1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation - The accompanying consolidated financial statements include the accounts of Bull Run Corporation ("Bull Run") and its wholly-owned subsidiary, Datasouth Computer Corporation ("Datasouth", and collectively, the "Company"), after elimination of intercompany accounts and transactions.
Use of Estimates - The preparation of the consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.
Cash and Cash Equivalents - Cash equivalents are composed of all highly liquid investments with an original maturity of three months or less.
Accounts Receivable - The Company sells computer printers and provides service worldwide to distributors, value-added resellers and large volume end users. The Company performs ongoing credit evaluations of its customers' financial condition and generally requires no collateral from its customers. In addition, the Company receives consulting fees generally payable in monthly installments from Gray Communications Systems, Inc. ("Gray"), an investee, for the performance of services in connection with Gray's acquisitions. As of December 31, 1997 and 1996, fees of $850 and $1,000, respectively, were receivable from Gray. The allowance for doubtful accounts was $55 as of December 31, 1997 and $45 as of December 31, 1996.
Inventories - Inventories are associated with the printer operations and are stated at the lower of cost, determined on the first-in, first-out method, or market.
Property and Equipment - Property and equipment is stated at cost less depreciation computed under the straight-line method over the estimated useful life of the asset, generally from 3 to 7 years. When assets are disposed, the associated cost and accumulated depreciation are eliminated from the respective accounts and any resulting gain or loss is reflected in income. Expenditures for maintenance, repairs and minor renewals are charged to expense. Depreciation expense was $614 in 1997, $590 in 1996, and $783 in 1995.
Investment in Affiliated Companies - The Company accounts for its investments in Gray, Host Communications, Inc. ("HCI") and Capital Sports Properties, Inc. ("CSP") by the equity method, and its investment in Rawlings Sporting Goods Company, Inc. ("Rawlings") and Universal Sports America, Inc. ("USA") by the cost method. The excess of the Company's investments over the underlying equity of Gray and HCI, totaling $24,221 as of December 31, 1997, is being amortized over 40 years, with such amortization (totaling $610, $487, and $378 in 1997, 1996, and 1995, respectively) reported as a reduction in the Company's equity in earnings of affiliated companies. The equity in earnings of HCI is recognized by the Company on a six month lag basis, in order to align HCI's fiscal year ending each June 30 with the Company's fiscal year.
Goodwill and Other Long-Lived Assets - Goodwill associated with Bull Run's acquisition of Datasouth's common stock is being amortized over 15 years. The carrying value of goodwill, as well as other long-lived assets, are reviewed if the facts and circumstances suggest that they may be impaired. If this review indicates that the assets will not be recoverable, as determined based on undiscounted estimated cash flows over the remaining amortization period, the carrying value of the assets would be reduced to their estimated fair value. Goodwill amortization was $301 in 1997, $292 in 1996 and $309 in 1995, and accumulated amortization was $928 and $627 as of December 31, 1997 and 1996, respectively.
Warranty Costs - An estimated allowance for future warranty costs of the printer operations, based on past experience, is recorded as a charge to cost of goods sold. Included in other accrued liabilities is $60 and $65 for future warranty costs as of December 31, 1997 and 1996, respectively. Research and Development - Research and development costs of the printer operations, including the costs of software developed internally, are expensed as incurred.
Income Taxes - Income taxes are recognized in accordance with Statement of Accounting Standards No. 109, "Accounting for Income Taxes," whereby deferred income tax liabilities or assets at the end of each period are determined using the tax rate expected to be in effect when the taxes are actually paid or recovered. Accordingly, income tax expense will increase or decrease in the same period in which a change in tax rates is enacted. A valuation allowance is recognized on certain deferred tax assets whose realization is not reasonably assured.
Stock-Based Compensation - The Company grants stock options for a fixed number of shares to employees with an exercise price equal to the fair value of the shares at the date of grant. In accordance with APB Opinion No. 25, "Accounting for Stock Issued to Employees", no compensation expense is recognized for such grants.
Earnings (Loss) Per Share - In 1997, the Financial Accounting Standards Board issued Statement No. 128, "Earnings Per Share". Statement No. 128 replaced the calculation of primary and fully-diluted earnings per share with basic and diluted earnings per share. Unlike primary earnings per share, basic earnings per share excludes any dilutive effects of options. Diluted earnings per share is very similar to the previously reported primary earnings per share. All earnings (loss) per share amounts for all periods have been presented, and where appropriate, restated to conform to the Statement No. 128 requirements. In periods where they are anti-dilutive, dilutive effects of options are excluded from the calculation of diluted earnings (loss) per share.
2. INVESTMENT IN AFFILIATED COMPANIES
Investment in Rawlings - On November 21, 1997, the Company entered into an Investment Purchase Agreement with Rawlings. Pursuant to this agreement, the Company acquired warrants to purchase 925,804 shares of Rawlings' common stock, and has the right, under certain circumstances, to purchase additional warrants. The Company's total cost to purchase the warrants pursuant to this agreement (excluding the additional warrants) was $2,842. Fifty percent of the purchase price, or $1,421, was paid to Rawlings on November 21, 1997. The remaining fifty percent of the purchase price, plus interest at 7% per annum from November 21, 1997 until the date of payment, will be due on the earlier of the date of exercise and the date of expiration of the warrants. In the event of a partial exercise of the warrants, a pro rata portion of the purchase price with interest accrued thereon will be payable. The warrants have a four year term and an exercise price of $12.00 per share, but are exercisable only if Rawlings' common stock closes at or above $16.50 for twenty consecutive trading days during the four year term. In addition, under the terms of the agreement, the Company purchased 10.4% of the outstanding shares of Rawlings' common stock in the open market from November 1997 through January 1998 (of which, 5.0% was acquired as of December 31, 1997 at a cost of $4,382). Rawlings' common stock is publicly traded on The Nasdaq Stock Market (symbol: RAWL).
The Company and Rawlings also entered into a Standstill Agreement, which, among other things, provides that, for a specified period, the Company will be restricted in acquiring additional shares of Rawlings' common stock or participating in certain types of corporate events relating to the Company, including proxy contests and tender offers, subject to certain exceptions. Pursuant to a Registration Rights Agreement, Rawlings has also granted the Company rights to have the shares issuable upon exercise of the warrants (and the additional warrants, if any) registered under the Securities Act of 1933 under certain circumstances.
Investment in Gray and Gain on Issuance of Common Shares - In 1996, Gray consummated a public offering of 3.5 million shares of its newly-issued class B common stock at $20.50 per share, resulting in net proceeds to Gray of $67,060. As a result of such issuance, the Company's common equity ownership of Gray was reduced from 27.6% to 15.2%, (subsequently increasing to 17.0% as of December 31, 1997, as a result of additional investments in Gray made by the Company), resulting in a pretax gain for the Company of $8,179 in 1996. Such offering also reduced the Company's common equity voting power in Gray from 27.1% to 25.1% (subsequently increasing to 27.1% as of December 31, 1997). Gray is a communications company, based in Albany, Georgia, that operates eight network affiliated television stations, three daily newspapers, advertising weekly shoppers, plus a satellite broadcasting operation and a paging business. Gray's class A and class B common stock is publicly traded on the New York Stock Exchange (symbols: GCS and GCS.B, respectively).
The Company provides consulting services to Gray from time to time in connection with Gray's acquisitions and acquisition financing. Income on a portion of such fees is deferred and recognized over forty years as a result of the Company's equity investment position in Gray. Due to the reduction in the Company's equity ownership of Gray as described above, $174 of previously deferred consulting fees were recognized as consulting fee income in 1996. The Company recognized consulting fee income from Gray of $681, $844, and $721 in 1997, 1996, and 1995, respectively, for services rendered in connection with certain of Gray's acquisitions. As of December 31, 1997 and 1996, income from additional consulting fees of $400 and $272, respectively, has been deferred and will be recognized as Gray amortizes goodwill associated with the acquisitions.
In January 1996, the Company purchased an 8% Subordinated Note (the "8% Note") of Gray in the principal amount of $10,000, on which the Company received interest income of $580 during 1996. In connection with the purchase of the 8% Note, Gray issued to the Company warrants to purchase up to 487,500 shares of Gray's class A common stock at $17.88 per share. In September 1996, the Company exchanged the 8% Note for 1,000 shares of Gray's series A preferred stock, which entitles the holder thereof to cash dividends at an annual rate of $800 per share. At that same time, the Company purchased for $5,000, 500 shares of Gray's series B preferred stock entitling the holder thereof to annual dividends of $600 per share, which are cumulative. Dividends on the series B preferred stock are payable in cash or in additional shares of series B preferred stock, at Gray's option. Total dividend income of $1,100 and $293 was recognized by the Company in 1997 and 1996, respectively, on Gray series A and B preferred stock. In connection with the Company's acquisition of series B preferred stock, Gray issued to the Company warrants to purchase up to 250,000 shares of Gray's class A common stock at $24.00 per share. Of the total warrants owned by the Company to purchase 737,500 shares of Gray's class A common stock, 457,500 are fully vested, with the remaining warrants vesting periodically through 2001. Such warrants are exercisable beginning in January 1998 and expire in 2006.
In 1996, Gray retired certain of its debt, thereby incurring an after-tax extraordinary loss of $3,159 related to costs associated with the retired debt. As a result, the Company recognized 15.2% of Gray's charge, or $480, less a $185 deferred tax benefit, as an extraordinary loss in its 1996 financial statements.
Investments in HCI, CSP and USA - The Company acquired its initial interests in the outstanding common stock of HCI and CSP in 1995. In 1996, CSP exercised warrants to acquire HCI common shares. As a result of this exercise of warrants and subsequent purchases of HCI common stock by the Company, the Company's direct common equity ownership in HCI, plus the Company's indirect common equity ownership in HCI through its investment in CSP, was increased to 30.2 % as of December 31, 1997. Additionally, the Company owns indirectly, through CSP, 51.5% of HCI's 8% series B preferred stock having a face value of $3,750. HCI, based in Lexington, Kentucky, and HCI's 33.8%-owned affiliate, Universal Sports America, Inc. ("USA"), provide media and marketing services to universities, athletic conferences and various associations representing collegiate sports and, in addition, market and operate amateur participatory sporting events.
The Company recognizes its equity in earnings of HCI on a six month lag basis, in order to align HCI's fiscal year ending June 30 with the Company's fiscal year. Effective July 1, 1995 (the first day of HCI's 1996 fiscal year), HCI adopted a new accounting policy for the recognition of corporate sponsor license fee revenue and guaranteed rights fee expenses, since the nature of HCI's contracts were changing to include revenue-sharing or net profit split arrangements, rather than guaranteed rights fee payments. As a result, the rights fee expense associated with this type of contract could not be accurately measured until the expiration of each contract period when the revenue-sharing or net profit split amount was determined. Under the revised policy, license fee revenue and rights fee expense are recognized on a straight-line basis over the life of the contract, instead of recognizing revenue and expense in their entirety on the effective date of the contract, thereby providing for the uniform matching of revenue and expenses. As a result of such adoption, HCI recognized a $4,559 charge against its earnings, representing the after-tax cumulative effect of the accounting change. The Company has reported 9.1% of such charge, or $415, less a $141 deferred tax benefit, as a charge against its 1996 earnings.
In September 1995, HCI sold certain operating assets to USA in exchange for its 33.8% common equity position. The transaction resulted in a gain, net of tax, of approximately $4,000 for HCI, the Company's share of which amounted to $377, as reflected in the Company's 1996 equity in earnings of affiliated companies. In 1995, the Company invested $650 in preferred stock of USA, which is convertible to 3.0% of USA's total common shares, assuming conversion of all USA preferred stock.
Summarized Aggregate Financial Information - The summarized aggregate financial information of affiliated companies, in which the Company accounts by the equity method, follows:
Aggregate financial position (reflecting Gray and CSP as of December 31, 1997 and 1996 combined with HCI as of June 30, 1997 and 1996):
Aggregate operating results (reflecting Gray and CSP for the years ended December 31, 1997, 1996 and 1995, combined with HCI for the years ended June 30, 1997, 1996 and 1995):
Cumulative distributions exceed cumulative earnings of investments accounted for by the equity method by approximately $100 as of December 31, 1997.
Estimate of Aggregate Fair Value - As of December 31, 1997, the aggregate value of the Company's investment in affiliated companies was approximately $73,000, based on, in the case of publicly-traded Gray and Rawlings, quoted market prices on the New York Stock Exchange and The Nasdaq Stock Market, respectively, and in the case of privately-held HCI and CSP, recent transactions in HCI common stock and management estimates.
3. INVENTORIES
Inventories related to the Company's printer operations consist of the following as of December 31:
4. PROPERTY AND EQUIPMENT
The Company's property and equipment consist of the following as of December 31:
Bull Run's executive offices are leased from a company affiliated with a principal stockholder and director of the Company under an operating lease expiring in 2002. Datasouth leases its main facility for printer operations under an operating lease expiring in 1998, having a renewal option for an additional three year period, and leases additional office and warehouse space under operating leases expiring in 2000. The Company's total rental expense was $328, $309, and $317 in 1997, 1996, and 1995, respectively. The minimum annual rental commitments under these and other leases with an original lease term exceeding one year are approximately $367 for 1998, $167 for each of 1999 and 2000, and $17 for each of 2001 and 2002.
5. LONG-TERM DEBT AND NOTE PAYABLE
The Company amended all of its long-term debt agreements with two banks subsequent to December 31, 1997.
An agreement amended February 20, 1998 (the "February Agreement") provides:
(a) a $5,000 term note, payable $250 per quarter beginning March 31, 1998, bearing interest at the London Interbank Offered Rate ("LIBOR") plus 2.75%; and,
(b) a revolving bank credit facility for borrowings of up to $5,000 expiring in February 2001, bearing interest principally at LIBOR plus 2.75%, with a mandatory reduction in February 1999 to $4,000 in available borrowings. This revolving bank credit facility replaced a similar $5,500 facility under which $5,472 was outstanding as of December 31, 1997 and $1,865 was outstanding as of December 31, 1996.
An agreement amended March 20, 1998 (the "March Agreement") provides: (a) term notes for borrowings of up to $42,900 requiring no principal payments prior to maturity on January 1, 2003, bearing interest at LIBOR plus 1.75%, under which $34,343 was outstanding as of December 31, 1997 and $28,500 was outstanding as of December 31, 1996; and, (b) a revolving bank credit facility for borrowings of up to $3,500 expiring May 1, 1999, bearing interest at the bank's prime rate, under which $3,183 was outstanding as of December 31, 1997 and $1,499 was outstanding as of December 31, 1996.
Loans made under the February Agreement are collateralized by Datasouth's accounts receivable, inventories and property and equipment. Loans made under the March Agreement are collateralized by all of the common stocks of Gray (except for certain shares of Gray common stock pledged under the note payable discussed below), HCI, CSP and Rawlings owned by the Company; the preferred stock of Gray owned by the Company; warrants to purchase Gray's and Rawlings' common stock owned by the Company; and shares of the Company's common stock held by a significant shareholder of the Company. The loans require adherence to certain financial covenants, the most restrictive of which requires maintaining a cash flow coverage ratio of at least 1.1 to 1.0 beginning December 31, 1998.
In January 1998, the Company executed two interest rate swap agreements, which effectively modify the interest characteristics of $24,750 of the Company's outstanding long-term debt. The agreements involve the exchange of amounts based on a fixed interest rate for amounts based on variable interest rates over the life of the agreements, without an exchange of the notional amount upon which the payments are based. The differential to be paid or received as interest rates change will be accrued and recognized as an adjustment of interest expense related to the debt. The Company effectively converted $20,000 and $4,750 of floating rate debt to a fixed rate basis under two separate agreements. Under the first agreement, $20,000 of long-term debt is subject to a one-year forward swap arrangement, whereby beginning January 1, 1999 and for the following nine years, the Company will be subject to a fixed rate of 7.83%, instead of LIBOR plus 1.75%, the rate in effect until then. Under the second agreement, $4,750 of long-term debt will be subject to a fixed rate of no more 8.9% beginning March 31, 1998, instead of LIBOR plus 2.75%, the rate in effect until then. The notional amount on the $4,750 interest rate swap agreement amortizes $250 per quarter through December 31, 2002. The fair value of the swap agreements is not recognized in the financial statements. If, in the future, an interest rate swap agreement was terminated, any resulting gain or loss would be deferred and amortized to interest expense over the remaining life of the interest rate swap agreement. In the event of early extinguishment of a designated debt obligation, any realized or unrealized gain or loss from the swap would be recognized in the income coincident with the extinguishment.
The Company also has a demand bank note for borrowings of up to $2,000 under which $1,500 was outstanding as of December 31, 1997, bearing interest at the bank's prime rate, collateralized by certain shares of Gray common stock owned by the Company. As of December 31, 1996, $500 of the Company's long-term debt was presented as a short-term obligation, even though there was no obligation to repay any amounts outstanding.
The bank's prime rate as of December 31, 1997 was 8.5%. The interest rate on the Company's LIBOR-based borrowings of $34,343 for the 120-day period including December 31, 1997 was approximately 7.56%. The interest rate on the Company's LIBOR-based borrowings of $2,500 for the 90-day period including December 31, 1997 was approximately 8.13%.
The carrying amount of long-term debt approximates fair value.
6. INCOME TAXES
The Company's income tax benefit (provision) for the years ending December 31 consists of the following:
Deferred tax liabilities (assets) are comprised of the following as of December 31:
The principal differences between the federal statutory tax rate and the effective tax rate are as follows:
A valuation allowance was provided principally to offset a portion of the deferred tax asset associated with Alternative Minimum Tax ("AMT") credit carryforward as of December 31, 1995, the realization of which was uncertain. Following two successive years in which the Company utilized some of its AMT credit carryforward, the Company determined that the realization of the entire AMT credit carryforward was reasonably certain, and as a result, reduced its valuation allowance to zero. The reduction in the valuation allowance resulted in a tax benefit of $47 and a reduction in goodwill of $131 in 1996. In 1995, the Company reduced its valuation allowance resulting in a tax benefit of $250.
7. STOCK OPTIONS
In 1994, the Company adopted the 1994 Long Term Incentive Plan (the "1994 Plan") under which 2,500,000 shares of the Company's common stock have been reserved for issuance of stock options, restricted stock awards and stock appreciation rights. Under terms of the Merger with Datasouth, all outstanding stock options to purchase Datasouth common stock were converted to Bull Run stock options under the 1994 Plan. Certain options granted under the 1994 Plan are fully vested at the date of grant, and others vest over three to five year periods. Options granted under the 1994 Plan have terms ranging from three to ten years Shares available for future option grants under the 1994 Plan as of December 31, 1997 and 1996 were 567,000 and 662,000, respectively.
Also in 1994, the Company adopted the Non-Employee Directors' 1994 Stock Option Plan (the "1994 Directors' Plan") under which 350,000 shares of the Company's common stock have been reserved for issuance of stock options. Options under the 1994 Directors' Plan are fully vested when granted. Shares available for future option grants under the 1994 Directors' Plan as of December 31, 1997 and 1996 were 180,000 and 190,000, respectively. The weighted average fair value of options granted was $1.26 in 1997 and $1.03 in 1996.
Information with respect to the Company's stock option plans follows:
As of December 31, 1997, the number of outstanding shares under option, weighted average option exercise price and weighted average remaining option contractual life is as follows: 75,000 exercisable shares at $.75 per share, expiring in 4.8 years; 867,000 shares at $.90 per share, expiring in 4.2 years (717,000 shares of which are exercisable); 300,000 exercisable shares at $1.46 per share, expiring in 6.5 years; 535,000 shares at $2.64 per share, expiring in 2.4 years (185,000 shares of which are exercisable); and, 105,000 shares at $2.40 per share, expiring in 8.8 years (none of which are exerciseable).
Pro forma net income and earnings per share required by FASB Statement No. 123, "Accounting for Stock-Based Compensation" ("FAS 123") has been determined as if the Company had accounted for its employee stock options under the fair value method of that Statement. The fair values for these options were estimated at the time of grant using a Black-Scholes option pricing model assuming a risk-free interest rate of 5.93%, dividend yield of 0.0%, a volatility factor of .469, and a weighted-average expected life for the options of four to six years. Had compensation cost been measured based on the fair value based accounting of FAS 123, net loss for 1997 would have been $(1,900), or $(.09) per share (basic and diluted), and net income for 1996 would have been $5,225, or $.24 per share (basic) and $.23 per share (diluted). These pro forma results are provided for comparative purposes only and do not purport to be indicative of what would had occurred had compensation cost been measured under FAS 123 or of results which may occur in the future. Since FAS 123 is applicable only to options granted subsequent to December 31, 1994, its pro forma effect will not be fully reflected until future years.
8. EARNINGS (LOSS) PER SHARE
The following table sets forth the computation of basic and diluted earnings (loss) per share:
9. RETIREMENT PLANS
The Company has a 401(k) defined contribution benefit plan, whereby employees of the Company may contribute 1% to 15% of their gross pay to the plan subject to limitations set forth by the Internal Revenue Service. The Company may make matching and/or discretionary contributions to the employees' accounts in amounts to be determined annually. Total Company contributions to the plan were $208 in 1997, $243 in 1996 and $255 in 1995.
10. GEOGRAPHIC DATA AND SIGNIFICANT CUSTOMER
Sales to non-domestic customers, located principally in Western Europe and South America, were $2,497 in 1997, $2,954 in 1996 and $2,361 in 1995. A significant amount of revenue from printer operations is derived from one customer. In 1997, 1996 and 1995, 33%, 30% and 30% of such revenue was attributable to this customer, respectively.
11. ACQUISITION OF PRINTER MANUFACTURER
Effective January 2, 1998, the Company acquired all of the outstanding common stock of CodeWriter Industries, Inc. ("CodeWriter") and all of the outstanding membership interests of CodeWriter's affiliate, CW Technologies, LLC ("CWT"), in a transaction valued at approximately $6,200, of which $5,000 was paid at closing in the form of $2,500 cash and $2,500 in the Company's common stock. In addition, the Company is obligated to pay quarterly to the members of CWT, a specified percentage of revenue generated by the Company from CodeWriter and CWT products and services during each calendar quarter through December 31, 2001, but in no event will the aggregate amount of such payments exceed $1,200. The transaction will be accounted for as a purchase.