Fellow Stockholders of Bull Run Corporation,
We are very pleased with the progress we have made on your behalf in 1997, strategically laying a foundation for continued success. 1997 was a year of investment, strengthening and diversifying your Company for continued growth in stockholder value. The addition of Rawlings Sporting Goods Company, Inc. to the Bull Run family provides us a "name brand" company, and Rawlings' new five-year marketing agreement with Host Communications, Inc. ("HCI") provides both companies some exciting opportunities for growth. We are encouraged by the growth and prospects for Gray Communications Systems, Inc., and as a result, we increased our investment position in Gray by $3.1 million in 1997. Datasouth Computer Corporation developed a revolutionary new airline ticket printer which began shipping in December, and significantly broadened its thermal printer product line with a recent acquisition.
FINANCIAL RESULTS
We reported a net loss for 1997, but we believe that there is more to the story than simply the "bottom line" as determined by generally accepted accounting principles. Three factors need to be considered when evaluating our 1997 financial performance.
First, our Company and our affiliated companies are very acquisition - oriented. As a result of acquisitions, traditional accounting rules require us and our affiliates to report, and amortize, goodwill. We attribute this goodwill to such intangibles as strategic customer relationships, brand names and FCC broadcasting licenses. Even though we believe that many of these intangible assets actually appreciate over time, goodwill amortization is required to be charged against our earnings for financial statement purposes. Our 1997 pretax results were negatively impacted by over $2 million in non-cash goodwill amortization charges.
Second, Datasouth embarked on, and completed, a very significant product development project in 1997. In concert with The SABRE Group, Datasouth's largest customer, a new low cost airline ticket printer was designed and introduced to the market. This development project, costing us more than $2 million, not only substantially increased our R&D expense in 1997, but also consumed virtually all of Datasouth's engineering resources at the expense of generating any new product revenue.
Third, the value of our common stock investments in Gray Communications and Rawlings, based on the publicly-reported per share closing prices, appreciated more than $9.4 million in 1997, none of which could be included as 1997 earnings under generally accepted accounting principles.
RAWLINGS SPORTING GOODS COMPANY, INC.
On November 21, 1997 we entered into an Investment Agreement with Rawlings, whereby we acquired from Rawlings a warrant to purchase, under certain conditions, up to 10% of Rawlings common stock at $12.00 per share. Additionally, we were afforded the right to acquire additional Rawlings' outstanding common stock through open market purchases. We completed the open market purchases in January, and as a result, now hold 10.4% of Rawlings' outstanding common stock. I was elected to the Rawlings' board of directors in January and have been appointed to their committee conducting a search for a new President and CEO. Simultaneously with the execution of the Investment Agreement, Rawlings entered into a five-year Strategic Marketing Agreement with HCI. The combination of HCI's marketing prowess and position as manager of the NCAA's Corporate Partner Program, with Rawlings' products and brand appeal, should be very formidable and mutually beneficial. We believe Rawlings has outstanding growth potential given the right tools, such as HCI's marketing expertise, and given the right strategic direction, in which we will actively participate.
HOST COMMUNICATIONS, INC.
The affiliation with Rawlings was clearly one of HCI's many highlights in 1997. A new five-year contract with the NCAAš kicked off in September, which provides HCI exclusive corporate partners' promotional licensing, championship event radio broadcasts, as well as publication and distribution of championship event programs. This contract extends what is currently HCI's 23-year business relationship with the NCAA. In 1997, HCI signed several major companies to NCAA corporate sponsorships, including Compaq Computer, General Motors Corporation, Gillette, Marriott, Nabisco, Phoenix Home Mutual and Tricon Global Restaurants.
In 1997, HCI's association management business grew significantly as a result of its acquisition of Wayne Smith Company last January. Additionally, "Hoop-It-Up" 3-on-3 basketball tournaments, which are operated by HCI's 33.8%-owned affiliate, Universal Sports America, Inc., continue to grow in world-wide popularity.
We increased our common stock investment position in privately-held HCI during 1997 to effectively 30.2% of HCI's common equity.
GRAY COMMUNICATIONS SYSTEMS, INC.
In part due to the 1997 acquisition of WITN-TV, an NBC-affiliate in the Greenville-Washington-New Bern, North Carolina market, Gray's "Media Cash Flow", a commonly-used statistic and valuation measurement in the broadcasting industry, increased 36% for 1997 to $38.1 million, from $28 million in 1996. In 1997, Gray also acquired GulfLink Communications, Inc., a business providing transportable uplink satellite services for on-site satellite broadcasts. By virtue of this acquisition, Gray is now the largest single provider of such services in the United States.
In February 1998, Gray announced the signing of a definitive purchase agreement to acquire Busse Broadcasting Corporation, the owner and operator of three television stations, KOLN-TV in the Lincoln-Hastings-Kearney, Nebraska television market, its satellite station KGIN-TV in Grand Island, Nebraska, and WEAU-TV serving the Eau Claire-La Crosse, Wisconsin market. The purchase is subject to FCC approval. The stations are the highest rated stations in their respective markets and are also the local news leaders.
Mack Robinson and I continue to be actively involved in Gray's management. We continue to conduct a search for a President and CEO, however we have the utmost confidence in those who manage the day-to-day operations of the business, and do not presently feel that the absence of a chief executive has been, or will be in the foreseeable future, a detriment or deterrent to Gray's continued growth.
In 1997, we invested an additional $3.1 million in Gray's common stock, increasing our investment position in Gray's common equity to 17.0%, and increasing our voting rights to 27.6%.
DATASOUTH COMPUTER CORPORATION
Datasouth, Bull Run's wholly-owned subsidiary, recently achieved two very significant milestones, the successful completion of its "Journey" product development project and acquisition of a printer manufacturer.
In December, Datasouth began shipping "Journey", a low cost airline ticket printer designed for travel agencies, city ticket offices, and satellite ticket printing locations. The printer includes specifications provided by Datasouth's largest customer, The SABRE Group, accommodating all facets of the travel agency and airline business and complementing electronic ticketing.
In January 1998, Datasouth acquired CodeWriter Industries, Inc. and its affiliate, CW Technologies, LLC, which design and manufacture thermal bar code printers. We are very excited about Datasouth adding the CodeWriter products to its line, and leveraging its design and manufacturing capabilities through consolidation of product manufacturing at Datasouth's facility. The CodeWriter products, like Datasouth's, are designed for industrial applications, and can therefore be sold through Datasouth's existing distribution channels.
PLANS FOR 1998
There are plenty of challenges and opportunities ahead.
In 1998, we plan to actively participate in Rawlings' management and strategic direction, and oversee the development of an effective business relationship with HCI.
We intend to manage Gray for continued growth through internal improvement of operations, assist with the successful integration of newly-acquired properties, and seek possible acquisitions of new properties which meet our criteria.
We plan to manage an effective roll out of Datasouth's new airline ticket printer and begin development of complementary products for the travel industry, along with managing an efficient integration of the CodeWriter operations.
We believe that we are strategically building shareholder value through the acquisition and development of well managed operating companies having excellent growth potential. We appreciate the continued support of our shareholders, business partners and employees, all of whom play a vital role in our success.
Sincerely,