##### 



UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
 FORM 10-Q [X]
    
    QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
 For the quarterly period ended February 29, 2004 OR [   ]
    
    TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
 For the transition period fromto. Commission file number 0-9385 Bull Run Corporation  Georgia
(State of incorporation
or organization)
    
    58-2458679
(I.R.S. Employer
Identification No.)
 4370 Peachtree Road, N.E., Atlanta, GA 30319
(Address of principal executive offices)        (Zip Code) (404) 266-8333
(Registrants telephone number, including area code) 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. Yes [X] No [   ] Indicate the number of shares outstanding of each of the issuers classes of
common stock, as of the latest practicable date: 4,731,087 shares of Common
Stock, par value $.01 per share, were outstanding as of March 31, 2004.




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PART I. FINANCIAL INFORMATION Item 1. Financial Statements BULL RUN CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)
(Amounts in thousands) February 29,
    
    August 31,2004
    
    2003ASSETSCurrent assets:Cash and cash equivalents
    
    $
    135
    
    
    $
    4,520Accounts receivable, net of allowance of $282 as of February 29,
2004 and $465 as of August 31, 2003
    
    
    12,723
    
    
    
    10,071Inventories
    
    
    700
    
    
    
    409Prepaid costs and expenses
    
    
    1,350
    
    
    
    1,576Total current assets
    
    
    14,908
    
    
    
    16,576Property and equipment, net
    
    
    3,987
    
    
    
    4,310Goodwill
    
    
    43,664
    
    
    
    43,664Customer relationships and trademarks
    
    
    8,935
    
    
    
    9,562Other assets
    
    
    798
    
    
    
    803Net noncurrent assets of discontinued segment
    
    
    1,695
    
    
    
    1,695$
    73,987
    
    
    $
    76,610LIABILITIES AND STOCKHOLDERS DEFICITCurrent liabilities:Current portion of long-term debt
    
    $
    56,522
    
    
    $
    590Accounts payable
    
    
    5,275
    
    
    
    11,878Deferred revenue
    
    
    2,984
    
    
    
    6,542Accrued and other liabilities
    
    
    17,950
    
    
    
    9,600Total current liabilities
    
    
    82,731
    
    
    
    28,610Long-term debt
    
    
    8,693
    
    
    
    72,641Other liabilities
    
    
    2,319
    
    
    
    2,361Total liabilities
    
    
    93,743
    
    
    
    103,612Commitments and contingenciesStockholders deficit:Series D preferred stock, $.01 par value (authorized 100 shares;
issued and outstanding 12.497 shares having a $12,497 liquidation
value and 14.28 shares having a $14,280 liquidation value as of
February 29, 2004 and August 31, 2003, respectively)
    
    
    12,497
    
    
    
    14,280Series E preferred stock, $.01 par value (authorized 25 shares;
issued and outstanding 9.799 shares; $9,799 liquidation value)
    
    
    9,799Series F preferred stock, $.01 par value (authorized 25 shares;
issued and outstanding 2.0 shares; $2,000 liquidation value)
    
    
    2,000Common stock, $.01 par value (authorized 100 shares; issued
4.731 and 4.324 shares as of February 29, 2004 and August 31,
2003, respectively)
    
    
    47
    
    
    
    43Additional paid-in capital
    
    
    81,266
    
    
    
    80,138Accumulated deficit
    
    
    (125,365
    )
    
    
    (121,463
    )Total stockholders deficit
    
    
    (19,756
    )
    
    
    (27,002
    )$
    73,987
    
    
    $
    76,610
 The accompanying notes are an integral part of these condensed consolidated financial statements. 2




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BULL RUN CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
(Amounts in thousands, except per share data) Three Months Ended
    
    Six Months EndedFebruary 29,
    
    February 28,
    
    February 29,
    
    February 28,2004
    
    2003
    
    2004
    
    2003Revenue from services rendered
    
    $
    16,921
    
    
    $
    17,626
    
    
    $
    38,555
    
    
    $
    43,468Operating costs and expenses:Direct operating costs for services rendered
    
    
    11,067
    
    
    
    12,779
    
    
    
    26,458
    
    
    
    30,845Selling, general and administrative
    
    
    6,053
    
    
    
    6,303
    
    
    
    12,040
    
    
    
    12,734Amortization of acquisition intangibles
    
    
    314
    
    
    
    304
    
    
    
    627
    
    
    
    608Total operating costs and expenses
    
    
    17,434
    
    
    
    19,386
    
    
    
    39,125
    
    
    
    44,187Loss from operations
    
    
    (513
    )
    
    
    (1,760
    )
    
    
    (570
    )
    
    
    (719
    )Other income (expense):Equity in losses of affiliated companies
    
    
    
    
    
    
    (366
    )

    
    
    
    
    
    
    (193
    )Net change in value of certain derivative instruments
    
    
    241
    
    
    
    (189
    )
    
    
    547
    
    
    
    (1,863
    )Loss on issuance of shares by affiliate
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,339
    )Loss on investment valuation adjustments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (977
    )Interest expense
    
    
    (1,108
    )
    
    
    (2,138
    )
    
    
    (2,194
    )
    
    
    (4,331
    )Debt issue cost amortization
    
    
    (293
    )
    
    
    (610
    )
    
    
    (584
    )
    
    
    (1,154
    )Other income (expense), net
    
    
    (17
    )
    
    
    21
    
    
    
    (11
    )
    
    
    23Loss from continuing operations
    
    
    (1,690
    )
    
    
    (5,042
    )
    
    
    (2,812
    )
    
    
    (11,553
    )Income from discontinued segment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,267Net loss
    
    
    (1,690
    )
    
    
    (5,042
    )
    
    
    (2,812
    )
    
    
    (6,286
    )Preferred dividends
    
    
    (558
    )
    
    
    (281
    )
    
    
    (1,090
    )
    
    
    (540
    )Net loss available to common stockholders
    
    $
    (2,248
    )
    
    $
    (5,323
    )
    
    $
    (3,902
    )
    
    $
    (6,826
    )Loss per share available to common stockholders,
basic and diluted:Loss from continuing operations
    
    $
    (0.50
    )
    
    $
    (1.38
    )
    
    $
    (0.88
    )
    
    $
    (3.14
    )Income from discontinued segment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1.37Net loss available to common stockholders
    
    $
    (0.50
    )
    
    $
    (1.38
    )
    
    $
    (0.88
    )
    
    $
    (1.77
    )Weighted average number of common shares
outstanding, basic and diluted
    
    
    4,500
    
    
    
    3,867
    
    
    
    4,420
    
    
    
    3,849
 The accompanying notes are an integral part of these condensed consolidated financial statements. 3




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BULL RUN CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS DEFICIT (Unaudited)
(Amounts in thousands) Series DPreferred
    
    Series EPreferred
    
    Series FPreferred
    
    Common StockStock
    
    Stock
    
    Stock
    
    Shares
    
    AmountAs of September 1, 2003
    
    $
    14,280
    
    
    $
    
    
    
    $
    

    
    
    

    4,324
    
    
    $
    43Exchange of subordinated notes for shares of
Series E preferred stock
    
    
    
    
    
    
    8,016Issuance of Series F preferred stock
    
    
    
    
    
    
    
    
    
    
    2,000Exchange of Series D preferred stock for shares
of Series E preferred stock
    
    
    (1,783
    )
    
    
    1,783Issuance of common stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    407
    
    
    
    4As of February 29, 2004
    
    $
    12,497
    
    
    $
    9,799
    
    
    $
    2,000
    
    
    
    4,731
    
    
    $
    47
 Additional
    
    
    
    
    
    TotalPaid-In
    
    Accumulated
    
    StockholdersCapital
    
    Deficit
    
    DeficitAs of September 1, 2003
    
    $
    80,138
    
    
    $
    (121,463
    )
    
    $
    (27,002
    )Exchange of subordinated notes for shares of
Series E preferred stock
    
    
    
    
    
    
    
    
    
    
    8,016Issuance of Series F preferred stock
    
    
    
    
    
    
    
    
    
    
    2,000Exchange of Series D preferred stock for shares
of Series E preferred stock
    
    
    
    
    
    
    
    
    
    
    0Issuance of common stock
    
    
    1,128
    
    
    
    
    
    
    
    1,132Preferred dividends
    
    
    
    
    
    
    (1,090
    )
    
    
    (1,090
    )Net loss
    
    
    
    
    
    
    (2,812
    )
    
    
    (2,812
    )As of February 29, 2004
    
    $
    81,266
    
    
    $
    (125,365
    )
    
    $
    (19,756
    )
 The accompanying notes are an integral part of these condensed consolidated financial statements. 4




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BULL RUN CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(Amounts in thousands) Six Months EndedFebruary 29,
    
    February 28,2004
    
    2003Cash flows from operating activities:Net loss
    
    $
    (2,812
    )
    
    $
    (6,286
    )Income from discontinued segment
    
    
    
    
    
    
    (5,267
    )Adjustments to reconcile net loss to net cash used in operations:Provision for bad debts
    
    
    (63
    )
    
    
    235Depreciation and amortization
    
    
    1,736
    
    
    
    2,390Equity in losses of affiliated companies
    
    
    
    
    
    
    193Dividends received from affiliated company
    
    
    
    
    
    
    81Net change in value of certain derivative instruments
    
    
    (547
    )
    
    
    1,863Loss on issuance of shares by affiliate
    
    
    
    
    
    
    2,339Loss on investment valuation adjustments
    
    
    
    
    
    
    1,032Change in operating assets and liabilities:Accounts receivable
    
    
    (2,589
    )
    
    
    (5,205
    )Inventories
    
    
    (291
    )
    
    
    196Prepaid costs and expenses
    
    
    376
    
    
    
    (405
    )Accounts payable and accrued expenses
    
    
    (3,673
    )
    
    
    7,388Other long-term liabilities
    
    
    (20
    )
    
    
    (585
    )Net cash used in continuing operations
    
    
    (7,883
    )
    
    
    (2,031
    )Net cash provided by discontinued operations
    
    
    
    
    
    
    106Net cash used in operating activities
    
    
    (7,883
    )
    
    
    (1,925
    )Cash flows from investing activities:Capital expenditures
    
    
    (204
    )
    
    
    (121
    )Proceeds on sale of investments
    
    
    
    
    
    
    6,764Decrease in other assets
    
    
    (57
    )
    
    
    197Net cash provided by (used in) investing activities
    
    
    (261
    )
    
    
    6,840Cash flows from financing activities:Borrowings from revolving line of credit
    
    
    
    
    
    
    175Cash advances made by stockholder
    
    
    1,800Repayments of long-term debt
    
    
    
    
    
    
    (6,767
    )Debt issue costs
    
    
    (41
    )
    
    
    (981
    )Issuance of preferred stock
    
    
    2,000
    
    
    
    3,000Net cash provided by (used in) financing activities
    
    
    3,759
    
    
    
    (4,573
    )Net increase (decrease) in cash and cash equivalents
    
    
    (4,385
    )
    
    
    342Cash and cash equivalents, beginning of period
    
    
    4,520
    
    
    
    397Cash and cash equivalents, end of period
    
    $
    135
    
    
    $
    739
 The accompanying notes are an integral part of these condensed consolidated financial statements. 5




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BULL RUN CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except per share amounts) 1. BASIS OF PRESENTATION In managements opinion, the accompanying unaudited condensed consolidated
financial statements reflect all adjustments (consisting solely of normal,
recurring adjustments) necessary to present fairly the financial position and
results of operations for the transition and comparative period reported.
These condensed consolidated financial statements should be read in conjunction
with the consolidated financial statements contained in the Annual Report on
Form 10-K of Bull Run Corporation for the fiscal year ended August 31, 2003. On December 17, 1999, Bull Run Corporation (Bull Run) acquired the stock of
Host Communications, Inc. (Host or Host Communications), Universal Sports
America, Inc. (USA) and Capital Sports Properties, Inc. not previously owned,
directly or indirectly, by Bull Run (the Host-USA Acquisition). All
operations of the acquired entities are now combined under Host. The accompanying condensed consolidated financial statements include the
accounts of Bull Run and its wholly owned subsidiaries (collectively, unless
the context otherwise requires, the Company), after elimination of
intercompany accounts and transactions. Prior to the current fiscal year, the Company provided consulting services to
Gray Television, Inc. (Gray), a company in which Bull Run had a significant
investment until August 2003 (refer to Note 4), in connection with Grays
acquisition and divestiture activities. In January 2004, the Company
determined that it will not be engaged in such services in the future, with
Gray or any other party, and as a result, the Company presents consulting
income for all prior fiscal periods as income from discontinued operations
beginning with the comparative financial statements filed in this Form 10-Q.
There are no expenses associated with the consulting segment, nor are there any
associated assets or liabilities as of February 29, 2004 or August 31, 2003.
Unless otherwise indicated, amounts provided in these notes to the consolidated
financial statements pertain to continuing operations. In April 2002, the FASB issued Statement of Financial Accounting Standards No.
145, Rescission of FASB Statements No. 4, 44, and 62, Amendment of FASB
Statement No. 13, and Technical Corrections(SFAS 145), effective for fiscal
years beginning after May 15, 2002. For most companies, SFAS 145 requires gains
and losses on extinguishments of debt to be classified as income or loss from
continuing operations rather than as extraordinary items as previously required
under FASB Statement No. 4. Previously, in the six months ended February 28,
2003, Gray recorded an extraordinary charge in connection with an early
extinguishment of debt. Since the Company accounted for its investment in Gray
using the equity method, the Company reported its proportionate share of Grays
extraordinary losses as an extraordinary charge in its financial statements.
Gray adopted SFAS 145 in its first quarter ended March 31, 2003, and
accordingly, reclassified each of its losses on its early extinguishment of
debt, from an extraordinary charge to income from continuing operations.
Therefore, Bull Run has reclassified its proportionate share of such losses,
amounting to $(406) in the six months ended February 28, 2003, to continuing
operations as a component of Equity in losses of affiliates. 2. LIQUIDITY As of February 29, 2004, the Companys negative working capital was $67,823,
including $55,932 of bank debt maturing on November 30, 2004. In recent fiscal
years, the Company has reported substantial losses and has consumed substantial
cash in its operations. The Company has funded its liquidity needs through the
issuance of preferred stock and through the sale of investments. Although 6




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management anticipates that the Company will continue to experience negative
working capital ranging from approximately $60,000 to $70,000, management
believes the Company has sufficient liquidity to meet its cash obligations
until the maturity date of the bank credit agreement. The Company intends to
commence discussions with its bank
lenders regarding an extension of the agreement or other refinancing plan by
August 2004, and currently believes that it will be able to extend or refinance
the agreement under terms similar to those of the present bank credit
agreement. The Companys Chairman previously committed to contribute an
additional $1,000 in capital to the Company through November 2004, if
necessary, for additional shares of the Companys common or preferred stocks or
for subordinated debt. In January 2004, the Chairman provided $1,800 in cash
used for working capital purposes, of which, at least $800 (classified as a
component of Other liabilities, a noncurrent liability, in the Condensed
Consolidated Balance Sheet as of February 29, 2004) is expected to ultimately
be applied as proceeds for newly-issued subordinated debt or equity. The
remaining $1,000 is currently classified as a component of Accrued and other
liabilities, a current liability, until such time as a more definitive
application of the cash advance is determined by the parties. As noted above and as further discussed in Note 5, the Company has $55,932 of
debt outstanding as of February 29, 2004 under its bank credit agreement, which
matures on November 30, 2004. As further discussed in Note 5, the Companys
Chairman has guaranteed repayment of $53,000 of the outstanding bank debt. The
Companys ability to continue this or similar financing beyond the November 30,
2004 maturity date is significantly dependent on the continued support of the
Companys Chairman and, in part, on the Companys future operating results.
There can be no assurances with respect to either the Companys future
operating results or the continued support of its Chairman. 3. SUPPLEMENTAL CASH FLOW DISCLOSURES Supplemental cash flow information follows: Six Months EndedFebruary 29,
    
    February 28,2004
    
    2003Interest paid
    
    $
    2,320
    
    
    $
    4,480Income taxes paid
    
    
    27
    
    
    
    9Noncash investing and financing activity:Exchange of subordinated debt for shares of
preferred stock
    
    
    8,016Issuance of common stock in payment of
preferred stock dividends
    
    
    503Issuance of common stock primarily in
connection with debt issuance costs
    
    
    479
    
    
    
    919Issuance of common stock to a retirement plan
and as a component of directors fees
    
    
    150
    
    
    
    146
 4. INVESTMENT IN AFFILIATED COMPANIES Prior to August 31, 2003, the Company held investments in Gray common stocks
and warrants to purchase additional shares of Gray common stocks. The Company
accounted for its investments in Grays two publicly traded classes of common
stock using the equity method. In April 2003, the Company sold the warrants
back to Gray. In August 2003, the Company sold its investments in Gray common
stocks to Gray and other parties affiliated with the Company, including the
Companys Chairman of its board of directors. 7




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In October 2002, Gray completed a public offering of 30,000 shares of its
common stock for net proceeds of approximately $231,200, and in November 2002,
Gray issued an additional 4,500 shares for additional proceeds of approximately
$34,900. As a result of these transactions by Gray, the Companys ownership of
Grays outstanding common stock was reduced from 12.9% to 4.0%. Since Grays
net proceeds per share of issued common stock was an amount which was less than
the Companys carrying value per share of Gray common stock owned prior to such
transactions, a loss of $2,339 on the issuance of shares by Gray was reported
by the Company in the six months ended February 28, 2003. Certain executive
officers of Gray and certain directors of Gray are also executive officers and
directors of the Company; therefore until such time as the Company sold its
investments in Gray common stocks, the Company continued to account for its
investment in Gray under the equity method subsequent to the issuance of shares
by Gray, despite the dilution of the Companys voting power to less than 20%,
since the Company continued to have significant influence in Gray. The Company sold its investment in Rawlings Sporting Goods Company, Inc.
(Rawlings) common stock in December 2002 for cash proceeds of $6,764. Prior
to the sale, a loss of $1,032 on the Rawlings investment that had been
previously reported as other comprehensive accumulated loss (a component of
the Companys stockholders equity) was expensed, and reported as an investment
valuation adjustment in the Companys results of operations for the six months
ended February 28, 2003. 5. LONG-TERM DEBT Long-term debt and notes payable consist of the following: February 29,
    
    August 31,2004
    
    2003Term loans
    
    $
    35,932
    
    
    $
    35,932Revolver
    
    
    20,000
    
    
    
    20,000Subordinated notes
    
    
    9,283
    
    
    
    17,29965,215
    
    
    
    73,231Less current portion
    
    
    56,522
    
    
    
    590$
    8,693
    
    
    $
    72,641
 As amended in August 2003, the Companys bank credit agreement provides for (a)
two term loans (the Term Loans) for borrowings totaling $35,932 and (b) a
revolving loan commitment (the Revolver) for maximum borrowings of $20,000.
All amounts outstanding under the Term Loans and the Revolver are due on
November 30, 2004, and bear interest at either the banks prime rate or the
London Interbank Offered Rate (LIBOR) plus 2.75%, payable monthly. The
amendment in August 2003 reduced the interest rate charged by the banks and
revised the maturity date of the agreement to November 30, 2004 from September
30, 2003. As of February 29, 2004, all amounts available under the Revolver
were borrowed, and no additional borrowing capacity was available. As of
February 29, 2004, substantially all borrowings under the Term Loans and
Revolver were subject to the LIBOR-based rate of 3.85%. Under the terms of the credit agreement, up to an aggregate of $12,500 in
funding for working capital purposes, if necessary, may be sourced from the
issuance of equity securities, including shares of the Companys preferred
stock, or by the issuance of subordinated debt. Through February 29, 2004, the
Company has received an aggregate total of approximately $10,900 of such
funding for working capital purposes, including $2,000 received from the
Companys Chairman in November 2003 for shares of the Companys series F
preferred stock, and the $1,800 received from the Chairman in January 2004
discussed in Note 2.As a result of the these transactions, the Company would
currently be permitted under its bank credit agreement to source up to an
additional $1,600 of cash from the issuance of equity or debt securities during
the remaining term of the credit facility. 8




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##### 



The bank credit agreement, as amended, contains certain financial covenants,
including the maintenance of minimum interest coverage ratios determined
quarterly. Long-term debt is collateralized by all of the Companys assets.
The Company is presently in compliance with all provisions of the credit
agreement as last amended. In connection with the Companys bank credit facilities, the Companys Chairman
of the board entered into a guarantee agreement in favor of the banks, for
which he receives compensation from the Company in the form of shares of the
Companys common stock. During the six months ended February 29, 2004, the
Company issued approximately 151 restricted shares of the Companys common
stock then valued at approximately $479. During the six months ended February
28, 2003, the Company issued approximately 119 restricted shares of the
Companys common stock then valued at approximately $919. The value of the
shares issued to the Chairman is based on an annual compensation rate of 1.625%
of the guarantee amount. The guarantee agreement currently requires the
Chairman to personally guarantee up to $53,000 of the Companys outstanding
bank debt. The guaranteed amount has historically reduced, and will continue
to reduce, dollar for dollar, as the aggregate outstanding amount under the
Term Loans is reduced, subject to certain limitations. The guarantee agreement
provides that if the Company defaults on its bank loan, the banks have the
right to require the Chairman to repay the amount of such loan to the banks up
to the maximum amount of his personal guarantee. Under the terms of his
guarantee, if the banks exercise their rights to demand repayment from the
guarantor, the Chairman has the option to purchase the entire loan from the
banks, and thereby becoming the holder of the Companys debt currently payable
to the banks as a secured creditor. In connection with the Host-USA Acquisition, the Company issued 8% subordinated
notes to former stockholders of Host and USA, representing long-term debt of
$8,693 as of February 29, 2004 and $16,709 as of August 31, 2003. Interest is
payable quarterly and the notes, as amended, have a maturity date of January
17, 2006. During the six months ended February 29, 2004, holders of 8%
subordinated notes representing an aggregate face value of $8,016 exchanged
their notes for shares of Series E Preferred Stock (refer to Note 7). In
February 2004, a note having a face value of $3,019 was acquired by the
Companys Chairman from the note holder, and the Chairman has agreed to modify
the terms of the note to amend the maturity date from January 2005 to January
2006, as well as to defer the payment of interest to the maturity date of the
note. The Company also has outstanding 9% subordinated notes representing an
aggregate amount of $590 having a maturity date of December 31, 2004. Payment
of interest and principal on all subordinated notes is subordinate to the
Companys bank credit agreement. Aggregate maturities of the Companys long-term debt and notes payable as of
February 29, 2004 (including the effects of the note modifications discussed
above) in the fiscal years ending August 31, 2004, 2005 and 2006 are,
respectively, $0, $55,932 (all of which maturing on November 30, 2004) and
$8,693, and none thereafter. The Company is a party to an interest rate swap agreement terminating on
December 31, 2004, which involves the exchange of interest at a fixed rate of
6.71% for interest at a variable rate, determined quarterly, equal to the
90-day LIBOR rate, without an exchange of the $25,000 notional amount upon
which the payments are based. The differential paid or received as interest
rates change is settled quarterly and is accrued and recognized as an
adjustment of interest expense related to the debt. 6. INCOME TAXES The principal differences between the federal statutory tax rate of 34% and the
effective tax rate of zero are increases in the valuation allowance for
potentially non-realizable deferred tax assets of $577 9




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##### 



and $1,700 for the three
months ended February 29, 2004 and February 28, 2003, respectively, and $929
and $2,025 for the six months ended February 29, 2004 and February 28, 2003,
respectively. 7. PREFERRED STOCK ISSUANCE AND EXCHANGE As of February 29, 2004, 12.497 shares of the Companys series D convertible
preferred stock (Series D Preferred Stock) were outstanding, having an
aggregate face value of $12,497, 5.4 shares of which are currently convertible
at the holders option into 540 shares of the Companys common stock. An
additional 4.097 shares of Series D Preferred Stock is convertible at the
holders option into approximately 410 shares of the Companys common stock
beginning in July 2004 and the remaining 3 shares of Series D Preferred Stock
are convertible into 300 shares of the Companys common stock beginning in
September 2004. Each holder of the Series D Preferred Stock is entitled to
receive dividends at an annual rate of $90.00 per share in cash or in shares of
the Companys common stock at the holders option, except that, until the
second anniversary of the date of issuance, the Company has the option to pay
such dividends in cash or in shares of the Companys common stock. The
liquidation and redemption price of the Series D Preferred Stock is $1,000 per
share, and dividends are cumulative. The Company has the option to redeem the
Series D Preferred Stock at any time. All shares of preferred stock rank, as
to payment of dividends and as to distribution of assets upon liquidation or
dissolution of the Company, on a parity with all other currently issued
preferred stock and any preferred stock issued by the Company in the future,
and senior to the Companys currently issued common stock and common stock
issued in the future. As of February 29, 2004, 9.799 shares of the Companys series E convertible
preferred stock (Series E Preferred Stock) were outstanding, having an
aggregate face value of $9,799. Each share of the Series E Preferred Stock is
convertible at the holders option into 0.14286 shares of the Companys common
stock beginning one year following the date of issuance of the Series E
Preferred Stock (initially, October 2004). Each holder of the Series E
Preferred Stock is entitled to receive dividends at an annual rate of $90.00
per share in cash or in shares of the Companys common stock at the holders
option, except that, no dividend is payable prior to June 30, 2005, or upon
conversion to common stock, if earlier. The liquidation and redemption price
of the Series E Preferred Stock is $1,000 per share. The Company has the
option to redeem the Series E Preferred Stock at any time. During the six
months ended February 29, 2004, subordinated note holders elected to exchange
an aggregate $8,016 of subordinated debt for an aggregate 8.016 shares of
Series E Preferred Stock, including subordinated notes having an aggregate face
amount of $5,257 acquired by the Companys Chairman immediately prior to the
exchange. Also during the six months ended February 29, 2004, 1.783 shares of
Series D Preferred Stock issued to a former director of the Company and his
spouse (both of whom were formerly holders of subordinated notes) were
exchanged for the same number of shares of Series E Preferred Stock. As of February 29, 2004, 2.0 shares of the Companys series F convertible
preferred stock (Series F Preferred Stock) were outstanding, having an
aggregate face value of $2,000. All of these shares were issued to the
Companys Chairman in the six months ended February 29, 2004. Each share of
the Series F Preferred Stock is convertible at the holders option into 0.78125 shares of
the Companys common stock beginning in November 2006. The holder of Series F
Preferred Stock is entitled to receive dividends at an annual rate of $90.00
per share in cash or in shares of the Companys common stock at the holders
option, except that, until the second anniversary of the date of issuance, the
Company has the option to pay such dividends in cash or in shares of the
Companys common stock. The liquidation and redemption price of the Series F
Preferred Stock is $1,000 per share. The Company has the option to redeem the
Series F Preferred Stock at any time. In November 2003, the Companys Articles of Incorporation were amended to
effectively cancel all authorized but unissued shares of the Companys series
A, series B and series C preferred stocks. There were no shares of such
preferred stocks issued at that time. 10




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##### 



8. OTHER COMPREHENSIVE INCOME (LOSS) A reconciliation of the net loss as reported in the Condensed Consolidated
Statement of Operations to the comprehensive loss is as follows: Three Months Ended
    
    Six Months EndedFebruary 29,
    
    February 28,
    
    February 29,
    
    February 28,2004
    
    2003
    
    2004
    
    2003Net loss
    
    $
    (1,690
    )
    
    $
    (5,042
    )
    
    $
    (2,812
    )
    
    $
    (6,286
    )Other comprehensive income:Change in the valuation of
available-for-sale investments
    
    
    
    
    
    
    366
    
    
    
    
    
    
    
    2,050Comprehensive loss
    
    $
    (1,690
    )
    
    $
    (4,676
    )
    
    $
    (2,812
    )
    
    $
    (4,236
    )
 9. SEGMENT INFORMATION The Company has three business segments associated with its continuing
operations that provide different products or services: (a) marketing and
production services, which primarily include services rendered in connection
with college athletics (Collegiate Marketing and Production Services); (b)
event management and marketing services (Affinity Events); and (c)
association management services (Affinity Management Services). A fourth
business segment, associated with consulting services rendered to a related
party, has been classified as a discontinued segment beginning in the fiscal
period ended February 29, 2004 (see Note 1). Information for each of the
Companys segments is presented below: Three Months Ended
    
    Six Months EndedFebruary 29,
    
    February 28,
    
    February 29,
    
    February 28,2004
    
    2003
    
    2004
    
    2003Net revenues, continuing operations:Collegiate Marketing and Production Services
    
    $
    13,990
    
    
    $
    15,238
    
    
    $
    31,323
    
    
    $
    37,018Affinity Events
    
    
    578
    
    
    
    568
    
    
    
    2,717
    
    
    
    2,352Affinity Management Services
    
    
    2,353
    
    
    
    1,820
    
    
    
    4,515
    
    
    
    4,098$
    16,921
    
    
    $
    17,626
    
    
    $
    38,555
    
    
    $
    43,468Operating income (loss), continuing operations:Collegiate Marketing and Production Services
    
    $
    744
    
    
    $
    103
    
    
    $
    2,686
    
    
    $
    2,649Affinity Events
    
    
    (1,446
    )
    
    
    (1,513
    )
    
    
    (3,318
    )
    
    
    (2,749
    )Affinity Management Services
    
    
    862
    
    
    
    280
    
    
    
    1,371
    
    
    
    676Amortization of acquisition intangibles
    
    
    (314
    )
    
    
    (304
    )
    
    
    (627
    )
    
    
    (608
    )Unallocated general and administrative costs
    
    
    (359
    )
    
    
    (326
    )
    
    
    (682
    )
    
    
    (687
    )$
    (513
    )
    
    $
    (1,760
    )
    
    $
    (570
    )
    
    $
    (719
    )
 11




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##### 



Item 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW Bull Run Corporation (Bull Run or the Company), based in Atlanta, Georgia,
is a sports and affinity marketing and management company through its sole
operating business, Host Communications, Inc. (Host), acquired in December
1999 (the Host-USA Acquisition). Hosts Collegiate Marketing and Production
Services business segment provides sports marketing and production services to
a number of collegiate conferences and universities, and on behalf of the
National Collegiate Athletic Association (NCAA). Hosts Affinity Events
business segment produces and manages individual events and several events
series, including the Hoop-It-Up® Basketball Tour (a 3-on-3 basketball tour)
and the got milk? 3v3 Soccer Shootout National Tour (a 3-on-3 soccer tour).
Hosts Affinity Management Services business segment provides associations
such as the National Tour Association and Quest (the J.D. Edwards users group),
with services ranging from member communication, recruitment and retention, to
conference planning, Internet web site management, marketing and
administration. The Company formerly held significant investments in other sports, media and
marketing companies, including Gray Television, Inc. (Gray), the owner and
operator of 29 television stations, four newspapers and other communications
businesses, and Rawlings Sporting Goods Company, Inc. (Rawlings), a supplier
of team sports equipment. The Company currently owns 35.1% of the outstanding
common stock of iHigh, Inc. (iHigh), an Internet and marketing company
focused on high school students. The Company sold its investments in Gray
(representing approximately 4.0% of Grays outstanding common stock and
warrants to purchase additional shares of Gray common stocks) and Rawlings
(representing approximately 10.1% of Rawlings outstanding common stock) during
the fiscal year ended August 31, 2003. The Gray common stocks and warrants
were sold by the Company to Gray and other parties affiliated with the Company,
including the Companys Chairman of its board of directors. The Company
formerly provided consulting services to Gray in connection with certain of
Grays acquisitions and dispositions. The Consulting segment is reported as
a discontinued operation. CERTAIN RELATIONSHIPS J. Mack Robinson, Chairman of the board of the Company, is Chief Executive
Officer, Chairman and a director of Gray, and the beneficial owner of Gray
common stocks representing approximately 31.0% of the combined voting power of
Grays two classes of common stock as of the date of the Companys disposition
of its investment in Gray common stocks (the Gray Disposition Date).
Additionally, Mr. Robinson is the beneficial owner of approximately 48.2%
of the Companys common stock as of February 29, 2004, and Mr. Robinson and his
affiliates also own shares of the Companys convertible preferred stock having
an aggregate face amount of approximately $19.8 million as of February 29,
2004, representing approximately 81.5% of the aggregate face amount of all
outstanding preferred stock on that date. Robert S. Prather, Jr., President,
Chief Executive Officer and a director of the Company, is President, Chief
Operating Officer and a director of Gray, and the beneficial owner of Gray
common stocks representing approximately 20.2% of the combined voting power of
Grays two classes of common stock as of the Gray Disposition Date. Hilton H.
Howell, the Companys Vice President and Secretary, is Vice Chairman and a
director of Gray, and the beneficial owner of Gray common stocks representing
approximately 23.3% of the combined voting power of Grays two classes of
common stock as of the Gray Disposition Date. Each of Messrs. Robinson,
Prather and Howells beneficial ownership percentages noted above includes the
Companys beneficial ownership of approximately 17.2% of the combined voting
power of Grays two classes of common stock as of the Gray Disposition Date.
Beneficial ownership percentages include warrants and options to acquire shares
of Gray common stocks that were exercisable on, or within 60 days after, such
date. Mr. Robinson personally guarantees substantially all of the debt outstanding
under the Companys bank credit facility. Under the terms of his guarantee,
Mr. Robinson has the option to purchase the entire 12




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##### 



loan from the banks, and
thereby would become the holder of the debt currently payable to the banks and
the related lien on the Companys assets. W. James Host, a director of the Company until his resignation in January 2004,
owns along with his wife, shares of the Companys convertible preferred stock
having an aggregate face amount of approximately $1.8 million. Other officers
or directors of the Company own shares of the Companys preferred stock having
an aggregate face value of approximately $0.2 million. CRITICAL ACCOUNTING POLICIES The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
judgments and estimations that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates. The Company considers the following accounting policies to be
critical policies that require judgments or estimations in their application
where variances in those judgments or estimations could make a significant
difference to future reported results. Revenue Recognition and Rights Fee Expenses  Revenue from services is recognized as the services are rendered. Corporate
sponsor license fee revenue that is not related to specific events is
recognized ratably over the term of the sponsorship. In certain circumstances,
the Company enters into contractual arrangements with associations or
institutions it represents in various capacities which involve payment of
guaranteed rights fees. Guaranteed rights fee expense that is not related to
specific events is recognized ratably over the term specified in the contract.
The Companys contractual arrangements with associations or institutions may
also involve net profit sharing arrangements (profit splits) based on the net
profit associated with services rendered under the contract. Profit split
expense is accrued over the contract period, based on estimates, and is
adjusted at the end of the contract term in order to reflect the actual profit
split. Goodwill and Other Intangible Assets  Prior to July 1, 2001, goodwill and certain purchased intangible assets (i.e.,
trademarks) were amortized over 20 years. Effective July 1, 2001, the Company
adopted Statement of Financial Accounting Standards No. 142, Goodwill and
Other Intangible Assets,(SFAS 142) which eliminated the requirement to
amortize goodwill and trademarks, and also affected the Companys accounting
for its equity in earnings (losses) of affiliated companies. Under the
provisions of SFAS 142, the Company is required to periodically assess the
carrying value of goodwill and trademarks associated with each of five distinct
business units that comprise three business segments of the Company to
determine if an impairment in value has occurred. Annual impairment tests
prior to the fiscal year ended August 31, 2003 concluded that the carrying
amount of goodwill and trademarks for each acquired business unit did not
exceed its net realizable value based on the Companys estimate of expected
future cash flows to be generated by each of the five business units. However,
the Company updated its assessment as of August 31, 2003 and concluded that
based on a valuation model incorporating expected future cash flows in
consideration of historical cash flows and operating results, an impairment
charge of $28.2 million was necessary to reduce the carrying value of goodwill
and trademarks to net realizable value. If the Company concludes in the future
that the adjusted carrying value of goodwill for any of the business units
exceeds its respective net realizable value, the Company would expense such
excess and decrease goodwill as reported in the consolidated balance sheet. Other purchased intangibles, including customer relationships, are amortized
primarily over a 16-year average life. The use of a 16-year average life for
customer relationships acquired in the Host-USA Acquisition, amortized on a
straight-line method, is not materially different from using the estimated life
of each individual relationship using a systematic allocation method. Prior to
the fiscal year ended August 31, 2003, the Company determined that an
impairment charge of approximately $6.6 million was necessary to reduce the
carrying amount of certain customer relationship intangible assets as a result
of a significant change in the contractual nature of the Companys underlying
relationship with the 13




---



##### 



NCAA. An updated impairment analysis performed as of
August 31, 2003 indicated the need for an additional impairment charge of
approximately $2.3 million at that date. If the Company concludes in the
future that significant changes occur in its customer relationships, additional
impairment charges may be necessary. The remaining value assigned to customer relationships will continue to be
amortized over a 16-year average life, at a rate of approximately $0.6 million
per year, except for a specific customer relationship having a remaining
carrying value of approximately $0.3 million that is being amortized over the
fiscal year ending
August 31, 2004. The use of a 16-year average life of customer relationships
amortized on a straight-line method is not materially different than using the
estimated life of each individual relationship using a systematic allocation
method. Goodwill and intangible assets, net of accumulated amortization, were
approximately $52.6 million as of February 29, 2004 and $53.2 million as of
August 31, 2003, of which, goodwill was approximately $43.7 million as of each
date. As of February 29, 2004, the carrying value of goodwill and acquired
intangibles, net of accumulated amortization, represented approximately 71% of
the Companys total assets. Deferred Income Taxes  Deferred income tax liabilities or assets at the end of each period are
determined using the tax rate expected to be in effect when the taxes are
actually paid or recovered. A valuation allowance is recognized on certain
deferred tax assets if it is more likely than not that some or all of these
deferred tax assets will not be realized. As of February 29, 2004 the Company
has recognized a full valuation allowance for net deferred tax assets thereby
resulting in a carrying amount for deferred taxes in the balance sheet of zero.
If and when the Company generates taxable income in the future and benefits
primarily from net operating loss carryforwards for federal tax purposes that
expire beginning in 2018, some or all of the deferred tax assets may be
reinstated on the balance sheet, and the Company would report income tax
benefits in the period that such reinstatement occurs. Derivative Instruments and Hedging Activities  Effective July 1, 2000, the Company adopted Statement of Financial Accounting
Standards No. 133, Accounting for Derivative Investments and Hedging
Activities(SFAS 133). SFAS 133 requires the Company to recognize all
derivative instruments (i.e., interest rate swap agreements, and until sold in
April 2003, warrants to purchase additional shares of Gray common stocks) on
the balance sheet at fair value. The aggregate fair market value of
derivatives as of February 29, 2004 and August 31, 2003 of approximately $(1.2)
million and $(1.7) million, respectively, is included in the Companys balance
sheet as a component of Other liabilities. Changes in the estimated fair
value of derivatives that do not meet the specific criteria in SFAS 133 for
hedge accounting are included in the earnings (losses) reported for the period
of the change. None of the Companys derivative instruments have been
determined to qualify for hedge accounting treatment. Management estimates the
fair value of interest rate swap agreements based on estimated market values
provided by the counterparties to the swap agreements. Valuation of Certain Non-Trade Receivables  The Company recorded impairment charges of approximately $5.2 million and $1.7
million in the fiscal year ended August 31, 2003 (but subsequent to the six
months ended February 28, 2003), associated with its investment in and amounts
due from iHigh and a note receivable from the purchaser of Datasouth,
respectively. The Company performs ongoing credit evaluations of parties from
such non-trade receivables are due, and if and when management determines that
the carrying value of such receivables may not ultimately be realized, the
estimated impairment amount is charged to the earnings (losses) reported for
the period in which the determination is made. The impairment charges recorded
in the fiscal year ended August 31, 2003 reduced the carrying amount of the
investment in and amounts due from iHigh to zero, and the Companys note
receivable from the purchaser of Datasouth to approximately $1.7 million. 14




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##### 



LIQUIDITY AND CAPITAL RESOURCES Credit Arrangements  As of February 29, 2004, the Companys indebtedness to its bank lenders was
approximately $55.9 million. The bank credit agreement has a maturity date of
November 30, 2004 at which time all amounts outstanding become due and payable.
The agreement does not require any payments of principal prior to maturity,
nor does it provide for any additional borrowing capacity. The agreement,
which was last amended on August 18, 2003, requires the maintenance of interest
coverage ratios, determined quarterly beginning November 30, 2003. Prior to
the maturity date, the Company will be required to refinance the total amount
due and payable to the banks at that time. The Companys debt to the banks is
collateralized by a lien on all of the Companys assets, and is personally
guaranteed by the Companys Chairman. The Companys ability to continue this
or similar financing beyond the November 30, 2004 maturity date is
significantly dependent on the continued support of the Companys Chairman and,
in part, on the Companys future operating results. There can be no assurances
with respect to either the Companys future operating results or the continued
support of its Chairman. As amended in August 2003, the Companys bank credit agreement provides for (a)
two term loans (the Term Loans) for borrowings totaling approximately $35.9
million and (b) a revolving loan commitment (the Revolver) for maximum
borrowings of $20 million. All amounts outstanding bear interest at either the
banks prime rate or the London Interbank Offered Rate (LIBOR) plus 2.75%,
payable monthly. The amendment in August 2003 reduced the interest rate
charged by the banks and revised the maturity date of the agreement to November
30, 2004 from September 30, 2003. The Company anticipates that it will
continue to utilize fully the availability under the Revolver throughout the
remaining term of the agreement. Under the terms of the credit agreement, up to an aggregate of $12.5 million in
funding for working capital purposes, if necessary, may be sourced from the
issuance of equity securities, including shares of the Companys preferred
stock, or by the issuance of subordinated debt. In July 2002, the Companys
Chairman provided the Company short-term loans totaling $4 million to provide
cash to the Company for working capital purposes. In August 2002, the loans
were refinanced with the issuance of the Companys convertible preferred stock
having a face amount of approximately $4.1 million to the Chairman. In
September 2002, the Chairman and certain other affiliates of the Chairman
invested an aggregate $3 million in cash used for working capital purposes, for
shares of the Companys convertible preferred stock. In November 2003, the
Chairman invested an additional $2 million in cash used for working capital
purposes for shares of the Companys Series F Preferred Stock. The Chairman
previously committed to invest up to an additional $1 million in cash over the
next year for additional shares of the Companys common or preferred stocks or
for subordinated debt, to be used for working capital purposes. In January
2004, the Chairman provided $1.8 million in cash used for working capital
purposes, of which, at least $0.8 million is expected to ultimately be applied
as proceeds for newly-issued subordinated debt or equity. Therefore, as of
February 29, 2004, the Company has sourced approximately $10.9 million of cash
for working capital purposes, and as a result, the Company would currently be
permitted under its bank credit agreement to source up to an additional $1.6
million of cash from the issuance of equity or debt securities during the
remaining term of the credit facility. The Companys Chairman personally guarantees substantially all of the debt
outstanding under the current credit facility, and if the Company is unable to
meet its principal payment obligations under the recently amended credit
facility, it is likely that the bank lenders would call the guarantee, thereby
requiring the Chairman to repay the amount of the loan to the banks. Under the
terms of his guarantee, the Chairman has the option to purchase the entire loan
from the banks, and thereby becoming the holder of the debt currently payable
to the banks and the related lien on the Companys assets. The Chairman is
compensated by the Company for his guarantee in the form of newly issued shares
of the Companys common stock, valued at an annual rate of 1.625% of the
guarantee amount. The guarantee amount will reduce in the future as principal
payments are made to the bank lenders on the outstanding term loans. 15




---



##### 



In connection with the Host-USA Acquisition, the Company issued 8% subordinated
notes to former stockholders of Host and USA, representing long-term debt of
approximately $8.7 million as of February 29, 2004 and approximately $16.7
million as of August 31, 2003. During the six months ended February 29, 2004,
holders of 8% subordinated notes representing an aggregate face value of
approximately $8.0 million exchanged their notes for shares of Series E
Preferred Stock. Interest is payable quarterly on all but a $3.0
million subordinated note payable to the Companys Chairman, for which interest
is payable at maturity, and the notes, as amended, have a maturity date of
January 17, 2006. Payment of interest and principal on all subordinated notes
is subordinate to the Companys bank credit agreement. The Company met and exceeded all of its principal payment requirements during
the fiscal year ended August 31, 2003, reducing its bank debt by $38 million.
The Company sourced these principal payments through the sales of its
investments in Rawlings common stock, Gray common stocks and warrants to
purchase additional shares of Gray common stocks, for cash proceeds aggregating
approximately $46.2 million. As a result of the seasonality of its business, the Company generally expects
to use more cash than it generates during the first half of its fiscal year,
and generate more cash than it uses during the second half of its fiscal year.
Due to negative operating cash flow generated in the past, the Company
currently has trade payables and other cash obligations that exceed its current
assets. In the six months ended February 29, 2004, the Companys Chairman
provided an aggregate total of $3.8 million in cash used for operating
purposes. While the Company believes its cash flow will be sufficient to meet
its immediate needs through the maturity date of its bank credit agreement, the
Company may also seek to (a) issue and sell equity securities of the Company,
which may include the Companys preferred stock; (b) issue additional
subordinated debt; (c) accelerate cash flows otherwise anticipated to be
received later in the current fiscal year or future fiscal years; or (d) a
combination thereof. The Companys bank credit agreement does provide the
Company the ability to issue additional subordinated debt or equity securities
for cash proceeds of currently up to approximately $1.6 million without
requiring an associated reduction in its outstanding debt to the banks. The
Companys capital expenditures are not expected to exceed $600,000 for the
fiscal year ending August 31, 2004. Historical Cash Flow Information  Summary  The following summarizes the Companys historical cash flow activities (amounts
in 000s): Six Months EndedFebruary 29,
    
    February 28,2004
    
    2003Cash flows from operating activities:Continuing operations
    
    $
    (7,883
    )
    
    $
    (2,031
    )Discontinued operations
    
    
    
    
    
    
    106Cash flows from investing activities
    
    
    (261
    )
    
    
    6,840Cash flows from financing activities
    
    
    3,759
    
    
    
    (4,573
    )Net increase (decrease) in cash and cash equivalents
    
    $
    (4,385
    )
    
    $
    342
 16




---



##### 



Historical Cash Flow Information  Cash Flows from Operating Activities  The following summarizes the Companys historical cash flows from operating
activities (amounts in 000s): Six Months EndedFebruary 29,
    
    February 28,2004
    
    2003Operating income (loss)
    
    $
    (570
    )
    
    $
    (719
    )Depreciation and amortization included in operations
    
    
    1,152
    
    
    
    1,229Interest expense, net of interest and dividend income
    
    
    (2,194
    )
    
    
    (4,322
    )Net change in operating assets and liabilities
    
    
    (6,261
    )
    
    
    1,624Other operating cash flows
    
    
    (10
    )
    
    
    157Net cash flows from continuing operations
    
    
    (7,883
    )
    
    
    (2,031
    )Net cash flows from discontinued operations
    
    
    
    
    
    
    106Net cash flows from operating activities
    
    $
    (7,883
    )
    
    $
    (1,925
    )
 The Collegiate Marketing and Production Services segment primarily generates
revenues during the collegiate football and basketball seasons. In the six
months ended February 28 (or 29), the segment primarily derived revenues from
projects and services associated with the college football and college
basketball regular seasons. The Affinity Events segment consists primarily of
participatory sports tours that generally begin in March and end in September
each year. Therefore, this segment generates a proportionately low amount of
revenues during the six months ended February 28 (or 29). The net change in operating assets and liabilities had an unfavorable impact on
total cash flows from continuing operations during the six months ended
February 29, 2004 and a favorable impact during the six months ended February
28, 2003. Accounts receivable increased $2.7 million in the six months ended
February 29, 2004 and $5.0 million in the six months ended February 29, 2004
respectively, due to advertising billings associated with the college football
and college basketball seasons during the period subsequent to August 31 of the
preceding calendar year. Advertising and other revenues generated during this
period result in increases in the Companys accounts receivable. In addition,
during the six months ended February 29, 2004, cash available at the beginning
of the period was used to reduce accounts payable and accrued expenses by $3.7
million, compared to an increase in accounts payable and accrued expenses of
$7.4 million in the six months ended February 28, 2003. The Companys total
cash flows from continuing operations were also used to fund interest expense.
Interest paid, net of interest income received, was approximately $2.3 million
and $4.5 million for the six months ended February 29, 2004 and February 28,
2003, respectively, with the reduction caused by the decrease in total
outstanding debt and reductions in interest rates to which the debt is subject. Historical Cash Flow Information  Cash Flows from Investing Activities The following summarizes the Companys historical cash flows from investing
activities (amounts in 000s): Six Months EndedFebruary 29,
    
    February 28,2004
    
    2003Capital expenditures
    
    $
    (204
    )
    
    $
    (121
    )Proceeds on sales of investments
    
    
    
    
    
    
    6,764Decrease (increase) in other assets
    
    
    (57
    )
    
    
    197Net cash flows from investing activities
    
    $
    (261
    )
    
    $
    6,840
 In the six months ended February 28, 2003, the Company sold its investment in
Rawlings common stock to an unrelated company for cash proceeds of
approximately $6.8 million. 17




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##### 



Historical Cash Flow Information  Cash Flows from Financing Activities The following summarizes the Companys historical cash flows from financing
activities (amounts in 000s): Six Months EndedFebruary 29,
    
    February 28,2004
    
    2003Borrowings from revolving line of credit
    
    $
    
    
    
    $
    175Cash advances made by stockholder
    
    
    1,800Repayments of long-term debt
    
    
    
    
    
    
    (6,767
    )Debt issue costs
    
    
    (41
    )
    
    
    (981
    )Proceeds on issuance of preferred stock
    
    
    2,000
    
    
    
    3,000Net cash flows from financing activities
    
    $
    3,759
    
    
    $
    (4,573
    )
 CONTRACTUAL OBLIGATIONS AND OTHER COMMITMENTS The following summarizes the Companys contractual obligations as of February
29, 2004 (amounts in 000s): Payments Due by Period as of February 29, 2004Less than
    
    More than 1
    
    More than 3
    
    More thanContractual Obligations
    
    Total
    
    1 Year
    
    to 3 Years
    
    to 5 Years
    
    5 YearsLong-term debt obligations
    
    $
    65,215
    
    
    $
    56,522
    
    
    $
    8,693
    
    
    $
    
    
    
    $Operating lease obligations
    
    
    3,426
    
    
    
    1,288
    
    
    
    1,059
    
    
    
    649
    
    
    
    430Purchase obligations
    
    
    32,545
    
    
    
    13,550
    
    
    
    14,059
    
    
    
    4,569
    
    
    
    367Total
    
    $
    101,186
    
    
    $
    71,360
    
    
    $
    23,811
    
    
    $
    5,218
    
    
    $
    797
 Purchase obligations primarily consist of future guaranteed rights fee
commitments to associations or institutions under contractual arrangements of
typically one to four years, which expire at varying times through 2009. The Company is a party to an interest rate swap agreement described in Note 5
to the Condensed Consolidated Financial Statements. The estimated cost of
terminating the swap agreements, if the Company elected to do so, was
approximately $1.4 million as of February 29, 2004, including accrued interest
through that date. Dividends on Series D Preferred Stock and Series F Preferred Stock are payable
annually at an annual rate of $90 per share in cash or in shares of the
Companys common stock, at the holders option, except that, until the second
anniversary of the date of issuance, the Company has the option to pay such
dividends in cash or in shares of the Companys common stock. For purposes of
determining the number of shares of common stock to be issued as payment of a
dividend, the common stock is valued at the average market closing price for
the twenty trading days immediately preceding each dividend payment date. All
dividends payable through February 29, 2004 on issued shares of the Companys
preferred stock have been paid, including Series D Preferred Stock dividends
payable to the Companys Chairman that were declared effective June 30, 2003,
having an aggregate value at that time of approximately $0.5 million, paid to
the Chairman in January 2004 in the form of approximately 149 shares of the
Companys common stock, following the Companys stockholders approval of the
issuance of such shares. Dividends on Series E Preferred Stock are payable annually at an annual rate of
$90 per share in cash or in shares of the Companys common stock at the
holders option, except that the initial dividend accruing through June 30,
2005 is not payable until July 2005. The amount of dividends accruing through
February 29, 2004 on the outstanding shares of Series E Preferred Stock
potentially payable in cash in July 2005 is approximately $0.4 million. 18




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##### 



RESULTS OF CONTINUING OPERATIONS  THREE MONTHS ENDED FEBRUARY 29, 2004
COMPARED TO THREE MONTHS ENDED FEBRUARY 28, 2003 Results Derived from Operating Businesses  Operating results for the three months ended February 29, 2004 and February 28,
2003 are summarized as follows (amounts in $000s): Three Months EndedFebruary 29,
    
    February 28,2004
    
    2003RevenuesCollegiate Marketing and Production Services
    
    $
    13,990
    
    
    $
    15,238Affinity Events
    
    
    578
    
    
    
    568Affinity Management Services
    
    
    2,353
    
    
    
    1,820$
    16,921
    
    
    $
    17,626Operating Costs and ExpensesDirect operating costs of services rendered
    
    $
    11,067
    
    
    $
    12,779Selling, general and administrative
    
    
    6,053
    
    
    
    6,303Amortization of acquisition intangibles
    
    
    314
    
    
    
    304$
    17,434
    
    
    $
    19,386Income (Loss) from OperationsCollegiate Marketing and Production Services
    
    $
    744
    
    
    $
    103Affinity Events
    
    
    (1,446
    )
    
    
    (1,513
    )Affinity Management Services
    
    
    862
    
    
    
    280Amortization of acquisition intangibles
    
    
    (314
    )
    
    
    (304
    )Unallocated general and administrative costs
    
    
    (359
    )
    
    
    (326
    )$
    (513
    )
    
    $
    (1,760
    )
 Total revenues and operating results for the Collegiate Marketing and
Production Services segment were impacted in the three months ended February
29, 2004 by the termination of three university contractual relationships at
the end of the previous fiscal year. Such contracts generated revenues of
approximately $1.5 million during the three months ended February 28, 2003 and
generated a negligible operating loss during that period. For the fiscal year
ended August 31, 2003, such terminated contracts generated revenues of
approximately $5.3 million and operating profit of approximately $0.5 million. The three months ended February 28 (or 29) is typically a period of
proportionately low activity in the Affinity Events segment. The tours and
events currently operated within the Affinity Events segment generally take
place during the months of March through September, except for the soccer tour
finals, which take place in January; therefore, the three month period ended
February 28 (or 29) is expected to reflect proportionately low revenue and a
loss from operations. A greater proportion of the Companys selling, general
and administrative costs has been allocated to the Affinity Events segment in
the current fiscal year, causing
approximately $0.2 million of the increased loss from operations for this
segment. This change was made to reflect the additional sales and management
resources devoted to this segment in the current fiscal year. Therefore, in
periods of proportionately low revenue activity within the Affinity Events
segment, operating losses may be higher than those reported in the prior fiscal
year due to the higher amount of selling, general and administrative costs
absorbed by this segment in comparison with the prior year. Total revenues for the three months ended February 29, 2004 for the Affinity
Management Services segment represented an increase over the same period in the
prior year due to a change in the terms of a management contract which provided
additional revenue and profit incentives in exchange for a lower management
fee. The Company met such incentives, thereby increasing its revenues and
profits in comparison with the same period in the prior year. 19




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##### 



Direct operating costs of services rendered decreased for the three months
ended February 29, 2004 from the same period in the prior year due (a) to the
termination of certain contractual relationships as discussed above, which
substantially contributed to a reduction in total guaranteed rights fee and
profit split expenses of approximately $0.6 million; and (b) the elimination of
approximately $0.5 million of other direct costs associated with the three
terminated university contracts. Results Derived from Investments and Derivative Instruments  Equity in losses of affiliated companies of approximately $0.4 million for the
three months ended February 28, 2003 was derived from the Companys
proportionate share of the net losses reported by Gray and iHigh. The Company
sold its investments in Gray common stocks in August 2003 and recorded an
impairment charge to reduce the carrying amount of its investment in iHigh to
zero as of August 31, 2003. Since there is no commitment for the Company to
provide any additional capital to iHigh in the future, and since the carrying
amount of the Companys investment in iHigh has been reduced to zero, the
Company has reported no equity in earnings or losses of affiliated companies
subsequent to August 31, 2003, nor does it anticipate reporting such amounts in
the foreseeable future. The net change in the value of certain derivative instruments, currently
consisting of an interest rate swap agreement, and previously consisting of a
second interest rate swap agreement that expired on December 31, 2002 and
warrants to purchase shares of Gray common stocks that were sold in April 2003,
was approximately $0.2 million for the three months ended February 29, 2004 due
to an increase in the value of the remaining interest rate swap agreement, and
$(0.2) million for the three months ended February 28, 2003 primarily due to a
decline in the value of warrants. Interest Expense and Debt Related Costs  Interest expense decreased to approximately $1.1 million for the three months
ended February 29, 2004 from approximately $2.1 million for the same period in
the prior year, as a result of a reduction in long-term debt and declines in
variable interest rates to which a significant amount of the debt is subject. Debt issue cost amortization of approximately $0.3 million and $0.6 million for
the three months ended February 29, 2004 and February 28, 2003, respectively,
results from the amortization of costs paid in connection with amendments to
the Companys bank credit agreement, as well as amortization of the value of
shares of the Companys common stock issued to the Companys Chairman, who has
personally guaranteed the Companys debt under its bank credit agreement.
During the three months ended February 29, 2004, the Company issued
approximately 151,000 shares of restricted common stock to the Chairman to
compensate him for his personal guarantee, then valued at approximately $0.5
million. The value of all shares issued to the Chairman is amortized over the
period for which the shares provide compensation, and approximately $0.2
million and $0.3 million of such amortization is included in debt issue cost
amortization for the three months ended February 29, 2004 and February 28,
2003, respectively. Income Taxes  The principal differences between the federal statutory tax rate of 34% and the
effective tax rate of zero are increases in the valuation allowance for
potentially non-realizable deferred tax assets of $0.6 million and $1.7 million
for the three months ended February 29, 2004 and February 28, 2003,
respectively. The valuation allowance for net deferred tax assets was
approximately $20.4 million as of February 29, 2004. 20




---



##### 



RESULTS OF CONTINUING OPERATIONS  SIX MONTHS ENDED FEBRUARY 29, 2004 COMPARED
TO SIX MONTHS ENDED FEBRUARY 28, 2003 Results Derived from Operating Businesses  Operating results for the six months ended February 29, 2004 and February 28,
2003 are summarized as follows (amounts in $000s): Six Months EndedFebruary 29,
    
    February 28,2004
    
    2003RevenuesCollegiate Marketing and Production Services
    
    $
    31,323
    
    
    $
    37,018Affinity Events
    
    
    2,717
    
    
    
    2,352Affinity Management Services
    
    
    4,515
    
    
    
    4,098$
    38,555
    
    
    $
    43,468Operating Costs and ExpensesDirect operating costs of services rendered
    
    $
    26,458
    
    
    $
    30,845Selling, general and administrative
    
    
    12,040
    
    
    
    12,734Amortization of acquisition intangibles
    
    
    627
    
    
    
    608$
    39,125
    
    
    $
    44,187Income (Loss) from OperationsCollegiate Marketing and Production Services
    
    $
    2,686
    
    
    $
    2,649Affinity Events
    
    
    (3,318
    )
    
    
    (2,749
    )Affinity Management Services
    
    
    1,371
    
    
    
    676Amortization of acquisition intangibles
    
    
    (627
    )
    
    
    (608
    )Unallocated general and administrative costs
    
    
    (682
    )
    
    
    (687
    )$
    (570
    )
    
    $
    (719
    )
 Total revenues and operating results for the Collegiate Marketing and
Production Services segment were impacted in the six months ended February 29,
2004 by the termination of three university contractual relationships at the
end of the previous fiscal year. Such contracts generated revenues of
approximately $4.8 million during the six months ended February 28, 2003 and
generated operating profit of approximately $0.6 million during that period.
The change in total revenues of this segment was also affected by certain
printing, publishing and broadcasting projects and activities which occurred in
the prior year period but not in the current fiscal year. Total revenues
derived from printing, publishing, broadcasting and other integrated media
activities, net of the elimination of intercompany revenues, were approximately
$3.9 million and $4.8 million for the six months ended February 29, 2004 and
February 28, 2003, respectively. The six months ended February 28 (or 29) is typically a period of
proportionately low activity in the Affinity Events segment. The tours and
events currently operated within the Affinity Events segment generally take
place during the months of March through September, except for the soccer tour
finals, which take place in January; therefore, the six month period ended
February 28 (or 29) is expected to reflect proportionately low revenue and a
loss from operations. The increase in revenues from the same period in the
prior year was primarily due to the timing of certain events, and the addition
of the U.S. Cowboy Tour finals, which was held in September 2003. The
segments loss from operations for the six months ended February 29, 2004 is
greater than the same period in the prior year due to higher losses derived
from the end of the 2003 tour event season as compared to the 2002 tour events,
and losses derived from certain events taking place in the current fiscal
period that did not take place in the prior year. The change in the Companys
allocation of selling, general and administrative costs to the Affinity Events
segment in the current fiscal year caused approximately $0.4 million of the
increased operating loss for this segment. 21




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##### 



Total revenues for the six months ended February 29, 2004 for the Affinity
Management Services segment increased due to the change in the terms of the
management contract discussed previously. Direct operating costs of services rendered decreased for the six months ended
February 29, 2004 from the same period in the prior year due to the termination
of certain contractual relationships as discussed previously, which
substantially contributed to a reduction in total guaranteed rights fee and
profit split expenses of approximately $1.9 million; (b) the elimination of
approximately $1.4 million of other direct costs associated with the three
terminated university contracts; and (c) the reduction of approximately $0.7
million in production expenses associated with the printing, publishing and
broadcasting operations due to lower volume during the current year in
comparison with the prior fiscal year. Selling, general and administrative costs declined for the six months ended
February 29, 2004 compared to the same period in the prior fiscal year due to
the decline in employee compensation costs of approximately $0.4 million. Results Derived from Investments and Derivative Instruments  Equity in losses of affiliated companies of approximately $0.2 million for the
six months ended February 28, 2003 was derived from the Companys
proportionate share of the net losses reported by Gray and iHigh. During the six months ended February 28, 2003, the Company accounted for its
prior investment in Rawlings as an available-for-sale marketable security,
and recorded an investment valuation charge of approximately $1.0 million for
the unrealized loss on its investment in Rawlings. The amount of the charge
was determined based on the actual proceeds derived from the Companys sale of
its investment in Rawlings common stock in December 2002. As a result of Grays issuance of common stock in October and November 2002 for
average net proceeds to Gray of approximately $7.72 per share, and since the
Companys carrying amount of its investment in Gray common stock prior to
Grays issuance exceeded $7.72 per share, the Company reported a non-cash loss
of approximately $2.3 million on Grays issuance of shares in the six months
ending February 28, 2003. The net change in the value of certain derivative instruments was approximately
$0.5 million for the six months ended February 29, 2004 due to an increase in
the value of the remaining interest rate swap agreement, and $(1.9) million for
the six months ended February 28, 2003 primarily due to a decline in the value
of warrants. Interest Expense and Debt Related Costs  Interest expense decreased to approximately $2.2 million for the six months
ended February 29, 2004 from approximately $4.3 million for the same period in
the prior year, as a result of a reduction in long-term debt and declines in
variable interest rates to which a significant amount of the debt is subject. Debt issue cost amortization was approximately $0.6 million and $1.2 million
for the six months ended February 29, 2004 and February 28, 2003, respectively.
During the six months ended February 29, 2004, the Company issued
approximately 151,000 shares of restricted common stock to the Chairman to
compensate him for his personal guarantee, then valued at approximately $0.5
million. During the six months ended February 28, 2003, the Company issued
approximately 49,000 shares of restricted common stock to the Chairman to
compensate him for his personal guarantee, then valued at approximately $0.4
million. Amortization of the value of all shares issued to the Chairman, of
approximately $0.4 million and $0.7 million, is included in debt issue cost
amortization for the six months ended February 29, 2004 and February 28, 2003,
respectively. 22




---



##### 



Income Taxes  The principal differences between the federal statutory tax rate of 34% and the
effective tax rate of zero are increases in the valuation allowance for
potentially non-realizable deferred tax assets of approximately $0.9 million
and $2.0 million for the six months ended February 29, 2004 and February
28, 2003, respectively. RESULTS OF DISCONTINUED OPERATIONS Prior to the fiscal year ended August 31, 2003, the Company received a $5.0
million consulting fee from Gray for services performed in connection with
Grays acquisition of Stations Holding Company, Inc. (Stations), which was
consummated in October 2002. Also in October 2002, Gray completed a public
offering of its common stock, and in November 2002, Gray issued additional
shares of its common stock. These issuances of common stock by Gray resulted
in a reduction of the Companys equity investment in Grays outstanding common
stock from 12.9% to 4.0%. As a result of these transactions by Gray, the
Company recognized consulting fee income of approximately $4.8 million in the
six months ended February 28, 2003 attributable to Grays acquisition of
Stations, plus approximately an additional $0.5 million of previously deferred
consulting fee income, as a result of the reduction in the Companys
proportionate ownership of Gray following Grays issuances of common stock.
The Company does not anticipate receiving any additional consulting fees from
Gray, and in January 2004, determined that it will not be engaged in such
services with any other party in the future. Therefore, the consulting fee
income of approximately $5.3 million for the six months ended February 28,
2003 is reported as Income from discontinued segment in the Condensed
Consolidated Statement of Operations. INTEREST RATE AND MARKET RATE RISK The Company is exposed to changes in interest rates due to the Companys
financing of its acquisitions, investments and operations. Interest rate risk
is present with both fixed and floating rate debt. The Company uses interest
rate swap agreements 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 the counterparty to its current agreement. Based on the Companys debt profile as of February 29, 2004 and February 28,
2003, 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 approximately
$0.1 million for each of the three months ended February 29, 2004 and February
28, 2003, and approximately $0.2 million and $0.3 million for the six months
ended February 29, 2004 and February 28, 2003, respectively. These amounts
were determined by calculating the effect of the hypothetical interest rate on
the Companys floating rate debt, after giving effect to the Companys interest
rate swap agreements. These amounts do not include the effects of certain
potential results of increased interest rates, such as a reduced level of
overall economic activity or other actions management may take to mitigate the
risk. Furthermore, this sensitivity analysis does not assume changes in the
Companys financial structure that could occur if interest rates were higher. FORWARD-LOOKING STATEMENTS This Quarterly Report on Form 10-Q 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 23




---



##### 



and uncertainties. The forward-looking statements
included in this report are made only as of the date hereof. The Company
undertakes no obligation to update such forward-looking statements to reflect
subsequent events or circumstances. Actual results and events may differ
materially from those in the forward-looking statements as a result of various
factors including, but not limited to the following: (i) the Companys leverage
and/or operating results may adversely affect its ability to obtain new
financing or extend its current bank credit agreement beyond the
November 30, 2004 maturity date under terms acceptable to the Company and its
bank lenders, thereby impairing the Companys ability to withstand economic
downturns or competitive pressures; (ii) the delisting of the Companys common
stock from the Nasdaq SmallCap Market may hinder the Companys ability to raise
new capital through the issuance of equity securities; (iii) significant
segments of the Companys business are seasonal; (iv) the Companys business
depends on short term contracts and the inability to renew or extend these
contracts could adversely affect its business; (v) the Company may lose money
on some of its contracts, because it guarantees certain payments thereunder;
and (vi) war or acts of terrorism or a domestic economic downturn or recession
could materially adversely impact corporate discretionary spending, such as
sponsorships and advertising sold by the Company. Item 4. Controls and Procedures Based on the evaluation of the effectiveness of the design and operation of the
Companys disclosure controls and procedures performed pursuant to Rule 13a-15
under the Securities Exchange Act of 1934 as amended, the Companys Chief
Executive Officer and its Chief Financial Officer have concluded that there
were no material weaknesses in such controls as of February 29, 2004. There were no significant changes to the Companys internal controls or in
other factors that could significantly affect these controls during the
quarterly period ended February 29, 2004. 24




---



##### 



PART II. OTHER INFORMATION Item 4. Results of Votes of Security Holders An annual meeting of the Companys shareholders was held in Atlanta, Georgia on
January 7, 2004. All of the proposals considered by shareholders were
approved, as follows:  (1)
    
    Proposal to elect J. Mack Robinson, Gerald N. Agranoff, James W. Busby,
W. James Host, Hilton H. Howell, Jr., Monte C. Johnson, Robert S. Prather,
Jr. and Gordon D. Whitener as directors: For:
    
    
    3,558,794Withhold:
    
    
    9,685
  (2)
    
    Proposal to authorize the past and future issuance of shares of Bull Run
common stock to the Companys Chairman and his affiliates as compensation
for his personal guarantee of the Companys bank loans and as payment of
annual dividends on investments in the Companys preferred stock: For:
    
    
    2,268,778Against:
    
    
    47,770Abstain:
    
    
    5,348
  (3)
    
    Proposal to ratify the appointment of PricewaterhouseCoopers LLP as the
independent auditors: For:
    
    
    3,545,594Against:
    
    
    13,005Abstain:
    
    
    9,880
 Item 6. Exhibits and Reports on Form 8-K  (a)
    
    Exhibits  31.1
    
    Certifications of Chief Executive Officer Pursuant to Section
302 of the Sarbanes-Oxley Act of 200231.2
    
    Certifications of Chief Financial Officer Pursuant to Section
302 of the Sarbanes-Oxley Act of 200232.1
    
    Certifications of Chief Executive Officer Pursuant to Section
906 of the Sarbanes-Oxley Act of 200232.2
    
    Certifications of Chief Financial Officer Pursuant to Section
906 of the Sarbanes-Oxley Act of 2002  (b)
    
    Reports on Form 8-KCurrent Report on Form 8-K dated December 1, 2003 for the purpose of
furnishing the press release announcing the Companys financial results
for the fiscal year ended August 31, 2003.Current Report on Form 8-K dated December 8, 2003 for the purpose of
furnishing the press release announcing the Companys receipt of a Nasdaq
Staff Determination indicating the Companys failure to comply with the
minimum stockholders equity requirement for continued listing.Current Report on Form 8-K dated January 14, 2004 for the purpose of
furnishing the press release announcing the Companys financial results
for the fiscal quarter ended November 30, 2003 and a change in the
Companys listing status from the Nasdaq Stock Market to the OTC Bulletin
Board. 25




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##### 



SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized. BULL RUN CORPORATIONDate: April 13, 2004
    
    By:
    
    /s/ FREDERICK J. ERICKSONFrederick J. EricksonVice President-Finance, Treasurerand Assistant Secretary
 26