Edgar Filing: GRAY COMMUNICATIONS SYSTEMS INC /GA/

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 8-K

CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934


July 15, 2002		1-13796

Date of Report (Date of earliest event reported)		Commission File Number

GRAY COMMUNICATIONS SYSTEMS, INC.
(Exact name of registrant as specified in its charter)


Georgia		52-0285030

(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification Number)

4370 Peachtree Road, NE
Atlanta, Georgia 30319

(Address of Principal Executive Offices) (Zip Code)

(404) 504-9828

(Registrant’s telephone number, including area code)

Item 5. Other Events.

In this report, unless otherwise indicated, the words “Gray,” “our,” “us” and “we” refer to Gray Communications Systems, Inc. and its subsidiaries. Our discussion of the television stations that we own and operate does not include our interest in the stations owned by Sarkes Tarzian, Inc.

On June 4, 2002, we executed a merger agreement with Stations Holding Company, Inc., which we refer to as “Stations,” the parent company of Benedek Broadcasting Corporation, which we refer to as “Benedek.” The merger agreement provides that we will acquire Stations by merging our newly formed wholly-owned subsidiary, Gray MidAmerica Television, Inc., which we refer to as “Gray MidAmerica Television,” into Stations. In consideration for Stations, we will pay an estimated consideration of $502.5 million, a substantial portion of which will be used to satisfy, in full, certain outstanding indebtedness of Stations in accordance with a plan of reorganization filed by Stations with the United States bankruptcy court in Delaware on July 1, 2002. We may pay additional cash consideration of $4.9 million for certain estimated net working capital, as specified in the merger agreement.

Benedek plans to sell or already has sold, prior to the effective time of the merger, a total of nine designated television stations. Upon completion of the merger, we will own a total of 28 stations serving 23 television markets. Based on results for the year ended December 31, 2001, the combined Gray and Benedek television stations produced approximately $213.9 million of net revenue and $84.8 million of broadcast cash flow. Including our publishing and other operations, the combined Gray and Benedek operations for 2001 produced approximately $263.8 million of net revenue and $97.1 million of media cash flow. We expect the merger, if it closes, to be completed by the fourth quarter of 2002.

In connection with our acquisition of Stations, we intend to issue equity and debt securities, which may be effected through a registered offering or a private placement exempt from the registration requirements of the Securities Act, and amend our existing credit facility.

Set forth below is certain business and financial information regarding Gray and Stations and information regarding our acquisition of Stations.

THE MERGER

This section of the report describes certain material aspects of the proposed merger. This summary does not contain all of the information that is important to you. You should carefully read the entire report and the other documents to which we refer you, including the merger agreement, for a more complete understanding of the merger.

The Other Parties

Stations is the parent company of Benedek. Stations’ principal executive offices are located at 2895 Greenpoint Parkway, Hoffman Estates, Illinois 60195, telephone number (847) 585-3450. Gray MidAmerica Television is our newly-formed wholly-owned subsidiary, formed solely for the purpose of effecting the merger.

Our Reasons for the Merger

Our business strategy includes continued acquisitions of companies whose businesses are complementary to ours. We believe that Stations is an excellent strategic fit and that the acquisition of Stations will create significant benefits, including:


	•	the acquisition will create a stronger company and will diversify the geographic range of our television stations, broadening substantially our market presence in the television broadcasting market;

	•	the acquisition gives us access to additional operating cash flow for the purposes of funding debt service, as well as future acquisitions and investments;

	•	the acquisition presents an opportunity to increase revenue share and audience share;

	•	the acquisition presents an opportunity for cross-promotion and cross-selling; and

	•	the acquisition strengthens our management teams and local news operations.

Bankruptcy Court and Regulatory Filings and Approvals

Bankruptcy Court. Stations has filed a voluntary petition under Chapter 11 of the federal bankruptcy code. Consequently, the merger is subject to the bankruptcy court’s approval of Stations’ plan of reorganization, and all of Stations’ obligations under the merger agreement are subject to the approval of the bankruptcy court. Stations filed the required information and materials with the bankruptcy court on July 1, 2002.

Federal Communications Commission. The merger is subject to approval by the Federal Communications Commission, “FCC.” Stations and its subsidiaries and we and our subsidiaries filed with the FCC the necessary application with respect to the change of control on June 10, 2002.

Antitrust. The merger is subject to the requirements of the Hart-Scott Rodino Antitrust Improvements Act of 1976, which provides that certain transactions may not be consummated until required information and materials have been furnished to the Department of Justice and the Federal Trade Commission and certain waiting periods have expired or been terminated. Stations and we filed the required information and materials with the Department of Justice and the Federal Trade Commission on June 20, 2002. Early termination of the statutory waiting period under the Hart-Scott Rodino Antitrust Improvements Act of 1976 was granted on July 1, 2002.

The Department of Justice and the Federal Trade Commission frequently scrutinize the legality under the antitrust laws of transactions such as the merger. At any time before or after the effective time, either the Department of Justice or the Federal Trade Commission could take such action under the antitrust laws as it deems necessary or desirable in the public interest, or certain other persons could take action under the antitrust laws, including seeking to enjoin the merger.

Sale of Certain Designated Benedek Stations Prior to the Merger

Benedek has sold or plans to sell, prior to the effective time of the merger, a total of nine designated television stations, which we refer to as the “excluded stations.” Benedek plans to sell eight of the excluded stations to Chelsey Broadcasting Company, LLC, a Delaware limited liability company, which we refer to as “Chelsey,” or its affiliates pursuant to an asset purchase agreement. Benedek already has sold its television station in Wheeling, West Virginia to a third party on April 30, 2002. Benedek intends to use the net proceeds of these sales to repay indebtedness under its senior secured credit facility. The sale of the nine designated television stations is a condition to the merger.

Accounting Treatment

The merger will be accounted for as a purchase for financial accounting purposes in accordance with accounting principles generally accepted in the United States. For purposes of preparing our consolidated financial statements, we will establish a new accounting basis for Stations’ assets and liabilities based upon their fair values, the merger consideration and the costs of the merger. Any excess of cost over the fair value of the net assets of Stations will be recorded as goodwill and other intangible assets. A final determination of the intangible asset values and required purchase accounting adjustments, including the allocation of the purchase price to the assets acquired and liabilities assumed based on their respective fair values, has not yet been made. We will determine the fair value of Stations’ assets and liabilities and will make appropriate purchase accounting adjustments, including adjustments to the amortization period of the intangible assets, upon completion of that determination.

THE MERGER AGREEMENT AND RELATED AGREEMENTS

This section of the report describes the material terms of the Agreement and Plan of Merger, dated as of June 4, 2002, among Stations, Gray MidAmerica Television and us and related agreements, including the Lock Up, Voting and Consent Agreements that Stations and we entered into with certain stockholders and creditors of Stations, an agreement regarding benefits to be provided to members of the Benedek family following consummation of the merger and an amendment to K. James Yager’s employment agreement. Copies of the merger agreement and lock up agreements are attached as exhibits to the report. You are urged to read the merger agreement in its entirety for a more complete description of the merger because it is the principal legal document that governs the merger.

The Merger

Subject to the terms and conditions of the merger agreement, we will acquire Stations through the merger of Gray MidAmerica Television with and into Stations. Stations will be the surviving corporation in the merger.

Effective Time

The merger will be consummated when a certificate of merger, that we will file with the State of Delaware, becomes effective. The merger agreement provides that the parties will use their reasonable efforts to cause the effective time to occur on the seventh business day after the satisfaction or waiver of all the conditions to the merger. See “The Merger Agreement and Related Agreements — Conditions to the Merger.” However, the effective time may not occur prior to October 1, 2002.

The merger agreement further provides that we may, on one occasion, delay the effective time for up to 120 days if any of the following occurs: (1) any general suspension of trading in equity securities in the United States securities or financial markets for more than two consecutive trading days; (2) a declaration of a banking moratorium or any suspension of payments in respect of banks by federal or state authorities in the United States; (3) commencement of a war, armed hostilities or other national or international calamity directly involving the United States; (4) any limitation by any governmental authority on the extension of credit by banks or other lending institutions in the United States; or (5) if any of the foregoing exists on the date the merger agreement is signed, a material acceleration or worsening thereof.

Merger Consideration and Conversion of Gray MidAmerica Television and Stations’ Stock

At the effective time of the merger, the outstanding shares of Stations 11.5% Senior Exchangeable Preferred Stock, which we refer to as the “senior preferred stock,” and Junior Discount Preferred Stock, which we refer to as the “junior preferred stock,” will be converted into the right to receive a cash payment. No cash consideration will be paid to holders of outstanding shares of Stations class A common stock and class B common stock. The stock of Gray MidAmerica Television and Stations will be converted as described below:

Gray MidAmerica Television common stock. Each share of Gray MidAmerica Television common stock issued and outstanding immediately prior to the effective time will be converted into one share of Stations class B common stock.

Stations senior preferred stock. Each share of Stations senior preferred stock (excluding shares held by Stations or any of its subsidiaries, other than in a fiduciary capacity) issued and outstanding immediately prior to the effective time will be converted into the right to receive the senior preferred stock purchase price, equal to the quotient obtained by dividing (1) $500,000,000, minus (A) the amount outstanding at the effective time under Stations debt instruments plus accrued interest thereon through the effective time, determined in accordance with Stations’ plan of reorganization, plus or minus (B) working capital adjustments and adjustments relating to amounts incurred by Stations and its subsidiaries with

respect to the conversion of their television stations to digital broadcasting by (2) 100,000 (the number of outstanding shares of Stations’ senior preferred stock at the effective time).

Stations junior preferred stock. Each share of Stations junior preferred stock (excluding shares held by Stations or any of the Stations subsidiaries, other than in a fiduciary capacity) issued and outstanding immediately prior to the effective time will be converted into the right to receive a cash payment equal to the quotient obtained by dividing (1) $2,500,000 by (2) 450,000 (the number of outstanding shares of Stations junior preferred stock at the effective time).

Stations class A common stock and class B common stock. Each share of Stations class A common stock and class B common stock and any options or warrants to acquire such shares issued and outstanding immediately prior to the effective time will be cancelled. We will not pay any cash consideration for such securities.

The Letter of Credit and the Escrow Shares

When the merger agreement was signed, we delivered to Stations a standby letter of credit in the amount of $12.5 million and deposited with SunTrust Bank, as escrow agent, 885,269 shares of our class B common stock. These escrow shares had an aggregate value of $12.5 million, based on the average price of our class B common stock for the 20 consecutive trading days on the New York Stock Exchange ending on June 2, 2002. The escrow shares are being held by the escrow agent in accordance with the terms of an escrow agreement that we executed on June 4, 2002. We will maintain the letter of credit in effect, and the escrow shares will remain in escrow, until the earlier of the effective time or 10 business days after the termination of the merger agreement. If the letter of credit or any replacement letter of credit expires before either of the dates described in the previous sentence, we will renew the letter of credit or obtain a replacement letter of credit, which we will deliver to Stations at least five business days before such expiration.

If the merger is not consummated because of a material default by us, and Stations has not materially defaulted due to a breach of any of its representations or warranties or any of its covenants or agreements under the merger agreement, then Stations may draw on the letter of credit and instruct the escrow agent to deliver to it the escrow shares pursuant to the escrow agreement. We have an obligation to deliver a letter of credit and escrow shares totaling $25 million, except that we may, in our sole discretion, replace some or all of the escrow shares with a cash payment, so long as any such cash payment is a whole number multiple of $500,000. Under specified circumstances, if Stations is entitled to receive the escrow shares and the value of the escrow shares decreases to below $12.5 million at the time Stations sells them, we may be required to pay to Stations the amount of such decrease. Likewise, if the value of the escrow shares increases, Stations may be required to pay to us the amount of such increase. At the effective time and subject to the conditions in the merger agreement and the escrow agreement, the letter of credit and the escrow shares will be returned to us.

Registration of the Escrow Shares

The escrow shares have not been registered under the Securities Act or any other applicable securities laws, and therefore are restricted securities. If the merger agreement is terminated and the escrow shares are delivered by the escrow agent to Stations, we are required to:


	•	file with the SEC a registration statement with respect to the resale or distribution of the escrow shares by Stations and/or an affiliate of Stations, within 30 days after such termination;

	•	use our best efforts to cause the registration statement to be declared effective at the earliest practicable time;

	•	keep the registration statement effective and current until the earlier of six months following the effectiveness of the registration statement or the date that all of the escrow shares covered by the registration statement have been sold or distributed;


	•	cause the escrow shares to be listed promptly with the New York Stock Exchange; and

	•	indemnify, to the extent permitted by law, each person selling or distributing securities under the registration statement, and related parties, against all losses caused by any material misstatement or omission by us in the registration statement or any violation by us of the Securities Act, the Securities Exchange Act of 1934, any state securities laws or any rules or regulations of the New York Stock Exchange.

Conditions to the Merger

The parties’ obligations to consummate the merger and related transactions generally are subject to the satisfaction or waiver of the following conditions:


	•	the bankruptcy court approving the order confirming Stations’ plan of reorganization and such confirmation order becoming a final bankruptcy court order;

	•	the FCC approving the transactions contemplated by the merger agreement, without any condition or qualification materially adverse to us or our subsidiaries or Stations or its subsidiaries, or materially adverse to our acquisition of control of Stations and its subsidiaries;

	•	all regulatory waiting periods applicable to the merger agreement and the related transactions expiring or terminating;

	•	no order being in effect enjoining, restraining or prohibiting the consummation of the merger and related transactions and no action or proceeding having been instituted by any regulatory authority seeking any such order that would reasonably be expected to have a material adverse effect on us or on Stations; and

	•	the transactions related to the Chelsey purchase agreement being consummated, unless the failure to consummate such transactions is the result of either the wrongful refusal of Chelsey to consummate such transactions or the election by Chelsey not to consummate the transactions because Benedek failed to satisfy certain conditions set forth in the Chelsey purchase agreement. If the transactions contemplated by the Chelsey purchase agreement are not consummated as a result of FCC action or inaction, Stations and we each agree to use commercially reasonable efforts to take, or cause to be taken, all actions and to do, or cause to be done, everything reasonably necessary, proper or advisable under applicable laws to consummate and make effective the transactions contemplated by the merger agreement and the Chelsey purchase agreement at the earliest practicable date.

Our obligations to consummate the merger and related transactions are subject to the satisfaction or waiver of the following additional conditions:


	•	the representations and warranties made by Stations in the merger agreement being, subject to limited exceptions, correct and complete in all material respects at the effective time;

	•	each and all of the agreements and covenants of Stations and each of its subsidiaries under the merger agreement and related agreements being performed and complied with in all material respects prior to the effective time;

	•	our receiving from Stations customary officer certificates and board of directors resolutions relating to the transactions contemplated by the merger agreement;

	•	our receiving a legal opinion of FCC counsel to Stations;

	•	Stations returning to us the letter of credit;

	•	the FCC issuing a final FCC order approving the transfer of control of Benedek’s television licenses to us;


	•	Stations obtaining and delivering to us consents or waivers relating to the transactions contemplated by the merger agreement, as required by its network affiliation agreements; and

	•	no litigation being pending or threatened involving Stations or any its subsidiaries that would have, or reasonably be expected to have, a material adverse effect on Stations or its subsidiaries or their respective businesses or assets.

The obligations of Stations to consummate the merger and related transactions are subject to the satisfaction or waiver of the following additional conditions:


	•	the representations and warranties made by us and Gray MidAmerica Television in the merger agreement being, subject to limited exceptions, correct and complete in all material respects at the effective time;

	•	each of our and Gray MidAmerica Television’s agreements and covenants under the merger agreement and related agreements being performed and complied with in all material respects prior to the effective time; and

	•	Stations receiving from us and Gray MidAmerica Television customary officer certificates and board of directors resolutions relating to the transactions contemplated by the merger agreement.

Representations and Warranties

In the merger agreement, Stations makes customary representations and warranties about itself and its business, including representations and warranties about:


	•	organization, good standing and corporate power;

	•	authorization and enforceability of the merger agreement;

	•	capitalization and subsidiaries;

	•	financial statements and tax matters; and

	•	absence of undisclosed liabilities or material adverse changes.

In addition, Stations makes numerous representations and warranties with respect to its assets, real property, intellectual property, computer software and databases, accounts receivable, insurance, bonds, letters of credit and guarantees, compliance with law, environmental matters, litigation and claims, benefit plans, contracts, labor matters, brokers and finders, interested transactions, officers, directors and bank accounts and the absence of any material misstatement or omission by it in the merger agreement.

We and Gray MidAmerica Television, jointly and severally, also make customary representations and warranties in the merger agreement about ourselves and our business, including representations and warranties regarding organization, good standing and corporate power, authorization and enforceability of the merger agreement, brokers and finders, litigation, and the absence of any material misstatement or omission by us and Gray MidAmerica Television. We also make representations with respect to our qualification under the Telecommunications Act of 1966 to enter into and consummate the transactions contemplated by the merger agreement, our filings with the SEC and our issuance of the escrow shares.

Mutual Covenants of Gray and Stations

Subject to limited exceptions and except for the sale of the excluded stations by Benedek to Chelsey, from June 4, 2002 until the closing of the merger or the termination of the merger agreement, Stations and we will, and will cause each of our respective subsidiaries, to:


	•	operate our respective businesses only in the usual, regular, and ordinary course;

	•	use commercially reasonable efforts to preserve intact our respective business organizations and assets and maintain our respective rights and franchises; and


	•	take no action that would materially adversely affect the ability of any party to (1) obtain any consents required for the transactions contemplated in the merger agreement, or (2) perform its covenants and agreements under the merger agreement in all material respects and to consummate the merger and to satisfy the conditions to closing set forth in the merger agreement. However, the covenant described in clause (2) above will not prohibit us or any of our subsidiaries from discontinuing or disposing of any of our assets or businesses, or, provided that we do not materially adversely affect our ability to obtain an FCC order approving the transactions contemplated by the merger agreement, from acquiring or agreeing to acquire any other person or their assets if such action is, in our judgment, desirable in the conduct of our business or our subsidiaries’ business.

Additional Covenants. The merger agreement also contains other covenants made by us and Stations, including a covenant to file all necessary FCC applications for approval of the transactions contemplated by the merger agreement and a covenant to use reasonable efforts to take all actions and to do all things necessary, proper or advisable to consummate the merger as promptly as practicable but not before October 1, 2002.

Covenants of Stations

The merger agreement contains numerous covenants of Stations that are customary for this type of transaction. Among other things, subject to limited exceptions, Stations and its subsidiaries will not do or agree to do any of the following without our prior written consent, which we will not withhold unreasonably:


	•	amend the organizational documents of Stations or of any of its subsidiaries;

	•	incur, guarantee or otherwise become responsible for any new debt obligation or other obligation for borrowed money (other than indebtedness of Stations or any of its subsidiaries to Stations or any of its subsidiaries) or enter into or extend any capital leases, in excess of an aggregate of $500,000 for Stations and its subsidiaries on a consolidated basis;

	•	acquire, sell or encumber any securities or assets of Stations or any of its subsidiaries, or declare or pay any dividend or make any other distribution in respect of any such securities;

	•	increase the compensation or benefits of the employees or officers of Stations or any or its subsidiaries;

	•	voluntarily accelerate the vesting of any stock options or other stock-based compensation or employee benefits;

	•	adopt any new employee benefit plan or program of Stations or any of its subsidiaries or make any material change in or to any existing employee benefit plans or programs of Stations or any of its subsidiaries;

	•	make any significant change in any accounting methods, principles, or practices or systems of internal accounting controls, except as may be necessary to conform to changes in regulatory accounting requirements or generally accepted accounting principles;

	•	settle any material litigation other than in accordance with past practice or to the extent it is covered by insurance;

	•	except in the ordinary course of business consistent with past practices, enter into or terminate any material contract or make any material change in any contract;

	•	fail to promptly notify us of any inquiry, investigation, or proceeding related to any of Stations’ television stations that is initiated by the FCC; and

	•	request the bankruptcy court to take any action or to grant any approval to any action or matter that is in any way inconsistent with the merger agreement.

Indemnification

For a period of six years after the effective time of the merger, we will indemnify the pre-merger directors, officers, employees and agents of Stations and its subsidiaries against all liabilities arising out of acts or omissions occurring at or prior to the effective time arising out of their service as directors, officers, employees or agents of Stations, any of its subsidiaries or, at Stations’ or any of its subsidiaries’ request, another entity, to the fullest extent permitted under Delaware law, by Stations’ or its subsidiaries’ certificates of incorporation and bylaws and by any applicable indemnification agreements.

Termination of the Merger Agreement

The merger agreement generally may be terminated at any time prior to the effective time by the mutual consent of Gray and Stations or by us or Stations:


	•	if the terminating party is not then in material breach of any of its representations or warranties or any of its covenants contained in the merger agreement, in the event of the inaccuracy of any representation or warranty of the non-terminating party contained in the merger agreement which would reasonably be expected to have or result in a material adverse effect on the non-terminating party and cannot be or has not been cured within 30 days after written notice of such inaccuracy is given to the non-terminating party;

	•	if the terminating party is not then in material breach of any of its representations or warranties or any of its covenants contained in the merger agreement, in the event of a material breach by the non-terminating party of any covenant or agreement contained in the merger agreement that cannot be or has not been cured within 30 days after written notice of such breach is given to the non-terminating party, except that we may not cure any breach of our obligation to pay the merger consideration;

	•	if the merger is not consummated by March 31, 2003, in each case only if the failure to consummate the transactions contemplated by the merger agreement on or before such date is not caused by any material breach of the merger agreement by the terminating party, except that the March 31, 2003 termination date automatically will be extended by one day for each day that the closing does not occur because, subject to certain exceptions, the transactions contemplated by the Chelsey purchase agreement are not consummated; or

	•	if it is reasonably anticipated that any of the conditions precedent to the obligations of the terminating party to consummate the merger, other than the condition that, subject to certain exceptions, the transactions contemplated by the Chelsey purchase agreement are consummated, cannot be satisfied or fulfilled by March 31, 2003 and such failure was not the fault of the terminating party.

Effects of Termination

If the merger agreement is terminated, as described above, it will become void and have no effect. However, certain provisions of the merger agreement will survive termination, including provisions relating to the letter of credit and the escrow shares, confidentiality and expenses. In addition, in the event that the merger agreement is terminated by us or by Stations in connection with any material breach of any representation or warranty or any covenant or other agreement of the other party contained in the merger agreement or because the merger is not consummated prior to the applicable termination date, the breaching party will remain liable for any uncured breach of a representation, warranty, covenant or agreement giving rise to such termination.

If the closing does not occur due to a material default by us, and Stations has not materially defaulted due to a breach of any of its representations or warranties or any of its covenants or agreements under the merger agreement, then Stations may draw on the letter of credit and instruct the escrow agent to deliver to it the escrow shares pursuant to the escrow agreement. The aggregate proceeds of the drawing on the letter of credit and the escrow shares will total $25 million, but we may replace some or all of the

escrow shares with a cash payment so long as any such cash payment is a whole number multiple of $500,000.

If the closing does not occur due to the non-fulfillment of any of the conditions precedent to each party’s obligation to consummate the merger, and we are not in material default in the performance of any of our representations or warranties or any of our covenants or agreements under the merger agreement, Stations will not be entitled to the letter of credit or the escrow shares and, after termination of the merger agreement, the letter of credit and the escrow shares will be returned to us.

Waivers

Prior to or at the effective time, we and Stations may waive any material default in the performance of any term of the merger agreement by the other party or any of its subsidiaries, waive or extend the time for the compliance or fulfillment by the other party and its subsidiaries of any and all of their obligations under the merger agreement, and waive any or all of the conditions precedent to the obligations of the other party and its subsidiaries under the merger agreement. However, neither we nor Stations may waive any condition which, if not satisfied, would result in the material violation of any law.

Fees and Expenses

Generally, regardless of whether the merger is consummated, Stations will be responsible for all expenses and fees incurred by it and its subsidiaries in connection with the merger and we will be responsible for all expenses and costs incurred by us in connection with the merger. However, we will pay all the fees related to the filings with the FTC. Also, Stations and we will each pay one-half of the processing fees related to the filing with the FCC of applications regarding the transfer of control of Benedek’s television licenses to us.

Lock Up Agreements

On June 4, 2002, in connection with the transactions contemplated by the merger agreement, Stations and we entered into the lock up agreements with certain stockholders and creditors of Stations, whom we refer to as the “consenting stockholders and creditors.” Under these lock up agreements, the consenting stockholders and creditors agreed to, among other things, support and vote their shares in favor of a Stations bankruptcy plan that will give effect to the transactions contemplated by the merger agreement. Stations has received executed lock up agreements from holders of 97.9% of the outstanding senior preferred stock, 98.8% of the outstanding junior preferred stock, 100% of the outstanding class B common stock, and 94.6% of the outstanding aggregate principal amount of the senior subordinated discount notes.

In addition, consenting stockholders that hold Stations senior preferred stock have agreed to pay to us, if Stations receives certain superior proposals relating to an acquisition of Stations by a third party and such superior proposal is approved by the bankruptcy court, contemporaneously with the transaction contemplated by such superior proposal, a termination fee of $15 million. The liability of each consenting stockholder that holds Stations senior preferred stock is limited to an amount determined by multiplying $15 million by a fraction, the numerator of which is the number of shares of senior preferred stock owned by such consenting stockholder and the denominator of which is the number of shares of Stations senior preferred stock owned by all consenting stockholders.

Benedek Family Benefits Agreement

On May 29, 2002, in connection with the transactions contemplated by the merger agreement, we entered into a letter agreement with A. Richard Benedek, Chairman of the Board and Chief Executive Officer of Stations, Laura Benedek, Richard Benedek’s wife, and Stephen D. Benedek, a Vice President of Stations and Richard Benedek’s son, in which we agreed to provide to them, following consummation of the merger, certain health and welfare benefits, use of office space in New York City until no later than August 31, 2005, and severance benefits of up to $275,000. In addition, we may be required to forgive certain indebtedness owed by Richard Benedek to Stations. Upon the closing of the merger, we will cease

the use of the name “Benedek Broadcasting,” the “Benedek.com” URL and the name “Benedek Interactive Media.” The right to use the “Benedek Broadcasting” name will be conveyed, at no cost, to Richard Benedek and the right to use the “Benedek.com” URL and the name “Benedek Interactive Media” will be conveyed, at no cost, to Stephen Benedek.

K. James Yager Employment Agreement

On June 4, 2002, Benedek and K. James Yager, Benedek’s President and Chief Operating Officer, entered into a second amendment to K. James Yager’s employment agreement, which will become effective only upon consummation of the merger. In addition, we entered into a letter agreement with K. James Yager relating to this amendment.

K. James Yager’s employment agreement is for a term of four years commencing on January 1, 2001 and ending on December 31, 2004, the “expiration date.” K. James Yager’s base salary is $630,000 for 2001 and $680,000 for 2002 and thereafter increases to a per annum rate not less than 105% of his base salary during the preceding year. K. James Yager is eligible to receive a bonus in respect of each fiscal year during the term of the agreement in such amount as Benedek may determine. The agreement also entitles K. James Yager to specified fringe benefits and to participation in employee benefit plans generally available to Benedek’s executives. In addition, Benedek has agreed to pay to K. James Yager the amount necessary, on an after-tax basis, to discharge all amounts, including accrued interest, owed by him to Benedek under his $555,000 promissory note.

If Benedek terminates K. James Yager’s employment without cause, or if K. James Yager terminates his employment by reason of a “constructive discharge,” which includes the assignment to K. James Yager of duties or reporting responsibilities inconsistent in any material respect with his status, title, position or duties or any breach by Benedek of his employment agreement, K. James Yager will be entitled to receive his base salary, and to participate, at no cost to him, in all employee benefits, through the expiration date and his non-competition obligations will be terminated. In our letter agreement with K. James Yager, we agreed that our failure to employ him as President and Chief Operating Officer of our broadcast division or subsidiary within 12 months after the consummation of the merger would constitute a constructive discharge, entitling him to the above benefits.

Our letter agreement with K. James Yager also provides that, after consummation of the merger, we will grant to him nonqualified options to purchase shares of our class B common stock pursuant to the terms of our long term incentive plan. The number of shares subject to the option award will be determined by our board of directors, and the exercise price of the option shares will be the market price of our class B common stock at the time the award is granted. The options will vest ratably over the term of K. James Yager’s employment agreement, with vesting to be accelerated in the event of a constructive discharge.

Bull Run Advisory Fee

For advisory services rendered by Bull Run in connection with the merger, we paid to Bull Run an advisory fee of $5,000,000 on June 10, 2002. This advisory fee must be repaid to us if the merger is not completed.

INFORMATION REGARDING GRAY

Operating & Growth Strategy

We attribute our success to date and our current opportunities to increase our revenue, media cash flow and audience share to the successful implementation of our core operating strategies, the principal components of which are to:


	•	*Focus on Local News and Programming to Maintain a Strong Local Franchise.* We operate, or will operate after completion of the merger with Stations, 28 network affiliated television stations serving 23 markets, with 24 of our 28 stations ranked first or second in local news. We endeavor to make each of our television stations a highly recognizable, local brand through the depth, quality and focus of its local news, programming and community involvement. We believe that providing the leading source for local news and programming in our markets enables us to strengthen audience loyalty and increase viewership among attractive demographic audiences. As a result, we believe that the strength of our local franchises enables us to maximize advertising revenues from local, regional and national accounts. We believe that our commitment to local news, programming and community involvement is essential to our ability to serve each of the communities in which we operate and provides us with a strong competitive advantage.

	•	*Continue to Develop Innovative Local Sales and Targeted Marketing Initiatives.* We employ an experienced, high-quality local sales force at each station to increase advertising revenue by leveraging our local brand. In 2001, pro forma for the proposed merger with Stations, approximately 60% of our net television advertising revenue was generated from our local advertisers. Additionally, our net revenue from local television advertisers represented approximately 67% of the combined total of our local and national net advertising revenues. Our goal is to develop customized advertising campaigns for our customers, which directly target their desired audience and address their long-term advertising objectives. We believe that a focused, tailored advertising solution is very attractive to local advertisers, who have historically been a more stable source of revenue than national advertisers. In addition to focusing on expanding our relationships with existing advertisers, we seek to identify and create new relationships with local, regional and national customers in our markets. Each station’s sales personnel are trained to understand local advertisers’ needs and are required to meet performance standards with respect to client activity, including new customer identification.

	•	*Capitalize on Leading Network Brands in Markets with Limited Competition.* We have, or will have after completion of the merger with Stations, a broad and diverse portfolio of 28 affiliated television stations located in 23 markets, of which 15 are affiliated with CBS, seven are affiliated with NBC and six are affiliated with ABC affiliates, representing approximately 56%, 29%, and 15% of our total pro forma net television revenue in 2001, respectively. Additionally, we will be the largest independent owner of CBS affiliated television stations. Our network affiliations provide our television stations with top-rated programming, which complements and enhances our leading local brand. We believe that our markets are less competitive than larger designated market areas, “DMAs.” Of our 24 markets (including Hazard, Kentucky as a separate market), 16 markets are served by four TV stations or fewer, and seven markets are served by three or fewer television stations. Our markets also typically have fewer radio stations than larger DMAs.

	•	*Pursue Strategic Acquisitions to Expand and Enhance Our Regional Clusters.* We have acquired and integrated successfully 12 of our 13 television stations since 1993, and have signed a definitive


		agreement to acquire an additional 15 television stations from Stations. After giving effect to the proposed merger, our television stations are located in several distinct regions throughout the United States, with significant presence in the Southeast, Midwest, Texas and Great Lakes region, diminishing any potential adverse effect on our business caused by specific regional economic fluctuations. We believe that we are well positioned to participate in further consolidation of our industry, including opportunities that may arise as a result of future regulatory changes. For example, a number of the FCC’s most restrictive ownership regulations, including newspaper-television cross ownership and television duopoly rules, are currently under review and could be relaxed in the future, providing us with further attractive growth opportunities. In pursuing future acquisitions, we intend to focus on network affiliated television stations in medium-sized markets that offer superior growth. Specifically, we pursue television stations proximate to our existing clusters, as evidenced by the proposed merger with Stations in which five of the 15 television stations we intend to acquire are adjacent to markets in which we currently own and operate television stations. Additionally, we focus on acquiring television stations where we can successfully implement our operating strategies to establish leading local news, increase revenue and audience share, develop relevant regional content and reduce costs.

	•	*Attract and Retain High-Quality Management.* We believe that high-quality management at both the corporate and station level is critical to the successful implementation of our strategy. We use equity incentives to attract and retain station general managers with proven track records. Members of our senior management team have extensive experience in operating, managing and acquiring television stations, and include: J. Mack Robinson, President and Chief Executive Officer; Robert Prather, Executive Vice President - Acquisitions; James Ryan, Vice President and Chief Financial Officer; and after the proposed merger, K. James Yager, currently the President of Benedek.

	•	*Maintain Strict Financial Planning and Cost Controls.* We employ a comprehensive ongoing strategic planning and budgeting process that enables us to continually identify and implement cost savings at each station, and is designed to increase our media cash flow. Owning and operating 28 television stations will enable us to achieve economies of scale and reduce expenses for syndicated programming, capital equipment and vendor services. Furthermore, we believe that the synergies generated through geographic clustering, further enhanced by the Stations acquisition and the realization of technological and automation efficiencies, will enable us to achieve additional cost savings in the near future.

	•	*Increase Advertising Revenue and Circulation at Our Newspaper Publishing Operations.* We seek to increase advertising revenues and circulation at each of our four newspapers by creating a highly recognizable local brand by focusing on the depth and quality of our coverage of local news, sports and lifestyles and through community involvement. We are able to differentiate our publications from larger competitors and build reader loyalty by becoming the primary source for local news and advertising information within each of our target markets. We also sponsor community events with the objective of strengthening our community relationships. We employ an experienced local sales force to increase advertising revenue by leveraging our local brand. Through our ongoing strategic planning and budgeting process, we continually identify and implement cost savings at each newspaper to increase our media cash flow. In 2001, publishing represented approximately 16% of our total pro forma net revenue. Our publishing management team has extensive experience in operating, managing and acquiring newspapers and is led by Thomas J. Stultz, Vice President and President of Publishing, who has 32 years of publishing industry experience.

SELECTED STATION AND MARKET INFORMATION REGARDING GRAY AND STATIONS

Gray Television Stations Pro Forma Following the Merger

The following is a list of all our stations pro forma following the merger. In markets where we have satellite stations and stations that serve distant communities, the figures have been combined.


													FCC					Station				In Market
									Network Affiliation				License		Station			News		Commercial		Share of			Television
	DMA						Analog						Renewal		Rank in			Rank In		Stations in		Household			Households(a)
	Rank(a)		Market		Station		Channel		Network		Expiration		Date		DMA(b)			DMA(c)		DMA(d)		Viewing(b)			(in thousands)

*		62		Knoxville, TN		WVLT		8		CBS		12/31/04		8/1/05		2 (tied	)		3		5		22	%		478
		65		Wichita- Hutchinson, KS		KAKE		10		ABC		1/1/06		6/1/06		3			3		4		21	%		453
				(Colby, KS)		KLBY(e)		4		ABC		1/1/06		6/1/06
				(Garden City, KS)		KUPK(e)		13		ABC		1/1/06		6/1/06
*		66		Lexington, KY		WKYT		27		CBS		12/31/04		8/1/05		1			1		5		35	%		436
*		Note (f)		Hazard, KY		WYMT		57		CBS		12/31/04		8/1/05		1			1				39	%		169
		75		Omaha, NE		WOWT		6		NBC		1/1/12		6/1/06		1			1		5		36	%		386
		85		Madison, WI		WMTV		15		NBC		1/1/12		12/1/05		2			2		4		30	%		339
		91		Colorado Springs, CO		KKTV		10		CBS		6/30/05		4/1/06		1			1		5		33	%		306
*		94		Waco-Temple- Bryan, TX		KWTX		10		CBS		12/31/05		8/1/06		1			1		6		42	%		299
*				(Bryan, TX)		KBTX(g)		3		CBS		12/31/05		8/1/06		1			1
*		102		Lincoln-Hastings- Kearney, NE		KOLN		10		CBS		12/31/05		6/1/06		1			1		5		54	%		269
*				(Grand Island, NE)		KGIN(h)		11		CBS		12/31/05		6/1/06
*		106		Greenville- New Bern- Washington, NC		WITN		7		NBC		12/31/11		12/1/04		2			2		4		30	%		251
		111		Lansing, MI		WILX		10		NBC		1/1/12		10/1/05		1			1		4		39	%		238
*		113		Tallahassee, FL- Thomasville, GA		WCTV		6		CBS		12/31/04		4/1/05		1			1		5		57	%		237
*		114		Augusta, GA		WRDW		12		CBS		3/31/05		4/1/05		1			1		4		35	%		234
*		127		La Crosse- Eau Claire, WI		WEAU		13		NBC		12/31/11		12/1/05		1			1		4		39	%		198
		132		Rockford, IL		WIFR		23		CBS		6/30/05		12/1/05		2			1		4		32	%		176
		137		Wausau- Rhinelander, WI		WSAW		7		CBS		6/30/05		12/1/05		1			2		4		42	%		169
		138		Topeka, KS		WIBW		13		CBS		6/30/05		6/1/06		1			1		4		49	%		166
*		159		Panama City, FL		WJHG		7		NBC		12/31/11		2/1/05		1			1		3		50	%		121
*		160		Sherman, TX- Ada, OK		KXII		12		CBS		12/31/05		8/1/06		1			1		2		74	%		119
		172		Dothan, AL		WTVY		4		CBS		6/30/05		4/1/05		1			1		3		69	%		95
		178		Harrisonburg, VA		WHSV		3		ABC		11/1/04		10/1/04		1			1		1		97	%		84
		181		Bowling Green, KY		WBKO		13		ABC		11/1/04		8/1/05		1			1		2		83	%		81
		185		Meridian, MS		WTOK		11		ABC		11/1/04		6/1/05		1			1		3		66	%		70
		186		Parkersburg, WV		WTAP		15		NBC		1/1/12		10/1/05		1			1		1		96	%		63

																										5,437

(Approximately 5% of all

US television households)


	*	Denotes a television station currently owned by Gray.


(a)		Based on data published by Nielsen.

(b)		Based on Nielsen data for the May 2002 rating period, Sunday to Saturday, 6 am – 2 am.

(c)		Based on our review of the Nielsen data for the May 2002 rating period during various news hours.

(d)		Based on stations that BIA has reported at one share or more in three of the four most recent rating periods.

(e)		KLBY and KUPK are satellite stations of KAKE under FCC rules.

(f)		Special 16 county trading area defined by Nielsen and is part of the Lexington, KY DMA.

(g)		KBTX is a satellite station of KWTX under FCC rules.

(h)		KGIN is a satellite station of KOLN under FCC rules.

Our Markets

Below is a brief description of the market for each of our stations. All statements as to station ranking in this report are based on Nielsen data for the 6:00 a.m. to 2:00 a.m. Sunday through Saturday time period, except that data in the tables titled “Competitive Landscape,” is based on BIA data for the 9:00 a.m. to midnight Sunday through Saturday time period. The news ranking information is based on our management’s review of the Nielsen Station Index, Viewers in Profile, dated May 2002. As NBC affiliate stations broadcasted the Olympic games during February 2002, their ratings for this period reflect a higher than normal viewership. “CAGR” refers to compound annual growth rate and “EBI” refers to effective buying income. EBI statistics reflect data for 2000 and 2005. In the “Competitive Landscape” tables below, we have included only stations that BIA has reported at one share or more in three of the four most recent rating periods.

Knoxville, Tennessee

WVLT, a CBS affiliate, was acquired by us in September 1996 and began operations in 1988. It is the second ranked station, with the third ranked news program, in the Knoxville, Tennessee market. The Knoxville area is a center for education, manufacturing, healthcare and tourism. The University of Tennessee’s main campus with approximately 26,000 students is located within the city of Knoxville. Leading manufacturing employers in the area include: Lockheed Martin Energy Systems, Inc., DeRoyal Industries, Aluminum Company of North America, Phillips Consumer Electronics North America Corp., Clayton Homes and Sea Ray Boats, Inc.

Market Overview


	2001		2006		CAGR


	(In Thousands)
DMA Population		1,208		1,277		1.12	%
Retail Sales	$	17,255	$	22,109		5.08
EBI		19,317		25,203		5.46
Gross Market Revenue		68,700		77,600		2.47
Average Household Income		40.3		NA

Competitive Landscape

Share Summary

9AM to Midnight

VHF or

Station

Network

UHF

Owner

May-02

Feb-02

Nov-01

Jul-01

WBIR-TV

NBC

VHF

Gannett Company, Inc.

WVLT-TV

CBS

VHF

Gray Communications Systems, Inc.

WATE-TV

ABC

VHF

Young Broadcasting Inc.

WTNZ

FOX

UHF

Raycom Media, Inc.

WBXX-TV

UHF

Acme Communications, Inc.

Lexington and Hazard, Kentucky

WKYT, a CBS affiliate, was acquired by us in September 1994 and began operations in 1957. It is ranked first in total viewers and in news programming in the Lexington, Kentucky market. The Lexington area is a regional hub for shopping, business, healthcare, education, and cultural activities. Major employers in the Lexington area include Toyota Motor Corp., Lexmark International, Inc., ALLTEL Corporation, Square D Company, Ashland, Inc., the University of Kentucky and International Business Machines Corporation. Eight hospitals are located in Lexington, reinforcing Lexington’s position as a regional medical center. The University of Kentucky’s main campus with approximately 25,000 students is located in Lexington. Frankfort, the capital of Kentucky is located within WKYT’s service area. WYMT, WKYT’s sister station is located in the Lexington DMA. In addition, the Lexington market is adjacent to the Bowling Green, Kentucky market where we intend to acquire WBKO in the merger.

WYMT, a CBS affiliate, was acquired by us in September 1994 and began operations in 1985. It is ranked first in total viewers and in news programming in the Hazard, Kentucky market, a special 16 county trading area defined by Nielsen. The mountain region of eastern and southeastern Kentucky where Hazard is located is on the outer edges of four separate markets: Bristol-Kingsport-Johnson City, Charleston-Huntington, Knoxville and Lexington. Prior to the start of WYMT’s operations in 1985, mountain residents relied primarily on satellite dishes and cable television carrying distant signals for their television entertainment and news. WYMT is the only commercial television station in this 16-county trading area and we generally consider it to be a distinct television market even though WYMT is technically included in the Lexington market. WYMT is the sister station of WKYT and shares many resources and simulcasts some local programming with WKYT. The trading area’s economy is primarily centered around coal and related industries, such as natural gas and oil.

Market Overview


	2001		2006		CAGR


	(In Thousands)
DMA Population		1,153		1,210		0.97	%
Retail Sales	$	13,381	$	15,738		3.30
EBI		17,241		22,236		5.22
Gross Market Revenue		55,300		67,600		4.10
Average Household Income		39.2		NA

Competitive Landscape

Share Summary

9AM to Midnight

VHF or

Station

Network

UHF

Owner

May-02

Feb-02

Nov-01

Jul-01

WKYT-TV

CBS

UHF

Gray Communications Systems, Inc.

WLEX-TV

NBC

UHF

Evening Post Publishing Company

WTVQ-TV

ABC

UHF

Media General Broadcast Group

WDKY-TV

FOX

UHF

Sinclair Broadcast Group, Inc.

WYMT-TV

CBS

UHF

Gray Communications Systems, Inc.

Waco-Temple-Bryan, Texas

KWTX and KBTX, both CBS affiliates, were acquired by us in October 1999 and began operations in 1955 and 1957, respectively. They collectively are ranked first in total viewers and in news programming in the Waco-Temple-Bryan, Texas market. KBTX is a “satellite” station under FCC rules and is used to enhance our ability to effectively serve the entire market. Waco, Temple, Killeen, Bryan and College Station are the primary economic centers of the region. College Station, Texas is the home of Texas A&M University with approximately 45,000 students and Baylor University is located in Waco, Texas with approximately 13,000 students. The Waco-Temple-Bryan economy centers on education, medical services and U.S. military installations. Leading employers in the area include: Texas A&M University, Raytheon, Baylor University, St. Joseph’s Regional Medical Center, Killeen ISD, Scott and White Hospital and the U.S. Army base at Fort Hood, Texas.

Market Overview


	2001		2006		CAGR


	(In Thousands)
DMA Population		843		869		0.61	%
Retail Sales	$	9,433	$	11,698		4.40
EBI		11,824		14,508		4.18
Gross Market Revenue		29,500		36,400		4.29
Average Household Income		39.2		NA

Competitive Landscape

Share Summary

9AM to Midnight

VHF or

Station

Network

UHF

Owner

May-02

Feb-02

Nov-01

Jul-01

KWTX-TV & KBTX-TV

CBS

VHF

Gray Communications Systems, Inc.

KCEN-TV

NBC

VHF

Channel 6, Inc.

KWKT & KYLE

FOX

UHF

Communications Corp of America

KXXV & KRHD-LP

ABC, WB

UHF

Drewry Communications Group

KAKW

UNI

UHF

Univision Communications, Inc.

—

Lincoln-Hastings-Kearney, Nebraska

KOLN and KGIN, both CBS affiliates, were acquired by us in July 1998 and began operations in 1953 and 1961, respectively. They are ranked first in total viewers and in news programming in the Lincoln-Hastings-Kearney, Nebraska market. KGIN is a “satellite” station under FCC rules and is used to enhance our ability to serve the entire market effectively. The city of Lincoln is the primary economic center of the region, the capital of Nebraska and home to the University of Nebraska with approximately 23,000 students. The Lincoln-Hastings-Kearney economy centers around state government, education, medical services and agriculture. Leading employers in the area include: the State of Nebraska, the University of Nebraska, Gallup Inc., the Lincoln Public School System and several area hospitals. The Lincoln market is adjacent to the Omaha, Nebraska market where we intend to acquire WOWT in the merger.

Market Overview


	2001		2006		CAGR


	(In Thousands)
DMA Population		684		696		0.35	%
Retail Sales	$	7,766	$	8,680		2.25
EBI		12,081		15,140		4.62
Gross Market Revenue		21,200		25,900		4.09
Average Household Income		44.6		NA

Competitive Landscape

Share Summary

9AM to Midnight

VHF or

Station

Network

UHF

Owner

May-02

Feb-02

Nov-01

Jul-01

KOLN & KGIN

CBS

VHF

Gray Communications Systems, Inc.

KHGI-TV

ABC

VHF

Pappas Telecasting Companies

KLKN & KLKE

ABC

VHF

Citadel Communications Company, Ltd.

KHAS-TV

NBC

VHF

Greater Nebraska Television, Inc.

KTVG

FOX

UHF

Hill Broadcasting Company, Inc.

Greenville-New Bern-Washington, North Carolina

WITN, an NBC affiliate, was acquired by us in August 1997 and began operations in 1955. Based on the February and May 2002 ratings, WITN is currently tied for the first position in total viewers and in news programming in the Greenville-New Bern-Washington, North Carolina market. Greenville, North Carolina is the primary economic center of the region and home to East Carolina University with approximately 19,000 students. The Greenville-New Bern-Washington economy centers around education, manufacturing and agriculture. Leading employers in the area include: Pitt County Memorial Hospital, NADEP (Naval Rework Facility), East Carolina University, Catalytica Pharmaceuticals, Inc., PCS Phosphate, Rubber Maid Cleaning Products, Inc. and Weyerhaeuser Co.

Market Overview


	2001		2006		CAGR


	(In Thousands)
DMA Population		705		731		0.73	%
Retail Sales	$	7,271	$	8,116		2.22
EBI		10,060		12,647		4.68
Gross Market Revenue		29,200		36,400		4.51
Average Household Income		40.0		NA

Competitive Landscape

Share Summary

9AM to Midnight

VHF or

Station

Network

UHF

Owner

May-02

Feb-02

Nov-01

Jul-01

WNCT-TV

CBS

VHF

Media General Broadcast Group

WITN-TV

NBC

VHF

Gray Communications Systems, Inc.

WCTI

ABC

VHF

Lamco Communications Incorporated

WFXI & WYDO

FOX

VHF

GOCOM Holdings LLC

Tallahassee, Florida - Thomasville, Georgia

WCTV, a CBS affiliate, was acquired by us in September 1996 and began operations in 1955. It is ranked first in total viewers and in news programming in the Tallahassee, Florida - Thomasville, Georgia market. The Tallahassee-Thomasville economy centers around state and local government as well as state and local universities which include Florida State University with approximately 33,000 students, Florida A&M University with approximately 12,000 students, Tallahassee Community College, Thomas College and Valdosta State University. Florida State University and Florida A&M University each have their main campus located within the city of Tallahassee.

Market Overview


	2001		2006		CAGR


	(In Thousands)
DMA Population		649		678		0.88	%
Retail Sales	$	7,217	$	8,880		4.23
EBI		9,439		11,780		4.53
Gross Market Revenue		23,900		30,500		5.00
Average Household Income		39.4		NA

Competitive Landscape

Share Summary

9AM to Midnight

VHF or

Station

Network

UHF

Owner

May-02

Feb-02

Nov-01

Jul-01

WCTV

CBS

VHF

Gray Communications Systems, Inc.

WTWC-TV

NBC

UHF

Sinclair Broadcast Group, Inc.

WTXL-TV

ABC

UHF

Media Venture Management, Inc.

WTLH

FOX

UHF

Pegasus Communications Corporation

Augusta, Georgia

WRDW, a CBS affiliate, was acquired by us in January 1997 and began operations in 1954. It is ranked first in total viewers and in news programming in the Augusta, Georgia market. The Augusta, Georgia area is one of Georgia’s major metropolitan/regional centers, with a particular emphasis on health services, manufacturing and the military. The federal government employs military and civilian personnel at the Department of Energy’s Savannah River Site, a nuclear processing plant, and Fort Gordon, a U.S. Army military installation. Augusta has eight large hospitals, which collectively employ approximately

20,000 and reinforce Augusta’s status as a regional healthcare center. Augusta is also home to the Masters Golf Tournament, which has been broadcast by CBS for 46 years.

Market Overview


	2001		2006		CAGR


	(In Thousands)
DMA Population		644		661		0.52	%
Retail Sales	$	6,736	$	7,902		3.24
EBI		8,668		10,153		3.21
Gross Market Revenue		30,000		36,200		3.83
Average Household Income		36.8		NA

Competitive Landscape

Share Summary

9AM to Midnight

VHF or

Station

Network

UHF

Owner

May-02

Feb-02

Nov-01

Jul-01

WRDW-TV

CBS

VHF

Gray Communications Systems, Inc.

WJBF

ABC

VHF

Media General Broadcast Group

WAGT

NBC

UHF

Schurz Communications, Inc.

WFXG

FOX

UHF

Fisher Broadcasting Company

La Crosse-Eau Claire, Wisconsin

WEAU, an NBC affiliate, was acquired by us in July 1998 and began operations in 1953. It is the first ranked station in total viewers and in news programming in the La Crosse-Eau Claire, Wisconsin market. The La Crosse and Eau Claire economy centers around medical services, agriculture, education and retail business. The University of Wisconsin maintains an 11,000-student campus in Eau Claire. Leading employers include Menard, Inc., the University of Wisconsin at Eau Claire and several area hospitals. The La Crosse-Eau Claire market is adjacent to both the Madison, Wisconsin market where we intend to acquire WMTV in the merger and the Wausau-Rhinelander, Wisconsin market where we intend to acquire WSAW in the merger.

Market Overview


	2001		2006		CAGR


	(In Thousands)
DMA Population		530		541		0.41	%
Retail Sales	$	7,160	$	8,793		4.19
EBI		7,779		9,415		3.89
Gross Market Revenue		22,800		30,200		5.78
Average Household Income		39.1		NA

Competitive Landscape

Share Summary

9AM to Midnight

VHF or

Station

Network

UHF

Owner

May-02

Feb-02

Nov-01

Jul-01

WEAU-TV

NBC

VHF

Gray Communications Systems, Inc.

WKBT

CBS

VHF

Morgan Murphy Stations

WXOW-TV & WQOW-TV

ABC

UHF

Quincy Newspapers, Inc.

WLAX & WEUX

FOX

UHF

Grant Media, Inc.

Panama City, Florida

WJHG, an NBC affiliate, was acquired by us in 1960 and began operations in 1953. It is the first ranked station in total viewers and in news programming in the Panama City, Florida market. It has a

secondary affiliation agreement with United Paramount Network, “UPN”. The Panama City economy centers around tourism, military bases, manufacturing, education and financial services. Panama City is the county seat and principal city of Bay County. Leading employers in the area include: Tyndall Air Force Base, the U.S. Navy Coastal Systems Station, Sallie Mae Servicing Corp., Stone Container Corporation, Arizona Chemical Corporation and Gulf Coast Community College. The Panama City market is adjacent to the Dothan, Alabama market where we intend to acquire WTVY, a CBS affiliate, in the merger.

Market Overview


	2001		2006		CAGR


	(In Thousands)
DMA Population		324		346		1.32	%
Retail Sales	$	3,508	$	4,265		3.99
EBI		4,525		5,792		5.06
Gross Market Revenue		12,300		14,900		3.91
Average Household Income		37.4		NA

Competitive Landscape

Share Summary

9AM to Midnight

VHF or

Station

Network

UHF

Owner

May-02

Feb-02

Nov-01

Jul-01

WJHG-TV

NBC, UPN

VHF

Gray Communications Systems, Inc.

WMBB

ABC

VHF

Media General Broadcast Group

WPGX

FOX

UHF

Waitt Broadcasting, Inc.

Sherman, Texas-Ada, Oklahoma

KXII, a CBS affiliate, was acquired by us in October 1999 and began operations in 1956. It is ranked first in total viewers and in news programming in the Sherman, Texas-Ada, Oklahoma market. The Sherman, Texas-Ada, Oklahoma economy centers around medical services, manufacturing and distribution services. Leading employers include Michelin, MEMC Southwest, Globitech, Raytheon, CIGNA, Johnson & Johnson and Texas Instruments.

Market Overview


	2001		2006		CAGR


	(In Thousands)
DMA Population		310		322		0.76	%
Retail Sales	$	3,815	$	4,806		4.73
EBI		4,265		5,383		4.77
Gross Market Revenue		7,700		9,200		3.62
Average Household Income		35.4		NA

Competitive Landscape

Share Summary

9AM to Midnight

VHF or

Station

Network

UHF

Owner

May-02

Feb-02

Nov-01

Jul-01

KXII

CBS

VHF

Gray Communications Systems, Inc.

KTEN

NBC

VHF

Lockwood Broadcasting, Inc.

Stations’ Markets

Below is a brief description of the market for each of the stations that we intend to acquire in the merger. All statements as to station ranking in this report are based on Nielsen data for the 6:00 a.m. to 2:00 a.m. Sunday through Saturday time period, except that data in the tables titled “Competitive Landscape” is based on BIA data for the 9:00 a.m. to midnight Sunday through Saturday time period. The news ranking information is based on our management’s review of the Nielsen Station Index, Viewers in Profile, dated May 2002. As NBC affiliate stations broadcasted the Olympic games, during February 2002, their ratings for this period reflect a higher-than-normal viewership. “CAGR” refers to compound annual growth rate and “EBI” refers to effective buying income. EBI statistics reflect data for 2000 and 2005. In the “Competitive Landscape” tables below, we have included only stations that BIA has reported at one share or more in three of the four most recent rating periods.

Wichita — Hutchinson, Kansas

KAKE, KLBY and KUPK, all ABC affiliates, began operations in 1953. They collectively are ranked third in total viewers and in news programming in the Wichita-Hutchinson, Kansas market. KLBY and KUPK are “satellite” stations under FCC rules and are used to enhance Stations’ ability to effectively serve the entire market. The area is well known for its involvement in the aviation industry, with the top three companies in the region, Boeing Company, Cessna Aircraft Company and Raytheon Aircraft Company representing that industry. The Wichita area also serves as a regional banking and medical center, as well as home to the McConnell Air Force Base. Other leading employers in the region are Wichita Public Schools and the State of Kansas. Wichita is also the home to Wichita State University, which has an enrollment of 14,000 students.

Market Overview


	2001		2006		CAGR


	(In Thousands)
DMA Population		1,175		1,212		0.62	%
Retail Sales	$	15,293	$	18,877		4.30
EBI		19,659		23,850		3.94
Gross Market Revenue		57,200		71,200		4.48
Average Household Income		43.0		NA

Competitive Landscape



						Share Summary
						9AM to Midnight
			VHF or
Station	Network		UHF		Owner	May-02		Feb-02		Nov-01		Jul-01

KWCH-TV, KBSD-TV, KBSH-TV & KBSL-TV		CBS		VHF	Media General Broadcast Group		18		15		18		17
KSNW, KSNC, KSNG & KSNK		NBC		VHF	Emmis Communications Corp.		16		22		15		14
KAKE-TV, KLBY & KUPK-TV		ABC		VHF	Stations Holding Company, Inc.		10		8		11		10
KSAS-TV, KAAS-TV & KBDK		FOX		UHF	Clear Channel Television, Inc.		4		6		6		4
KSCC		UPN		UHF	Mercury Broadcasting Company, Inc.		2		2		2		2
KWCV		WB		UHF	Banks Broadcasting, Inc.		2		2		2		—

Omaha, Nebraska

WOWT, an NBC affiliate, began operations in 1949. It is ranked first in total viewers and second in news programming in the Omaha, Nebraska market. The Omaha DMA is home to five Fortune 100 companies, the U.S. Strategic Command Headquarters at Offutt Air Force Base, the University of Nebraska Medical Center and Creighton Medical Center. The University of Nebraska-Omaha has an enrollment of nearly 14,000, and Creighton University has an enrollment of 6,300. Major employers in the area include: the United States military, Union Pacific Railroad, ConAgra, Omaha Public Schools and

First Data Resources. The Omaha market is adjacent to the Lincoln, Nebraska market where we own and operate television stations KOLN and KGIN.

Market Overview


	2001		2006		CAGR


	(In Thousands)
DMA Population		1,008		1,048		0.78	%
Retail Sales	$	13,687	$	16,275		3.52
EBI		20,452		27,141		5.82
Gross Market Revenue		62,100		72,200		3.06
Average Household Income		52.9		NA

Competitive Landscape

Share Summary

9AM to Midnight

VHF or

Station

Network

UHF

Owner

May-02

Feb-02

Nov-01

Jul-01

WOWT

NBC

VHF

Stations Holding Company, Inc.

KETV

ABC

VHF

Hearst-Argyle Television, Inc.

KMTV

CBS

VHF

Emmis Communications Corp.

KPTM

FOX

UHF

Pappas Telecasting Companies

KXVO

UHF

Mitts Telecasting Company

Madison, Wisconsin

WMTV, an NBC affiliate, began operations in 1953. It is the first ranked station, with the second ranked news program, in the Madison, Wisconsin market. The Madison area hosts the international headquarters for American Family Insurance, Oscar Meyer, Ray-O-Vac and Lands End. In addition to being the state capital, the University of Wisconsin has a major campus in Madison and has an enrollment of over 41,000 students. Major employers in the area are: University of Wisconsin Hospital and Clinics, General Motors Corporation, American Family Insurance, Meritor Health and Wisconsin Physicians Insurance Corporation. The Madison market is adjacent to the Wausau-Rhinelander market and La Crosse-Eau Claire, Wisconsin market where we own and operate television station WEAU.

Market Overview


	2001		2006		CAGR


	(In Thousands)
DMA Population		874		920		1.03	%
Retail Sales	$	15,394	$	19,812		5.18
EBI		16,101		20,418		4.87
Gross Market Revenue		47,200		57,700		4.10
Average Household Income		47.3		NA

Competitive Landscape

Share Summary

9AM to Midnight

VHF or

Station

Network

UHF

Owner

May-02

Feb-02

Nov-01

Jul-01

WISC-TV

CBS

VHF

Morgan Murphy Stations

WMTV

NBC

UHF

Stations Holding Company, Inc.

WKOW

ABC

UHF

Quincy Newspapers, Inc.

WMSN-TV

FOX

UHF

Sinclair Broadcast Group, Inc.

Colorado Springs, Colorado

KKTV, a CBS affiliate, began operations in 1952. It is ranked first in total viewers and in news programming in the Colorado Springs, Colorado market. The Colorado Springs market is home to five major military installations: the Air Force Academy, Peterson Air Force Base, Fort Carson Army Base, Cheyenne Mountain Complex (NORAD), and Shriever Air Force Base. Major employers in the area in addition to the United States military include: The City of Colorado Springs, WorldCom, Inc., Intel Corporation and various non-profit organizations.

Market Overview


	2001		2006		CAGR


	(In Thousands)
DMA Population		799		870		1.72	%
Retail Sales	$	10,439	$	13,172		4.76
EBI		12,591		16,149		5.10
Gross Market Revenue		42,300		49,700		3.28
Average Household Income		41.3		NA

Competitive Landscape

Share Summary

9AM to Midnight

VHF or

Station

Network

UHF

Owner

May-02

Feb-02

Nov-01

Jul-01

KKTV

CBS

VHF

Stations Holding Company, Inc.

KOAA-TV

NBC

VHF

Evening Post Publishing Company

KRDO-TV

ABC

VHF

Pikes Peak Broadcasting Company, Inc.

KXRM

FOX

UHF

Raycom Media, Inc.

KXTU-LP

UPN

UHF

Raycom Media, Inc.

Lansing, Michigan

WILX, an NBC affiliate, began operations in 1957. It is ranked first in total viewers and in news programming in the Lansing, Michigan market. Lansing, the state capital, derives much of its economic base from state agencies, the automotive sector, and the Michigan State University which has over 43,000 students. Some of the top employers in the region include: the State of Michigan, Michigan State University, General Motors Corporation, Sparrow Health Systems and Meijer Grocery Stores.

Market Overview


	2001		2006		CAGR


	(In Thousands)
DMA Population		655		669		0.42	%
Retail Sales	$	7,561	$	8,408		2.15
EBI		10,823		12,728		3.30
Gross Market Revenue		31,900		39,700		4.47
Average Household Income		45.1		NA

Competitive Landscape

Share Summary

9AM to Midnight

VHF or

Station

Network

UHF

Owner

May-02

Feb-02

Nov-01

Jul-01

WLNS

CBS

VHF

Young Broadcasting Inc.

WILX-TV

NBC

VHF

Stations Holding Company, Inc.

WSYM-TV

FOX

UHF

Journal Broadcast Group, Inc.

WLAJ

ABC

UHF

Freedom Communications, Inc.

Rockford, Illinois

WIFR, a CBS affiliate, began operations in 1965. It is ranked first in total viewers and in news programming in the Rockford, Illinois market. Currently, Rockford’s economy is based on the fastener business, as well as the manufacturing of machine parts and aerospace parts. Rockford is emerging as a growing regional education center, having the well respected, small liberal arts school Rockford College in its vicinity. Major employers in the region include: United Parcel Service, Rockford School District, Rockford Health Systems, DaimlerChrysler Corporation, Swedish American Health Systems and Hamilton Sundstrand Corporation.

Market Overview


	2001		2006		CAGR


	(In Thousands)
DMA Population		460		472		0.52	%
Retail Sales	$	5,341	$	5,965		2.23
EBI		8,178		9,590		3.24
Gross Market Revenue		26,600		33,100		4.47
Average Household Income		46.3		NA

Competitive Landscape

Share Summary

9AM to Midnight

VHF or

Station

Network

UHF

Owner

May-02

Feb-02

Nov-01

Jul-01

WREX-TV

NBC

VHF

Quincy Newspapers, Inc.

WIFR

CBS

UHF

Stations Holding Company, Inc.

WTVO

ABC

UHF

Young Broadcasting Inc.

WQRF-TV

FOX

UHF

Quorum Broadcasting Company

Wausau-Rhinelander, Wisconsin

WSAW, a CBS affiliate, began operations in 1954. It is ranked first in total viewers and in news programming in the Wausau-Rhinelander, Wisconsin market. In addition to being a regional medical center, Wausau and the surrounding communities are known as a major capital of paper products and insurance. The University of Wisconsin-Stevens Point has over 10,000 students and is located in the DMA. Major employers in the region include: Wausau Insurance, Marshfield Clinics, Wausau Hospital, Wausau-Mosinee Paper Corporation and the City of Wausau. The Wausau-Rheinlander market is adjacent to the Madison, Wisconsin market and the La Crosse-Ean Claire, Wisconsin market where we own and operate television station WEAU.

Market Overview


	2001		2006		CAGR


	(In Thousands)
DMA Population		444		456		0.53	%
Retail Sales	$	6,323	$	7,707		4.04
EBI		6,984		8,558		4.15
Gross Market Revenue		18,100		22,000		3.98
Average Household Income		41.4		NA

Competitive Landscape

Share Summary

9AM to Midnight

VHF or

Station

Network

UHF

Owner

May-02

Feb-02

Nov-01

Jul-01

WSAW-TV

CBS

VHF

Stations Holding Company, Inc.

WAOW-TV & WYOW

ABC

VHF

Quincy Newspapers, Inc.

WJFW-TV

NBC

VHF

Rockfleet Broadcasting, Inc.

WFXS

FOX

UHF

Davis Television, LLC

Topeka, Kansas

WIBW, a CBS affiliate, began operations in 1953. It is ranked first in total viewers and in news programming in the Topeka, Kansas market. The Topeka DMA has an agricultural base which is augmented by production and manufacturing. In addition to being the state capital, Topeka is home to Forbes Air Force Base, Kansas State University with an enrollment of 22,400 and Washburn University with an enrollment of 6,300 students. Major employers in the area include: Goodyear Tire and Rubber Corporation, Payless ShoeSource, Blue Cross Blue Shield of Kansas and Burlington Northern Santa Fe Railroad.

Market Overview


	2001		2006		CAGR


	(In Thousands)
DMA Population		443		442		(0.05	)%
Retail Sales	$	5,537	$	6,723		3.96
EBI		6,708		7,631		2.61
Gross Market Revenue		16,200		19,900		4.20
Average Household Income		39.8		NA

Competitive Landscape

Share Summary

9AM to Midnight

VHF or

Station

Network

UHF

Owner

May-02

Feb-02

Nov-01

Jul-01

WIBW

CBS

VHF

Stations Holding Company, Inc.

KSNT

NBC

UHF

Emmis Communications Corp.

KTKA-TV

ABC

UHF

Brechner Management Company

KTMJ-CA

FOX, UPN

VHF

Montgomery Communications, Inc.

Dothan, Alabama

WTVY, a CBS affiliate, began operations in 1954. It is ranked first in total viewers and in news programming in the Dothan, Alabama market. Dothan serves as the regional economic, retail, and medical center. It houses Ft. Rucker Army Base, the Southeast Alabama Medical Center, and serves as an important agricultural center. Major employers in the area include: Southeast Alabama Medical Center, Collins Signs, Dothan and Houston Counties School System, Perdue Farms, Inc. and Flowers Hospital. The Dothan market is adjacent to the Panama City, Florida market where we own and operate WJHG.

Market Overview


	2001		2006		CAGR


	(In Thousands)
DMA Population		246		249		0.24	%
Retail Sales	$	2,963	$	3,288		2.10
EBI		3,481		4,187		3.76
Gross Market Revenue		11,900		14,500		4.03
Average Household Income		36.6		NA

Competitive Landscape

Share Summary

9AM to Midnight

VHF or

Station

Network

UHF

Owner

May-02

Feb-02

Nov-01

Jul-01

WTVY

CBS

VHF

Stations Holding Company, Inc.

WDHN

ABC

UHF

Morris Multimedia, Inc.

WDFX-TV

FOX

UHF

Waitt Broadcasting, Inc.

Harrisonburg, Virginia

WHSV, an ABC affiliate, began operations in 1953. It is the only commercial television station broadcasting in the Harrisonburg, Virginia market and is ranked first in total viewers and in news programming. The Harrisonburg market derives much of its economic base from poultry products, book manufacturing and the pharmaceutical industry. James Madison University, with an enrollment of over 16,000, is located in the DMA. Major employers in the area include: James Madison University, Pilgrims Pride, Cargill, Rockingham Memorial Hospital and R.R. Donnelley & Sons Company.

Market Overview


	2001		2006		CAGR


	(In Thousands)
DMA Population		228		236		0.69	%
Retail Sales	$	2,953	$	3,512		3.53
EBI		3,493		4,174		3.63
Gross Market Revenue		9,800		11,800		3.78
Average Household Income		40.7		NA

Competitive Landscape

Share Summary

9AM to Midnight

VHF or

Station

Network

UHF

Owner

May-02

Feb-02

Nov-01

Jul-01

WHSV-TV

ABC

VHF

Stations Holding Company, Inc.

Bowling Green, Kentucky

WBKO, an ABC affiliate, began operations in 1962. It is ranked first in total viewers and in news programming in the Bowling Green, Kentucky market. Bowling Green is located approximately 65 miles outside of Nashville, Tennessee and benefits from its proximity to this major city. Bowling Green is home to Western Kentucky University which has an enrollment of almost 15,000 students. Some of the major employers in the region include: Commonwealth Health Corp., Warren County Board of Education, Western Kentucky University, General Motors Corvette Plant and DESA International. The Bowling Green market is adjacent to the Lexington, Kentucky market where we own and operate WKYT and WYMT.

Market Overview


	2001		2006		CAGR


	(In Thousands)
DMA Population		209		220		1.03	%
Retail Sales	$	2,475	$	2,865		2.97
EBI		3,039		4,006		5.68
Gross Market Revenue		7,500		8,800		3.25
Average Household Income		37.5		NA

Competitive Landscape

Share Summary

9AM to Midnight

VHF or

Station

Network

UHF

Owner

May-02

Feb-02

Nov-01

Jul-01

WBKO

ABC

VHF

Stations Holding Company, Inc.

WNKY

NBC

UHF

Northwest Broadcasting, L.P.

Meridian, Mississippi

WTOK, an ABC affiliate, began operations in 1953. It is ranked first in total viewers and in news programming in the Meridian, Mississippi market. Meridian Naval Air Station is located in the DMA of Meridian, which also is a regional medical and economic center. Major industries in the area include tourism, timber processing, paper products and electronics manufacturing. Top employers in the area include: Peavey Electronics, Mississippi Band of Choctaw Indians, Meridian Naval Air Station, Jeff Anderson Regional Medical Center and the Meridian School System.

Market Overview


	2001		2006		CAGR


	(In Thousands)
DMA Population		189		190		0.11	%
Retail Sales	$	1,883	$	2,245		3.58
EBI		2,469		3,048		4.30
Gross Market Revenue		7,900		9,800		4.40
Average Household Income		34.7		NA

Competitive Landscape

Share Summary

9AM to Midnight

VHF or

Station

Network

UHF

Owner

May-02

Feb-02

Nov-01

Jul-01

WTOK-TV

ABC

VHF

Stations Holding Company, Inc.

WMDN

CBS

UHF

Spain, Frank & Family

WGBC

NBC

UHF

Global Communications, Inc.

Parkersburg, West Virginia

WTAP, an NBC affiliate, began operations in 1953. It is the only commercial television station broadcasting in the Parkersburg, West Virginia market and is ranked first in total viewers and in news programming. The Parkersburg DMA is a major chemical and petroleum center, with such employers as Dupont, Eramet, General Electric Company, Chevron, Globe Metallurgical and Krayton. Other significant employers include Coldwater Creek Clothiers and Ames Hardware. The Parkersburg DMA also plays host to Marietta College with an enrollment of nearly 23,500.

Market Overview


	2001		2006		CAGR


	(In Thousands)
DMA Population		159		157		(0.25	)%
Retail Sales	$	1,911	$	2,025		1.17
EBI		2,539		3,051		3.74
Gross Market Revenue		5,600		6,600		3.34
Average Household Income		39.9		NA

Competitive Landscape

Share Summary

9AM to Midnight

VHF or

Station

Network

UHF

Owner

May-02

Feb-02

Nov-01

Jul-01

WTAP-TV

NBC

UHF

Stations Holding Company, Inc.

BUSINESS OF STATIONS HOLDING COMPANY, INC.

Overview of Stations

We plan to acquire in the merger 15 of Stations’ television stations. These television stations are geographically diverse and serve small to medium-sized markets in 11 states. Five of the stations are affiliated with CBS, six are affiliated with ABC, and four are affiliated with NBC. All of the data included in this section relates solely to the stations that we plan to acquire in the merger.

The stations are located in DMAs ranked in size from 65 to 186 out of the 210 DMAs surveyed by A. C. Nielsen Company. The broadcast signals for these stations that we intend to acquire in the merger reach approximately 2.6 million television households, representing approximately 2.5% of all television households in the United States. Stations believes that broadcast television stations in small to medium-sized markets offer an opportunity to generate attractive and stable broadcasting cash flow due to limited competition from:


	•	other television stations for viewers;

	•	other media soliciting advertising expenditures; and

	•	other television stations purchasing syndicated programming.

Stations operates in markets that typically have stable employment and a diverse base of employers. Stations generally targets markets that have population centers that share common community interests and are receptive to local programming. Stations’ local programming and news content coupled with its network affiliations provide each of its stations with an established audience and reputation for news, sports and entertainment programming.

Stations’ senior management team, led by K. James Yager, President and Chief Operating Officer, has extensive experience in acquiring and improving the operations of television stations. In addition, Stations’ stations are supported by a team of senior vice presidents who directly oversee the day-to-day operations of the business. Louis S. Wall and Christopher H. Cornelius manage seven and six of the stations, respectively. These executives have an average of 22 years of experience operating and managing broadcast television stations.

Stations selectively purchases first run and off-network syndicated programming designed to reach specific demographic groups attractive to advertisers. Currently, Stations broadcasts on many of its stations the five most highly-rated syndicated programs. These programs and the number of stations on which they are broadcast are:


	•	“Wheel of Fortune” on nine of its stations;

	•	“Jeopardy” on seven of its stations;

	•	“Seinfeld” on seven of its stations; and

	•	“Entertainment Tonight” on seven of its stations.

Additionally, Stations broadcasts other highly-rated first run and off-network syndicated programs on its stations including:


	•	“Judge Judy;”

	•	“The Oprah Winfrey Show;”

	•	“Everybody Loves Raymond;”

	•	“Live! with Regis and Kelly;” and

	•	“Frasier.”

Stations seeks to acquire syndicated programs that:


	•	have wide audience appeal;

	•	are available on a cost-effective basis for limited licensing periods;

	•	allow scheduling flexibility;

	•	complement each station’s overall programming mix; and

	•	counter competitive programming.

Stations has been able to purchase syndicated programming at attractive rates because of the limited competition from other television broadcasters for such programming in its markets. As a result, Stations’ cash program expense as a percentage of net revenues for its stations was 4.4% in 1999, 4.7% in 2000 and 5.5% in 2001. In comparison, according to the 2001 Television Financial Report published by the National Association of Broadcasters, the percentage of net revenues spent for programming by all network affiliated stations was 8.8% in 1999 and 8.2% in 2000.

Background

Stations was incorporated under the laws of the State of Delaware on April 10, 1996. Stations’ corporate name was changed from Benedek Communications Corporation to Stations Holding Company, Inc. effective February 1, 2002. Benedek was incorporated under the laws of the State of Delaware on January 22, 1979. The principal executive offices of Stations is located at 2895 Greenspoint Parkway, Suite 250, Hoffman Estates, Illinois 60195. The telephone number at the executive offices is (847) 585-3450.

Network Affiliation of Stations’ Television Stations

Each of the television stations we are acquiring is affiliated with either CBS, ABC or NBC. Each affiliation agreement provides the station with the right to broadcast all programs transmitted by the network. In return, the network has the right to sell a substantial majority of the advertising time during network programming. In exchange for every hour that a station elects to broadcast network programming, CBS, ABC and NBC have historically paid the station a specified fee. This fee varies with the time of day. Typically, prime-time programming generates the highest hourly rates. Fees are subject to increase or decrease by the network during the term of an affiliation agreement, with provisions for advance notices and the right of termination by the station in the event of a reduction of rates.

During 1999, each of the major networks publicly indicated that it was reviewing the economic and other terms under which it provides programming to network affiliates like our stations. Proposed changes that have been publicly discussed include:


	•	reducing the period of exclusivity with respect to popular programming;

	•	changing the amount and placement of advertising time made available for sale by affiliates during network programming; and

	•	requiring affiliates to share part of the costs of producing sports or special programming.

These changes may be implemented during the term of existing affiliation agreements or upon their renewal. Additionally, the major networks have proposed reducing or eliminating the cash payments paid by networks to affiliates at the time of renewal of existing affiliation agreements.

Stations’ NBC affiliation agreements for WOWT, WMTV, WILX and WTAP were renegotiated effective as of January 1, 2002 and the agreements were extended to January 1, 2012. As a result of these negotiations compensation for WOWT, WMTV, WILX and WTAP continues although at a reduced level through 2005. For the period from January 1, 2006 through the expiration of the contract on January 1, 2012, the agreements do not provide for any network compensation payments.

Stations’ ABC affiliation agreements for WBKO, WHSV and WTOK expire on November 1, 2004 and provide for compensation that decreases throughout the term of the contract and reduces to zero by the expiration date of the contract.

In response to declining revenues, some networks have suggested that they may search for alternative methods of distribution for their programming, such as cable channels.

Advertising Sales

Television station revenues are derived primarily from local, regional and national advertising. Stations seeks to manage its spot inventory efficiently to maximize advertising rates. Advertising rates are based upon numerous factors including:


	•	a program’s popularity among the audience;

	•	the number of advertisers competing for the available time allotted to commercials;

	•	the size and demographic make-up of the audience; and

	•	the availability of alternative advertising media in the market area.

In March 2000, Stations restructured the organization of its local sales departments to place a greater emphasis on local and regional advertising sales. Stations shifted certain local advertising accounts to national representatives to better reflect the actual source of revenues. As a result of the restructuring and its new philosophy, period-to-period comparisons of trends in Stations’ local/regional and national sales will be difficult for you to make.

Local Sales. Approximately 60% of Stations’ gross revenues in 2001 came from local and regional advertisers. Local and regional advertising is sold primarily by each station’s professional sales staff. Typical local and regional advertisers include:


	•	automobile dealerships;

	•	restaurants;

	•	retailers;

	•	communications companies;

	•	grocery chains;

	•	soft drink bottlers;

	•	health and medical services; and

	•	state lotteries.

Stations seeks to establish long term relationships with local advertisers by selling its advertising time through dedicated local sales teams. Stations’ goal is to provide local customers the opportunity to communicate their longer term advertising goals so it can develop strategic advertising campaigns for them. In addition to increasing revenues from existing advertisers, Stations seeks to identify new sources of local advertising revenues. In particular, Stations seeks potential advertisers who have not previously advertised on broadcast television, but whose businesses would benefit from the identity of Stations’ local news and programming. Stations’ sales personnel are required to meet minimum weekly and monthly performance standards with respect to client activity, including new customer identification. Stations also offers commercial production services at each of its stations.

National Sales. Approximately 31% of Stations’ gross revenues in 2001 came from national advertisers. Typical national advertisers include:


	•	automobile manufacturers;

	•	consumer goods manufacturers;


	•	communications companies;

	•	fast food franchisers;

	•	national retailers; and

	•	direct marketers.

National advertising time is sold through representative agencies retained by Stations. Two of the television stations we are acquiring are represented by Petry Television, Inc., ten are represented by Katz Television Sales, and one is represented by Blair Television. These stations’ national sales coordinators actively assist their national sales representatives to induce national advertisers to increase their national spot expenditures designated to our markets.

Political Sales. Political advertising revenues are a significant factor in Stations business during election years. Local and regional elections, which can include gubernatorial, U.S. senatorial and congressional races, generally occur every even numbered year. National presidential elections occur every four years. In 2000 and 1998, Stations had political advertising revenues of $13.3 million and $8.6 million, respectively, at its stations we are acquiring pursuant to the merger representing approximately 10% and 7% of such stations’ gross revenues during such years.

Implementation of the Cable Act of 1992

The Cable Television Consumer Protection and Competition Act of 1992, the “Cable Act,” was enacted on October 5, 1992. The Cable Act:


	•	imposes cable rate regulation;

	•	establishes cable ownership limitations;

	•	regulates the relationships between cable operators and their program suppliers;

	•	regulates signal carriage and retransmission consent; and

	•	regulates numerous other aspects of the cable television business.

Stations has entered into agreements for its stations with substantially all of the cable system operators that carry our stations’ signals. All of these agreements grant such cable system operators consent to retransmit Stations’ broadcast signals. These retransmission arrangements do not represent a significant source of revenues for Stations. Stations expects to be able to renew its current retransmission agreements when such agreements expire. However, there can be no assurance that such renewals will be obtained.

Digital Operations

The FCC had required that all of the stations owned by Stations commence digital operations by May 1, 2002. Stations has incurred approximately $4.5 million in capital expenditures towards its digital conversion of the stations we are acquiring as a result of the merger, and it anticipates incurring additional capital expenditures of $6.8 million in the balance of 2002 and thereafter with respect to such stations. In order to accommodate the conversion to digital and maintain our historical capital expenditure levels, Stations has reduced its plans for the other non-essential capital expenditures in 2002. Stations anticipates that such expenditures will be paid for through cash generated from operations.

One of the stations owned by Stations had commenced digital operations by May 1, 2002. The FCC had implemented a process to allow broadcast companies to request an extension of time to complete the build-out to digital. On March 4, 2002, Stations filed extension requests with respect to its stations that have not been converted to digital. Stations was granted extensions covering the period May 1, 2002 through various dates in November 2002. We cannot assure you that Stations will be able to complete the construction of all of its DTV stations by the applicable FCC deadlines. If Stations is unable to meet

applicable build-out deadlines or obtain additional extensions, Stations may be subject to FCC sanctions, including the loss of the authorization to construct the DTV station.

Employees

As of May 31, 2002, Stations had 807 full-time employees at the stations we are acquiring as a result of the merger. Approximately 172 of such employees located at three of such stations are represented by labor unions under collective bargaining agreements. The collective bargaining agreements expire at various times from June 2003 through December 2003. At WIFR-TV, Rockford, Illinois, 23 employees have certified a union and negotiations for a collective bargaining agreement are scheduled to occur shortly. There are no unionized employees at the other stations we are acquiring as a result of the merger. Stations believes that its relationship with all of its employees, including those represented by labor unions, is satisfactory.

Properties

The principal executive offices of Stations is located in leased premises in Hoffman Estates, Illinois. Stations also has executive offices in New York City.

The types of properties required to support the television stations which Gray is acquiring as a result of the merger include offices, studios, and tower and transmitter sites. A station’s studio and office are generally located in business districts while tower and transmitter sites are generally located so as to provide maximum signal coverage to each market. The following table contains certain information describing the general character of our properties.

Approximate

Owned or

Size

Height (ft.)/

Station, Market Area and Use

Leased

(sq. ft.)(a)

Power

Lease expiration date

Wichita-Hutchinson, Kansas KAKE-TV

Office and Studio

Owned

46,762

—

Tower/ Transmitter Site

Owned

2,176

1,000/316 kw

—

Colby, Kansas KLBY-TV

Office and Studio

Leased

2,850

—

04/30/2004

Tower/ Transmitter Site

Leased

1,000

768/100 kw

04/30/2007

Garden City, Kansas KUPK-TV

Office and Studio

Owned

1,831

—

Tower/ Transmitter Site

Owned

4,655

880/224 kw

—

Omaha, Nebraska WOWT-TV

Office and Studio

Owned

58,829

—

Tower/ Transmitter Site

Owned

2,500

1,342/100 kw

—

Madison, Wisconsin WMTV-TV

Office and Studio

Owned

(b)

16,485

(c)

—

Tower/ Transmitter Site

Owned

(b)

1,040/955 kw

—

Colorado Springs-Pueblo, Colorado KKTV

Office and Studio

Owned

(b)

30,465

—

Tower/ Transmitter Site

Leased

800

350/234 kw

02/01/2059

Lansing, Michigan WILX-TV

Office and Studio

Owned

(b)

13,700

—

Tower/ Transmitter Site

Leased

5,000

994/309 kw

10/18/2003

Approximate

Owned or

Size

Height (ft.)/

Station, Market Area and Use

Leased

(sq. ft.)(a)

Power

Lease expiration date

Rockford, Illinois WIFR-TV

Office and Studio

Owned

(b)

13,500

(c)

—

Tower/ Transmitter Site

Owned

(b)

674/562 kw

—

Wausau-Rhinelander, Wisconsin WSAW-TV

Office and Studio

Owned

(b)

24,400

—

Tower/ Transmitter Site

Leased

(d)

432

650/316 kw

08/01/2017

Topeka, Kansas WIBW-TV

Office and Studio

Owned

(b)

19,800

—

Tower/ Transmitter Site

Leased

2,338

1,249/316 kw

02/14/2062

Dothan, Alabama and Panama City, Florida WTVY-TV

Office and Studio

Leased

20,440

—

12/31/2003

Tower/ Transmitter Site

Owned

(b)

2,500

1,880/100 kw

—

Harrisonburg, Virginia WHSV-TV

Office and Studio

Leased

(b)

18,000

—

04/27/2018(e)

Tower/ Transmitter Site

Leased

2,016

337/8.32 kw

12/31/2001(f)

Bowling Green, Kentucky WBKO-TV

Office and Studio

Owned

(b)

17,598

—

Tower/ Transmitter Site

Owned

(b)

1,175

603/316 kw

—

Meridian, Mississippi WTOK-TV

Office and Studio

Owned

(b)

13,188

—

Tower/ Transmitter Site

Owned

(b)

1,504

316/316 kw

—

Parkersburg, West Virginia WTAP-TV

Office and Studio

Owned

(g)

17,500

—

Tower/ Transmitter Site

Owned

(b)

3,600

439/208 kw

—


(a)		Approximate size is for building space only and does not include the land on which the facilities are located.

(b)		Stations has mortgaged its interest in this property to the collateral agent under its credit facility, which mortgage will be released at the time of the merger.

(c)		The tower/transmitter is located at and included within the size of the office and studio premises.

(d)		Stations leases this space with Shockley Communications Corporation and the Wisconsin Educational Communications Board from the State of Wisconsin Department of Natural Resources.

(e)		Stations has an option to purchase this property during the term of the lease. The purchase price is subject to adjustment depending upon the date the option is exercised. If Stations had exercised the option on December 31, 2001, the purchase price would have been approximately $1.4 million.

(f)		The United States Department of Agriculture Forest Service granted us a Special Use Permit to occupy this land. Stations has applied for and is currently awaiting renewal of this permit.

(g)		In May 2000, Stations exercised a purchase option on this property. Stations mortgaged its interest in this property in connection with the purchase. Stations had previously leased this property and had mortgaged its leasehold interest to the collateral agent under its credit facility, which leasehold mortgage will be released at the time of the merger.

Legal Proceedings

On March 22, 2002, Stations filed a voluntary petition for relief under Chapter 11 of the United States Bankruptcy Code. Benedek and its subsidiaries are not party to the bankruptcy action. On July 1,

2002, Stations filed its proposed plan of reorganization and related disclosure statement with respect to its bankruptcy case for approval by the court. The plan of reorganization contemplates completion of the merger of Gray MidAmerica Television with and into Stations. In conjunction with the execution of the merger agreement, Stations and Gray entered into Lock up, Voting and Consent Agreements with certain stockholders and creditors of Stations. Under the lock up, voting and consent agreements, these stockholders and creditors agreed to, among other things, support and vote their shares or interests, as applicable, in favor of Stations’ plan of reorganization that will give effect to the transactions contemplated by the merger agreement. As of the date of this report, lock up, voting and consent agreements have been received from holders of 97.9% of the outstanding Stations senior preferred stock, 98.8% of the outstanding Stations junior preferred stock, 100.0% of the outstanding Stations class B common stock and 94.6% of the outstanding Stations senior notes.

Stations is currently and from time to time involved in litigation incidental to the conduct of its business. Stations is not currently a party to any such lawsuit or proceeding that, in its opinion, is likely to have a material adverse effect on us.

STATIONS SELECTED FINANCIAL DATA

The table below sets forth the selected consolidated financial data of Stations for the five years ended December 31, 2001 and the three month periods ended March 31, 2001 and 2002. The selected consolidated financial data for the years ended December 31, 1999, 2000 and 2001 have been derived from Stations’ audited consolidated financial statements included elsewhere in this report. The data for the three month periods ended March 31, 2001 and 2002 are unaudited, but have been prepared on the same basis as the audited financial statements. In Stations’ opinion, they reflect all adjustments, consisting only of normal recurring adjustments, necessary to present fairly Stations’ results of operation for the period then ended and its financial position as of such dates. Operating results for the three month period ended March 31, 2002 are not necessarily indicative of the results that may be expected in the future. The selected consolidated financial data should be read in conjunction with the consolidated financial statements and notes thereto included elsewhere in this report and “Stations Management’s Discussion and Analysis of Financial Condition and Results of Operations.”



																	Three Months Ended
		Year Ended December 31,															March 31,

		1997(a)			1998(a)			1999(b)			2000(b)			2001			2001			2002


		(Dollars in thousands, except share and per share data)
Statement of Operations Data:
Net revenues(c)		$	84,392		$	94,525		$	99,432		$	116,687		$	107,561		$	23,587		$	25,584
Operating expenses:
	Station operating expenses		48,891			52,446			55,154			63,935			64,007			16,664			16,258
	Depreciation and amortization		21,794			20,660			17,442			19,711			21,901			5,368			6,309

Station operating income			13,707			21,419			26,836			33,041			21,653			1,555			3,017
	Corporate expenses		3,787			4,643			4,510			5,590			5,946			1,664			1,543

			9,920			16,776			22,326			27,451			15,707			(109	)		1,474
Gain on sale of stations, net(d)			—			—			6,403			61,406			—			—			—

	Operating income (loss)		9,920			16,776			28,729			88,857			15,707			(109	)		1,474

Financial expenses, net:
Interest expense, net(e):
	Cash interest, net		(23,358	)		(21,943	)		(20,701	)		(23,000	)		(33,191	)		(5,002	)		(10,559	)
	Other interest		(19,374	)		(17,043	)		(19,040	)		(20,943	)		(10,011	)		(5,661	)		(192	)

			(42,732	)		(38,986	)		(39,741	)		(43,943	)		(43,202	)		(10,663	)		(10,751	)

Reorganization items			—			—			—			—			—			—			(931	)
Income (loss) before income tax benefit and extraordinary item			(32,812	)		(22,210	)		(11,012	)		44,914			(27,495	)		(10,772	)		(10,208	)
Income tax benefit (expense)			11,243			7,646			(406	)		(29,199	)		10,165			4,064			3,931

Income (loss) from continuing operations			(21,569	)		(14,564	)		(11,418	)		15,715			(17,330	)		(6,708	)		(6,277	)
Income (loss) from discontinued operations			(2,741	)		(2,061	)		(4,359	)		(881	)		(28,085	)		(1,646	)		(22,028	)

Income (loss) before extraordinary item			(24,310	)		(16,625	)		(15,777	)		14,834			(45,415	)		(8,354	)		(28,305	)
Extraordinary item(f)			—			—			(12,510	)		942			—			—			—

Net income (loss)			(24,310	)		(16,625	)		(28,287	)		15,776			(45,415	)		(8,354	)		(28,305	)
Preferred stock dividends and accretion			(19,037	)		(30,855	)		(18,987	)		(23,933	)		(31,186	)		(7,480	)		(7,849	)

Net (loss) applicable to common stock		$	(43,347	)	$	(47,480	)	$	(47,274	)	$	(8,157	)	$	(76,601	)	$	(15,834	)	$	(36,154	)

Basic and diluted (loss) per common share(g):
	(Loss) from continuing operations	$	(5.78	)	$	(6.14	)	$	(4.11	)	$	(1.11	)	$	(6.56	)	$	(1.92	)	$	(1.91	)
	(Loss) from discontinued operations		(0.39	)		(0.28	)		(0.59	)		(0.12	)		(3.79	)		(0.22	)		(2.98	)
	Extraordinary item		—			—			(1.69	)		0.13			—			—			—

	(Loss) per common share	$	(6.17	)	$	(6.42	)	$	(6.39	)	$	(1.10	)	$	(10.35	)	$	(2.14	)	$	(4.89	)

Weighted-average common shares outstanding			7,030,000			7,400,000			7,400,000			7,400,000			7,400,000			7,400,000			7,400,000



																	Three Months Ended
		Year Ended December 31,															March 31,

		1997(a)			1998(a)			1999(b)			2000(b)			2001			2001			2002


		(Dollars in thousands, except share and per share data)
Other Financial Data
Broadcast cash flow(h)		$	35,678		$	42,333		$	44,681		$	53,220		$	43,934		$	6,939		$	9,036
Broadcast cash flow margin(i)			42.3	%		44.8	%		44.9	%		45.6	%		40.8	%		29.4	%		35.3	%
Operating cash flow(j)		$	31,891		$	37,690		$	40,171		$	47,630			37,988		$	5,275		$	7,493
Operating cash flow margin(k)			37.8	%		39.9	%		40.4	%		40.8	%		35.3	%		22.4	%		29.3	%
Cash flow provided by (used in):
	Operating activities	$	8,471		$	20,016		$	19,302		$	26,209		$	15,244		$	5,401		$	6,466
	Investing activities		(6,282	)		(6,582	)		(28,291	)		(11,259	)		(10,835	)		(1,973	)		(1,659	)
	Financing activities		(7,632	)		(11,791	)		7,976			(14,245	)		(4,889	)		(5,016	)		(945	)
Capital expenditures			10,833			10,147			12,784			12,157			13,690			2,637			1,720
Balance Sheet Data (end of period):
Cash and cash equivalents		$	2,648		$	4,291		$	3,278		$	3,983		$	3,503		$	2,395		$	7,365
Total assets			468,495			447,462			457,776			508,262			468,237			494,018			428,439
Total intangible assets, net			345,588			335,634			335,348			381,914			346,352(m	)		379,210			311,402(m	)
Long-term debt(l)			370,917			374,816			427,579			432,942			437,372			433,398			435,928
Redeemable preferred stock			124,556			162,644			181,631			205,564			236,750			213,045			244,599
Stockholders’ (deficit)			(94,908	)		(147,263	)		(197,494	)		(205,731	)		(282,490	)		(221,723	)		(318,599	)


(a)		The selected consolidated financial data of Stations for the years ended December 31, 1997 and 1998 have been derived from Stations’ audited consolidated financial statements included elsewhere in this report with reclassification to reflect the application of Statement of Financial Accounting Standards No. 144.

(b)		In January 1999, Stations entered into a time brokerage agreement in anticipation of the station exchange of KKTV, Colorado Springs-Pueblo, Colorado and KCOY-TV, Santa Maria, California. The statement of operations and other data for the year ended December 31, 1999 includes information with respect to the time brokerage agreement. In March 2000, Stations exchanged WWLP-TV, its station in Springfield, Massachusetts, and $18.0 million for KAKE-TV, Wichita, Kansas and WOWT-TV, Omaha, Nebraska. The statement of operations does not reflect the exchange prior to March 2000.

(c)		Net revenues reflect deductions from gross revenues for agency and national sales representative commissions.

(d)		Net gain on sale of stations for 1999 includes $13.3 million as a result of the 1999 station exchange netted against a $6.9 million loss on the sale of KOSA-TV, Odessa, Texas. In 2000, net gain on sale of stations includes a $61.1 million gain on the exchange of WWLP-TV, Springfield, Massachusetts, for KAKE-TV, Wichita, Kansas and WOWT-TV, Omaha, Nebraska, and a $0.3 million gain on the sale of KOSA-TV, Odessa, Texas.

(e)		Cash interest expense, net, includes cash interest paid and normal adjustments to accrued interest. Other interest expense includes accrued interest added to long-term debt balances, deferred loan cost amortization and write- offs, except deferred loan cost write-offs related to extraordinary debt extinguishments, financing costs not consummated, and accretion of discounts.

(f)		In 1999, Stations recorded an extraordinary loss of $12.5 million net of applicable taxes of $8.3 million as a result of the early extinguishment of debt associated with the completion of the tender offer for $135.0 million of outstanding senior secured notes. In 2000, Stations redeemed a portion of its 13 1/4% senior subordinated discount notes with an aggregate face value of $12.3 million. The discount notes had an accreted value of $11.4 million and were purchased for $9.8 million. A total of $0.9 million, net of taxes, was recorded as a gain on the early extinguishment of debt.

(g)		Earnings (loss) per common share is computed by dividing income (loss) after the deduction of preferred dividends and accretion of the redemption prepayment premium and amortization of our initial warrants, by the weighted average number of common shares outstanding. The effect of the stock options and initial warrants has not been reflected in the computation since their inclusion as common stock equivalents for both basic and fully-diluted earnings (loss) per share was anti-dilutive.


(h)		Broadcast cash flow is defined as operating income before financial income as derived from the consolidated statements of operations plus depreciation and amortization, amortization of program broadcast rights, corporate expenses and noncash compensation less payments on program broadcast liabilities and net gain on sale of stations. Broadcast cash flow data is included in this report because the information is a measurement:


	(1)	used by lenders to measure a borrower’s ability to service its debt and pay for capital expenditures;

	(2)	used by industry analysts to determine a market value of television stations; and

	(3)	used by industry analysts when evaluating and comparing operating performance of different companies.

Broadcast cash flow does not purport to represent cash provided by operating activities as reflected in Stations’ consolidated financial statements, is not a measure of financial performance under generally accepted accounting principles and should not be considered in isolation or as a substitute for measures of performance prepared in accordance with generally accepted accounting principles. Broadcast cash flow is also not reflected in Stations’ consolidated statements of cash flows; but it is a common and meaningful measure for comparison to other companies in the broadcast industry. The amounts excluded from broadcast cash flow are significant components in understanding and assessing Stations’ results of operations and cash flows. The term “broadcast cash flow” may not be the same terminology utilized by other companies in the presentation of similar information.


(i)		Broadcast cash flow margin is defined as broadcast cash flow divided by net revenues.

(j)		Operating cash flow is defined as operating income before financial income as derived from the consolidated statements of operations plus depreciation and amortization, amortization of program broadcast rights and noncash compensation less payments on program broadcast liabilities and net gain on sale of stations. Operating cash flow data is included in this report because the information is a measurement:


	(1)	used by lenders to measure a borrower’s ability to service its debt and pay for capital expenditures;

	(2)	used by industry analysts to determine a market value of television stations; and

	(3)	used by industry analysts when evaluating and comparing operating performance of different companies.

Operating cash flow does not purport to represent cash provided by operating activities as reflected in Stations’ consolidated financial statements, is not a measure of financial performance under generally accepted accounting principles and should not be considered in isolation or as a substitute for measures of financial performance prepared in accordance with generally accepted accounting principles. Operating cash flow is also not reflected in Stations’ consolidated statements of cash flows; but it is a common and meaningful measure for comparison to other companies in the broadcast industry. The amounts excluded from operating cash flow are significant components in understanding and assessing Stations’ results of operations and cash flows. The term “Operating cash flow” may not be the same terminology utilized by other companies in the presentation of similar information.


(k)		Operating cash flow margin is defined as operating cash flow divided by net revenues.

(l)		Long-term debt is defined as notes payable, including the current portion thereof, net of discount. At March 31, 2002, long-term debt includes the balance of Stations’ credit facility of $276.0 million and the discount notes of $154.7 million, which are classified as “Liabilities subject to compromise” on the March 31, 2002 balance sheet.

(m)		Intangible assets at December 31, 2001 and March 31, 2002 include balances of $15.5 million and $20.2 million, respectively, which are classified as “Assets of Stations held for sale” on the respective balance sheets.

STATIONS MANAGEMENT’S DISCUSSION AND ANALYSIS

OF FINANCIAL CONDITION AND RESULTS OF OPERATION

Overview

On April 1, 2002, Stations signed a letter of intent with Gray and subsequently executed a merger agreement on June 4, 2002 whereby Stations will become a wholly-owned subsidiary of Gray. Gray will pay an estimated $502.5 million in cash consideration in connection with the merger and the transaction is expected to close during the fourth quarter of 2002.

Pursuant to the letter of intent with Gray, Stations agreed to sell all of the television broadcasting assets of eight television stations (the “Station Group”) to a third party prior to its merger with Gray. On June 4, 2002, Stations signed an agreement with Chelsey Broadcasting, LLC to sell the Station Group for $30.0 million.

On November 16, 2001, Stations entered into an Asset Purchase agreement with West Virginia Media Holdings, LLC (“West Virginia Media”) pursuant to which, on April 30, 2002, Stations sold the television broadcast assets of WTRF-TV, in Wheeling, West Virginia for $18.5 million.

Stations elected to early adopt Statement of Financial Accounting Standards No. 144 (“SFAS No. 144”) “Accounting for the Impairment or Disposal of Long-Lived Assets” for its 2001 financial statements. As a result of the adoption of SFAS No. 144, the Station Group and WTRF-TV have been classified as assets held for sale at March 31, 2002 and accordingly the carrying value of the assets were adjusted to their fair value and the operations of these portions of Stations have been reported in discontinued operations.

Stations’ revenues are derived primarily from the sale of advertising time and, to a modest extent, from compensation paid by the networks for broadcasting network programming and barter transactions for goods and services. Revenues depend on Stations’ ability to provide programming that attracts audiences in the demographic groups targeted by advertisers. Stations’ revenues also depend significantly on factors such as the national and local economy and the level of local competition.

In March 2000, Stations restructured the organization of its local sales departments to place a greater emphasis on local and regional advertising sales. Stations shifted certain local advertising accounts to national representatives to better reflect the actual source of revenues. As a result of the restructuring and its new philosophy, year-to-year comparisons of trends in Stations’ local/regional and national sales for the years 2000 and 2001 will be difficult for you to make.

On March 31, 2000, Stations completed a transaction with WGRC, Inc., whereby it exchanged the television station assets of WWLP-TV, in Springfield, Massachusetts formerly owned by it plus $18.0 million for the television station assets of KAKE-TV, in Wichita, Kansas, together with its two satellite stations, and WOWT-TV in Omaha, Nebraska. The acquired stations were owned by The Chronicle Publishing Company and were acquired in a like-kind exchange transaction through WGRC, Inc. The transaction was recorded under the purchase method of accounting.

On March 21, 2000, Stations sold the television broadcast assets of KOSA-TV, in Odessa, Texas to ICA Broadcasting I, Ltd. for a cash payment of $8.0 million. Stations recorded a lower of cost or market adjustment of approximately $6.9 million in 1999 to write down the assets of KOSA-TV to the sales price less estimated selling costs. The exchange of WWLP-TV and the sale of KOSA-TV resulted in a gain on sale of stations before taxes of $61.4 million in 2000.

During October 1998, Stations transferred WMTV-TV, its station in Madison, Wisconsin to The WMTV Trust due to the Grade A broadcast signal overlap between WMTV-TV and WIFR-TV, Stations’ station in Rockford, Illinois. Under the trust arrangement, Stations relinquished control of WMTV-TV to a trustee while retaining the economic risks and benefits of ownership. On August 5, 1999, the FCC approved new duopoly rules that enabled Stations to own both WMTV-TV and WIFR-TV. As a result of

the new rules, The WMTV Trust was dissolved on February 29, 2000 and all assets and liabilities were transferred to Stations.

Local and national non-political advertising sales constitute the largest concentration of Stations’ revenues and represent approximately 90% of gross revenues in 2001 compared to approximately 82% in 2000. Excluding political advertising revenues from our gross revenues, the percentage of gross revenues attributable to Stations’ local/regional advertising and national advertising in 1999, 2000 and 2001 was approximately 90%, 91% and 91%, respectively. Approximately 60% of Stations’ gross revenues in 2001 were generated from local and regional advertising, which is sold primarily by each station’s sales staffs. The remainder of Stations’ advertising revenues is comprised primarily of national advertising, which is sold by national sales representatives retained by Stations. Stations generally pay commissions to advertising agencies on local, regional and national advertising and to national sales representatives on national advertising. Net revenues reflect deductions from gross revenues for commissions payable to advertising agencies and national sales representatives.

Stations’ primary operating expenses are employee compensation, programming expense, and depreciation and amortization. Changes in compensation expense result primarily from adjustments to fixed salaries based on employee performance and, to a lesser extent, from changes in sales commissions paid based on levels of advertising revenues. Programming expense consists primarily of amortization of program rights. Stations purchases first run and off-network syndicated programming on an ongoing basis. Under Stations’ contracts with the networks, a network affiliated station receives more than half of its daily programming from its network and in turn is compensated, in most cases, by the network for carrying such programming with the network’s commercial content intact. Barter expense generally offsets barter revenues and reflects the fair market value of goods and services received. Stations’ operating expenses, excluding depreciation and amortization, represent approximately 65% of net revenues from continuing operations for 2001 compared to 60% of net revenues in both 2000 and 1999.

Results of Operations

The following table sets forth certain of Stations’ historical results of operations and operating data for the periods indicated in order to reconcile its broadcast cash flow and operating cash flow.



											Three Months Ended
		Years Ended December 31,									March 31,

		1999			2000			2001			2001			2002


		(Dollars in thousands)
Operating income (loss)		$	28,729		$	88,857		$	15,707		$	(109	)	$	1,474
Add:
	Amortization of program broadcast rights		4,740			5,907			6,341			1,566			1,543
	Depreciation and amortization		17,442			19,711			21,901			5,368			6,309
	Corporate expenses		4,510			5,590			5,946			1,664			1,543
Less:
	Payments on program broadcast liabilities		(4,337	)		(5,439	)		(5,961	)		(1,550	)		(1,833	)
	Gain on sale of stations, net		(6,403	)		(61,406	)		—			—			—
Broadcast cash flow		$	44,681		$	53,220		$	43,934		$	6,939		$	9,036
Less corporate expenses		$	4,510		$	5,590		$	5,946		$	1,664		$	1,543
Operating cash flow		$	40,171		$	47,630		$	37,988		$	5,275		$	7,493

Three Months Ended March 31, 2002 Compared to Three Months Ended March 31, 2001

The following table provides historical information for the three months ended March 31, 2001 and 2002.



		Three Months Ended March 31,

		2001			2002			% Change


		(Dollars in thousands)
Local/regional		$	15,894		$	18,160			14.3	%
National			8,440			8,407
Political			302			529			75.2
Other			2,606			2,425			(6.9	)

			27,242			29,521			8.4
Direct costs			3,655			3,937			7.7

Net revenues		$	23,587		$	25,584			8.5	%
Operating expenses:
	Selling, technical and program expenses		12,526			12,191			(2.7	)
	General and administrative		4,138			4,067			(1.7	)
	Depreciation and amortization		5,368			6,309			17.5
	Corporate		1,664			1,543			(7.3	)

			23,696			24,110			1.7

Operating income (loss)		$	(109	)	$	1,474			N/A

Broadcast cash flow		$	6,939		$	9,036			30.2	%
Broadcast cash flow margin			29.4	%		35.3	%
Operating cash flow		$	5,275		$	7,493			42.0	%
Operating cash flow margin			22.4	%		29.3	%

Net revenues. Stations had net revenues from continuing operations in the first quarter of 2002 of $25.6 million compared to $23.6 million for the same period in 2001. The increase in net revenues was $2.0 million or 8.5%. The improvement in net revenues from continuing operations in 2002 is a result of political advertising revenues, the winter Olympics on Stations’ four NBC affiliated stations and a significant increase in local advertising revenues due to the successful efforts toward increasing this portion of Stations’ advertising base. National advertising revenues in the first quarter of 2002 remained constant at $8.4 million as compared to the same period in 2001. Local/ regional revenues increased and were $18.2 million in the three months ended March 31, 2002 compared to $15.9 million for the same period in 2001, an increase of $2.3 million or 14.3%. Political advertising revenues were $0.5 million in the first quarter of 2002 as compared to $0.3 million in the same period in 2001.

Operating expenses. Stations had operating expenses in the first quarter of 2002 of $24.1 million, an increase of $0.4 million or 1.7% compared to $23.7 million in the same period in 2001. Depreciation and amortization increased by $0.9 million or 17.5% to $6.3 million as compared to $5.4 million in the same period in 2001 due to the shorter amortization period used for network affiliation intangible assets as a result of the adoption of Statement of Financial Accounting Standards No. 142 “Goodwill and Other Intangible Assets” (SFAS No. 142) on January 1, 2002. The effect of the shorter amortization period used for network affiliation intangible assets more than offset the effect caused by the discontinuance of amortization on Stations’ intangibles related to its FCC licenses and goodwill. Amortization was discontinued on FCC intangible assets and goodwill in the first quarter of 2002 due to the requirement of SFAS No. 142 that specifies that intangible assets with indefinite useful lives are no longer subject to amortization.

Operating income (loss). Stations’ operating income for the first quarter of 2002 increased by $1.6 million to $1.5 million from an operating loss of $(0.1) million for the same period in 2001.

Financial income (expense). Stations’ financial expense for the first quarter of 2002 was relatively constant with the first quarter of 2001 and was $10.8 million as compared to $10.7 million for the three months ended March 31, 2001.

Reorganization items. Stations had reorganization items of $1.0 million in the first quarter of 2002 which consisted primarily of professional fees associated with its Chapter 11 bankruptcy filing on March 22, 2002.

Income tax benefit (expense). Stations’ income tax benefit in the first quarter of 2002 was $3.9 million compared to $4.1 million for the first quarter of 2001, a decrease of $0.2 million or 3.3%. Stations’ effective tax rate for the first quarter 2002 was 38.5% as compared to 37.7% in the first quarter 2001.

Loss from continuing operations. Stations’ loss from continuing operations was $(6.3) million for the first quarter of 2002 compared to $(6.7) million for the corresponding period in 2001.

Discontinued operations. Stations’ loss from operations of discontinued stations was $(22.0) million for the first quarter 2002 as compared to $(1.6) million for the comparable period in 2001. Before income taxes, the loss on the operations of discontinued stations was $(33.5) million for the first quarter of 2002 as compared to $(2.4) million in the first quarter of 2001. Included in the first quarter 2002 was a $31.3 million writedown to the expected sales price of the assets of the Station Group.

Broadcast cash flow. Broadcast cash flow for the first quarter of 2002 increased $2.1 million or 30.2% to $9.0 million from $6.9 million for the first quarter of 2001. As a percentage of net revenues, broadcast cash flow margin increased to 35.3% for the first quarter of 2002 from 29.4% for the first quarter of 2001.

Year Ended December 31, 2001 Compared to Year Ended December 31, 2000

The following table provides historical information for the year ended December 31, 2000 and 2001.



		Year Ended December 31,

		2000			2001			% Change


		(Dollars in thousands)
Local/regional		$	70,732		$	73,501			3.9	%
National			41,153			37,624			(8.6	)
Political			13,238			1,367			(89.7	)
Other			10,935			10,557			(3.5	)

			136,058			123,049			(9.6	)
Direct costs			19,371			15,488			(20.0	)

Net revenues		$	116,687		$	107,561			(7.8	)%
Operating expenses:
	Selling technical and program expenses		48,078			48,696			1.3
	General and administrative		15,857			15,311			(3.4	)
	Depreciation and amortization		19,711			21,901			11.1
	Corporate		5,590			5,946			6.4

			89,236			91,854			2.9
Gain on sale of stations, net			61,406			—			(100.0	)

Operating income		$	88,857		$	15,707			(82.3	)%

Broadcast cash flow		$	53,220		$	43,934			(17.4	)%
Broadcast cash flow margin			45.6	%		40.8	%
Operating cash flow		$	47,630		$	37,988			(20.2	)%
Operating cash flow margin			40.8	%		35.3	%

Net revenues. Stations’ net revenues in 2001 decreased by $9.1 million or 7.8% to $107.6 million from $116.7 million in 2000. Stations’ net revenues were negatively impacted by the absence of political revenues in 2001 which were $1.4 million as compared to $13.2 million in 2000. Excluding political advertising revenues and before direct costs, Stations’ gross revenues decreased by $1.1 million or 0.9% to $121.7 million for 2001 from $122.8 million for 2000 due to a protracted softening of the advertising market and the negative effects on the advertising market and the economy in general as a result of the attacks of September 11, 2001.

Operating expenses. Stations’ operating expenses in 2001 increased by $2.7 million or 2.9% to $91.9 million from $89.2 million in 2000. The increase in operating expenses was caused by the change in the mix of stations owned by Stations, with the March 2000 addition of KAKE-TV and WOWT-TV and the disposition of WWLP-TV and KOSA-TV. The effect of the change of stations was greatest on depreciation and amortization expenses which increased $2.2 million or 11.1% to $21.9 million for 2001 as compared to $19.7 million for 2000. As a percentage of net revenues, operating expenses increased to 85.4% for 2001 compared to 76.5% for 2000.

Gain on sale of stations, net. In 2000, Stations recognized a gain of $61.1 million as a result of the exchange of the assets of WWLP-TV with a fair market value of $123.0 million and $18.0 million in cash for the assets of KAKE-TV and WOWT-TV. Stations also realized a $0.3 million gain on the sale of KOSA-TV in 2000. KOSA-TV was sold for $8.0 million.

Operating income. Stations’ operating income for 2001 decreased $73.2 million or 82.3% to $15.7 million from $88.9 million for 2000. The change in operating income was primarily caused by the gain on sale of stations in March 2000 and increased depreciation and amortization expense.

Financial income (expense). Stations’ financial expense for 2001 decreased $0.7 million or 1.7% to $43.2 million from $43.9 million in 2000 as a result of declining interest rates.

Income tax benefit (expense). Stations’ income tax benefit in 2001 was $10.2 million compared to an income tax expense of $29.2 million for 2000. The decrease in income tax expense in 2001 from 2000 was primarily due to the tax effect of the sale of WWLP-TV and KOSA-TV in March 2000. For tax purposes, the sale of the WWLP-TV assets was treated as an exchange for the assets of KAKE-TV and WOWT-TV under the Internal Revenue Service like-kind exchange rules. As such, Stations had a $2.2 million gain for tax purposes.

Discontinued operations. Stations’ loss from discontinued operations was $(28.1) million in 2001 as compared to $(0.9) million in 2000. Before income taxes, Stations’ loss from discontinued operations was $(29.8) million in 2001 as compared to $(0.2) million in 2000. Discontinued operations consist of the operating results and valuation adjustments related to WTRF-TV and the Station Group. Included in discontinued operations for 2001 was a write-down to fair value on the sale of WTRF-TV of $6.9 million as well as $17.7 million of valuation adjustments on certain other stations’ goodwill and network affiliation intangible assets that were determined to have been impaired based on estimated discounted future cash flows. During 2002, these certain stations were held for sale and the valuation adjustments have been reclassified to discontinued operations consistent with the restatement provisions of SFAS No. 144.

Net income (loss). Stations had a net loss of $(45.4) million for 2001 as compared to net income of $15.8 million for 2000.

Broadcast cash flow. Broadcast cash flow for 2001 decreased $9.3 million or 17.4% to $43.9 million from $53.2 million for 2000. As a percentage of net revenues, broadcast cash flow margin decreased to 40.8% for 2001 from 45.6% for 2000.

Year Ended December 31, 2000 Compared to Year Ended December 31, 1999

The following table provides historical information for the year ended December 31, 1999 and 2000.



		Year Ended December 31,

		1999			2000			% Change


		(Dollars in thousands)
Local/regional		$	66,146		$	70,732			6.9	%
National			35,535			41,153			15.8
Political			1,329			13,238			96.1
Other			11,756			10,935			(7.0	)

			114,766			136,058			18.6
Direct costs			15,334			19,371			26.3

Net revenues			99,432			116,687			17.4	%
Operating expenses:
	Selling, technical and program expenses		40,247			48,078			19.5
	General and administrative		14,907			15,857			6.4
	Depreciation and amortization		17,442			19,711			13.0
	Corporate		4,510			5,590			23.9

			77,106			89,236			15.7
Gain on sale of stations, net			6,403			61,406			859.0

Operating income		$	28,729		$	88,857			209.3	%

Broadcast cash flow		$	44,681			53,220			19.1	%
Broadcast cash flow margin			44.9	%		45.6	%
Operating cash flow		$	40,171		$	47,630			18.6	%
Operating cash flow margin			40.4	%		40.8	%

Net revenues. Stations’ net revenues in 2000 increased by $17.3 million or 17.4% to $116.7 million from $99.4 million in 1999. Stations’ net revenues were positively impacted by political revenues in 2000 which were $13.2 million compared to $1.3 million in 1999. Excluding political advertising revenues and before direct costs, Stations’ gross revenues increased by $9.4 million or 8.3% to $122.8 million for 2000 from $113.4 million for 1999 due to the exchange of WWLP for KAKE-TV and WOWT-TV which was offset in part by a softening advertising market and the displacement of commercial advertisers by political advertisers.

Operating expenses. Stations’ operating expenses in 2000 increased by $12.1 million or 15.7% to $89.2 million from $77.1 million in 1999. The increase in operating expenses was caused by the change in the mix of stations owned by Stations, with the March 2000 addition of KAKE-TV and WOWT-TV and the disposition of WWLP-TV and KOSA-TV. As a percentage of net revenues, operating expenses decreased to 76.5% for 2000 compared to 77.6% for 1999.

Gain on sale of stations, net. Stations recognized a gain of $61.1 million in 2000 as a result of the exchange of the assets of WWLP-TV with a fair market value of $123.0 million and $18.0 million in cash for the assets of KAKE-TV and WOWT-TV. The book value of the WWLP-TV assets was $61.4 million and related fees were $0.4 million. Stations also realized a $0.3 million gain on the sale of KOSA-TV in 2000. KOSA-TV was sold for $8.0 million and fees related to the sale were $0.1 million.

Operating income. Stations’ operating income for 2000 increased $60.2 million or 209.3% to $88.9 million from $28.7 million for 1999 primarily from the gain on the sale of stations.

Financial income (expense). Stations’ financial expense, net, for 2000 increased $4.2 million or 10.6% to $43.9 million from $39.7 million in 1999 as a result of higher interest rates and to a lesser extent to greater accretion on the 13 1/4% senior subordinated discount notes.

Discontinued operations. Stations’ loss from discontinued operations was $(0.9) million in 2000 as compared to $(4.4) million in 1999. Before income taxes, Stations’ loss from discontinued operations was $(0.2) million in 2000 as compared to $(6.1) million in 1999. Discontinued operations consist of the operating results and valuation adjustments related to the Station Group. Included in discontinued operations for 1999 was $2.8 million of valuation adjustments on certain stations’ goodwill and network affiliation intangible assets that were determined to have been impaired based on estimated discounted future cash flows. During 2002, these certain stations were held for sale and the valuation adjustments have been reclassified to discontinued operations consistent with SFAS No. 144.

Income tax expense. Stations’ income tax expense in 2000 was $29.2 million compared to $0.4 million for 1999. The increase in income tax expense in 2000 was due in part to the $61.1 million gain on the sale of WWLP-TV. For tax purposes, the sale of the WWLP-TV assets was treated as an exchange for the assets of KAKE-TV and WOWT-TV under the IRS like-kind exchange rules. As such, Stations had a $2.2 million gain for tax purposes compared with the book gain of $61.1 million.

Extraordinary gain (loss). Extraordinary gain was $0.9 million for 2000, net of $0.6 million in income taxes and consisted of an early extinguishment of debt. The gain was recognized when Stations purchased its 13 1/4% senior subordinated discount notes with a face amount of $12.3 million for $9.8 million. The notes Stations purchased had an accreted value of $11.4 million. In 1999, Stations recorded an extraordinary loss of $(12.5) million, net of $8.3 million in income taxes. The loss was a result of the early extinguishment of debt associated with the completion of the tender offer for $135.0 million of Benedek’s senior secured notes.

Net income (loss). Stations’ net income was $15.8 million for 2000 compared to a net loss of $(28.3) million for 1999.

Broadcast cash flow. Broadcast cash flow for 2000 increased $8.5 million or 19.1% to $53.2 million from $44.7 million for 1999. As a percentage of net revenues, broadcast cash flow margin increased to 45.6% for 2000 from 44.9% for 1999.

Income Taxes

For the year ended December 31, 2001, Stations had an income tax benefit of $10.2 million compared to an income tax expense of $29.2 million for the year ended December 31, 2000. The change in income taxes is due primarily to the $61.1 million gain on the sale of WWLP-TV in 2000. For tax purposes, the sale of the WWLP-TV assets was treated as an exchange for the assets of KAKE-TV and WOWT-TV under the Internal Revenue Service like-kind exchange rules. As such, Stations had a $2.2 million gain for tax purposes. At March 31, 2002, Stations has approximately $35.7 million of actual net operating loss carryforwards available to offset future tax liabilities. These net operating loss carryforwards expire in the years 2020 through 2023. Stations also has approximately $0.5 million of tax credit carryforwards with no expiration.

Seasonality

Stations net revenues and operating cash flow are generally highest during the fourth quarter of each year. This is primarily due to increased expenditures by advertisers in anticipation of holiday season consumer spending and an increase in viewership during this period. Generally, the second quarter of each year produces net revenues and operating cash flow greater than the first and third quarters due to higher viewership in this period.

Quantitative and Qualitative Disclosures About Market Risk

During September 2001, in accordance with certain covenants of Benedek’s credit facility, Benedek entered into an interest rate cap agreement, which matures in September 2003. The agreement reduces the impact of changes in interest rates on Benedek’s floating-rate long-term debt. That agreement effectively entitles Benedek to receive from a financial institution the amount, if any, by which the British Bankers’ Association interest settlement rates for U.S. dollar deposits exceeds 6.00% on a notional amount totaling $60.0 million subject to an amortization schedule. As of March 31, 2002, the settlement rate was 1.90%.

UNAUDITED PRO FORMA FINANCIAL DATA

The unaudited pro forma financial data presented below is for illustrative purposes only and is not necessarily indicative of the operating results that would have actually occurred, nor is it necessarily indicative of future operating results. The unaudited pro forma financial data should be read in conjunction with Gray’s consolidated financial statements and notes thereto contained in Gray’s filings with the SEC and in conjunction with Stations’ consolidated financial statements and notes thereto included elsewhere in this report.

Stations’ historical consolidated financial statements reflect the nine television stations to be sold prior to our acquisition of Stations as discontinued operations. Accordingly, the operating results of those stations are excluded from continuing operations and the related assets and liabilities are segregated in the balance sheet. Those stations are:


	WTRF — Wheeling, WV which was sold in April 2002
	WYTV — Youngstown, OH
	WHOI — Peoria - Bloomington, IL
	KDLH — Duluth, MN - Superior, WI
	KMIZ, K02NQ, K11TB — Columbia - Jefferson City, MO
	KAUZ — Wichita Falls, TX - Lawton, OK
	KHQA — Quincy, IL - Hannibal, MO - Keokuk, IA
	KGWN, KSTF — Cheyenne, WY - Scottsbluff, NE
	KGWC, KGWL, KGWR — Casper - Riverton, WY

The unaudited pro forma combined condensed financial statements reflect the following transactions:


	•	Our acquisition of Stations in a merger transaction for total estimated consideration of $513.4 million which includes a base price of $502.5 million, additional cash consideration of $4.9 million for certain estimated net working capital, as specified in the merger agreement, and related fees and expenses of $6.0 million.

	•	Our financing the acquisition of Stations which included (1) revising or replacing our senior credit facility to provide additional revolving credit borrowing ability of $50 million, and additional term loan borrowings of $175 million, (2) the issuance of $100 million of senior subordinated notes and (3) the sale of $225 million of our class B common stock for an estimated $14.49 per share, the closing price at March 31, 2002.

	•	The incurrence of an estimated $22.8 million in fees related to the financing transactions described above. The estimated costs include (1) revising our current senior credit facility and the issuance of additional senior subordinated notes for aggregate fees of $7.8 million and (2) the sale of additional shares our class B common stock for a fee of $15.0 million. The estimated fees and expenses have been paid or will be payable to various underwriters, advisors, and professional service providers, including lawyers and accountants.

	•	The issuance in April 2002 of $40.0 million liquidation value of a Series C preferred stock with an 8% annual dividend rate. The Series C preferred stock has a mandatory redemption in April 2012 and is exchangeable into our class B common stock at a current conversion rate of $14.39 per share. We received net cash proceeds of approximately $30.6 million after paying fees and expenses of $767,000. $8.6 million liquidation value of the Series C preferred stock was used to exchange our existing series A and series B preferred stock with an aggregate liquidation value of $8.6 million into the Series C preferred stock using a one for one exchange ratio.

The unaudited pro forma combined condensed statement of operations for the three months ended March 31, 2002 reflect these transactions as if they had been completed on January 1, 2001. The unaudited pro forma combined condensed statement of operations for the year ended December 31, 2001 reflect these transactions as if they had been completed on January 1, 2001. The March 31, 2002

unaudited pro forma combined condensed balance sheet reflects these transactions as if they had been completed on March 31, 2002.

The pro forma adjustments are based on the preliminary estimates of the number of shares of our class B common stock to be issued and their related value, indebtedness to be incurred and related financing terms, the amount of the specified net working capital and certain other payments as of the closing date, and the transaction costs all determined as of the closing date. Accordingly, the actual amounts of these transactions are expected to differ from the pro forma financial statements.

UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS

FOR THE THREE MONTHS ENDED MARCH 31, 2002


								Pro Forma
		Gray			Stations			Adjustments			Pro Forma


		(Dollars in thousands except per share data)
Operating revenues:
	Broadcasting (net of agency commissions)	$	25,453		$	25,584		$	—		$	51,037
	Publishing		10,143			—			—			10,143
	Paging		2,009			—			—			2,009

			37,605			25,584			—			63,189

Expenses:
	Broadcasting		15,481			16,258			—			31,739
	Publishing		7,651			—			—			7,651
	Paging		1,383			—			—			1,383
	Corporate and administrative		1,000			1,543			(536	)(a)		2,007
	Depreciation and amortization		3,733			6,309			(3,864	)(b)		6,178

			29,248			24,110			(4,400	)		48,958

Operating income			8,357			1,474			4,400			14,231
Other (income) expense:
Interest expense			8,965			10,783			(5,915	)(c)(d)		13,833
Miscellaneous income, net			(38	)		(32	)		—			(70	)
Appreciation (depreciation) in value of derivatives, net			(389	)		—			—			(389	)
Reorganization fees and expenses			—			931			(931	)(a)		—

Total other (income) expense, net			8,538			11,682			(6,846	)		13,374

Income (loss) from continuing operations before provision for (benefit from) income taxes			(181	)		(10,208	)		11,246			857
Provision for (benefit from) income taxes			(46	)		(3,931	)		4,273	(e)		296

Income (loss) from continuing operations		$	(135	)	$	(6,277	)	$	6,973		$	561

Preferred dividends		$	154		$	7,849		$	(7,203	)(f)(g)	$	800

Basic and diluted earnings per common share:
	Loss from continuing operations	$	(289	)							$	(239	)

Weighted average outstanding common shares:
	Basic and diluted		15,647									31,175	(h)

Basic and diluted loss per share available to common stockholders from continuing operations		$	(0.02	)							$	(0.01	)


(a)		Reflects the elimination of certain historical expenses of Stations that Gray will not, or does not expect, to incur subsequent to the acquisition including compensation paid to certain persons who will resign concurrent with the closing of the merger, certain professional fees and other overhead costs.

(b)		Reflects adjustment to the depreciation and amortization charges to reflect the allocation of the total consideration paid by Gray among the assets acquired and the liabilities assumed. The adjustment is primarily the result of eliminating Stations’ amortization of amounts assigned to network affiliation agreements. Of our consideration estimated to be paid, $7.6 million was assigned to network


		affiliation agreements, thereby increasing the amount of indefinite lived intangible assets which are not amortized.

(c)		Reflects the elimination of certain historical interest expense of Stations reflecting the repayment, in full, of certain senior and subordinated debt as part of Stations’ Plan of Reorganization.

(d)		Reflects adjustments to include (1) interest charges of $2.4 million on the estimated $175.5 million of newly issued senior debt with an assumed effective interest rate of 5.55%, (2) interest charges of $2.3 million on the estimated $100 million of newly issued senior subordinated indebtedness with an assumed effective interest rate of 9.25%, (3) amortization of $0.2 million of the estimated $7.8 million aggregate of deferred financing charges incurred with the revised or newly issued senior credit facility with an estimated average life to maturity of 8.25 years and the offering of the senior subordinated notes with an estimated average life to maturity of 9.2 years and (4) the elimination $0.2 million of historical amortization expense for deferred financing charges associated with our prior senior credit facility.

(e)		Reflects the provision for (benefit from) income taxes using an effective income tax rate of 38%.

(f)		Preferred dividends have been adjusted to reflect our issuance of $40.0 million liquidation value Series C preferred stock with an annual dividend rate of 8% and the application of the $30.6 million net cash proceeds toward our merger consideration, thereby reducing our senior debt borrowing requirements and related interest expense and the exchange of an aggregate of $8.6 million liquidation value of our existing series A and series B preferred stock into the Series C preferred stock.

(g)		Reflects elimination of historical preferred dividends of Stations as such preferred stock is extinguished in the merger.

(h)		Reflects our issuance of an additional 15,527,950 shares of our class B common stock at an assumed price of $14.49 per share, the closing price at March 31, 2002.

UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS

FOR THE YEAR ENDED DECEMBER 31, 2001


								Pro Forma
		Gray			Stations			Adjustments			Pro Forma


		(Dollars in thousands except per share data)
Operating revenues:
	Broadcasting (less agency commissions)	$	106,430		$	107,561		$	—		$	213,991
	Publishing		41,189			—			—			41,189
	Paging		8,724			—			—			8,724

			156,343			107,561			—			263,904

Expenses:
	Broadcasting		66,232			64,007			—			130,239
	Publishing		31,915			—			—			31,915
	Paging		5,877			—			—			5,877
	Corporate and administrative		3,615			5,946			(2,284	)(a)		7,277
	Depreciation and Amortization		30,824			21,901			(12,120	)(b)		40,605

			138,463			91,854			(14,404	)		215,913

Operating income			17,880			15,707			14,404			47,991
Other (income) expense:
Interest expense			35,783			43,361			(24,031	)(c)(d)		55,113
Depreciation in value of derivatives, net			1,581			—			—			1,581
Miscellaneous income, net			(194	)		(159	)		—			(353	)

Total other (income) expense, net			37,170			43,202			(24,031	)		56,341

Income (loss) from continuing operations before provision for (benefit from) income taxes			(19,290	)		(27,495	)		38,435			(8,350	)
Provision for (benefit from) income taxes			(5,972	)		(10,165	)		14,605	(e)		(1,532	)

Income (loss) from continuing operations		$	(13,318	)	$	(17,330	)	$	23,830		$	(6,818	)

Preferred dividends		$	616		$	31,186		$	(28,602	)(f)(g)	$	3,200

Basic and diluted earnings per common share:
	Loss from continuing operations	$	(13,934	)							$	(10,018	)

Weighted average outstanding common shares:
	Basic and diluted		15,605									31,133	(h)

Basic and diluted net loss per share available to common stockholders from continuing operations		$	(0.89	)							$	(0.32	)


(a)		Reflects the elimination of certain historical expenses of Stations that Gray will not, or does not expect, to incur subsequent to the acquisition including compensation paid to certain persons who will resign concurrent with the closing of the merger, certain professional fees and other overhead costs.

(b)		Includes adjustment to the depreciation and amortization charges to reflect the allocation of the total consideration estimated to be paid by Gray among the assets acquired and the liabilities assumed. However, the adjustment is primarily the result of eliminating Stations’ amortization of FCC licenses and goodwill which are no longer amortized on acquisitions occurring after July 1, 2001.

(c)		Reflects the elimination of certain historical interest expense of Stations reflecting the repayment, in full, of certain senior and subordinated debt as part of Stations’ Plan of Reorganization.


(d)		Reflects adjustments to include (1) interest charges of $9.7 million on the estimated $175.5 million of newly issued senior debt with an assumed effective interest rate of 5.55%, (2) interest charges of $9.2 million on the estimated $100 million of newly issued senior subordinated indebtedness with an assumed effective interest rate of 9.25%, (3) amortization of $0.9 million of the estimated $7.8 million of deferred financing charges incurred with the revised or newly issued senior credit facility with an estimated average life to maturity of 8.25 years and the offering of the senior subordinated notes with an estimated average life to maturity of 9.2 years and (4) the elimination of $0.9 million of the historical amortization expense for deferred financing charges associated with our prior senior credit facility.

(e)		Reflects the provision for (benefit from) income taxes using an effective income tax rate of 38%.

(f)		Preferred dividends have been adjusted to reflect our issuance of $40.0 million liquidation value Series C preferred stock with an annual dividend rate of 8% and the application of the $30.6 million net cash proceeds toward our merger consideration, thereby reducing our senior debt borrowing requirements and related interest expense and the exchange of an aggregate of $8.6 million liquidation value of our existing series A and series B preferred stock into the Series C preferred stock.

(g)		Reflects elimination of historical preferred dividends of Stations as such preferred stock is extinguished in the merger.

(h)		Reflects our issuance of an additional 15,527,950 shares of our class B common stock at an assumed price of $14.49 per share, the closing price at March 31, 2002.

UNAUDITED PRO FORMA COMBINED CONDENSED BALANCE SHEET

AS OF MARCH 31, 2002


								Pro Forma
		Gray			Stations			Adjustments			Pro Forma


		(Dollars in thousands)
ASSETS
Current assets:
	Cash and cash equivalents	$	3,165		$	7,365		$	(5,000	)(a)	$	5,530
	Trade accounts receivable, less allowance for doubtful accounts		24,927			21,092			(1,702	)(b)		44,317
	Recoverable income taxes		987			—			—			987
	Inventories		970			—			—			970
	Current portion of program broadcast rights, net		2,565			2,947			—			5,512
	Other current assets		992			3,009			—			4,001
	Assets of stations held for sale		—			47,841			(47,841	)(c)		—

Total current assets			33,606			82,254			(54,543	)		61,317
Property and equipment, net			61,372			49,967			—			111,339
Deferred loan costs, net			11,334			3,714			(2,026	)(b)(d)		13,022
FCC licenses and network affiliation agreements			403,794			213,123			234,491	(b)		851,408
Goodwill			53,151			78,099			2,652	(b)		133,902
Consulting, noncompete and other definite lived intangible assets			795			—			3,000	(b)		3,795
Other			14,549			1,282			—			15,831

Total assets		$	578,601		$	428,439		$	183,574		$	1,190,614

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
	Trade accounts payable and accrued expenses	$	11,641		$	9,935		$	—		$	21,576
	Accrued interest		7,670			—			—			7,670
	Current portion of program broadcast obligations		2,393			4,819			—			7,212
	Deferred revenue		3,278			276			—			3,554
	Unrealized loss on derivatives		1,192			—			—			1,192
	Current portion of long-term debt		456			2,283			—			2,739
	Liabilities of stations held for sale		—			8,967			(8,967	)(c)		—

Total current liabilities			26,630			26,280			(8,967	)		43,943
Long-term debt, less current portion			390,992			2,975			275,471	(d)		669,438
Program broadcast obligations, less current portion			576			1,121			—			1,697
Supplemental employee benefits			472			—			—			472
Deferred income taxes			54,358			23,326			54,370	(b)(d)		132,054
Other			1,695			562			—			2,257
Liabilities subject to compromise			—			448,175			(448,175	)(e)		—

Total liabilities			474,723			502,439			(127,301	)		849,861

Senior exchangeable preferred stock			—			162,163			(162,163	)(f)		—
Seller junior discount preferred stock			—			82,436			(82,436	)(f)		—

Series C preferred stock, redeemable, exchangeable, 4,000 shares, liquidation value $10,000 per share			—			—			39,233	(g)		39,233
Stockholders’ equity
	Serial preferred stock, 861 shares, liquidation value $10,000 per share		4,637			—			(4,637	)(g)		—
	Class A common stock		20,173			—			—			20,173
	Class B common stock		117,829			74			209,926	(f)(h)		327,829
	Additional paid-in capital		—			(68,595	)		68,595	(f)(h)		—
	Retained earnings (accumulated deficit)		(30,422	)		(249,414	)		241,693	(d)(f)(g)		(38,143	)
	Stockholder’s note receivable		—			(664	)		664	(f)		—

			112,217			(318,599	)		516,241			309,859
	Treasury stock at cost, class A common		(8,339	)		—			—			(8,339	)
	Treasury stock at cost, class B common		—			—			—			—

Total stockholders’ equity			103,878			(318,599	)		516,241			301,520

Total liabilities and stockholders’ equity		$	578,601		$	428,439		$	183,574		$	1,190,614


(a)		Assumes $5.0 million of the aggregate cash on hand upon concluding the merger is utilized to pay certain fees and expenses incurred with the merger.

(b)		Reflects the acquisition of Stations for total estimated consideration of $513.4 million which includes a base price of $502.5 million, additional cash consideration of $4.9 million for certain estimated net working capital, as specified in the merger agreement, fees and expenses of $6.0 million and the allocation of the estimated consideration among the assets acquired and the liabilities assumed as of March 31, 2002. The allocation of the consideration paid is as follows:


				Disposition Of						Opening
				Designated			Fair Value			Balance
Description	SHC			Stations			Adjustments			Sheet


	(in thousands)
Cash	$	7,365								$	7,365
Accounts receivable		21,092					$	(1,702	)		19,390
Assets of stations held for sale		47,841		$	(47,841	)					—
Current portion of program broadcast rights		2,947									2,947
Other current assets		3,009									3,009
Property and equipment		49,967									49,967
Other long term assets		1,282									1,282
Deferred loan costs		3,714						(3,714	)		—
FCC licenses, network affiliation agreements and other indefinite lived intangible assets		213,123						234,491			447,614
Consulting, noncompete and other definite lived intangible assets		—						3,000			3,000
Goodwill		78,099						2,652			80,751
Trade payables and accrued expenses		(9,935	)								(9,935	)
Current portion of notes payable		(2,283	)								(2,283	)
Current portion of program broadcast obligations		(4,819	)								(4,819	)
Liabilities of stations held for sale		(8,967	)		8,967						—
Deferred revenue		(276	)								(276	)
Deferred tax liabilities		(23,326	)					(56,674	)		(80,000	)
Long term portion of program broadcast obligations		(1,121	)								(1,121	)
Long term portion of notes payable		(2,975	)								(2,975	)
Other long term liabilities		(562	)								(562	)

Total purchase price including expenses	$	374,175		$	(38,874	)	$	178,053		$	513,354


	The allocation of the consideration to the assets and liabilities of Stations acquired by Gray will remain preliminary until we have finalized our assessment of these assets and liabilities following the acquisition. Such assessment will be based in part upon third party evaluations which we will not receive until after the acquisition is completed.


(c)		Reflects the elimination of assets sold or to be sold and the liabilities assumed, or to be assumed, for the nine television stations which have been or will be sold by Stations prior to our merger.

(d)		Reflects (1) our issuance of an estimated $175.5 million of senior debt with a variable interest rate based on LIBOR plus a premium which we have assumed to be 3.25% and we have further assumed for the pro forma adjustments that the effective interest rate on this debt is 5.55% and that it will have an assumed average life to maturity of 8.25 years, (2) our offering of $100 million of senior subordinated indebtedness with an assumed effective interest rate of 9.25% and an assumed average life to maturity of 9.2 years, (3) our incurring $7.8 million of deferred financing fees in connection


		with revising or replacing our senior credit facility and our offering of senior subordinated notes and (4) the elimination of Gray’s historical deferred financing charges of $6.0 million associated with its prior senior credit facility net of an income tax benefit assuming an effective tax rate of 38%.

(e)		Reflects the elimination of certain senior and subordinated debt and related accrued interest of Stations reflecting the repayment, in full, of such debt as part of Stations’ Plan of Reorganization. The cash used to make such debt repayments is a portion of the cash provided from our proposed issuance of senior debt, subordinated debt and class B common stock as discussed below.

(f)		Reflects the elimination of the historical stockholders equity of Stations including all preferred stock, common stock, additional paid-in capital and accumulated deficits.

(g)		Reflects our issuance in April 2002 of $40.0 million liquidation value of a Series C preferred stock with an 8% annual dividend rate. The Series C preferred stock has a mandatory redemption in April 2012 and is exchangeable into our class B common stock at a current conversion rate of $14.39 per share. We received net cash proceeds of approximately $30.6 million after paying fees and expenses of $767,000. $8.6 million liquidation value of the Series C preferred stock was used to exchange our existing series A and series B preferred stock with an aggregate liquidation value of $8.6 million into the Series C preferred stock using a one for one exchange ratio. Also includes as a charge to our accumulated deficit a $4.0 million non-cash constructive dividend resulting from the exchange of the series A and series B preferred stock into the Series C preferred stock.

(h)		Reflects the assumed issuance of 15,527,590 shares of our class B common stock at an assumed price of $14.49 per share, the closing price of such stock on March 31, 2002, net of issuance costs of $15.0 million.

INDEX TO FINANCIAL STATEMENTS


	Page

STATIONS HOLDING COMPANY, INC. AND SUBSIDIARIES
Independent Auditor’s Report		F-2
Consolidated Balance Sheets as of December 31, 2000 and 2001		F-3
Consolidated Statements of Operations for the Three Years Ended December 31, 2001		F-4
Consolidated Statements of Stockholders’ (Deficit) for the Three Years Ended December 31, 2001.		F-5
Consolidated Statements of Cash Flows for the Three Years Ended December 31, 2001		F-6
Notes to Consolidated Financial Statements		F-8
STATIONS HOLDING COMPANY, INC., DEBTOR-IN-POSSESSION AND SUBSIDIARIES
Consolidated Balance Sheets as of December 31, 2001 and March 31, 2002		F-29
Consolidated Statements of Operations for the Three Months Ended March 31, 2001 and 2002		F-30
Consolidated Statements of Stockholders’ (Deficit) for the Three Months Ended March 31, 2002		F-31
Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2001 and 2002		F-32
Notes to Consolidated Financial Statements		F-34

F-1

INDEPENDENT AUDITOR’S REPORT

To the Board of Directors

Stations Holding Company, Inc. (formerly Benedek Communications Corporation) and Subsidiaries

Hoffman Estates, Illinois

We have audited the accompanying consolidated balance sheets of Stations Holding Company, Inc. (“Stations”) and subsidiaries as of December 31, 2000 and 2001 and the related consolidated statements of operations, stockholders’ (deficit) and cash flows for the years ended December 31, 1999, 2000 and 2001. These financial statements are the responsibility of Stations’ management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Stations and subsidiaries as of December 31, 2000 and 2001 and the results of their operations and their cash flows for the years ended December 31, 1999, 2000 and 2001, in conformity with accounting principles generally accepted in the United States of America.

The accompanying consolidated financial statements have been prepared assuming that Stations will continue as a going concern. As discussed in Note Q to the consolidated financial statements, Stations is currently in default under its Credit Facility and Discount Notes and has filed for relief under Chapter 11 of the Bankruptcy Code subsequent to year-end. This raises substantial doubt about Stations’ ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note Q. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

As described in Note O to the consolidated financial statements, Stations has elected to early adopt the provisions of Statement of Financial Accounting Standards No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.”


	/s/ McGLADREY & PULLEN, LLP

Rockford, Illinois

March 15, 2002, except for the subsequent

events described in Note Q as to which

the date is June 4, 2002

F-2

STATIONS HOLDING COMPANY, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS



			December 31,

			2000		2001


			(In thousands)
ASSETS
Current Assets
	Cash and cash equivalents		$	3,983	$	3,503
	Receivables
		Trade, less allowance for doubtful accounts of $799 and $834 for 2000 and 2001