##### 



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 May 31, 2004
 OR o
    
    TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
 For the transition period from to .
 Commission file number 0-9385
 Bull Run Corporation  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: 4,922,804 shares of Common
Stock, par value $.01 per share, were outstanding as of June 30, 2004.




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##### 



PART I. FINANCIAL INFORMATION Item 1. Financial Statements BULL RUN CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)
(Amounts in thousands) May 31,
    
    August 31,2004
    
    2003ASSETSCurrent assets:Cash and cash equivalents
    
    $
    612
    
    
    $
    4,520Accounts receivable, net of allowance of $282 as of May 31, 2004
and $465 as of August 31, 2003
    
    
    7,364
    
    
    
    10,071Inventories
    
    
    512
    
    
    
    409Prepaid costs and expenses
    
    
    1,560
    
    
    
    1,576Total current assets
    
    
    10,048
    
    
    
    16,576Property and equipment, net
    
    
    3,791
    
    
    
    4,310Goodwill
    
    
    40,364
    
    
    
    43,664Customer relationships and trademarks
    
    
    8,623
    
    
    
    9,562Other assets
    
    
    709
    
    
    
    803Net noncurrent assets of discontinued segment
    
    
    1,495
    
    
    
    1,695$
    65,030
    
    
    $
    76,610LIABILITIES AND STOCKHOLDERS DEFICITCurrent liabilities:Current portion of long-term debt
    
    $
    56,522
    
    
    $
    590Accounts payable
    
    
    5,090
    
    
    
    11,878Deferred revenue
    
    
    4,034
    
    
    
    6,542Accrued fees payable to related party
    
    
    1,774Advances from stockholder
    
    
    3,300Accrued and other liabilities
    
    
    10,943
    
    
    
    9,600Total current liabilities
    
    
    81,663
    
    
    
    28,610Long-term debt
    
    
    8,693
    
    
    
    72,641Other liabilities
    
    
    1,119
    
    
    
    2,361Total liabilities
    
    
    91,475
    
    
    
    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
May 31, 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
4,923 and 4.324 shares as of May 31, 2004 and August 31,
2003, respectively)
    
    
    49
    
    
    
    43Additional paid-in capital
    
    
    81,479
    
    
    
    80,138Accumulated deficit
    
    
    (132,269
    )
    
    
    (121,463
    )Total stockholders deficit
    
    
    (26,445
    )
    
    
    (27,002
    )$
    65,030
    
    
    $
    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
    
    Nine Months EndedMay 31,
    
    May 31,2004
    
    2003
    
    2004
    
    2003Revenue from services rendered
    
    $
    14,298
    
    
    $
    18,154
    
    
    $
    52,853
    
    
    $
    61,622Operating costs and expenses:Direct operating costs for services rendered
    
    
    9,739
    
    
    
    11,873
    
    
    
    36,197
    
    
    
    42,718Selling, general and administrative
    
    
    6,189
    
    
    
    6,715
    
    
    
    18,229
    
    
    
    19,449Amortization and impairment of acquisition intangibles
    
    
    3,613
    
    
    
    304
    
    
    
    4,240
    
    
    
    912Total operating costs and expenses
    
    
    19,541
    
    
    
    18,892
    
    
    
    58,666
    
    
    
    63,079Loss from operations
    
    
    (5,243
    )
    
    
    (738
    )
    
    
    (5,813
    )
    
    
    (1,457
    )Other income (expense):Equity in earnings (losses) of affiliated companies
    
    
    
    
    
    
    40
    
    
    
    
    
    
    
    (153
    )Net change in value of certain derivative instruments
    
    
    400
    
    
    
    155
    
    
    
    947
    
    
    
    (1,708
    )Loss on issuance of shares by affiliate
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,339
    )Loss on investment valuation adjustments
    
    
    
    
    
    
    (1,650
    )
    
    
    
    

    
    
    (2,627
    )Interest expense
    
    
    (1,136
    )
    
    
    (1,882
    )
    
    
    (3,330
    )
    
    
    (6,213
    )Debt issue cost amortization
    
    
    (294
    )
    
    
    (585
    )
    
    
    (878
    )
    
    
    (1,739
    )Other income (expense), net
    
    
    (63
    )
    
    
    1
    
    
    
    (74
    )
    
    
    24Loss from continuing operations
    
    
    (6,336
    )
    
    
    (4,659
    )
    
    
    (9,148
    )
    
    
    (16,212
    )Income from discontinued segment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,267Net loss
    
    
    (6,336
    )
    
    
    (4,659
    )
    
    
    (9,148
    )
    
    
    (10,945
    )Preferred dividends
    
    
    (568
    )
    
    
    (288
    )
    
    
    (1,658
    )
    
    
    (828
    )Net loss available to common stockholders
    
    $
    (6,904
    )
    
    $
    (4,947
    )
    
    $
    (10,806
    )
    
    $
    (11,773
    )Loss per share available to common stockholders, basic and diluted:Loss from continuing operations
    
    $
    (1.44
    )
    
    $
    (1.25
    )
    
    $
    (2.38
    )
    
    $
    (4.38
    )Income from discontinued segment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1.35Net loss available to common stockholders
    
    $
    (1.44
    )
    
    $
    (1.25
    )
    
    $
    (2.38
    )
    
    $
    (3.03
    )Weighted average number of common shares
outstanding, basic and diluted
    
    
    4,798
    
    
    
    3,971
    
    
    
    4,546
    
    
    
    3,890
 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 D
    
    Series E
    
    Series FPreferred
    
    Preferred
    
    Preferred
    
    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
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    599
    
    
    
    6As of May 31, 2004
    
    $
    12,497
    
    
    $
    9,799
    
    
    $
    2,000
    
    
    
    4,923
    
    
    $
    49
 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
    
    
    1,341
    
    
    
    
    
    
    
    1,347Preferred dividends
    
    
    
    
    
    
    (1,658
    )
    
    
    (1,658
    )Net loss
    
    
    
    
    
    
    (9,148
    )
    
    
    (9,148
    )As of May 31, 2004
    
    $
    81,479
    
    
    $
    (132,269
    )
    
    $
    (26,445
    )
 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) Nine Months EndedMay 31,2004
    
    2003Cash flows from operating activities:Net loss
    
    $
    (9,148
    )
    
    $
    (10,945
    )Income from discontinued segment
    
    
    
    
    
    
    (5,267
    )Adjustments to reconcile net loss to net cash used in operations:Provision for bad debts
    
    
    (23
    )
    
    
    416Depreciation and amortization
    
    
    5,951
    
    
    
    3,563Equity in losses of affiliated companies
    
    
    
    
    
    
    153Dividends received from affiliated company
    
    
    
    
    
    
    122Net change in value of certain derivative instruments
    
    
    (947
    )
    
    
    1,708Loss on issuance of shares by affiliate
    
    
    
    
    
    
    2,339Loss on investment valuation adjustments
    
    
    
    
    
    
    2,682Change in operating assets and liabilities:Accounts receivable
    
    
    2,730
    
    
    
    800Inventories
    
    
    (103
    )
    
    
    511Prepaid costs and expenses
    
    
    166
    
    
    
    (482
    )Accounts payable and accrued expenses
    
    
    (7,608
    )
    
    
    1,560Other long-term liabilities
    
    
    (20
    )
    
    
    (572
    )Net cash used in continuing operations
    
    
    (9,002
    )
    
    
    (3,412
    )Net cash provided by discontinued operations
    
    
    
    
    
    
    106Net cash used in operating activities
    
    
    (9,002
    )
    
    
    (3,306
    )Cash flows from investing activities:Capital expenditures
    
    
    (316
    )
    
    
    (216
    )Proceeds on sale of investments
    
    
    
    
    
    
    11,885Increase in other assets
    
    
    (49
    )
    
    
    (551
    )Net cash provided by (used in) continuing operation investing activities
    
    
    (365
    )
    
    
    11,118Net cash provided by (used in) discontinued operation investing activities
    
    
    200
    
    
    
    (5
    )Net cash used in investing activities
    
    
    (165
    )
    
    
    11,113Cash flows from financing activities:Borrowings from revolving line of credit
    
    
    
    
    
    
    175Cash advances made by stockholder
    
    
    3,300Repayments of long-term debt
    
    
    
    
    
    
    (10,000
    )Debt issue costs
    
    
    (41
    )
    
    
    (992
    )Issuance of preferred stock
    
    
    2,000
    
    
    
    3,000Net cash provided by (used in) financing activities
    
    
    5,259
    
    
    
    (7,817
    )Net decrease in cash and cash equivalents
    
    
    (3,908
    )
    
    
    (10
    )Cash and cash equivalents, beginning of period
    
    
    4,520
    
    
    
    397Cash and cash equivalents, end of period
    
    $
    612
    
    
    $
    387
 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 The accompanying unaudited condensed consolidated financial statements of Bull
Run Corporation (Bull Run or the Company) have been prepared in accordance
with generally accepted accounting principles for interim financial information
and with the instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
In the opinion of management, all adjustments (consisting solely of normal,
recurring adjustments) considered necessary for a fair presentation of the
Companys financial position and results of operations have been included.
Operating results for the three-month and nine-month periods ended May 31, 2004
are not necessarily indicative of the results that may be expected for the
fiscal year ending August 31, 2004. For further information, refer to the
consolidated financial statements and footnotes thereto included in the
Companys Annual Report on Form 10-K for the fiscal year ended August 31, 2003. The accompanying condensed consolidated financial statements include the
accounts of Bull Run and its wholly owned subsidiaries, including Host
Communications, Inc. (Host), after elimination of intercompany accounts and
transactions. Bull Run, through Host, provides comprehensive sales, marketing,
multimedia, special event and convention/hospitality services to National
Collegiate Athletic Association (NCAA) Division I universities and
conferences, national/global associations, and domestic and international
grassroots sports and lifestyle events. Discontinued Operation-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 would 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. There are no expenses associated with the consulting segment, nor
are there any associated assets or liabilities as of May 31, 2004 or August 31,
2003. Unless otherwise indicated, amounts provided in these notes to the
consolidated financial statements pertain to continuing operations. Stock-Based Compensation The Company follows the provisions of Statement of
Financial Accounting Standards No. 123 Accounting for Stock-Based
Compensation (SFAS 123). SFAS 123 allows companies to either expense the
estimated fair value of stock options or continue to follow the intrinsic value
method set forth in Accounting Principles Board Opinion No. 25, Accounting for
Stock Issued to Employees (APB 25), but disclose the pro forma effects on
net income (loss) had the fair value of the options been expensed. The Company
has elected to continue to apply APB 25 in accounting for its stock option
incentive plans. For purposes of the following pro forma disclosures, the
estimated fair value of the options is amortized to expense over the options
vesting period: Three Months Ended
    
    Nine Months EndedMay 31,
    
    May 31,2004
    
    2003
    
    2004
    
    2003Net loss available to common stockholders,
as reported
    
    $
    (6,904
    )
    
    $
    (4,947
    )
    
    $
    (10,806
    )
    
    $
    (11,773
    )Deduct: Total stock-based employee compensation
expense determined under fair value based
method for all awards, net of related tax effects
    
    
    (93
    )
    
    
    (157
    )
    
    
    (278
    )
    
    
    (470
    )Net loss available to common stockholders,
pro forma
    
    $
    (6,997
    )
    
    $
    (5,104
    )
    
    $
    (11,084
    )
    
    $
    (12,243
    )Net loss per common share:Basic and diluted, as reported
    
    $
    (1.44
    )
    
    $
    (1.25
    )
    
    $
    (2.38
    )
    
    $
    (3.03
    )Basic and diluted, pro forma
    
    $
    (1.46
    )
    
    $
    (1.29
    )
    
    $
    (2.44
    )
    
    $
    (3.15
    )
 Recent Accounting Pronouncement In May 2003, the Financial Accounting
Standards Board (FASB) issued Statement of Financial Accounting Standards No.
150 Accounting for Certain Financial Instruments with Characteristics of both
Liabilities and Equity (SFAS 150). SFAS 150 establishes standards for
classification and measurement of certain financial instruments with
characteristics of both liabilities and equity. SFAS 150 was effective for the
Company as of September 1, 2003 and did not have any impact on the Companys
consolidated financial statements, however future classification of some of the
Companys preferred stock may be affected as a result of SFAS 150 (see Note 8). 6




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2. LIQUIDITY As of May 31, 2004, the Companys negative working capital was $71,615,
including $55,932 of bank debt maturing on November 30, 2004. Certain current
liabilities, including deferred revenue of $4,034, advances from stockholder of
$3,300 and accrued preferred stock dividends of $1,813, do not represent cash
obligations or do not represent liabilities expected to be paid in cash prior
to the November 30, 2004 maturity date of the bank credit facility. 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, the sale of investment assets, and the
receipt of cash advances from the Companys Chairman. Although management
anticipates that the Company will continue to experience negative working
capital ranging from approximately $65,000 to $75,000 at least until such time
as the bank credit agreement matures or is modified, management believes the
Company has sufficient liquidity sources, which include the Companys Chairman
and his affiliates, to meet its cash obligations until the November 30, 2004
maturity date of the bank credit agreement. Under the terms of the current
bank credit agreement, the Company may source up to an additional amount of
approximately $1,900, if necessary, from its Chairman and/or his affiliates,
for the funding of working capital cash requirements. As further discussed in
Note 6, the Companys Chairman has guaranteed repayment of up to
$53,500 of the outstanding bank debt. The Company has commenced discussions with its bank lenders regarding an
extension of the agreement or other refinancing plan, including the terms under
which additional financing might be made available and the terms under which
additional investments might be made by the Companys Chairman or other
affiliated parties, 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 prior to the November 30, 2004 maturity date. However, there can be
no assurance that the Company will be able to reach an acceptable agreement
with its lenders on an extension or expansion of the existing credit facility.
If the Company is unable to reach such an agreement with its bank lenders, the
Companys future liquidity needs will be primarily dependent on its Chairman,
since management believes that if the Company is unable to reach an acceptable
agreement with its lenders, the lenders would then likely exercise their rights
under the guaranty agreement with the Chairman, and the Chairman would, as a
result of a call of his guaranty, become the Companys primary creditor. The Companys ability to obtain bank financing beyond the November 30, 2004
maturity date of the current agreement 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 assurance that the Companys future
operating results will be sufficient, the Chairman will continue his financial
support of the Company, or the Company will ultimately be successful in
obtaining bank financing at acceptable terms; however, management currently
believes that its Chairman will continue providing financial support to the
Company and the Companys future operating results will not hinder the
Companys ability to reach an acceptable financing agreement with its bank
lenders. 3. SUPPLEMENTAL CASH FLOW DISCLOSURES Supplemental cash flow information follows: Nine Months EndedMay 31,2004
    
    2003Interest paid
    
    $
    3,383
    
    
    $
    6,453Income taxes paid
    
    
    21
    
    
    
    58Noncash investing and financing activity:Exchange of subordinated debt for shares of
preferred stock
    
    
    8,016
    
    
    
    1,783Issuance of common stock in payment of
preferred stock dividends
    
    
    503Issuance of common stock primarily in
connection with debt issuance costs
    
    
    694
    
    
    
    1,127Issuance of common stock to a retirement plan
and as a component of directors fees
    
    
    150
    
    
    
    248
 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 7




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##### 



common stock using the equity method. In April 2003, the Company sold the
warrants back to Gray for cash proceeds of $5,121. 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,
for aggregate cash proceeds of $34,297. 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 nine months ended May 31, 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 nine months
ended May 31, 2003. 5. GOODWILL AND OTHER ACQUISITION INTANGIBLE ASSETS The net change in the carrying amount of goodwill by reportable business
segment is as follows: CollegiateMarketing and
    
    
    
    
    
    AffinityProduction
    
    Affinity
    
    ManagementServices
    
    Events
    
    Services
    
    TotalAs of September 1, 2002
    
    $
    58,232
    
    
    $
    2,450
    
    
    $
    6,475
    
    
    $
    67,157Impairment charge
    
    
    (21,043
    )
    
    
    (2,450
    )
    
    
    
    
    
    
    (23,493
    )As of August 31, 2003
    
    
    37,189
    
    
    
    0
    
    
    
    6,475
    
    
    
    43,664Impairment charge
    
    
    (3,300
    )
    
    
    
    
    
    
    
    
    
    
    (3,300
    )As of May 31, 2004
    
    $
    33,889
    
    
    $
    0
    
    
    $
    6,475
    
    
    $
    40,364
 The net change in the carrying amount of customer relationships and trademarks
by reportable business segment is as follows: CollegiateMarketing and
    
    
    
    
    
    AffinityProduction
    
    Affinity
    
    ManagementServices
    
    Events
    
    Services
    
    TotalAs of September 1, 2002
    
    $
    8,263
    
    
    $
    6,339
    
    
    $
    2,397
    
    
    $
    16,999Adjustments
    
    
    
    
    
    
    826
    
    
    
    
    
    
    
    826Amortization
    
    
    (957
    )
    
    
    (118
    )
    
    
    (141
    )
    
    
    (1,216
    )Impairment charge
    
    
    
    
    
    
    (7,047
    )
    
    
    
    
    
    
    (7,047
    )As of August 31, 2003
    
    
    7,306
    
    
    
    0
    
    
    
    2,256
    
    
    
    9,562Amortization
    
    
    (805
    )
    
    
    
    
    
    
    (135
    )
    
    
    (940
    )As of May 31, 2004
    
    $
    6,501
    
    
    $
    0
    
    
    $
    2,122
    
    
    $
    8,623
 The Company recognized an impairment charge of $3,300 at May 31, 2004 based on
managements consideration of current fiscal year operating results and the
forecasted operating results and business plans for one of the Companys
business units. The impairment charge is reflected in Amortization of the
acquisition intangibles in the Companys condensed consolidated statement of
operations for the three months and nine months ended May 31, 2004. An
impairment charge of $30,540 (of which, $23,493 was attributable to goodwill,
$4,735 to trademarks and $2,312 to customer relationships) was recorded in the
Companys prior year fourth quarter ended August 31, 2003. 8




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##### 



6. LONG-TERM DEBT Long-term debt and notes payable consist of the following: May 31,
    
    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. No additional funding for working capital purposes is
available under the terms of the credit agreement. As of May 31, 2004,
substantially all borrowings under the Term Loans and Revolver were subject to
the LIBOR-based rate of 3.85%. 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 nine months ended May 31, 2004, the Company
issued approximately 343 restricted shares of the Companys common stock then
valued at approximately $694. During the nine months ended May 31, 2003, the
Company issued approximately 158 restricted shares of the Companys common
stock then valued at approximately $1,127. 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 $53,500 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 December 1999, the Company issued 8% subordinated notes in connection with
the acquisition of Host, representing long-term debt of $8,693 as of May 31,
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 nine
months ended May 31, 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 8). In May 31 2004, a note having a face value
of $3,019 was acquired by the Companys Chairman from the note holder, and the
terms of the note have been modified 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
May 31, 2004 (including the effects of the note modifications discussed above)
in the fiscal years ending August 31, 2004, 2005 and 2006 are, respectively,
$0, $56,522 (substantially 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. 9




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##### 



7. INCOME TAXES The differences between the federal statutory tax rate of 34% and the effective
tax rate of zero are principally due to increases in the valuation allowance
for potentially non-realizable deferred tax assets of $1,076 and $1,475 for the
three months ended May 31, 2004 and 2003, respectively, and $2,005 and $3,500
for the nine months ended May 31, 2004 and 2003, respectively. 8. PREFERRED STOCK ISSUANCE AND EXCHANGE As of May 31, 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 May 31, 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 nine
months ended May 31, 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 nine months ended May 31, 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 May 31, 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 nine months ended May 31, 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 outstanding at that time. As of May 31, 2004, the Companys Chairman and his affiliates owned
approximately 49.8% of the Companys outstanding common stock. Management
believes that as of August 31, 2004, such ownership percentage will exceed 50%,
at which time the Company will be required to reclassify, in accordance with
SFAS 150, all of the preferred stock issued to the Chairman and his affiliates
from stockholders equity (deficit) to a component of total liabilities. If
such classification was required as of May 31, 2004, the Companys
stockholders deficit and total liabilities would each increase by
approximately $19.8 million. 10




---



##### 



9. 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
    
    Nine Months EndedMay 31,
    
    May 31,2004
    
    2003
    
    2004
    
    2003Net loss
    
    $
    (6,336
    )
    
    $
    (4,659
    )
    
    $
    (9,148
    )
    
    $
    (10,945
    )Other comprehensive income:Change in the valuation of
available-for-sale investments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,050Comprehensive loss
    
    $
    (6,336
    )
    
    $
    (4,659
    )
    
    $
    (9,148
    )
    
    $
    (8,895
    )
 10. 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 (see Note 1).
Information for each of the Companys segments is presented below: Three Months Ended
    
    Nine Months EndedMay 31,
    
    May 31,2004
    
    2003
    
    2004
    
    2003Net revenues, continuing operations:Collegiate Marketing and Production Services
    
    $
    10,896
    
    
    $
    12,322
    
    
    $
    42,219
    
    
    $
    49,340Affinity Events
    
    
    1,525
    
    
    
    3 688
    
    
    
    4,242
    
    
    
    6,040Affinity Management Services
    
    
    1,877
    
    
    
    2,144
    
    
    
    6,392
    
    
    
    6,242$
    14,298
    
    
    $
    18,154
    
    
    $
    52,853
    
    
    $
    61,622Operating income (loss), continuing operations:Collegiate Marketing and Production Services
    
    $
    (341
    )
    
    $
    45
    
    
    $
    2,345
    
    
    $
    2,694Affinity Events
    
    
    (1,401
    )
    
    
    (528
    )
    
    
    (4,719
    )
    
    
    (3,277
    )Affinity Management Services
    
    
    329
    
    
    
    385
    
    
    
    1,700
    
    
    
    1,061Amortization and impairment of acquisition intangibles
    
    
    (3,613
    )
    
    
    (304
    )
    
    
    (4,240
    )
    
    
    (912
    )Unallocated general and administrative costs
    
    
    (217
    )
    
    
    (336
    )
    
    
    (899
    )
    
    
    (1,023
    )$
    (5,243
    )
    
    $
    (738
    )
    
    $
    (5,813
    )
    
    $
    (1,457
    )
 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
wholly-owned operating company, Host Communications, Inc. (Host). 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®
National Tour (a 3-on-3 basketball tour) and the got milk? 3v3 Soccer
Shootout (a 3-on-3 soccer tour). Hosts Affinity Management Services
business segment provides associations such as the National Tour Association
and the International Spa Association (ISPA), 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 49.8% of
the Companys outstanding common stock as of May 31, 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 May 31,
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. As of May 31, 2004, Mr. Robinson and his affiliates owned approximately 49.8%
of the Companys outstanding common stock. Management believes that as of
August 31, 2004, such ownership percentage will exceed 50%. 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 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. Through a rights-sharing agreement with Gray, the Company participates jointly
with Gray in the marketing, selling and broadcasting of certain collegiate
sporting events and in related programming, production and other associated
activities. The agreement commenced April 1, 2000 and terminates after five
years. As a result of the rights-sharing agreement, Gray may be called upon
for payment of a share of certain guaranteed rights fees. During the nine
months ended May 31, 12




---



##### 



2004, Gray had paid approximately $1.5 million under this provision, and as of
May 31, 2004, the Company has an accrued liability payable to Gray of
approximately $1.8 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. Management further determined that an
additional goodwill impairment charge of $3.3 million was necessary during the
three months and nine months ended May 31, 2004, upon managements
consideration of current fiscal year operating results and the forecasted
operating results and business plans for one of the Companys business units.
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 acquisition of Host, 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 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 $49.0 million as of May 31, 2004 and $53.2 million as of August
31, 2003, of which, goodwill was approximately $40.4 million and $43.7 million
as of each date, respectively. The carrying value of goodwill and acquired
intangibles, net of accumulated amortization, represented approximately 75% of
the Companys total assets as of May 31, 2004. 13




---



##### 



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 May 31, 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 May 31, 2004 and August 31, 2003 of approximately $(0.8)
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  In the fiscal year ended August 31, 2003, the Company recorded impairment
charges of approximately $5.2 million and $1.7 million 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 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 as of August 31, 2003. As
a result of the receipt of a payment on the note receivable, the carrying
amount has been further reduced to $1.5 million as of May 31, 2004. Recent Accounting Pronouncement  In May 2003, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards No. 150 Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity (SFAS 150).
SFAS 150 establishes standards for classification and measurement of certain
financial instruments with characteristics of both liabilities and equity.
SFAS 150 was effective for the Company as of September 1, 2003 and did not have
any impact on the Companys consolidated financial statements, however future
classification of some of the Companys preferred stock may be affected as a
result of SFAS 150. As of May 31, 2004, the Companys Chairman and his
affiliates owned approximately 49.8% of the Companys outstanding common stock.
Management believes that as of August 31, 2004, such ownership percentage will
exceed 50%, at which time the Company will be required to reclassify, in
accordance with SFAS 150, all of the preferred stock issued to the Chairman and
his affiliates from stockholders equity (deficit) to a component of total
liabilities. If such classification was required as of May 31, 2004, the
Companys stockholders deficit and total liabilities would each increase by
approximately $19.8 million. In any case, management does not believe that any
of the preferred stock issued to the Chairman or his affiliates will be
redeemed in the foreseeable future. LIQUIDITY AND CAPITAL RESOURCES Credit Arrangements  As of May 31, 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, the continued
support of its Chairman or whether or not the Company will ultimately be successful in
obtaining bank financing at acceptable terms. 14




---



##### 



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, as amended, up to an aggregate of $15 million in
funding for working capital purposes, if necessary, could be sourced from cash
investments and advances made by affiliated parties. As of July 15, 2004, the
Company has utilized approximately $13.1 million of this capacity in connection with the issuance of
debt and equity securities to, and the receipt of cash advances from, the
Companys Chairman and companies with which the Chairman is affiliated. As a
result, additional funding of approximately $1.9 million for working capital purposes is available under
the terms of the credit agreement. 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 if principal
payments are made to the bank lenders on the outstanding term loans, and may
increase if additional bank financing is made available to the Company. In connection with the acquisition of Host, the Company issued 8% subordinated
notes, representing long-term debt of approximately $8.7 million as of May 31,
2004 and approximately $16.7 million as of August 31, 2003. During the nine
months ended May 31, 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, on which
interest is payable at maturity. 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 nine months ended May 31, 2004, the Companys Chairman provided
an aggregate total of $5.3 million in cash used for operating purposes.
Subsequent to May 31, 2004, the Chairman provided an additional $2.1 million in
cash used for operating purposes. Management believes the Company has
sufficient liquidity sources, which include the Companys Chairman and his
affiliates, to meet its cash obligations until the November 30, 2004 maturity
date of its bank credit agreement. In exchange for cash advances made in the
past or in the future by the Companys Chairman and/or his affiliates, the
Company may (a) issue and sell equity securities of the Company, which may
include the Companys preferred stock; (b) issue additional subordinated debt;
or (c) a combination thereof. The use of future cash advances in excess of
approximately $1.9 million made by the Chairman or his affiliates for purposes
other than the reduction of the bank debt would require approval of the
Companys bank lenders. The Companys capital expenditures are not expected to
exceed $600,000 for the fiscal year ending August 31, 2004. 15




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Historical Cash Flow Information  Summary  The following summarizes the Companys historical cash flow activities (amounts
in 000s): Nine Months EndedMay 31,2004
    
    2003Cash flows from operating activities:Continuing operations
    
    $
    (9,002
    )
    
    $
    (3,412
    )Discontinued operations
    
    
    
    
    
    
    106Cash flows from investing activities:Continuing operation investing activities
    
    
    (365
    )
    
    
    11,118Discontinued operation investing activities
    
    
    200
    
    
    
    (5
    )Cash flows from financing activities
    
    
    5,259
    
    
    
    (7,817
    )Net decrease in cash and cash equivalents
    
    $
    (3,908
    )
    
    $
    (10
    )
 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): Nine Months EndedMay 31,2004
    
    2003Loss from operations
    
    $
    (5,813
    )
    
    $
    (1,457
    )Depreciation and amortization included in operations
    
    
    5,016
    
    
    
    1,815Interest expense, net of interest and dividend income
    
    
    (3,330
    )
    
    
    (6,203
    )Net change in operating assets and liabilities
    
    
    (4,858
    )
    
    
    2,233Other operating cash flows
    
    
    (17
    )
    
    
    200Net cash flows from continuing operations
    
    
    (9,002
    )
    
    
    (3,412
    )Net cash flows from discontinued operations
    
    
    
    
    
    
    106Net cash flows from operating activities
    
    $
    (9,002
    )
    
    $
    (3,306
    )
 The Collegiate Marketing and Production Services segment primarily generates
revenues during the collegiate football and basketball seasons, which take
place beginning in August of each year and end in April. Therefore, the
segment primarily derives the revenues from projects and services in the nine
months ended May 31. The Affinity Events segment consists primarily of
participatory sports tours that generally begin in March and end in September
each year. Due to a reduction in the number of events scheduled for the
Hoop-It-Up National Tour in 2004 compared to 2003, it is anticipated that the
Affinity Events segment will generate a higher proportionate amount of its
total revenues in the fourth fiscal quarter ending August 31, 2004 compared to
the same period in the prior fiscal year, and a lower proportionate amount of
its total revenues in the nine months ended May 31, 2004 compared to the same
period in the prior fiscal year. The net change in operating assets and liabilities had an unfavorable impact on
total cash flows from continuing operations during the nine months ended May
31, 2004 and a favorable impact during the nine months ended May 31, 2003.
During the nine months ended May 31, 2004, cash available at the beginning of
the period was used toward the reduction of accounts payable and accrued
expenses by $7.6 million, compared to an increase in accounts payable and
accrued expenses of $1.6 million in the nine months ended May 31, 2003.
Accounts receivable decreased $2.7 million and $1.2 million in the nine months
ended May 31, 2004 and 2003, respectively. Decreases in accounts receivable
during each period result from the seasonality of the Collegiate Marketing and
Production Services business segment, and the decrease in the current fiscal
year also results from the reduction of Affinity Events tour events. 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 $3.4 million and $6.5 million for the nine months ended May 31,
2004 and 2003, respectively, with the reduction caused by the decrease in total
outstanding debt and reductions in interest rates to which the debt is subject 16




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##### 



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): Nine Months EndedMay 31,2004
    
    2003Capital expenditures
    
    $
    (316
    )
    
    $
    (216
    )Proceeds on sales of investments
    
    
    
    
    
    
    11,885Increase in other assets
    
    
    (49
    )
    
    
    (551
    )Net cash flows from continuing operation investing activities
    
    
    (365
    )
    
    
    11,118Net cash flows from discontinued operation investing activities
    
    
    200Net cash flows from investing activities
    
    $
    (165
    )
    
    $
    11,118
 In the nine months ended May 31, 2003, the Company sold its investment in
Rawlings common stock to an unrelated company for cash proceeds of
approximately $6.8 million and sold warrants to acquire Gray common stock to
Gray for cash of $5.1 million. 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): Nine Months EndedMay 31,2004
    
    2003Borrowings from revolving line of credit
    
    $
    
    
    
    $
    175Cash advances made by stockholder
    
    
    3,300Repayments of long-term debt
    
    
    
    
    
    
    (10,000
    )Debt issue costs
    
    
    (41
    )
    
    
    (992
    )Proceeds on issuance of preferred stock
    
    
    2,000
    
    
    
    3,000Net cash flows from financing activities
    
    $
    5,259
    
    
    $
    (7,817
    )
 CONTRACTUAL OBLIGATIONS AND OTHER COMMITMENTS The following summarizes the Companys contractual obligations as of May 31,
2004 (amounts in 000s): Payments Due by Period as of May 31, 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
    
    
    3,240
    
    
    
    1,174
    
    
    
    1,080
    
    
    
    628
    
    
    
    358Purchase obligations
    
    
    45,650
    
    
    
    16,853
    
    
    
    21,154
    
    
    
    7,643Total
    
    $
    114,105
    
    
    $
    74,549
    
    
    $
    30,927
    
    
    $
    8,271
    
    
    $
    358
 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 6
to the Condensed Consolidated Financial Statements. The estimated cost of
terminating the swap agreements, if the Company elected to do so, was
approximately $1.0 million as of May 31, 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 May 31, 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. 17




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##### 



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
May 31, 2004 on the outstanding shares of Series E Preferred Stock potentially
payable in cash in July 2005 is approximately $0.7 million. RESULTS OF CONTINUING OPERATIONS  THREE MONTHS ENDED MAY 31, 2004 COMPARED TO
THREE MONTHS ENDED MAY 31, 2003 Results Derived from Operating Businesses  Operating results for the three months ended May 31, 2004 and 2003 are
summarized as follows (amounts in $000s): Three Months EndedMay 31,
    
    May 31,2004
    
    2003RevenuesCollegiate Marketing and Production Services
    
    $
    10,896
    
    
    $
    12,322Affinity Events
    
    
    1,525
    
    
    
    3,688Affinity Management Services
    
    
    1,877
    
    
    
    2,144$
    14,298
    
    
    $
    18,154Operating Costs and ExpensesDirect operating costs of services rendered
    
    $
    9,739
    
    
    $
    11,873Selling, general and administrative
    
    
    6,189
    
    
    
    6,715Amortization of acquisition intangibles
    
    
    3,613
    
    
    
    304$
    19,541
    
    
    $
    18,892Income (Loss) from OperationsCollegiate Marketing and Production Services
    
    $
    (341
    )
    
    $
    45Affinity Events
    
    
    (1,401
    )
    
    
    (528
    )Affinity Management Services
    
    
    329
    
    
    
    385Amortization of acquisition intangibles
    
    
    (3,613
    )
    
    
    (304
    )Unallocated general and administrative costs
    
    
    (217
    )
    
    
    (336
    )$
    (5,243
    )
    
    $
    (738
    )
 Total revenues and operating results for the Collegiate Marketing and
Production Services segment were impacted in the three months ended May 31,
2004 by the termination of three university contractual relationships at the
end of the previous fiscal year. Such contracts generated revenues of
approximately $0.6 million during the three months ended May 31, 2003 and
generated a negligible operating loss during that period. For the entire
fiscal year ended August 31, 2003, such terminated contracts generated revenues
of approximately $5.3 million and operating profit of approximately $0.5
million. Additionally, revenues derived from NCAA publications during the
three months ended May 31, 2004 were approximately $0.9 million less than the
same period of the prior fiscal year. The three months ended May 31 was a period of proportionately lower activity in
the Affinity Events segment in the current fiscal year compared to the prior
fiscal year. The 2004 Hoop-It-Up National Tour is scheduled to include
significantly fewer events than the 2003 tour (15 events in 2004 compared to 40
events in 2003), of which, four events were held in the three months ended May
31, 2004 compared to 16 events in the three months ended May 31, 2003. As a
result, total revenues from the Hoop-It-Up National Tour were approximately
$2.5 million less in the three months ended May 31, 2004 compared to the same
period of the prior year. 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 May 31, 2004 for the Affinity
Management Services segment represented a decrease over the same period in the
prior year due primarily to a change in the terms of a management contract
which provided additional revenue and profit incentives achieved during the
second quarter of the current fiscal year, in exchange for a lower management
fee. Direct operating costs of services rendered decreased for the three months
ended May 31, 2004 from the same period in the prior year due to (a) fewer
Hoop-It-Up events in 2004 compared to 2003. principally contributing to a
reduction in 18




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##### 



events operation costs in the Affinity Events segment of approximately $1.3
million; (b) 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 $0.3 million; and (c) the
elimination of approximately $0.1 million of other direct costs associated with
the three terminated university contracts. Amortization and impairment of acquisition intangibles included a goodwill
impairment charge of $3.3 million in the three months ended May 31, 2004 based
on managements consideration of historical operating results and reevaluation
of the forecasted operating results and business plans for one of the Companys
business units. Results Derived from Investments and Derivative Instruments  Equity in earnings of affiliated companies of $40 for the three months ended
May 31, 2003 was derived from the Companys proportionate share of the net
income (loss) 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 $0.4 million and $0.2 million for the three months ended May
31, 2004 and 2003, respectively, due to an increase in the value of the
remaining interest rate swap agreement. Interest Expense and Debt Related Costs  Interest expense decreased to approximately $1.1 million for the three months
ended May 31, 2004 from approximately $1.9 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 May 31, 2004 and 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 May 31, 2004, the Company issued approximately 192,000
shares of restricted common stock to the Chairman to compensate him for his
personal guarantee, then valued at approximately $0.2 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 May 31, 2004 and 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 $1.1 million and $1.5 million
for the three months ended May 31, 2004 and 2003, respectively. The valuation
allowance for net deferred tax assets was approximately $21.5 million as of May
31, 2004. 19




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##### 



RESULTS OF CONTINUING OPERATIONS  NINE MONTHS ENDED MAY 31, 2004 COMPARED TO
NINE MONTHS ENDED MAY 31, 2003 Results Derived from Operating Businesses  Operating results for the nine months ended May 31, 2004 and 2003 are
summarized as follows (amounts in $000s): Nine Months EndedMay 31,2004
    
    2003RevenuesCollegiate Marketing and Production Services
    
    $
    42,219
    
    
    $
    49,340Affinity Events
    
    
    4,242
    
    
    
    6,040Affinity Management Services
    
    
    6,392
    
    
    
    6,242$
    52,853
    
    
    $
    61,622Operating Costs and ExpensesDirect operating costs of services rendered
    
    $
    36,197
    
    
    $
    42,718Selling, general and administrative
    
    
    18,229
    
    
    
    19,449Amortization of acquisition intangibles
    
    
    4,240
    
    
    
    912$
    58,666
    
    
    $
    63,079Income (Loss) from OperationsCollegiate Marketing and Production Services
    
    $
    2,345
    
    
    $
    2,694Affinity Events
    
    
    (4,719
    )
    
    
    (3,277
    )Affinity Management Services
    
    
    1,700
    
    
    
    1,061Amortization of acquisition intangibles
    
    
    (4,240
    )
    
    
    (912
    )Unallocated general and administrative costs
    
    
    (899
    )
    
    
    (1,023
    )$
    (5,813
    )
    
    $
    (1,457
    )
 Total revenues and operating results for the Collegiate Marketing and
Production Services segment were impacted in the nine months ended May 31, 2004
by the termination of three university contractual relationships at the end of
the previous fiscal year. Such contracts generated revenues of approximately
$5.3 million during the nine months ended May 31, 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 $0.9 million less for
the nine months ended May 31 2004 than the same period of the prior year.
Additionally, revenues derived from NCAA publications and related activities
during the nine months ended May 31, 2004 were approximately $0.6 million less
than the same period of the prior fiscal year. The nine months ended May 31 was a period of proportionately lower activity in
the Affinity Events segment in the current fiscal year compared to the prior
fiscal year. The 2004 Hoop-It-Up National Tour, which runs from May 2004 to
September 2004, is scheduled to include 15 events, whereas the 2003 tour, which
ran from March 2003 to September 2003, included 40 events. As a result, total
revenues from the Hoop-It-Up National Tour were approximately $2.1 million less
in the nine months ended May 31, 2004 than the same period of 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 $0.6 million of the increased operating loss for this segment. Total revenues for the nine months ended May 31, 2004 for the Affinity
Management Services segment increased slightly due to the change in the terms
of the management contract discussed previously. Direct operating costs of services rendered decreased for the nine months ended
May 31, 2004 from the same period in the prior year due to (a) fewer Hoop-It-Up
events in 2004 compared to 2003. principally contributing to a reduction in
events operation costs in the Affinity Events segment of approximately $0.9
million; (b) 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 $2.4 million; (c) the
elimination of approximately $1.5 million of other direct costs associated with
the three terminated university contracts; and (d) the reduction of
approximately $0.8 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. 20




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##### 



Selling, general and administrative costs declined for the nine months ended
May 31, 2004 compared to the same period in the prior fiscal year due to a
decline in employee compensation costs of approximately $0.6 million and a
decline in depreciation expense of approximately $0.2 million. Amortization and impairment of acquisition intangibles included a goodwill
impairment charge of $3.3 million in the nine months ended May 31, 2004 based
on managements consideration of historical operating results and reevaluation
of the forecasted operating results and business plans for one of the Companys
business units. Results Derived from Investments and Derivative Instruments  Equity in losses of affiliated companies of approximately $0.2 million for the
nine months ended May 31, 2003 was derived from the Companys proportionate
share of the net losses reported by Gray and iHigh. During the nine months ended May 31, 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 nine months
ending May 31, 2003. The net change in the value of certain derivative instruments was approximately
$0.9 million for the nine months ended May 31, 2004 due to an increase in the
value of the remaining interest rate swap agreement, and $(1.7) million for the
nine months ended May 31, 2003 due to a decline in the value of warrants,
offset by an increase in the value of the interest rate swap agreements. Interest Expense and Debt Related Costs  Interest expense decreased to approximately $3.3 million for the nine months
ended May 31, 2004 from approximately $6.2 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 $0.9 million and $1.7 million
for the nine months ended May 31, 2004 and 2003, respectively. During the nine
months ended May 31, 2004, the Company issued approximately 343,000 shares of
restricted common stock to the Chairman to compensate him for his personal
guarantee, then valued at approximately $0.7 million. During the nine months
ended May 31, 2003, the Company issued approximately 221,000 shares of
restricted common stock to the Chairman to compensate him for his personal
guarantee, then valued at approximately $1.1 million. Amortization of the
value of all shares issued to the Chairman, of approximately $0.7 million and
$1.1 million, is included in debt issue cost amortization for the nine months
ended May 31, 2004 and 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 approximately $2.0 million
and $3.5 million for the nine months ended May 31, 2004 and 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
nine months ended May 31, 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 nine months ended May 31, 2003 is reported
as Income from discontinued segment in the Condensed Consolidated Statement
of Operations. 21




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##### 



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 May 31, 2004 and 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 and $0.2
million for the three months ended May 31, 2004 and 2003, respectively, and
approximately $0.2 million and $0.4 million for the nine months ended May 31,
2004 and 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 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 Company may not ultimately be successful in
obtaining bank financing beyond the November 30, 2004 maturity
date, or be successful in obtaining financing at acceptable terms; (iii) 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; (iv)
significant segments of the Companys business are seasonal; (v) the Companys
business depends on short term contracts and the inability to renew or extend
these contracts could adversely affect its business; (vi) the Company may lose
money on some of its contracts, because it guarantees certain payments
thereunder; and (vii) 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 May 31, 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 May 31, 2004. 22




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PART II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K (a)
    Exhibits31.1
    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 April 14, 2004 for the purpose of
furnishing the press release announcing the Companys financial results
for the fiscal quarter ended February 29, 2004.
 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: July 15, 2004
    By:
    /s/ FREDERICK J. ERICKSONFrederick J. EricksonVice President-Finance, Treasurer
and Assistant Secretary 23