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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the fiscal year ended DECEMBER 31, 1998
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the transition period from __________________ to
__________________
Commission File Number 0-9385
BULL RUN CORPORATION
(Exact name of registrant as specified in its charter)
GEORGIA 91-1117599
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
4370 PEACHTREE ROAD, N.E., ATLANTA, GA 30319
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (404) 266-8333
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
None
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $.01 PAR VALUE
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. [ X ] Yes [ ] No
Indicate by check mark if disclosure of delinquent filers in response
to Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. [ ]
The aggregate market value of the voting and non-voting common equity
held by non-affiliates as of February 26, 1999 was $53,018,295, based on the
closing price thereof on The Nasdaq Stock Market.
The number of shares outstanding of the registrant's Common Stock, par
value $.01 per share, as of February 26, 1999, was 22,268,267.
DOCUMENTS INCORPORATED BY REFERENCE
None
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BULL RUN CORPORATION
FORM 10-K INDEX
PART I
PAGE
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ITEM 1. Business............................................................................ 3
ITEM 2. Properties.......................................................................... 9
ITEM 3. Legal Proceedings................................................................... 10
ITEM 4. Submission of Matters to a Vote of Security Holders................................. 10
PART II
ITEM 5. Market for Registrant's Common Equity and Related Stockholder
Matters........................................................................ 10
ITEM 6. Selected Financial Data............................................................. 12
ITEM 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.......................................................... 13
ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk.......................... 20
ITEM 8. Financial Statements and Supplementary Data......................................... 21
ITEM 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure........................................................... 41
PART III
ITEM 10. Directors and Executive Officers of the Registrant.................................. 41
ITEM 11. Executive Compensation.............................................................. 42
ITEM 12. Security Ownership of Certain Beneficial Owners and Management...................... 44
ITEM 13. Certain Relationships and Related Transactions...................................... 46
PART IV
ITEM 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.................... 47
Signatures.......................................................................... 50
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PART I
ITEM 1. BUSINESS
GENERAL
Bull Run Corporation (the "Company"), a Georgia corporation, was
originally incorporated in 1983 under the laws of the State of Washington. Its
principal executive offices are located at 4370 Peachtree Road, N.E., Atlanta,
Georgia 30319.
In November 1994, the Company acquired by merger (the "Merger")
Datasouth Computer Corporation ("Datasouth"). Datasouth, located in Charlotte,
North Carolina, designs, manufactures and markets heavy-duty dot matrix and
thermal printers for vertical markets including transportation, distribution,
manufacturing and health care. Datasouth sells its products worldwide through
distributors and value-added resellers, and directly to large volume major
accounts. Since the Merger, Datasouth has operated as a wholly-owned subsidiary
of the Company.
The Company, through Datasouth, owns approximately 16.9% of the total
outstanding common stock of Gray Communications Systems, Inc. ("Gray"),
representing 27.4% of the voting interest in Gray, as of December 31, 1998. The
Company also owns shares of series A and series B preferred stock of Gray and
warrants to purchase additional shares of Gray's common stock. Parties
affiliated with the Company, including officers and directors of the Company and
companies of which they are principal shareholders and/or executive officers,
owned an additional 13.9% of Gray's common stock as of December 31, 1998,
representing an additional 21.5% voting interest in Gray.
Gray is a communications company headquartered in Atlanta, Georgia
which currently operates: (i) three NBC-affiliated television stations - WEAU-TV
in Eau Claire-La Crosse, Wisconsin, which was acquired during 1998; WJHG-TV in
Panama City, Florida; and WITN-TV, in the Greenville-Washington-New Bern, North
Carolina market; (ii) seven CBS-affiliated television stations - WCTV-TV in
Tallahassee, Florida; WVLT-TV in Knoxville, Tennessee; WKYT-TV in Lexington,
Kentucky; WYMT-TV in Hazard, Kentucky; WRDW-TV in Augusta, Georgia; and two
stations acquired during 1998, KOLN-TV in Lincoln, Nebraska and KGIN-TV in Grand
Island, Nebraska; (iii) four daily newspapers, The Albany Herald in Albany,
Georgia; The Rockdale Citizen in Conyers, Georgia; The Gwinnett Daily Post in
Lawrenceville, Georgia; and, acquired in March 1999, The Goshen News in Goshen,
Indiana; (iv) an advertising weekly shopper in southwest Georgia; (v) Lynqx
Communications, a satellite transmission and production services business based
in the southeastern United States; and (vi) PortaPhone Paging, a communications
and paging business in the Southeast. During 1998, Gray disposed of its
NBC-affiliated television station in Albany, Georgia, fulfilling a Federal
Communications Commission divestiture order in March 1997 following Gray's
acquisition of WCTV-TV. Gray reported revenue of $128.9 million in 1998 and had
total assets of $470.3 million as of December 31, 1998. J. Mack Robinson, the
Company's Chairman of the Board, Hilton H. Howell, Jr., the Company's Vice
President, Secretary and a director, and Mr. Prather are members of Gray's Board
of Directors. Mr. Robinson is President and the chief executive officer of Gray,
and Mr. Prather is Executive Vice President of Gray. Frederick J. Erickson, the
Company's Vice President - Finance and chief financial officer, was the interim
chief financial officer of Gray from March 1998 until September 1998.
In November 1997, the Company entered into an Investment Purchase
Agreement with Rawlings Sporting Goods Company, Inc. ("Rawlings"). Pursuant to
this agreement, the Company acquired warrants to purchase 925,804 shares of
Rawlings' common stock, and has the right, under certain circumstances, to
purchase additional warrants. The warrants have a four-year term and an exercise
price of $12.00 per share, but are exercisable only if Rawlings' common stock
closes at or above $16.50 for 20 consecutive trading days during the four year
term. In addition, under the terms of the agreement, the Company purchased 10.4%
of the outstanding shares of Rawlings' common stock in the open market from
November 1997
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through January 1998. Simultaneously with the execution of the Investment
Purchase Agreement, Rawlings and Host Communications, Inc. ("HCI") entered into
a five year strategic marketing alliance, under which HCI and Rawlings will
jointly market and sell Rawlings' products primarily through corporate
promotions, local events and international programs.
Rawlings, headquartered near St. Louis, Missouri, is a leading supplier
of team sports equipment in North America, operating eight manufacturing
facilities throughout the United States, Canada and Latin America, as well as
distribution centers in the United States and Canada. Rawlings' total revenue
for its most recently completed fiscal year ended August 31, 1998 was $170.6
million and total assets were $132.5 million as of such date. Mr. Prather is a
member of Rawlings' Board of Directors.
In August 1998, the Company acquired series C preferred stock of Total
Sports, Inc. ("TSI"). Based in Raleigh, North Carolina, TSI is a sports content
Internet company, which owns and adds daily to its proprietary sports content on
its web site; powers America Online's Internet portal destination for sports
news; publishes, among other print and electronic publications, "Total
Baseball", "Total Football" and "Total Hockey", the official encyclopedias of
Major League Baseball, the National Football League and the National Hockey
League, respectively; and, in partnership with Associated Press, publishes the
sports section of the "Wall Street Journal Interactive Edition". In conjunction
with HCI and the National Collegiate Athletic Association ("NCAA"), TSI
"TotalCasts" (real-time event coverage) on the Internet many college sporting
events including the "Final Four" college basketball championship tournament, in
addition to its TotalCast coverage of Major League Baseball games. The Company
increased its investment in TSI from 7.7% of TSI's outstanding capital stock as
of December 31, 1998, to 9.0%, following an additional investment made in
January 1999. In addition to the Company's direct investment in TSI, HCI owns
approximately 8.3% of TSI's common stock, assuming conversion of all TSI
preferred stock. The shares owned by HCI are expected to be acquired by the
Company in connection with the HCI-USA Acquisition (discussed below). Mr.
Prather is a member of TSI's Board of Directors.
In January 1999, the Company acquired common stock of Sarkes Tarzian,
Inc. ("Tarzian"), representing 33.5% of the total outstanding common stock of
Tarzian both in terms of the number of shares of common stock outstanding and in
terms of voting rights, but such investment represents 73% of the equity of
Tarzian for purposes of dividends, as well as distributions in the event of any
liquidation, dissolution or other termination of Tarzian. Tarzian owns and
operates two television stations and four radio stations: WRCB-TV in
Chattanooga, Tennessee, an NBC affiliate; KTVN-TV in Reno, Nevada, a CBS
affiliate; WGCL-AM and WTTS-FM in Bloomington, Indiana; and WAJI-FM and WLDE-FM
in Fort Wayne, Indiana. In March 1999, the Company executed an option agreement
with Gray, whereby Gray has the option of acquiring the Tarzian investment from
the Company. In connection with the option agreement, the Company received
warrants to purchase additional class B common shares of Gray.
In February 1999, the Company entered into an agreement to acquire the
stock of HCI, Universal Sports America, Inc. ("USA") and Capital Sports
Properties, Inc. ("CSP") not currently owned, directly or indirectly, by the
Company (the "HCI-USA Acquisition"). The Company is currently HCI's largest
stockholder, owning directly or indirectly approximately 32.5% of HCI's
outstanding common stock and 51.5% of HCI's outstanding preferred stock. The
Company's indirect ownership of HCI's common stock and HCI's preferred stock is
owned by CSP, in which the Company owns 51.5% of the outstanding common stock.
The Company and HCI together are the largest stockholders of USA, with the
Company owning approximately 3% of USA's outstanding capital stock and HCI
owning approximately 33% of USA's outstanding capital stock. For their most
recent fiscal year ended June 30, 1998, HCI and USA together had revenues of
approximately $109 million. This transaction is subject to the terms and
conditions of the merger agreement, including approval of the stockholders of
each of the companies, and is expected to close during the second quarter of
1999. Following the closing of this transaction, the Company's revenues
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will be predominantly generated by HCI and USA, which will be wholly-owned
subsidiaries of the Company. Robert S. Prather, Jr., the Company's President,
chief executive officer and a director, is a director of HCI, CSP and USA.
Pursuant to the agreement, a new holding company for the Company will
be created immediately prior to the HCI-USA Acquisition whereby each outstanding
share of the Company's common stock will be converted into one share of a newly
formed Delaware company. The new holding company, which will be a publicly held
company, will be owned by the stockholders of the Company immediately prior to
such conversion and the Company and its subsidiaries will become subsidiaries of
such holding company.
HCI, based in Lexington, Kentucky, is a well established sports
marketing and association management company. It is the primary marketer for the
NCAA, a business relationship that is now in its 24th year. Additionally, HCI
has significant printing, publishing, broadcast and Internet operating
divisions. HCI also manages the National Tour Association, National Grocers
Association, Quest, J.D. Edwards Users Group, and other associations. HCI's
total revenue for its most recently completed fiscal year ended June 30, 1998
was $46.3 million and total assets were $32.5 million as of such date.
USA, based in Dallas, is a full-service, lifestyle and sports marketing
company that specializes in developing integrated marketing programs and events
on the professional, collegiate and high school level. USA's Streetball
International division oversees the management and production of more than 270
worldwide events in conjunction with NBC Sports, the National Basketball
Association, the National Football League, the National Hockey League, Major
League Baseball and the Professional Golfers' Association Tour. USA's collegiate
division is a marketing partner for many leading schools and conference athletic
programs, including the University of Tennessee, Florida State University and
the Big 12 Conference. USA's total revenue for its most recently completed
fiscal year ended June 30, 1998 was $62.9 million and total assets were $34.7
million as of such date.
As of December 31, 1998, Datasouth represented 22.4% of the Company's
total assets; investments in HCI, CSP and USA, collectively represented 14.4%;
investments in Gray represented 48.5%; investments in Rawlings represented
11.5%; and the investment in TSI represented 2.6%.
PRINCIPAL PRODUCTS AND MARKETS
The Company, through Datasouth, designs, manufactures and markets
heavy-duty dot matrix and thermal printers for industrial applications,
generally selling under the "Datasouth" name. Although it has historically
targeted the heavy-duty, multipart forms segment of the serial matrix impact
printer market in industries such as transportation/travel, healthcare and
manufacturing/distribution, the Company recognizes that this market is
declining. Therefore, the Company has been recently involved in the industrial
thermal printer market through the development and acquisition of Automated
Ticket / Boarding Pass version 2 ("ATB2") printers for the travel industry, as
well as through the acquisition of portable and desktop thermal barcode label
printer product lines. The printer business is not seasonal to any significant
degree; however, short term revenue trends fluctuate due to variable ordering
patterns of large customers.
The Company's impact printers compete in the medium and high speed
(i.e., 300 to 600 characters per second, or "cps") serial impact dot matrix
printer markets. Datasouth's dot matrix products distinguish themselves from
many lower priced printers in their ability to print forms and reports as thick
as nine parts and to withstand rugged duty cycles. These printers are used
primarily for forms such as invoices, purchase orders, bills of lading, customs
documents, insurance documents, travel documents and patient admission forms.
Datasouth currently manufactures two dot matrix product families: Documax and
the XL line. A third line, Performax, was discontinued in 1997. Documax, a
heavy-duty dot matrix printer
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designed to provide maximum forms printing capabilities in a minimum amount of
space, is a narrow carriage printer intended for printing on demand industry
specific documents such as hotel bills, patient admissions/discharge forms,
airline tickets, packing slips and invoices. A multipath printer for multipart
forms, Documax offers a dual-tractor feature that allows the operator to switch
automatically from one form to another. The original Documax versions print at
speeds up to 333 cps and generate bar codes, OCR and industrial graphics as
well. The Company also has a 600 cps version of Documax. "Documax" is a
registered trademark of Datasouth. The XL line is a family of medium speed wide
carriage serial impact dot matrix printers which operate at speeds ranging from
300 to 400 cps.
The Company also has provided a line of portable and desktop thermal
printers for several years, including the 4-inch wide portable "FreeLiner", and
desktop version "FreeLiner DT", both of which take advantage of "liner-free"
label adaptations. "Liner-free" labels have no silicone coated liner, offering
several advantages over conventional liner-backed labels, including more
printable labels per roll, superior print image and durability, and elimination
of label liner waste, resulting in lower cost of use and greater efficiency. The
Company has filed a trademark application for "FreeLiner". In January 1998,
Datasouth acquired the CodeWriter product line of direct thermal and thermal
transfer desktop and portable bar code label printers (the "CodeWriter
Acquisition"). CodeWriter's product line includes the 4500 Series of 4.25" print
width desktop thermal / thermal transfer barcode printers, and a 4.1" print
width portable thermal / thermal transfer barcode printer. "CodeWriter" is a
registered trademark of the Company.
The Company was awarded a contract by The SABRE Group in February 1997
to develop and manufacture a new ATB2 airline ticket printer. In December 1997,
the Company began shipping to The SABRE Group the resulting product, "Journey",
for which the Company has filed a trademark application. This printer, which
uses direct thermal printing technology, was designed to be compact, easy to
use, and durable, with features such as an easily accessible jam-free paper path
and a simpler method to load ticket stock. During the second quarter of 1999,
the Company plans to introduce the "Journey II" version of the printer which
adds features such as a second bin for invoice and receipt printing. In
September 1998, the Company purchased marketing rights for the Sigma-Data 7200
high speed ATB2 printer (the "SD7200"). The SD7200 product line prints up to 24
coupons per minute and allows for either direct thermal or thermal transfer
printing.
Additional information concerning the Company's printer products is set
forth under the caption "Sales and Distribution" below in this Item 1.
COMPETITION
The computer printer industry is very competitive and some of the
Company's competitors have greater financial and other resources. As the printer
market continues to segment by speed, application and technology, the Company
believes its dot matrix products to be competitive in the medium and high speed
serial impact dot matrix printer markets for applications requiring high
performance output of text, graphics and bar codes, and believes its thermal
printer products to be competitive in the portable and desktop thermal printer
markets, and in the airline ticket printer market. The Company believes that its
products do not generally compete in "mass market" dot matrix and thermal
printer applications. The Company's products are intended for use in industrial
markets often avoided by large Japanese and domestic printer manufacturers,
which may not deem these markets large enough to pursue.
MANUFACTURING AND QUALITY CONTROL
The Company believes that its printer manufacturing capabilities
provide a strategic advantage over most competitors. Focusing on customer
response time and high quality customer service, the Company's goal is to
provide quick, on-time product delivery while
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maintaining low finished goods inventories. Product configurations are
scheduled daily based on customer orders. Raw materials and manufactured
assemblies, including PC boards assembled by the Company, are transferred to
work-in-process as materials and assemblies are consumed in the manufacturing
process, thereby eliminating unnecessary inventories and scheduling. After
configuration, the units are burned-in and are available for shipment within 24
hours. As a result, the product mix can be altered within hours, allowing the
Company to deliver its products more quickly than many of its competitors.
The Company assembles products in accordance with the Company's designs
and specifications. The Company utilizes components and sub-assemblies procured
from outside suppliers, some of which produce parts from tooling designed and
owned by the Company. Most of the materials, components and subassemblies are
available from a variety of sources and are generally not subject to significant
price volatility. Although the Company has not experienced any significant
problems in obtaining materials, components or subassemblies, future shortages
could result in production delays that would adversely affect its business.
Product design reflects an awareness of the practical aspects of
manufacturing high quality products. Commonality of components and subassemblies
across product lines provides efficiencies in quality control, productivity,
material cost and inventory control. The Company utilizes automated component
insertion, wave soldering and automated test equipment to reduce labor costs
while maintaining high quality. The Company verifies the quality of its products
by thorough testing at various stages of the assembly process.
The Company, in the ordinary course of its business, is subject to
various state and federal laws and regulations relating to the protection of the
environment. Compliance with these laws and regulations has not been material to
the Company's business.
WARRANTY AND SERVICE
The Company warrants its printers against defects in workmanship,
generally for one year, in addition to providing in-house depot repair service.
Distributors and national third party service organizations provide on-site
repair under service contracts. The Company has a technical support staff
accessible to all customers through a toll-free telephone number, as well as
through the Company's Internet web site.
The Company's warranty experience over the past three years has ranged
from approximately .4% to .6% of revenue. Total warranty expense for 1998, 1997
and 1996 was approximately $133,000, $124,000 and $104,000, respectively.
SALES AND DISTRIBUTION
Printers, parts, accessories and consumables are sold through an
international network of approximately 60 independent distributors and directly
to large volume major accounts, which consist of end-users and original
equipment manufacturers. During 1998, finished product sales to distributors
represented 26% of total revenue, and finished product sales to major accounts
represented 50%, compared to 28% and 48% in 1997, respectively.
Distributors typically operate in nonexclusive territories on a local,
regional, national or international basis. The distributors carry complementary
lines of computers and peripheral products and may carry products competitive
with the Company's products. The distributors sell principally to large
industrial companies, hospitals, banks, government agencies, educational
institutions, airlines, rental car companies and travel agencies.
The Company supplies Documax and Journey printers to The SABRE Group
under contracts that are cancelable at any time by The SABRE Group. Moreover,
The SABRE Group is under no contractual obligation to purchase any minimum
number of printers from Datasouth during the term of the contracts. Sales to The
SABRE Group, which began in
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earnest in 1993, were approximately $9,200,000 in 1998, $7,200,000 in 1997 and
$7,200,000 in 1996, representing 31%, 33% and 30% of the Company's sales from
printer operations, respectively.
As the travel market embraces a number of new technologies, such as
Internet reservation booking and electronic ticketing, the Company believes that
travel agencies will require more cost-effective equipment, such as its
"Journey" products. Priced at less than $2,000, Journey products provide an
attractively priced alternative to traditional ATB2 printers and will be
affordable for even small travel agencies. The addition of the SD7200 product
line in 1998 strategically expands the Company's ATB2 product line to offer a
wide range of ticket printing solutions for airlines, customer reservation
systems ("CRSs") and remote locations, such as corporate offices and
hotels/motels.
In 1998, the Company established a sales office and distribution point
in the United Kingdom following the acquisition of a sales organization that
primarily sold the Documax and SD7200 printers to airlines and CRSs in Europe,
Asia and Africa. The Company intends to expand its sales to customers in these
areas of the world and continue to pursue new major account business in 1999,
while maintaining and strengthening relationships with key distributors.
BACKLOG
The Company sells its products to its customers pursuant to cancelable
purchase orders and, accordingly, does not require firm quantity commitments.
Customers generally issue cancelable purchase orders with short delivery lead
times. The time lapse between receipt of a purchase order and shipment of
printers generally ranges from one to 90 days. For this reason, the Company's
production schedule is based substantially on anticipated releases, and
management does not regard the backlog of purchase orders at any one time to be
indicative of future trends in its revenue.
As of December 31, 1998, the Company had unfilled cancelable purchase
orders with an aggregate selling price of approximately $1,603,000, compared
with $1,724,000 and $1,821,000 as of December 31, 1997 and 1996, respectively.
ADVERTISING AND PROMOTION
The Company participates in numerous regional, national and
international trade shows and actively promotes its products through direct
mail, telemarketing and cooperative advertising arrangements with distributors.
It also advertises its products in publications serving the industrial markets
targeted by its products. Advertising costs were approximately $271,000,
$130,000, and $227,000 in 1998, 1997 and 1996, respectively.
RESEARCH AND DEVELOPMENT
The Company employs approximately 25 engineers, technicians and support
personnel to engage in basic and applied research. In 1998, the Company's
engineering team developed and released design enhancements to the CodeWriter
4500 series printer following the acquisition of the CodeWriter product line in
January 1998, and substantially completed the design of the "Journey II" product
currently expected to be released in the second quarter of 1999. In 1999, the
Company's primary product development focus will be on expanding the current
product lines with complementary products. In addition, engineering efforts are
focused on enhancement of existing products to expand market penetration and
customization of existing products to meet special printing applications for
specific customer needs.
Total research and development expense was $2,323,000, $2,418,000 and
$1,568,000 in 1998, 1997 and 1996, respectively.
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PATENTS, TRADEMARKS AND RELATED CONTRACTS
Although the Company holds certain patents, trademarks and related
contracts, none is considered to be material to its business.
EMPLOYEES
As of December 31, 1998, the Company had 134 full-time employees, of
which, 114 were located at Datasouth's administrative and manufacturing facility
in Charlotte, North Carolina. No employees are subject to collective bargaining
agreements, and there have been no work stoppages due to labor difficulties.
Management believes that its relationship with its employees is good.
EXPORT SALES
Sales to non-domestic customers, located principally in Western Europe
and South America, totaled $2,823,000 in 1998, $2,497,000 in 1997, and
$2,954,000 in 1996.
EXECUTIVE OFFICERS
Set forth below is certain information with respect to the executive
officers of the Company:
J. Mack Robinson, age 75, has been Chairman of the Board since 1994 and
a director since 1992. He has been Chairman of the Board and President of Delta
Life Insurance Company since 1958, President of Atlantic American Corporation
from 1988 to 1995, and Chairman of the Board of Atlantic American since 1974.
Mr. Robinson has also been President and Chief Executive Officer of Gray since
1996, and is a director of Gray.
Robert S. Prather, Jr., age 54, has been President, Chief Executive
Officer and a director since 1992. He has been Executive Vice President of Gray
since 1996 and a director of Gray since 1993. Mr. Prather is a director of HCI,
CSP, USA, Rawlings and TSI. In addition, Mr. Prather is a director of The Morgan
Group, Inc.
Hilton H. Howell, Jr., age 37, has been Vice President and Secretary
since 1994 and a director since 1994. He has been President and Chief Executive
Officer of Atlantic American Corporation since 1995 and Executive Vice President
from 1992 to 1995, and Executive Vice President and General Counsel of Delta
Life Insurance Company and Delta Fire & Casualty Insurance Company since 1991.
Mr. Howell is also a director of Gray, and is married to Mr. Robinson's
daughter.
Frederick J. Erickson, age 40, has been Vice President - Finance,
Treasurer and Chief Financial Officer since 1994. He has been Executive Vice
President - Finance & Administration of Datasouth since 1997 and Vice President
- - Finance & Administration from 1993 to 1997.
ITEM 2. PROPERTIES
The Company's executive offices are located in Atlanta, Georgia in
approximately 2,000 square feet of office space leased from Delta Life Insurance
Company, an affiliate of J. Mack Robinson, the Company's Chairman of the Board.
The lease expires in December 2002, subject to several renewal options on the
part of the Company.
Datasouth's administrative offices and operations are located in
Charlotte, North Carolina in approximately 74,000 square feet of fully-utilized
leased facilities. Although present facilities are suitable and adequate for its
current needs, the Company owns approximately eight acres of land contiguous to
its Charlotte facility for future expansion, if necessary.
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Datasouth's main administrative and manufacturing facility is leased through
December 2001 and additional office and warehousing space is leased through
December 2000. Datasouth's west coast service and distribution center in Vista,
California operates in a 6,781 square foot fully-utilized facility leased
through April 2001. Datasouth's 608 square foot sales office in Northampton,
England is leased through September 2001.
ITEM 3. LEGAL PROCEEDINGS
The Company has been named as a co-defendant in a Complaint filed on
February 1, 1999 with the United States District Court in Indianapolis, Indiana
by Sarkes Tarzian, Inc., an Indiana corporation ("Tarzian"). The Company
acquired 301,119 shares of Sarkes Tarzian, Inc. common stock, $4.00 par value
(the "Tarzian Shares") from U.S. Trust Company of Florida Savings Bank as
Personal Representative of the Estate of Mary Tarzian (the "Estate"), the other
co-defendant, on January 28, 1999 for $10 million. Tarzian claims that it had a
binding and enforceable contract to purchase the Tarzian Shares from the Estate
prior to the Company's purchase of such shares, and requests judgment providing
that the Estate be required to sell the Tarzian Shares to Tarzian. The Company
believes that a binding contract between Tarzian and the Estate did not exist
prior to the Company's purchase of the Tarzian Shares from the Estate, and in
any case, the Company's purchase agreement with the Estate provides that in the
event that a court of competent jurisdiction awards title to a person or entity
other than the Company, the purchase agreement is rescinded, and the Estate is
required to pay the Company the full $10 million purchase price, plus interest.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company did not submit any matter to a vote of security holders
during the quarter ended December 31, 1998.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
MARKET INFORMATION
The Company's common stock, par value $.01 per share (the "Common
Stock"), trades on The Nasdaq Stock Market under the symbol "BULL." The
following table sets forth for each period indicated the high and low sale
prices for the Common Stock as reported by The Nasdaq Stock Market. Such prices
reflect interdealer prices without adjustments for retail markups, markdowns or
commissions.
HIGH LOW
1997
First Quarter $3.06 $2.00
Second Quarter 2.75 2.13
Third Quarter 2.84 2.25
Fourth Quarter 3.84 2.56
1998
First Quarter $4.25 $2.88
Second Quarter 5.13 3.63
Third Quarter 5.00 3.44
Fourth Quarter 3.81 2.88
HOLDERS
As of February 26, 1999, there were 2,592 holders of record of Common
Stock.
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DIVIDENDS
Since its inception, the Company has not declared or paid a cash
dividend on its Common Stock. It is the present policy of the Company's Board of
Directors to retain all earnings to finance the development and growth of the
Company's business. The Company's future dividend policy will depend upon its
earnings, capital requirements, financial condition and other relevant
circumstances existing at that time.
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ITEM 6. SELECTED FINANCIAL DATA
Set forth below is certain selected historical consolidated financial
data of the Company. This information should be read in conjunction with the
Audited Consolidated Financial Statements of the Company and related notes
thereto appearing elsewhere herein, as well as "Management's Discussion and
Analysis". The selected consolidated financial data as of and for each of the
years in the five-year period ended December 31, 1998 are derived from the
Audited Consolidated Financial Statements of the Company. Also refer to the pro
forma data for the CodeWriter Acquisition and the Company's investment in
Rawlings appearing in Note 4 to the Company's Audited Consolidated Financial
Statements included elsewhere herein.
SELECTED FINANCIAL DATA
(Dollars and shares in thousands, except per share amounts)
OPERATING RESULTS FOR THE YEARS ENDED: 1998 1997 1996 1995 1994
Revenue from printer operations $ 29,848 $ 21,639 $ 23,810 $ 26,432 $ 2,751
Cost of goods sold (22,103) (15,967) (17,170) (18,649) (1,853)
------- ------- ------- ------- ------
Gross profit 7,745 5,672 6,640 7,783 898
Other operating revenue 1,618 681 844 721 323
Operating expenses (8,593) (6,852) (6,255) (6,764) (1,174)
------- ------- ------- ------- ------
Income (loss) from operations 770 (499) 1,229 1,740 47
Equity in earnings (losses) of affiliated companies 6,734 (599) 1,731 107 266
Gain on issuance of shares by affiliated company -- -- 8,179 -- --
Interest expense and other, net (3,290) (1,614) (1,250) (944) (11)
------- ------- ------- ------- ------
Income (loss) before income taxes, extraordinary
item and cumulative effect of accounting change 4,214 (2,712) 9,889 903 302
Income tax benefit (provision) (1,854) 939 (4,012) (180) (86)
------- ------- ------- ------- ------
Income (loss) before extraordinary item and
cumulative effect of accounting change 2,360 (1,773) 5,877 723 216
Extraordinary loss -- -- (295) -- --
Cumulative effect of accounting change -- -- (274) -- --
------- ------- ------- ------- ------
Net income (loss) $ 2,360 $ (1,773) $ 5,308 $ 723 $ 216
======= ======= ======= ======= ======
Earnings (loss) per share - Basic:
Income (loss) before extraordinary item and
cumulative effect of accounting change $ 0.11 $ (0.08) $ 0.26 $ 0.03 $ 0.02
Net income (loss) $ 0.11 $ (0.08) $ 0.24 $ 0.03 $ 0.02
Weighted average shares outstanding - Basic 22,189 21,302 22,013 22,127 13,350
Earnings (loss) per share - Diluted
Income (loss) before extraordinary item and
cumulative effect of accounting change $ 0.10 $ (0.08) $ 0.25 $ 0.03 $ 0.02
Net income (loss) $ 0.10 $ (0.08) $ 0.23 $ 0.03 $ 0.02
Weighted average shares outstanding - Diluted 23,182 21,302 22,945 23,236 13,534
FINANCIAL POSITION AS OF DECEMBER 31: 1998 1997 1996 1995 1994
Working capital $ 3,312 $ 2,513 $ 3,990 $ 3,739 $ 4,813
Investment in affiliated companies 73,346 61,551 53,752 29,246 15,709
Total assets 95,172 76,832 67,851 44,300 30,756
Long-term obligations 51,848 41,998 31,364 14,896 2,775
Stockholders' equity 29,791 25,056 28,318 24,079 23,584
Current ratio 1.4 1.4 2.1 1.9 2.6
Book value per share $ 1.34 $ 1.18 $ 1.30 $ 1.09 $ 1.07
The changes from year to year are primarily a result of the following
transactions:
1998 - Equity in the earnings attributable to Gray's gain on disposal of a
television station; acquisition of a printer manufacturer; additional
investments in Rawlings; and investment in TSI.
1997 - Initial investments in Rawlings.
1996 - Increase in the investment in Gray of $8,179 resulting from Gray's public
offering of its class B common stock; and purchase of Gray preferred
stock for $15 million.
1995 - Investments in HCI and its affiliates, CSP and USA; merger with Datasouth
effective November 29, 1994.
No dividends were declared or paid during the periods presented.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS
The consolidated operating results include those of Bull Run Corporation ("Bull
Run") and Datasouth Computer Corporation ("Datasouth", and collectively, with
Bull Run, the "Company"), after elimination of intercompany accounts and
transactions.
PENDING HCI-USA ACQUISITION AND OTHER SUBSEQUENT EVENTS
On February 15, 1999, the Company entered into an agreement to acquire the stock
of Host Communications, Inc. ("HCI"), Universal Sports America, Inc. ("USA") and
Capital Sports Properties, Inc. ("CSP") not currently owned, directly or
indirectly, by the Company, for approximately $95 million, net of cash acquired
(the "HCI-USA Acquisition"). Pursuant to the agreement, a new holding company
for the Company will be created immediately prior to the HCI-USA Acquisition
whereby each outstanding share of the Company's common stock will be converted
into one share of a newly formed Delaware company. The new holding company,
which will be a publicly held company, will be owned by the stockholders of the
Company immediately prior to such conversion and the Company and its
subsidiaries will become subsidiaries of such holding company. Approximately $37
million of the HCI-USA Acquisition purchase price is expected to be paid to HCI,
USA and CSP stockholders in cash and the remainder is expected to be paid in
common stock of the new holding company. The Company is currently HCI's largest
stockholder, owning directly or indirectly approximately 32.5% of HCI's
outstanding common stock and 51.5% of HCI's outstanding preferred stock. The
Company's indirect ownership of HCI's common stock and HCI's preferred stock is
owned by CSP, in which the Company owns 51.5% of the outstanding common stock.
The Company and HCI together are the largest stockholders of USA, with the
Company owning approximately 3% of USA's outstanding capital stock and HCI
owning approximately 33% of USA's outstanding capital stock. For their most
recent fiscal year ended June 30, 1998, HCI and USA together had revenues of
approximately $109 million. This transaction is subject to the terms and
conditions of the merger agreement, including approval of the stockholders of
each of the companies, and is currently expected to close during the second
quarter of 1999.
On January 15, 1999, the Company invested an additional $1 million for shares of
Total Sports, Inc. ("TSI") series C1 preferred stock, increasing its investment
in TSI to 9.0% of TSI's total outstanding capital stock. The shares, like the
shares of TSI's series C preferred stock acquired by the Company in August 1998
for $2.5 million, are convertible to TSI's common stock. The Company will
acquire HCI's investment in an additional 8.3% of TSI's total outstanding
capital stock in connection with the HCI-USA Acquisition.
On January 28, 1999, the Company acquired shares of the outstanding common stock
of Sarkes Tarzian, Inc. ("Tarzian") from the estate of Mary Tarzian (the
"Estate") for $10 million. The acquired shares (the "Tarzian Shares") represent
33.5% of the total outstanding common stock of Tarzian both in terms of the
number of shares of common stock outstanding and in terms of voting rights, but
such investment represents 73% of the equity of Tarzian for purposes of
dividends, as well as distributions in the event of any liquidation, dissolution
or other termination of Tarzian. Tarzian has filed a complaint with the United
States District Court, claiming that it had a binding contract with the Estate
to purchase the Tarzian Shares from the Estate prior to the Company's purchase
of the shares, and requests judgment providing that the Estate be required to
sell the Tarzian Shares to Tarzian (see "Legal Proceedings" in Item 3 for
further discussion). Tarzian owns and operates two television stations and four
radio stations: WRCB-TV Channel 3 in Chattanooga, Tennessee, an NBC affiliate;
KTVN-TV Channel 2 in Reno, Nevada, a CBS affiliate; WGCL-AM and WTTS-FM in
Bloomington, Indiana; and WAJI-FM and WLDE-FM in Fort Wayne, Indiana. The
Company's investment in Tarzian was financed with a $10 million bank note
payable with interest at the bank's prime rate, expiring May 28, 1999. The
Company intends to refinance or extend the $10 million note prior to the note's
expiration date, if necessary. On March 1, 1999, the Company executed an option
agreement with Gray Communications Systems, Inc. ("Gray"), the Company's
16.9%-owned affiliate, whereby Gray has the option of acquiring the Tarzian
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investment from the Company for $10 million plus related costs, expiring May 31,
1999. Gray has the ability to extend the option period in 30 day increments at a
fee of $66,700 per extension. The Company also received from Gray warrants to
acquire 100,000 shares of Gray's class B common stock at $13.625 per share, in
connection with the option agreement. The warrants will vest immediately upon
Gray's exercise of the option.
RESULTS OF OPERATIONS - 1998 AS COMPARED TO 1997
Total revenue for 1998, primarily from the printer manufacturing operations of
Datasouth, was $31,466,000 compared to $22,320,000 in 1997. Revenue from
Datasouth's printer operations (including the CodeWriter product line, which was
acquired on January 2, 1998 as discussed in "Liquidity and Capital Resources"
and in note 2 to the consolidated financial statements, referred to as the
"CodeWriter Acquisition"), was $29,848,000 in 1998, representing a 38% increase
from such revenue in 1997 of $21,639,000. CodeWriter products contributed
revenue of approximately $4,400,000 in 1998. Printer sales to the Company's
largest customer were approximately $9,200,000 in 1998 and $7,200,000 in 1997.
Short term revenue trends in the Company's printer business fluctuate due to
variable ordering patterns of large customers. The increase in 1998 revenue
compared to 1997 was also due in part to an increase in consulting fee income in
1998 compared to 1997.
Gross profit from printer operations of 25.9% for 1998 decreased slightly from
the 26.2% realized in 1997, primarily due to (a) a different mix of products
sold; (b) initial production costs associated with the introduction of a new
printer line; and (c) costs incurred by the Company immediately following the
CodeWriter Acquisition, prior to the integration of manufacturing operations
into the Company's existing product manufacturing facility, offset by (d) some
manufacturing overhead efficiencies gained as a result of higher unit volumes.
The Company provides consulting services to Gray in connection with Gray's
acquisitions and dispositions. Income on a portion of such fees is deferred and
recognized over forty years as a result of the Company's equity investment
position in Gray. Consulting fee income of $1,618,000 was recognized in 1998
compared to $681,000 in 1997. There can be no assurance that the Company will
recognize any consulting fees in the future, other than recognition of currently
deferred fees.
Operating expenses of $8,593,000 in 1998 represented a 25% increase from 1997,
due primarily to (a) an increase in sales and marketing personnel attributable
to the Company's expanded printer line; (b) expenses associated with the
Company's European sales office opened in October 1998; (c) an increase in
advertising expenses relating to the introduction of new products in 1998; (d)
an increase in personnel as a result of the CodeWriter Acquisition; and (e)
goodwill amortization expense and certain nonrecurring post-acquisition
transition costs in 1998 associated with the CodeWriter Acquisition. Operating
expenses include non-cash goodwill amortization expense of $488,000 in 1998 and
$301,000 in 1997, associated with the acquisition of Datasouth and, in 1998
only, the CodeWriter Acquisition.
Equity in earnings (losses) of affiliated companies, totaling $6,734,000 in 1998
and ($599,000) in 1997, includes the Company's proportionate share of the
earnings of Gray, HCI, CSP, and in 1998 only, Rawlings Sporting Goods Company,
Inc. ("Rawlings"), net of goodwill amortization totaling $777,000 and $610,000,
respectively. In 1998, Gray disposed of WALB-TV, its NBC affiliate in Albany,
Georgia, fulfilling a Federal Communications Commission divestiture order. As a
result of the gain on the disposition of WALB-TV, the Company's equity in Gray's
earnings was favorably impacted by approximately $6,900,000 in 1998.
Interest and dividend income of $1,085,000 in 1998 and $1,102,000 in 1997 was
primarily derived from dividends accrued on the Company's investment in Gray's
series A and series B preferred stock. Interest expense, totaling $4,247,000 in
1998 and $2,716,000 in 1997, was incurred primarily in connection with bank term
loans, the proceeds of which were used
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to finance (a) the Company's investments in Gray, HCI, CSP and USA; (b) the
Company's investments in Rawlings from November 1997 through January 1998; (c)
the CodeWriter Acquisition in January 1998; and (d) the Company's investment in
TSI in August 1998.
As of December 31, 1998, the Company has a net operating loss carryforward for
tax purposes of approximately $1,500,000 to reduce Federal taxable income in the
future, an Alternative Minimum Tax ("AMT") credit carryforward of approximately
$500,000 and a business credit carryforward of approximately $115,000, to reduce
regular Federal tax liabilities in the future. Nondeductible goodwill
amortization increased the Company's tax provision in 1998 and reduced the
Company's tax benefit in 1997, resulting in an effective tax rate of 44.0% in
1998 and 34.5% in 1997.
RESULTS OF OPERATIONS - 1997 AS COMPARED TO 1996
Total revenue for 1997, primarily from the printer manufacturing operations of
Datasouth, was $22,320,000 compared to $24,654,000 in 1996. Revenue from
Datasouth's printer operations of $21,639,000 in 1997 represented a 9% decrease
from such revenue in 1996 of $23,810,000. Printer sales to the Company's largest
customer were approximately $7,200,000 in 1997 and 1996. Sales to two
significant distributors were approximately $980,000 lower in 1997 than in 1996,
and a product line generating sales of $1,230,000 of sales in 1996 was
discontinued in 1997. Short term revenue trends in the Company's printer
business fluctuate due to variable ordering patterns of large customers.
Gross profit from printer operations of 26.2% for 1997 decreased from the 27.9%
realized in 1996, primarily due to a different mix of products sold, initial
production costs associated with the introduction of a new printer line, and
greater manufacturing overhead efficiencies gained in 1996 as a result of higher
unit volumes.
Consulting fee income on services provided to Gray in connection with Gray's
acquisitions and dispositions was $681,000 in 1997 compared to $844,000 in 1996.
Operating expenses of $6,852,000 in 1997 represented a 10% increase from 1996,
due primarily to (a) the cost of research and development efforts incurred for
the design of a new printer introduced in the fourth quarter of 1997 and (b)
certain general and administrative expenses. Operating expenses include non-cash
goodwill amortization associated with the acquisition of Datasouth of $301,000
in 1997 and $292,000 in 1996.
Equity in earnings (losses) of affiliated companies totaled ($599,000) in 1997
and $1,731,000 in 1996, net of goodwill amortization totaling $610,000 and
$487,000, respectively. Approximately $975,000 of the decrease from 1996 to 1997
in equity in earnings of affiliated companies can be attributed to Gray's gain
on the sale of a television station and HCI's gain on the sale of assets to USA
in 1996. Additional decreases in Gray's earnings for 1997 compared to 1996 are
attributable to increased interest expense and amortization of goodwill
associated with Gray's acquisitions.
In 1996, Gray consummated a public offering of 3.5 million shares of its
newly-issued class B common stock, resulting in net proceeds to Gray of
$67,100,000. As a result of this issuance, the Company's common equity ownership
of Gray was reduced from 27.1% to 15.2%, resulting in a pretax gain for the
Company of approximately $8,200,000 (approximately $5,000,000 million after
tax). This offering also reduced the Company's common equity voting power in
Gray from 27.1% to 25.1%. There is no assurance that such sales or such gains of
a material nature will occur in the future.
Interest and dividend income in 1997 of $1,102,000 was primarily derived from
dividends accrued on the Company's investment in Gray's series A and series B
preferred stock. Interest expense, totaling $2,716,000 in 1997, was incurred
primarily in connection with bank term loans, the proceeds of which were used to
finance (a) the Company's investments in
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Gray, HCI, CSP, USA and (b) the Company's investments in Rawlings beginning in
November 1997.
The Company recognizes its equity in earnings of HCI on a six month lag basis,
in order to align HCI's fiscal year ending June 30 with the Company's fiscal
year. Effective July 1, 1995 (the first day of HCI's 1996 fiscal year), HCI
adopted a new accounting policy for the recognition of corporate sponsor license
fee revenue and guaranteed rights fee expenses, since the nature of HCI's
contracts were changing to include revenue-sharing or net profit split
arrangements, rather than guaranteed rights fee payments. As a result, the
rights fee expense associated with this type of contract could not be accurately
measured until the expiration of each contract period when the revenue-sharing
or net profit split amount was determined. Under the new policy, license fee
revenue and rights fee expense are recognized on a straight-line basis over the
life of the contract, instead of recognizing revenue and expense in their
entirety on the effective date of the contract, thereby providing for the
uniform matching of revenue and expenses. As a result of the change in
accounting policy, HCI recognized a $4,559,000 charge against its earnings,
representing the after-tax cumulative effect of the accounting change. The
Company reported 9.1% of the charge, or $415,000, less a $141,000 deferred tax
benefit, as a charge against its 1996 earnings.
In 1996, Gray retired certain debt with the proceeds from its public offerings
of class B common stock and notes, and the sale of its series B preferred stock.
As a result, Gray incurred an after-tax extraordinary loss of $3,159,000 related
to costs associated with the retired debt. The Company therefore recognized
15.2% of Gray's charge, or $480,000, less a $185,000 deferred tax benefit, as an
extraordinary loss.
As of December 31, 1997, the Company had an Alternative Minimum Tax ("AMT")
credit carryforward of approximately $500,000 to reduce regular Federal tax
liabilities in the future. In part resulting from the carryback of the 1997
taxable loss to 1995, the Company had a business credit carryforward of
approximately $115,000 to reduce regular Federal tax liabilities in the future.
Nondeductible goodwill amortization reduced the Company's tax benefit in 1997
and increased the Company's tax expense in 1996, thereby reducing the Company's
effective tax rate to 34.5% in 1997 from 40.6% in 1996. The valuation allowance
on deferred tax assets was reduced in 1996, thereby reducing the 1996 income tax
provision by approximately $47,000 and goodwill by approximately $131,000.
LIQUIDITY AND CAPITAL RESOURCES
The Company amended its long-term debt agreements with two banks in 1998, and
further amended the agreements in February and March 1999. Under an agreement
amended on March 20, 1998, and further amended February 24, 1999, March 22, 1999
and March 24, 1999, the Company has outstanding (a) four term notes payable to a
bank, requiring no principal payments prior to maturity on January 1, 2003,
bearing interest at the London Interbank Offered Rate ("LIBOR") plus 1.75%,
under which $42,312,000 was outstanding as of December 31, 1998; and (b) a
revolving bank credit facility for borrowings of up to $3,500,000 expiring May
1, 2000, bearing interest at the bank's prime rate, under which $2,536,000 was
outstanding as of December 31, 1998.
Under an agreement amended February 20, 1998 (the "February 1998 Agreement"),
the Company entered into (a) a $5,000,000 term note, payable to a bank in
quarterly installments of $250,000, under which $4,000,000 was outstanding as of
December 31, 1998, and (b) a revolving bank credit facility for borrowings of up
to $5,000,000, under which the Company had borrowed $5,000,000 as of December
31, 1998. The February 1998 Agreement was further modified on March 5, 1999 to
revise certain terms, resulting in (a) a $4,000,000 term note, payable to a bank
in quarterly installments of $250,000 through March 31, 2000, with the remainder
due June 30, 2000, and (b) a revolving bank credit facility for borrowings of up
to $5,000,000 until June 30, 1999, and $4,000,000 thereafter until expiration on
June 30, 2000. Borrowings under the February 1998 Agreement, as modified,
currently bear interest at
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either (a) the prime rate or (b) LIBOR plus 3%. The Company also had a demand
bank note for borrowings of up to $2,000,000, bearing interest at the bank's
prime rate, under which $2,000,000 was outstanding as of December 31, 1998. The
demand note expires June 30, 1999.
The Company's investment in Tarzian was financed with a $10,000,000 bank note
payable with interest at the bank's prime rate, expiring May 28, 1999. The
Company intends to refinance or extend the note prior to the note's expiration
date, if necessary.
The Company currently anticipates refinancing all existing notes payable and
long-term debt agreements in 1999 in connection with the bank financing of the
HCI-USA Acquisition.
In January 1998, the Company executed two interest rate swap agreements,
effectively modifying the interest characteristics of $24,000,000 of the
Company's outstanding long-term debt. The agreements involve the exchange of
amounts based on a fixed interest rate for amounts based on variable interest
rates over the life of the agreements, without an exchange of the notional
amount upon which the payments are based. The differential to be paid or
received as interest rates change will be accrued and recognized as an
adjustment of interest expense related to the debt. The Company effectively
converted $20,000,000 and $4,000,000 of floating rate debt to a fixed rate basis
under two separate agreements, one of which was modified in September 1998.
Under the first agreement, $20,000,000 of long-term debt is subject to a
one-year forward swap agreement, whereby beginning January 1, 1999 and for the
following nine years, the Company will be subject to a fixed rate of 7.83%,
instead of LIBOR plus 1.75%, the rate in effect until then. Under the second
agreement, $4,000,000 of long-term debt is subject to a fixed rate of no more
than 8.66% beginning September 30, 1998 through December 31, 2004, instead of
LIBOR plus 3%, the rate in effect until then. In aggregate, the estimated cost
of terminating the swap agreements, if the Company elected to do so, is
approximately $1,300,000 as of December 31, 1998.
Effective January 2, 1998, the Company acquired all of the outstanding common
stock of CodeWriter Industries, Inc. ("CodeWriter") and all of the outstanding
membership interests of CodeWriter's affiliate, CW Technologies, LLC ("CWT"), in
a transaction valued at approximately $6,200,000 (the "CodeWriter Acquisition"),
of which $5,000,000 was paid at closing in the form of $2,500,000 in cash and
$2,500,000 in the Company's common stock. In addition, the Company is obligated
to pay quarterly to the Members of CWT, a specified percentage of revenue
generated by the Company from CodeWriter's and CWT's products and services
during each calendar quarter through December 31, 2001, but in no event will the
aggregate payments exceed $1,200,000.
In 1997, the Company entered into an Investment Purchase Agreement with
Rawlings. Pursuant to this agreement, the Company acquired warrants to purchase
925,804 shares of Rawlings' common stock, and has the right, under certain
circumstances, to purchase additional warrants. The Company's total cost to
purchase the warrants pursuant to this agreement (excluding the additional
warrants) was $2,842,000. Fifty percent of the purchase price, or $1,421,000,
was paid to Rawlings in 1997. The remaining fifty percent of the purchase price,
plus interest at 7% per annum from November 21, 1997 until the date of payment,
will be due on the earlier of the date of exercise or the date of expiration of
the warrants. In the event of a partial exercise of the warrants, a pro rata
portion of the purchase price with interest accrued thereon will be payable. The
warrants have a four-year term and an exercise price of $12.00 per share, but
are exercisable only if Rawlings' common stock closes at or above $16.50 for
twenty consecutive trading days during the four-year term. In addition, under
the terms of the agreement, the Company purchased 10.4% of the outstanding
shares of Rawlings' common stock in the open market from November 1997 through
January 1998. Investments in Rawlings were financed with borrowings under the
$42,312,000 term loans previously described.
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Dividends on the series B preferred stock of Gray owned by the Company are
payable in cash at an annual rate of $600 per share or, at Gray's option,
payable in additional shares of series B preferred stock. During 1998, Gray
redeemed 435.94 shares of its series B preferred stock owned by the Company,
including 110.94 shares previously issued in-kind as dividends on the series B
preferred stock, for a total of $3,805,000. The Company anticipates that
dividends on the series B preferred stock will be paid in cash for the
foreseeable future.
Inventories increased to $5,167,000 as of December 31, 1998 from $3,757,000 at
December 31, 1997, as a result of (a) the CodeWriter Acquisition, which added
inventories of $538,000 at the acquisition date; (b) an increase in raw
materials on hand associated with the Company's new internally-developed Journey
Automated Ticket / Boarding Pass Version 2 ("ATB2") airline ticket printer
initially introduced in December 1997; and (c) the purchase of assets,
consisting primarily of inventories associated with the Sigma-Data 7200
high-speed ATB2 printer, from a Japanese company in September 1998, in a
transaction valued at approximately $750,000 (the "Sigma-Data 7200 Purchase").
As of December 31, 1998, the Company had open purchase commitments totaling
approximately $8,500,000, primarily for raw materials inventories.
The Company's total working capital increased to $3,312,000 as of December 31,
1998 from $2,513,000 as of December 31, 1997, primarily as a result of (a) the
CodeWriter Acquisition, which added $409,000 in working capital as of the
acquisition date; (b) the increase in raw materials for Journey, discussed
above; (c) the Sigma-Data 7200 Purchase, which added approximately $750,000 in
working capital as of the acquisition date; and (d) an increase in accounts
receivable due to the increase in product sales, net of (x) an increase in the
demand note payable; (y) an increase in the current portion of long-term debt
attributable to the CodeWriter Acquisition financing, as modified; and (z) an
increase in accounts payable attributable to an increase in raw materials
inventories.
The Company has an active stock repurchase program authorized by its Board of
Directors for the repurchase of up to 2,000,000 shares of its common stock.
Repurchases may be made from time to time in the open market or directly from
shareholders at prevailing market prices, and may be discontinued at any time.
During 1998, the Company repurchased 40,500 shares at a total cost of $150,000
under the Program, in addition to 50,956 shares valued at $217,000 acquired in a
private transaction in 1998.
Capital spending for 1999 is expected to be approximately $600,000, excluding
any impact of the HCI-USA Acquisition. The Company anticipates that its current
working capital, funds available under its revolving credit facilities,
quarterly cash dividends on the Gray preferred stock and Gray class A common
stock, anticipated redemption of some amount of Gray preferred stock,
anticipated extension fees on the option agreement with Gray and cash flow from
operations will be sufficient to fund its debt service, working capital
requirements and capital spending requirements for at least the next twelve
months. Any capital required for potential additional business acquisitions
would have to be funded by issuing additional securities or by entering into
other financial arrangements.
INTEREST RATE RISK MANAGEMENT
The Company is exposed to changes in interest rates due to the Company's
financing of its acquisitions, investments and operations. Interest rate risk is
present with both fixed and floating rate debt. The Company uses interest rate
swap agreements (as detailed in "Liquidity and Capital Resources" above) to
manage its debt profile.
Interest rate swap agreements generally involve exchanges of underlying face
(notional) amounts of designated hedges. The Company continually evaluates the
credit quality of counterparties to interest rate swap agreements and does not
believe there is a significant risk of nonperformance by any of the
counterparties.
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Based on the Company's debt profile at December 31, 1998 and 1997, a 1% increase
in market interest rates would increase interest expense and decrease the income
before income taxes (or alternatively, increase interest expense and increase
the loss before income taxes) by $517,000 in 1998 and $353,000 in 1997. These
amounts were determined by calculating the effect of the hypothetical interest
rate on the Company's floating rate debt, after giving consideration to the
Company's interest rate swap agreements. These amounts do not include the
effects of certain potential results of increased interest rates, such as a
reduced level of overall economic activity or other actions management may take
to mitigate the risk. Furthermore, this sensitivity analysis does not assume
changes in the Company's financial structure that could occur if interest rates
were higher.
RECENTLY-ISSUED ACCOUNTING STANDARD
In June 1998, the Financial Accounting Standards Board issued Statement No. 133,
Accounting for Derivative Instruments and Hedging Activities. The Company
expects to adopt the new Statement effective January 1, 2000. The Statement will
require the Company to recognize all derivatives on the balance sheet at fair
value. The Company does not anticipate that the adoption of this Statement will
have a significant effect on its results of operations or financial position.
IMPACT OF YEAR 2000
Some of the Company's older computer programs were written using two digits
rather than four to define the applicable year. As a result, those computer
programs have time-sensitive software that recognize a date using "00" as the
year 1900 rather than the year 2000. This could cause a system failure or
miscalculations causing disruptions of operations, including, among other
things, a temporary inability to process transactions, send invoices, or engage
in similar normal business activities.
During 1997, the Company completed an assessment and determined (a) that its
printer products did not contain time-sensitive software that make them
susceptible to the Year 2000 Issue; however, (b) there were portions of the
Company's internal systems software and some hardware that would have to be
modified or replaced so that its computer systems would function properly with
respect to dates in the year 2000 and thereafter. The most significant computer
systems, which pertain to the Company's manufacturing and financial accounting
systems, were upgraded in 1998 and are currently Year 2000 compliant. Expense
incurred in 1998 related to Year 2000 upgrades and modifications was
approximately $100,000, including equipment lease rent expense. Future equipment
rent expense will not differ materially from depreciation expense attributed to
the replaced equipment. Although management expects to replace some personal
computers and other computer hardware during 1999 which are not Year 2000
compliant, management does not expect the cost of these additional expenditures
to exceed $50,000, nor does it expect that any of the necessary modifications or
replacements will have a material impact on the results of any future financial
reporting period. The remaining modifications and replacements are expected to
be completed by mid-1999, prior to any anticipated impact on its operating
systems. The Company believes that with the completed and anticipated
modifications to existing software and conversions to new software, the Year
2000 Issue will not pose significant operational problems for its computer
systems.
The Company has had communications with most of its major vendors and sole
source suppliers to determine the extent to which the Company may be vulnerable
to those third parties' failure to remedy their own Year 2000 issues. These
communications include both oral communications, as well as the receipt of
written Year 2000 compliance statements, and focus on certain key vendors and
suppliers from whom the Company receives unique materials, products and
services. The Company expects to complete its assessment of its major vendors
and sole source suppliers by mid-1999. Most raw materials used in the
manufacture of the Company's computer printers are available from more than one
supplier;
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20
therefore, management's contingency plans include, but are not limited to,
evaluating alternative vendors who are Year 2000 compliant, as well as
evaluating the adequacy of inventory levels.
The costs of the project and the date on which the Company believes it will
complete the Year 2000 modifications are based on management's best estimates,
which were derived utilizing numerous assumptions of future events, including
the continued availability of certain resources and other factors. However,
there can be no guarantee that these estimates will be achieved and actual
results could differ materially from those anticipated. Specific factors that
might cause such material differences include, but are not limited to, the
availability and cost of personnel trained in this area, the availability of
suitable replacement hardware, the ability to locate and correct all relevant
computer codes, and similar uncertainties. Furthermore, it is too early to
determine to what extent, if any, contingency plans will have to be implemented.
Although the Company expects to be Year 2000 compliant by mid-1999 and does not
expect to be materially impacted by the external environment, such future events
cannot be known with certainty.
FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K contains "forward-looking statements" within the
meaning of the Private Securities Litigation Reform Act of 1995. When used in
this report, the words "believes," "expects," "anticipates," "estimates" and
similar words and expressions are generally intended to identify forward-looking
statements. Statements that describe the Company's future strategic plans, goals
or objectives are also forward-looking statements. Readers of this Report are
cautioned that any forward-looking statements, including those regarding the
intent, belief or current expectations of the Company or management, are not
guarantees of future performance, results or events, and involve risks and
uncertainties. Actual results and events may differ materially from those in the
forward-looking statements as a result of various factors including, but not
limited to, (i) general economic conditions in the markets in which the Company
and its affiliates operate, (ii) competitive pressures in the markets in which
the Company and its affiliates operate, (iii) the effect of future legislation
or regulatory changes on the Company's and its affiliates' operations and (iv)
other factors described from time to time in the Company's filings with the
Securities and Exchange Commission. The forward-looking statements included in
this report are made only as of the date hereof. The Company undertakes no
obligation to update such forward-looking statements to reflect subsequent
events or circumstances.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
See "Interest Rate Risk Management" in Item 7 "Management's Discussion and
Analysis".
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
PAGE
----
Audited Consolidated Financial Statements of Bull Run Corporation
Report of Independent Auditors 22
Consolidated Balance Sheets at December 31, 1998 and 1997 23
Consolidated Statements of Operations for the years ended
December 31, 1998, 1997 and 1996 24
Consolidated Statements of Stockholders' Equity for the years
ended December 31, 1998, 1997 and 1996 25
Consolidated Statements of Cash Flows for the years ended
December 31, 1998, 1997 and 1996 26
Notes to Consolidated Financial Statements 27
Selected Quarterly Financial Data (Unaudited) 40
Audited Consolidated Financial Statements of Gray Communications Systems, Inc.
Report of Independent Auditors F-1
Consolidated Balance Sheets at December 31, 1998 and 1997 F-2
Consolidated Statements of Operations for the years ended
December 31, 1998, 1997 and 1996 F-4
Consolidated Statements of Stockholders' Equity for the years
ended December 31, 1998, 1997 and 1996 F-5
Consolidated Statements of Cash Flows for the years ended
December 31, 1998, 1997 and 1996 F-7
Notes to Consolidated Financial Statements F-8
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22
REPORT OF INDEPENDENT AUDITORS
BOARD OF DIRECTORS AND STOCKHOLDERS OF BULL RUN CORPORATION:
We have audited the accompanying consolidated balance sheets of Bull Run
Corporation as of December 31, 1998 and 1997, and the related consolidated
statements of operations, stockholders' equity and cash flows for each of the
three years in the period ended December 31, 1998. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits. The
financial statements of Rawlings Sporting Goods Company, Inc. ("Rawlings") as of
and for the year ended August 31, 1998, and the financial statements of Host
Communications, Inc. ("HCI") and Capital Sports Properties, Inc. ("CSP") as of
and for the year ended June 30, 1996 and for the six months ended June 30, 1996
have been audited by other auditors whose reports have been furnished to us; the
report as to HCI included an explanatory paragraph relating to an accounting
change in the method of recognizing certain revenue and related expenses. Our
opinion, insofar as it relates to data included for Rawlings, HCI and CSP for
their respective periods in 1998 and 1996, is based solely on the reports of the
other auditors. In the consolidated financial statements, the Company's
investment in Rawlings is stated at $11,001,000 at December 31, 1998 and the
Company's investment in HCI and CSP is stated at $11,854,000 at December 31,
1996; the Company's equity in the net income of Rawlings is stated at $237,000
for the year ended December 31, 1998; and the Company's equity in the net income
of HCI and CSP is stated at $762,000 for the year ended December 31, 1996; and
the Company's cumulative effect of accounting change recognized by HCI is stated
at $(274,000) for the year ended December 31, 1996.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits and the reports of the other auditors provide a
reasonable basis for our opinion.
In our opinion, based on our audits and, for 1998 and 1996, the reports of other
auditors, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Bull
Run Corporation at December 31, 1998 and 1997, and the consolidated results of
its operations and its cash flows for each of the three years in the period
ended December 31, 1998, in conformity with generally accepted accounting
principles.
As discussed in Note 4 to the Consolidated Financial Statements, during 1996 HCI
changed its method of recognizing certain revenue and related expenses.
/s/ ERNST & YOUNG LLP
Atlanta, Georgia
February 9, 1999, except as to Notes 4 and 7,
as to which the date is March 24, 1999
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23
BULL RUN CORPORATION
CONSOLIDATED BALANCE SHEETS
(Dollars and shares in thousands)
December 31
1998 1997
ASSETS
Current assets:
Cash and cash equivalents $ 58 $ 142
Accounts receivable (includes $880 and $850 due
from Gray Communications Systems, Inc. as of
December 31, 1998 and 1997, respectively) 5,980 4,600
Inventories 5,167 3,757
Other 231 193
-------- --------
Total current assets 11,436 8,692
Property and equipment, net 2,623 2,638
Investment in affiliated companies 73,346 61,551
Goodwill 7,583 3,589
Other assets 184 362
-------- --------
$ 95,172 $ 76,832
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Note payable and current portion of long-term debt $ 4,000 $ 2,500
Accounts payable 2,781 2,462
Accrued and other liabilities:
Employee compensation and related taxes 571 430
Interest 396 553
Other 376 234
-------- --------
Total current liabilities 8,124 6,179
Long-term debt 51,848 41,998
Deferred income taxes 5,409 3,599
Stockholders' equity:
Common stock, $.01 par value (authorized 100,000
shares; issued 22,785 and 22,583 shares as of
December 31, 1998 and 1997, respectively) 228 226
Additional paid-in capital 21,378 20,800
Treasury stock, at cost (542 and 1,287 shares as of
December 31, 1998 and 1997, respectively) (1,393) (3,188)
Retained earnings 9,578 7,218
-------- --------
Total stockholders' equity 29,791 25,056
-------- --------
$ 95,172 $ 76,832
======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
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BULL RUN CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars and shares in thousands, except per share amounts)
Years Ended December 31
1998 1997 1996
Revenue from printer operations $ 29,848 $ 21,639 $ 23,810
Cost of goods sold 22,103 15,967 17,170
-------- -------- --------
Gross profit 7,745 5,672 6,640
Consulting fee income 1,618 681 844
Operating expenses:
Research and development 2,323 2,418 1,568
Selling, general and administrative 6,270 4,434 4,687
-------- -------- --------
8,593 6,852 6,255
-------- -------- --------
Income (loss) from operations 770 (499) 1,229
Other income (expense):
Equity in earnings (losses) of affiliated companies 6,734 (599) 1,731
Gain on issuance of common shares by affiliated company -- -- 8,179
Interest and dividend income 1,085 1,102 874
Interest expense (4,247) (2,716) (2,124)
Other expense (128) -- --
-------- -------- --------
Income (loss) before income taxes, extraordinary
item and cumulative effect of accounting change 4,214 (2,712) 9,889
Income tax benefit (provision) (1,854) 939 (4,012)
-------- -------- --------
Income (loss) before extraordinary item and
cumulative effect of accounting change 2,360 (1,773) 5,877
Extraordinary loss recognized by affiliated company
(net of $185 tax benefit) -- -- (295)
Cumulative effect of accounting change recognized by affiliate
(net of $141 tax benefit) -- -- (274)
-------- -------- --------
Net income (loss) $ 2,360 $ (1,773) $ 5,308
======== ======== ========
Earnings (loss) per share - Basic:
Income (loss) before extraordinary item and cumulative
effect of accounting change $ 0.11 $ (0.08) $ 0.26
Extraordinary loss -- -- (0.01)
Cumulative effect of accounting change -- -- (0.01)
-------- -------- --------
Net income (loss) $ 0.11 $ (0.08) $ 0.24
======== ======== ========
Earnings (loss) per share - Diluted:
Income (loss) before extraordinary item and cumulative
effect of accounting change $ 0.10 $ (0.08) $ 0.25
Extraordinary loss -- -- (0.01)
Cumulative effect of accounting change -- -- (0.01)
-------- -------- --------
Net income (loss) $ 0.10 $ (0.08) $ 0.23
======== ======== ========
Weighted average number of common shares outstanding:
Basic 22,189 21,302 22,013
Diluted 23,182 21,302 22,945
The accompanying notes are an integral part of these consolidated financial
statements.
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BULL RUN CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Dollars and shares in thousands)
Additional Total
Common Stock Paid-In Treasury Retained Stockholders'
Shares Amount Capital Stock Earnings Equity
Balances, December 31, 1995 22,280 $ 223 $20,503 $ (330) $3,683 $24,079
Purchase of treasury stock (1,107) (1,107)
Exercise of stock options 45 38 38
Net income 5,308 5,308
------ ------- ------- ------- ------ -------
Balances, December 31, 1996 22,325 223 20,541 (1,437) 8,991 28,318
Purchase of treasury stock (1,751) (1,751)
Exercise of stock options 258 3 259 262
Net loss (1,773) (1,773)
------ ------- ------- ------- ------ -------
Balances, December 31, 1997 22,583 226 20,800 (3,188) 7,218 25,056
Issuance of treasury stock 555 1,945 2,500
Purchase of treasury stock (150) (150)
Exercise of stock options 202 2 23 25
Net income 2,360 2,360
------ ------- ------- ------- ------ -------
Balances, December 31, 1998 22,785 $ 228 $21,378 $(1,393) $9,578 $29,791
====== ======= ======= ======= ====== =======
The accompanying notes are an integral part of these consolidated financial
statements.
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BULL RUN CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
Years Ended December 31
1998 1997 1996
Cash flows from operating activities:
Net income (loss) $ 2,360 $ (1,773) $ 5,308
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Cumulative effect of accounting change 415
Extraordinary loss 480
Gain on issuance of common shares by affiliate (8,179)
Provision for bad debts 22 27 1
Depreciation and amortization 1,122 1,001 950
Equity in (earnings) losses of affiliated companies (6,734) 599 (1,731)
Deferred income taxes 1,837 (892) 3,553
Accrued preferred stock dividend income (175) (300)
Loss on disposition of assets 128
Change in operating assets and liabilities:
Accounts receivable (1,100) (553) (166)
Inventories (161) (442) 440
Other current assets 47 (6) 74
Accounts payable and accrued expenses 30 512 122
------ ------ ------
Net cash provided by (used in) operating activities (2,624) (1,827) 1,267
------ ------ ------
Cash flows from investing activities:
Capital expenditures (352) (1,160) (366)
Investment in affiliated companies (8,812) (9,099) (5,566)
Acquisition of printer manufacturer and printer product rights,
net of cash acquired (2,916)
Note purchased from affiliated company (10,000)
Redemption of preferred stock investment 3,805
Dividends received from affiliated companies 121 1,002 73
------ ------ ------
Net cash used in investing activities (8,154) (9,257) (15,859)
------ ------ ------
Cash flows from financing activities:
Borrowings from notes payable 1,200 1,500
Borrowings from revolving lines of credit 17,598 15,232 11,339
Repayments on notes payable (700)
Repayments on revolving lines of credit (18,718) (9,941) (10,656)
Proceeds from long-term debt 12,975 5,843 15,000
Repayments on long-term debt (1,536)
Loan commitment fees (87)
Issuance of common stock 25 262 38
Repurchase of common stock (150) (1,751) (1,107)
------ ------ ------
Net cash provided by financing activities 10,694 11,145 14,527
------ ------ ------
Net increase (decrease) in cash and cash equivalents (84) 61 (65)
Cash and cash equivalents, beginning of year 142 81 146
------ ------ ------
Cash and cash equivalents, end of year $ 58 $ 142 $ 81
====== ====== ======
Supplemental cash flow disclosures:
Interest paid $ 4,404 $ 2,460 $ 1,917
Income taxes paid (recovered), net (25) (58) 612
Treasury stock issued in connection with acquisition of printer
manufacturer, a noncash investing and financing activity 2,500
The accompanying notes are an integral part of these consolidated financial
statements.
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BULL RUN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
1. DESCRIPTION OF BUSINESS
Bull Run Corporation ("Bull Run"), based in Atlanta, Georgia, sells computer
printers and provides service worldwide to distributors, value-added resellers
and large volume end users through its wholly-owned subsidiary, Datasouth
Computer Corporation ("Datasouth", and collectively, the "Company"), and makes
significant investments in sports and media companies, including Gray
Communications Systems, Inc. ("Gray"), an owner and operator of ten television
stations and four daily newspapers; Host Communications, Inc. ("HCI"), a sports
marketing and association management company; Rawlings Sporting Goods Company,
Inc. ("Rawlings"), a leading supplier of team sports equipment in North America;
Universal Sports America, Inc. ("USA"), a lifestyle and sports marketing
company; and Total Sports, Inc. ("TSI"), a sports content Internet company. In
January 1999, the Company made an investment in Sarkes Tarzian, Inc.
("Tarzian"), owner and operator of two television stations and four radio
stations.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION - The accompanying consolidated financial statements
include the accounts of Bull Run and its wholly-owned subsidiary, Datasouth,
after elimination of intercompany accounts and transactions.
USE OF ESTIMATES - The preparation of the consolidated financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates.
CASH AND CASH EQUIVALENTS - Cash equivalents are composed of all highly liquid
investments with an original maturity of three months or less.
ACCOUNTS RECEIVABLE - The Company performs ongoing credit evaluations of its
customers' financial condition and generally requires no collateral from its
customers. In addition, the Company receives consulting fees generally payable
in monthly installments from Gray, an investee, for the performance of services
in connection with Gray's acquisitions and dispositions. The allowance for
doubtful accounts was $82 as of December 31, 1998 and $55 as of December 31,
1997.
INVENTORIES - Inventories are associated with the printer operations and are
stated at the lower of cost, determined on the first-in, first-out method, or
market.
PROPERTY AND EQUIPMENT - Property and equipment is stated at cost less
depreciation computed under the straight-line method over the estimated useful
life of the asset, generally from 3 to 7 years. When assets are disposed, the
associated cost and accumulated depreciation are eliminated from the respective
accounts and any resulting gain or loss is reflected in income. Expenditures for
maintenance, repairs and minor renewals are charged to expense. Depreciation
expense was $592 in 1998, $614 in 1997 and $590 in 1996.
INVESTMENT IN AFFILIATED COMPANIES - The Company has accounted for its
investments in Gray, HCI, Rawlings and Capital Sports Properties, Inc. ("CSP")
by the equity method, and its investments in USA and TSI by the cost method. The
excess of the Company's investment over the underlying equity of Gray, HCI and
Rawlings, totaling approximately $29,600 and $24,200 as of December 31, 1998 and
1997, respectively, is being amortized over 20 to 40
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years, with such amortization (totaling $777 in 1998, $610 in 1997 and $487 in
1996) reported as a reduction in the Company's equity in earnings of affiliated
companies. The equity in earnings of HCI is recognized by the Company on a six
month lag basis, in order to align HCI's fiscal year ending each June 30 with
the Company's fiscal year. Effective January 15, 1998, the date on which a
representative of the Company was elected to Rawlings' Board of Directors, the
Company has accounted for its investment in Rawlings by the equity method on a
one month lag basis, in order to align Rawlings' fiscal quarters ending November
30, February 28, May 31 and August 31 with the Company's fiscal quarters.
GOODWILL AND OTHER LONG-LIVED ASSETS - Goodwill associated with the Company's
acquisitions of printer manufacturing businesses is being amortized over 15 to
20 years. The carrying value of goodwill, as well as other long-lived assets,
are reviewed if the facts and circumstances suggest that they may be impaired.
If this review indicates that the assets will not be recoverable, as determined
based on undiscounted estimated cash flows over the remaining amortization
period, the carrying value of the assets would be reduced to their estimated
fair value. Goodwill amortization was $488 in 1998, $301 in 1997 and $292 in
1996, and accumulated amortization was $1,416 and $928 as of December 31, 1998
and 1997, respectively.
WARRANTY COSTS - An estimated allowance for future warranty costs of the printer
operations, based on past experience, is recorded as a charge to cost of goods
sold. Accrued warranty costs were $85 and $60 as of December 31, 1998 and 1997,
respectively.
RESEARCH AND DEVELOPMENT - Research and development costs of the printer
operations, including the costs of software developed internally and costs for
development services performed by third parties, are expensed as incurred.
INCOME TAXES - Income taxes are recognized in accordance with Statement of
Accounting Standards No. 109, "Accounting for Income Taxes," whereby deferred
income tax liabilities or assets at the end of each period are determined using
the tax rate expected to be in effect when the taxes are actually paid or
recovered. Accordingly, income tax expense will increase or decrease in the same
period in which a change in tax rates is enacted. A valuation allowance is
recognized on certain deferred tax assets whose realization is not reasonably
assured.
STOCK-BASED COMPENSATION - The Company grants stock options for a fixed number
of shares to employees with an exercise price equal to the fair value of the
shares at the date of grant. In accordance with APB Opinion No. 25, "Accounting
for Stock Issued to Employees", no compensation expense is recognized for such
grants.
EARNINGS (LOSS) PER SHARE - Basic and diluted earnings (loss) per share are
determined in accordance with Financial Accounting Standards Board Statement No.
128, "Earnings Per Share", whereby basic earnings per share excludes any
dilutive effects of stock options. In periods where they are anti-dilutive,
dilutive effects of stock options are excluded from the calculation of dilutive
earnings (loss) per share.
RECENTLY-ISSUED ACCOUNTING STANDARD - In June 1998, the Financial Accounting
Standards Board issued Statement No. 133, "Accounting for Derivative Instruments
and Hedging Activities". The Company expects to adopt the new Statement
effective January 1, 2000. The Statement will require the Company to recognize
all derivatives on the balance sheet at fair value. The Company does not
anticipate that the adoption of this Statement will have a significant effect on
its results of operations or financial position.
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29
3. PENDING AND COMPLETED ACQUISITIONS
On February 15, 1999, the Company entered into an agreement to acquire the stock
of HCI, USA and CSP not currently owned, directly or indirectly, by the Company,
for approximately $95,000, net of cash acquired (the "HCI-USA Acquisition").
Pursuant to the agreement, a new holding company for the Company will be created
immediately prior to the HCI-USA Acquisition whereby each outstanding share of
the Company's common stock will be converted into one share of a newly formed
Delaware company. The new holding company, which will be a publicly held
company, will be owned by the stockholders of the Company immediately prior to
such conversion and the Company and its subsidiaries will become subsidiaries of
such holding company. Approximately $37,000 of the HCI-USA Acquisition purchase
price is expected to be paid to HCI, USA and CSP stockholders in cash and the
remainder is expected to be paid in common stock of the new holding company. The
Company is currently HCI's largest stockholder, owning directly or indirectly
approximately 32.5% of HCI's outstanding common stock and 51.5% of HCI's
outstanding preferred stock. The Company's indirect ownership of HCI's common
stock and HCI's preferred stock is owned by CSP, in which the Company owns 51.5%
of the outstanding common stock. The Company and HCI together are the largest
stockholders of USA, with the Company owning approximately 3% of USA's
outstanding capital stock and HCI owning approximately 33% of USA's outstanding
capital stock. For their most recent fiscal year ended June 30, 1998, HCI and
USA together had revenues of approximately $109,000. This transaction is subject
to the terms and conditions of the merger agreement, including approval of the
stockholders of each of the companies, and is currently expected to close during
the second quarter of 1999.
Effective January 2, 1998, the Company acquired all of the outstanding common
stock of CodeWriter Industries, Inc. and all of the outstanding membership
interests of its affiliate, CW Technologies, LLC (collectively referred to as
"CodeWriter"), in a transaction valued at approximately $6,200, including the
issuance of treasury stock valued at $2,500 and future consideration of $1,200,
payable quarterly through December 2001 based on the greater of (a) a percentage
of revenue generated by CodeWriter products, or (b) $50, but in no event will
the aggregate quarterly payments exceed $1,200. The future consideration
increases goodwill as incurred. CodeWriter designs and manufactures a line of
direct thermal and thermal transfer desktop and portable bar code label
printers. The acquisition has been accounted for under the purchase method of
accounting, whereby the results of operations of the acquired business are
included in the accompanying condensed consolidated financial statements as of
its acquisition date. The assets and liabilities of the acquired business are
included based on an allocation of the purchase price.
On September 25, 1998, the Company purchased the assets, consisting primarily of
inventories, associated with the Sigma-Data 7200 high speed Automated Ticket /
Boarding Pass Version 2 printer from a Japanese company, in a transaction valued
at approximately $750. Effective October 1, 1998, the Company purchased a United
Kingdom-based sales organization from its UK parent, for future consideration.
The UK organization, which has been selling the Company's printer products and
the Sigma-Data 7200 printer to computer reservation systems and airlines
throughout the world, serves as the Company's European sales office and stocking
facility. The future consideration is scheduled to be paid annually in arrears
through September 2003, at amounts determined as a percentage of revenue
generated by the Company's European sales office. This future consideration is
charged to Cost of Goods Sold as the associated revenue is recognized.
4. INVESTMENT IN AFFILIATED COMPANIES
INVESTMENTS IN HCI, CSP AND USA - The Company acquired its initial interests in
the outstanding common stock of HCI and CSP in 1995. In 1996, CSP exercised
warrants to acquire HCI common shares. As a result of this exercise of warrants
and subsequent purchases of HCI common stock by the Company, the Company's
direct common equity
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30
ownership in HCI, plus the Company's indirect common equity ownership in HCI
through its investment in CSP, was increased to 32.5% as of December 31, 1998.
Additionally, the Company owns indirectly, through CSP, 51.5% of HCI's 8% series
B preferred stock having a face value of $3,750. Unless previously acquired by
the Company as a result of the HCI-USA Acquisition, outstanding shares of series
B preferred stock, plus all accumulated and unpaid dividends thereon, are
scheduled to be redeemed and paid in cash on December 15, 1999. HCI, based in
Lexington, Kentucky, and HCI's 33.8%-owned affiliate, USA, provide media and
marketing services to universities, athletic conferences and various
associations representing collegiate sports and, in addition, market and operate
amateur participatory sporting events.
The Company recognizes its equity in earnings of HCI on a six month lag basis,
in order to align HCI's fiscal year ending June 30 with the Company's fiscal
year. Effective July 1, 1995 (the first day of HCI's 1996 fiscal year), HCI
adopted a new accounting policy for the recognition of corporate sponsor license
fee revenue and guaranteed rights fee expenses, since the nature of HCI's
contracts were changing to include revenue-sharing or net profit split
arrangements, rather than guaranteed rights fee payments. As a result, the
rights fee expense associated with this type of contract could not be accurately
measured until the expiration of each contract period when the revenue-sharing
or net profit split amount was determined. Under the new policy, license fee
revenue and rights fee expense are recognized on a straight-line basis over the
life of the contract, instead of recognizing revenue and expense in their
entirety on the effective date of the contract, thereby providing for the
uniform matching of revenue and expenses. As a result of such adoption, HCI
recognized a $4,559 charge against its earnings, representing the after-tax
cumulative effect of the accounting change. The Company reported 9.1% of such
charge, or $415, less a $141 deferred tax benefit, as a charge against its 1996
earnings.
During HCI's 1996 fiscal year, HCI sold certain operating assets to USA in
exchange for its 33.8% common equity position. The transaction resulted in a
gain, net of tax, of approximately $4,000 for HCI, the Company's share of which
amounted to $377, as reflected in the Company's 1996 equity in earnings of
affiliated companies. In 1995, the Company invested $650 in preferred stock of
USA, which is convertible to 3.0% of USA's total common shares, assuming
conversion of all USA preferred stock.
INVESTMENT IN GRAY AND GAIN ON ISSUANCE OF COMMON SHARES - In 1996, Gray
consummated a public offering of 3.5 million shares of class B common stock,
resulting in net proceeds to Gray of $67,060. As a result of such issuance, the
Company's common equity ownership of Gray was reduced from 27.1% to 15.2%
(subsequently increasing to 16.9% as of December 31, 1998), resulting in a
pretax gain for the Company of $8,179 in 1996. This offering also reduced the
Company's common equity voting power in Gray from 27.1% to 25.1% (subsequently
increasing to 27.4% as of December 31, 1998. On July 31, 1998, Gray disposed of
a television station and recognized an after-tax gain of approximately $43
million in connection with the disposition. As a result, the Company's equity in
Gray's earnings was favorably impacted by approximately $4,000 in 1998. Gray is
a communications company, based in Atlanta, Georgia, that operates ten network
affiliated television stations (three of which were acquired in August 1998),
four daily newspapers (one of which was acquired in March 1999), an advertising
weekly shopper, a satellite broadcasting operation and a paging business. Gray's
class A and class B common stock is publicly traded on the New York Stock
Exchange (symbols: GCS and GCS.B, respectively).
The Company provides consulting services to Gray from time to time in connection
with Gray's acquisitions, dispositions and acquisition financing. Income on a
portion of such fees is deferred and recognized over forty years as a result of
the Company's equity investment position in Gray. Due to the reduction in the
Company's equity ownership of Gray as described above, $174 of previously
deferred consulting fees were recognized as consulting fee income in 1996. The
Company recognized consulting fee income from Gray of $1,618, $681 and $844 in
1998, 1997 and 1996, respectively, for services rendered in connection with
certain of Gray's acquisitions and dispositions. As of December 31, 1998 and
1997,
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income from additional consulting fees of $762 and $400, respectively, has been
deferred and will be recognized as Gray amortizes goodwill associated with its
acquisitions.
In January 1996, the Company purchased an 8% Subordinated Note (the "8% Note")
of Gray in the principal amount of $10,000, on which the Company received
interest income of $580 during 1996. In connection with the purchase of the 8%
Note, Gray issued to the Company warrants to purchase up to 731,250 shares of
Gray's class A common stock at $11.92 per share (as adjusted for a 3-for-2 stock
split announced by Gray effective September 30, 1998). In September 1996, the
Company exchanged the 8% Note for 1,000 shares of Gray's series A preferred
stock, which entitles the holder thereof to cash dividends at an annual rate of
$800 per share. At that same time, the Company purchased for $5,000, 500 shares
of Gray's series B preferred stock entitling the holder thereof to annual
dividends of $600 per share, which are cumulative. In connection with the
Company's acquisition of series B preferred stock, Gray issued to the Company
warrants to purchase up to 375,000 shares of Gray's class A common stock at
$16.00 per share (adjusted for the 3-for-2 stock split). Of the total warrants
owned by the Company to purchase 1,106,250 shares of Gray's class A common
stock, 847,500 are fully vested and exercisable as of December 31, 1998, with
the remaining warrants vesting periodically through 2001. The warrants expire in
2006. Dividends on the series B preferred stock are payable in cash or in
additional shares of series B preferred stock, at Gray's option. Total dividend
income of $1,072, $1,100 and $293 was recognized by the Company in 1998, 1997
and 1996, respectively, on Gray series A and B preferred stock. In 1998, Gray
redeemed $3,805 of the series B preferred stock held by the Company. As a
result, the Company held 175 shares of Gray's series B preferred stock as of
December 31, 1998.
In 1996, Gray retired certain of its debt, thereby incurring an after-tax
extraordinary loss of $3,159 related to costs associated with the retired debt.
As a result, the Company recognized 15.2% of Gray's charge, or $480, less a $185
deferred tax benefit, as an extraordinary loss in 1996.
INVESTMENT IN TARZIAN - On January 28, 1999, the Company acquired shares of the
outstanding common stock of Tarzian from the Estate of Mary Tarzian (the
"Estate") for $10 million. The acquired shares (the "Tarzian Shares") represent
33.5% of the total outstanding common stock of Tarzian both in terms of the
number of shares of common stock outstanding and in terms of voting rights, but
such investment represents 73% of the equity of Tarzian for purposes of
dividends, as well as distributions in the event of any liquidation, dissolution
or other termination of Tarzian. Tarzian has filed a complaint with the United
States District Court, claiming that it had a binding contract with the Estate
to purchase the Tarzian Shares from the Estate prior to the Company's purchase
of the shares, and requests judgment providing that the Estate be required to
sell the Tarzian Shares to Tarzian. The Company believes that a binding contract
between Tarzian and the Estate did not exist prior to the Company's purchase of
the Tarzian Shares from the Estate, and in any case, the Company's purchase
agreement with the Estate provides that in the event that a court of competent
jurisdiction awards title to a person or entity other than the Company, the
purchase agreement is rescinded, and the Estate is required to pay the Company
the full $10 million purchase price, plus interest. Tarzian owns and operates
two television stations and four radio stations: W