to common stockholders $ (3,174) $ 5,190 $ 792 Pro forma income (loss) before extraordinary charge per common share: Basic $ (0.40) $ 0.96 $ 0.18 Diluted $ (0.40) $ 0.92 $ 0.18 F-22 GRAY COMMUNICATIONS SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 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 follows (in thousands, except weighted average data):
Year Ended December 31, 1997 1996 1995 Weighted Weighted Weighted Average Average Average Exercise Exercise Exercise Options Price Options Price Options Price Stock options outstanding B beginning of year 198 $13.11 263 $12.39 199 $ 9.80 Options granted -0- -0- 111 16.14 Options exercised (85) 10.75 (52) 9.93 (29) 10.08 Options forfeited -0- (6) 12.44 (18) 10.45 Options expired (52) 19.25 (7) 10.17 -0- --- --- --- Stock options outstanding B end of year 61 $11.15 198 $13.11 263 $12.39 === === === Exercisable at end of year 61 $11.15 164 $13.06 86 $ 9.84 Weighted-average fair value of options granted during the year $ 3.37
Exercise prices for Class A Common Stock options outstanding as of December 31, 1997, ranged from $9.67 to $13.33 for the Incentive Plan. The weighted-average remaining contractual life of the Class A Common Stock options outstanding for the Incentive Plan is 1.4 years. A summary of the Company's stock option activity for Class B Common Stock, and related information for the years ended December 31 follows (in thousands, except weighted average data):
Year Ended December 31, 1997 1996 Weighted Weighted Average Average Exercise Exercise Options Price Options Price Stock options outstanding B beginning of year 68 $15.88 -0- Options granted 352 25.20 68 $15.88 --- --- Stock options outstanding B end of year 420 $23.70 68 $15.88 === === Exercisable at end of year 53 $15.88 -0- Weighted-average fair value of options granted during the year $ 8.10 $ 3.22
Exercise prices for Class B Common Stock options outstanding as of December 31, 1997, ranged F-23 GRAY COMMUNICATIONS SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Long-term Incentive Plan and Stock Purchase Plan (continued) from $15.88 to $25.50 for the Incentive Plan and $15.88 to $24.19 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 4.7 and 0.5 years, respectively. H. 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, 1997 1996 1995 Current Federal $(1,620) $ 1,462 $ (253) State and local 577 841 24 Deferred 1,283 (44) 863 ------- ------- ------- $ 240 $ 2,259 $ 634 ======= ======= ======= 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. Significant components of the Company's deferred tax liabilities and assets are as follows (in thousands): 1997 1996 Deferred tax liabilities: Net book value of property and equipment $ 2,670 $ 1,165 Goodwill 6,281 2,370 Other 120 120 ------- ------- Total deferred tax liabilities 9,071 3,655 Deferred tax assets: Liability under supplemental retirement plan 526 1,241 Allowance for doubtful accounts 499 619 Difference in basis of assets held for sale 941 941 Federal operating loss carryforwards 4,412 -0- State and local operating loss carryforwards 1,952 1,164 Other 290 511 ------- ------- Total deferred tax assets 8,620 4,476 Valuation allowance for deferred tax assets (753) (753) ------- ------- Net deferred tax assets 7,867 3,723 ------- ------- Deferred tax assets (liabilities) net $(1,204) $ 68 ======= ======= F-24 GRAY COMMUNICATIONS SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) H. Income Taxes (continued) A substantial portion of the federal operating loss carryforwards will expire in the year ended December 31, 2012. 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, 1997 1996 1995 Statutory rate applied to income $ (395) $ 1,625 $ 532 State and local taxes, net of federal tax benefits 572 (7) 91 Permanent difference relating to sale of KTVE -0- 602 -0- Other items, net 63 39 11 ------- ------- ------- $ 240 $ 2,259 $ 634 ======= ======= ======= The Company made income tax payments of approximately $275,000, $3.6 million and $742,000 during 1997, 1996 and 1995, respectively. At December 31, 1997, the Company had current recoverable income taxes of approximately $2.1 million. I. 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 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 net pension expense includes the following (in thousands):
Year Ended December 31, 1997 1996 1995 Service costs B benefits earned during the year $ 429 $ 360 $ 221 Interest cost on projected benefit obligation 442 409 384 Actual return on plan assets (608) (574) (655) Net amortization and deferral 121 126 187 ----- ----- ----- Net pension expense $ 384 $ 321 $ 137 ===== ===== ===== Assumptions: Discount rate 7.0% 7.0% 8.0% Expected long-term rate of return on assets 7.0% 7.0% 8.0% Estimated rate of increase in compensation levels 5.0% 5.0% 6.0%
F-25 GRAY COMMUNICATIONS SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) I. Retirement Plans (continued) Pension Plan (continued) The following summarizes the plan's funded status and related assumption (in thousands):
December 31, 1997 1996 Actuarial present value of accumulated benefit obligation is as follows: Vested $ 5,962 $ 5,675 Other 491 291 ------- ------- $ 6,453 $ 5,966 ======= ======= Plan assets at fair value, primarily mutual funds and an unallocated insurance contract $ 6,919 $ 6,282 Projected benefit obligation (7,053) (6,483) ------- ------- Plan assets less than projected benefit obligation (134) (201) Unrecognized net (gain) loss (58) 72 Unrecognized net asset (246) (300) ------- ------- Pension liability included in consolidated balance sheet $ (438) $ (429) ======= ======= Assumptions: Discount rate 7.0% 7.0% Estimated rate of increase in compensation levels 5.0% 5.0%
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. 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 allows 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 200,000 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. The Company's percentage match amount is declared by the Company's Board of Directors before the beginning of each plan year. In 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 was 50% for the three years ended December 31, 1997. 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 $419,670, $262,426 and $298,725 were charged to expense for 1997, 1996 and 1995, respectively, for the issuance of 20,874 Class B shares; 13,225 and 18,354 Class A shares, respectively. F-26 GRAY COMMUNICATIONS SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) J. 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, 1997, 1996 and 1995 were $1.4 million, $501,000, and $267,000, 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 1998 $ 1,434 $ 1,083 $ 2,517 1999 1,255 3,128 4,383 2000 674 2,693 3,367 2001 505 1,650 2,155 2002 290 920 1,210 Thereafter 732 -0- 732 ------- ------- ------- $ 4,890 $ 9,474 $14,364 ======= ======= ======= 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-27 GRAY COMMUNICATIONS SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) K. Information on Business Segments The Company operates in three business segments: broadcasting, publishing and paging. The broadcasting segment operates eight television stations at December 31, 1997. The publishing segment operates three daily newspapers in three different markets, and two area weekly advertising only publications in southwest Georgia and north Florida. 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, 1997 1996 1995 (In thousands) Operating revenues: Broadcasting $ 72,300 $ 54,981 $ 36,750 Publishing 24,536 22,845 21,866 Paging 6,712 1,479 -0- --------- --------- --------- $ 103,548 $ 79,305 $ 58,616 ========= ========= ========= Operating profit: Broadcasting $ 17,509 $ 14,106 $ 7,822 Publishing 2,206 1,980 (962) Paging 1,015 (7) -0- --------- --------- --------- Total operating profit 20,730 16,079 6,860 Miscellaneous income and (expense), net (31) 5,704 144 Interest expense (21,861) (11,689) (5,439) --------- --------- --------- Income (loss) before income taxes $ (1,162) $ 10,094 $ 1,565 ========= ========= =========
Operating profit is total operating revenue less operating expenses, excluding miscellaneous income and expense (net) and interest. Corporate and administrative expenses are allocated to operating profit based on net segment revenues. F-28 GRAY COMMUNICATIONS SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) K. Information on Business Segments (continued) Year Ended December 31, 1997 1996 1995 (In thousands) Depreciation and amortization expense: Broadcasting $11,024 $ 5,554 $ 2,723 Publishing 1,973 1,730 1,190 Paging 1,480 329 -0- ------- ------- ------- 14,477 7,613 3,913 Corporate 42 50 46 ------- ------- ------- Total depreciation and amortization expense $14,519 $ 7,663 $ 3,959 ======= ======= ======= Capital expenditures: Broadcasting $ 5,000 $ 2,674 $ 2,285 Publishing 4,235 692 973 Paging 975 -0- -0- ------- ------- ------- 10,210 3,366 3,258 Corporate 162 30 22 ------- ------- ------- Total capital expenditures $10,372 $ 3,396 $ 3,280 ======= ======= ======= December 31, 1997 1996 1995 (In thousands) Identifiable assets: Broadcasting $287,254 $245,614 $ 54,022 Publishing 19,818 16,301 18,170 Paging 23,950 23,764 -0- -------- -------- -------- 331,022 285,679 72,192 Corporate 14,029 12,985 6,048 -------- -------- -------- Total identifiable assets $345,051 $298,664 $ 78,240 ======== ======== ======== F-29 GRAY COMMUNICATIONS SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) L. Selected Quarterly Financial Data (Unaudited)
Fiscal Quarters First Second Third Fourth Year Ended December 31, 1997 (In thousands, except for per share data) 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 $ (0.10) $ 0.03 $ (0.19) $ (0.10) Diluted income (loss) per share $ (0.10) $ 0.03 $ (0.19) $ (0.10) Fiscal Quarters First Second Third Fourth Year Ended December 31, 1996 (In thousands, except for per share data) Operating revenues $ 17,027 $ 18,487 $ 16,699 $ 27,092 Operating income 2,678 4,633 2,381 6,387 Income before extraordinary charge 311 1,490 2,947 930 Extraordinary charge -0- -0- 3,159 -0- Net income (loss) 311 1,490 (212) 930 Net income (loss) available to common stockholders 311 1,490 (239) 580 Basic income (loss) per share Income before extraordinary charge available to $ 0.07 $ 0.33 $ 0.62 $ 0.07 common stockholders Extraordinary charge 0.00 0.00 (0.67) 0.00 ---------- ---------- ---------- ---------- Net income (loss) available to common stockholders $ 0.07 $ 0.33 $ (0.05) $ 0.07 ========== ========== ========== ========== Diluted income (loss) per share Income before extraordinary charge available to $ 0.07 $ 0.32 $ 0.58 $ 0.07 common stockholders Extraordinary charge 0.00 0.00 (0.63) 0.00 ---------- ---------- ---------- ---------- Net income (loss) available to common stockholders $ 0.07 $ 0.32 $ (0.05) $ 0.07 ========== ========== ========== ==========
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 1996 includes the KTVE Sale and an extraordinary charge. As a result of the KTVE Sale, the Company recognized a pre-tax gain of approximately $5.7 million and estimated income taxes of approximately $2.8 million (See Note B). The Company recorded an extraordinary charge on extinguishment of debt of $5.3 million and an income tax benefit of $2.2 million (See Note D). F-30 REPORT OF INDEPENDENT AUDITORS We have audited the consolidated financial statements of Gray Communications Systems, Inc. as of December 31, 1997 and 1996, and for each of the three years in the period ended December 31, 1997, and have issued our report thereon dated January 27, 1998 (except for the Pending Acquisition of Note C, as to which the date is February 13, 1998). 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 27, 1998 F-31 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** Deductions* Period - ----------- ---------- ---------- ---------- ----------- ---------- 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 Year ended December 31, 1995 Allowance for doubtful accounts $694,000 $384,000 $33,000 $661,000 $450,000
* "Deductions" represent write-offs of amounts not considered collectible ** Represents amounts recorded in certain allocations of purchase prices for the Company's acquisitions F-32 Independent Auditors' Report The Board of Directors Capital Sports Properties, Inc.: We have audited the balance sheets of Capital Sports Properties, Inc. as of June 30, 1996 and December 31, 1995, and the related statements of earnings, changes in stockholders' equity and cash flows for the six-months ended June 30, 1996 and the year ended December 31, 1995, 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 audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Capital Sports Properties, Inc. as of June 30, 1996 and December 31, 1995, and the results of its operations and its cash flows for the six-months ended June 30, 1996 and the year ended December 31, 1995, in conformity with generally accepted accounting principles. /s/ KPMG PEAT MARWICK LLP Stamford, Connecticut February 10, 1997 F-33 KPMG Peat Marwick LLP 1600 PNC Center 201 East Fifth Street Cincinnati, OH 45202 Dayton, OH Independent Auditors' Report The Board of Directors Host Communications, Inc.: We have audited the consolidated balance sheets of Host Communications, Inc. and subsidiaries as of June 30, 1996 and 1995, and the related consolidated statements of earnings, stockholders' equity, and cash flows for the years then ended. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Host Communications, Inc. and subsidiaries at June 30, 1996 and 1995, and the results of their operations and their cash flows for the years 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 PEAT MARWICK LLP October 11, 1996 F-34 -----END PRIVACY-ENHANCED MESSAGE-----