GRAY COMMUNICATIONS SYSTEMS INC /GA/
DEF 14A, 1996-08-14
TELEVISION BROADCASTING STATIONS
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<PAGE>
                            SCHEDULE 14A INFORMATION
 
   
                  Proxy Statement Pursuant to Section 14(a) of
                      the Securities Exchange Act of 1934
    
 
   
    Filed by the Registrant /X/
    Filed by a Party other than the Registrant / /
 
    Check the appropriate box:
    / /  Preliminary Proxy Statement
    / /  Confidential, for Use of the Commission Only (as permitted by Rule
         14a-6(e)(2))
    /X/  Definitive Proxy Statement
    / /  Definitive Additional Materials
    / /  Soliciting  Material  Pursuant  to  Section  240.14a-11(c)  or  Section
         240.14a-12
 
    
 
                             GRAY COMMUNICATIONS SYSTEMS, INC.
- - --------------------------------------------------------------------------------
                (Name of Registrant as Specified In Its Charter)
 
- - --------------------------------------------------------------------------------
    (Name of Person(s) Filing Proxy Statement, if other than the Registrant)
 
Payment of Filing Fee (Check the appropriate box):
 
/ /  $125 per  Exchange Act  Rules 0-11(c)(1)(ii),  14a-6(i)(1), 14a-6(i)(2)  or
     Item 22(a)(2) of Schedule 14A.
/ /  $500  per  each party  to  the controversy  pursuant  to Exchange  Act Rule
     14a-6(i)(3).
/ /  Fee  computed  on   table  below   per  Exchange   Act  Rules   14a-6(i)(4)
     and 0-11.
     1) Title of each class of securities to which transaction applies:
        ------------------------------------------------------------------------
     2) Aggregate number of securities to which transaction applies:
        ------------------------------------------------------------------------
     3) Per unit price or other underlying value of transaction computed
        pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the
        filing fee is calculated and state how it was determined):
        ------------------------------------------------------------------------
     4) Proposed maximum aggregate value of transaction:
        ------------------------------------------------------------------------
     5) Total fee paid:
        ------------------------------------------------------------------------
/X/  Fee paid previously with preliminary materials.
/ /  Check box if any part of the fee is offset as provided by Exchange Act Rule
     0-11(a)(2)  and identify the  filing for which the  offsetting fee was paid
     previously. Identify the previous filing by registration statement  number,
     or the Form or Schedule and the date of its filing.
     1) Amount Previously Paid:
        ------------------------------------------------------------------------
     2) Form, Schedule or Registration Statement No.:
        ------------------------------------------------------------------------
     3) Filing Party:
        ------------------------------------------------------------------------
     4) Date Filed:
        ------------------------------------------------------------------------
<PAGE>
                       GRAY COMMUNICATIONS SYSTEMS, INC.
                                  P.O. BOX 48
                           ALBANY, GEORGIA 31702-0048
 
                            ------------------------
 
                    NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
 
                            ------------------------
 
   
    The 1996 Annual Meeting of Shareholders of Gray Communications Systems, Inc.
(the  "Company") will be  held at The Peachtree  Insurance Center, The Executive
Board Room, 5th Floor, 4370 Peachtree Road, N.E., Atlanta, GA, on the 3rd day of
September, 1996 at 9:30 a.m. local time for the following purposes:
    
 
    (1)  To  elect  eight  directors  to  hold  office  until  their  respective
       successors have been duly elected and qualified;
 
    (2)  To  consider and  take  action upon  a  proposal to  adopt  and approve
       Articles of Amendment  to the  Company's Articles  of Incorporation  (the
       "Amendment")  to (a)  increase the  voting rights  of the  Class A Common
       Stock of no par value  such that the Class A  Common Stock shall have  10
       votes  per share  on each  matter that  is submitted  to shareholders for
       approval, (b) redesignate the presently  authorized Class B Common  Stock
       of no par value with no voting rights, such that the Class B Common Stock
       of  no par  value shall have  one vote per  share on each  matter that is
       submitted to shareholders for approval  and shall have certain rights  as
       described  herein and (c) increase the authorized number of shares of the
       Company's capital  stock  to  50,000,000  shares  designating  15,000,000
       shares  as Class  A Common  Stock of no  par value;  15,000,000 shares as
       Class B Common Stock of no  par value and 20,000,000 shares as  Preferred
       Stock;
 
    (3)  To consider  and take  action upon  a proposal  to amend  the Company's
       Bylaws to permit an increase of the  voting rights of the Class A  Common
       Stock to 10 votes per share;
 
    (4)  To consider and take action upon a proposal to amend the Company's 1992
       Long Term Incentive  Plan for certain  employees of the  Company and  its
       subsidiaries  to provide for the issuance thereunder of shares of Class B
       Common Stock in addition to shares of Class A Common Stock;
 
    (5) To approve the issuance to Bull Run Corporation of warrants to  purchase
       487,500 shares of Class A Common Stock;
 
    (6)  To approve the issuance to Bull Run Corporation of warrants to purchase
       500,000 shares of Class A Common Stock;
 
    (7) To  ratify the  Board of  Directors'  approval of  an amendment  to  the
       Company's  non-qualified stock option plan  for non-employee directors of
       the Company;
 
    (8) To approve the appointment of Ernst & Young LLP as independent  auditors
       of  the Company  and its  subsidiaries for  the year  ending December 31,
       1996; and
 
    (9) To transact such other business as may properly come before the  meeting
       or any adjournment or adjournments thereof.
 
   
    Only  holders of record of Class A Common  Stock at the close of business on
July 19, 1996 will be entitled to notice  of and to vote at this meeting or  any
adjournment  or adjournments thereof. The transfer books of the Company will not
be closed.
    
 
    IT IS IMPORTANT THAT YOUR STOCK BE REPRESENTED AT THIS MEETING IN ORDER THAT
THE PRESENCE OF A QUORUM BE ASSURED. ENCLOSED  IS A FORM OF PROXY WHICH, IF  YOU
DO  NOT EXPECT TO  ATTEND IN PERSON,  YOU ARE URGED  TO SIGN AND  FORWARD TO THE
SECRETARY IN THE ACCOMPANYING  ENVELOPE WHICH REQUIRES NO  POSTAGE IF MAILED  IN
THE UNITED STATES.
 
                                          By Order of the Board of Directors
                                          Robert A. Beizer, SECRETARY
 
   
August 14, 1996
    
<PAGE>
                       GRAY COMMUNICATIONS SYSTEMS, INC.
                                  P.O. BOX 48
                           ALBANY, GEORGIA 31702-0048
 
                            ------------------------
 
   
                                PROXY STATEMENT
        FOR ANNUAL MEETING OF SHAREHOLDERS TO BE HELD SEPTEMBER 3, 1996
    
 
                            ------------------------
 
                     SOLICITATION AND REVOCABILITY OF PROXY
 
   
    The  enclosed  proxy  is  solicited  by  the  Board  of  Directors  of  Gray
Communications Systems,  Inc.  (the "Company")  in  connection with  the  Annual
Meeting  of  Shareholders to  be  held at  The  Peachtree Insurance  Center, The
Executive Board Room, 5th Floor, 4370  Peachtree Road, N.E., Atlanta, GA on  the
3rd  day of September,  1996 at 9:30  a.m., local time,  and at any adjournments
thereof.
    
 
   
    The approximate date  on which this  Proxy Statement and  form of proxy  are
first being sent or given to shareholders is August 14, 1996.
    
 
   
    You  are requested to sign and complete  the enclosed proxy and return it in
the enclosed envelope. Any person giving this  proxy has the power to revoke  it
at  any  time before  it is  exercised by  delivering to  the Company  a written
instrument revoking it or a duly executed proxy bearing a later date. The  proxy
will  also be revoked if the person or  persons executing it shall be present at
the meeting  and elect  to  vote in  person.  If the  proxy  is not  revoked  or
suspended, the shares represented by the proxy will be voted as specified at the
meeting. All proxies received pursuant to this solicitation will be voted except
as  to matters  where authority  to vote is  specifically withheld  and, where a
choice is specified as to  the proposal, they will  be voted in accordance  with
such specification. If no instructions are given, the persons named in the proxy
solicited  by  the Board  of Directors  of the  Company intend  to vote  for the
nominees for election as directors of the Company listed herein and for approval
of the proposals stated in the accompanying Notice and described herein.
    
 
    The Board of Directors is not aware  of any matter that may come before  the
meeting  other  than the  proposals  stated in  the  accompanying Notice  and as
described herein. No director has informed management that he intends to  oppose
any action to be taken at the meeting. If any other matter is properly presented
at  the  meeting  for action,  the  individuals  named in  the  proxy  will have
discretionary authority to vote on such matter.
 
   
    The cost  of soliciting  proxies will  be borne  by the  Company, which  may
reimburse  brokers and  others for their  expenses incurred  in obtaining voting
instructions from beneficial owners of Class  A Common Stock, no par value  (the
"Class  A Common  Stock"), of  the Company  held of  record by  such brokers and
others.
    
 
                           OUTSTANDING CAPITAL STOCK
 
   
    The record date  for shareholders  entitled to vote  at the  meeting is  the
close  of business on July 19, 1996. At  the close of business on that date, the
Company had issued  and outstanding 4,710,293  shares of Class  A Common  Stock,
which constitute the only voting securities of the Company.
    
 
                               QUORUM AND VOTING
 
    Only  owners of record of shares of the Class A Common Stock at the close of
business on the record date will be entitled to vote at this meeting. Each owner
of record on the record date is entitled  to one vote for each share of Class  A
Common  Stock so held. The presence, in person  or by proxy, of the holders of a
majority of the outstanding  shares of Class A  Common Stock shall constitute  a
quorum  at  the  meeting of  shareholders.  Shares represented  by  proxies that
withhold authority to vote for a nominee for director or indicate an  abstention
or  a "broker non-vote" (i.e., shares represented at the meeting held by brokers
or shareholder nominees as to which (i) instructions have not been received from
the beneficial owners thereof or persons  entitled to vote such shares and  (ii)
the  broker  or  nominee does  not  have  the discretionary  voting  power  on a
particular matter with respect to such shares) will count as shares present  and
entitled  to vote for purposes  of determining the presence  of a quorum. Except
for the approval of the Amendment and the
<PAGE>
   
amendment to the Bylaws, which must be approved by the holders of a majority  of
the  outstanding shares, and  except with respect to  the election of directors,
which is by a plurality  of votes cast, each of  the matters being submitted  to
shareholder  vote will be approved if a quorum  is present in person or by proxy
and a majority of  the votes cast on  a particular matter are  cast in favor  of
that  matter. Abstentions and broker non-votes are  not counted as votes cast on
any matter to which they relate.
    
 
                             ELECTION OF DIRECTORS
                                   (ITEM ONE)
 
    One of the purposes of the meeting  is the annual election of directors.  It
is  intended that the shares represented by the enclosed proxy will be voted for
the election of  the eight nominees  for director named  in this section  unless
otherwise specified. Directors will be elected by a plurality of the votes cast.
The  eight  director  nominees listed  below,  all  of whom  currently  serve as
directors, have  been nominated  to serve  as directors  until the  next  annual
election of directors and until their respective successors are duly elected and
qualified.  If any nominee for director  should become unavailable, which is not
anticipated, it is intended that such shares subject to proxy will be voted  for
such  substitute nominees  as may  be nominated by  the Board  of Directors. THE
BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE "FOR" ALL THE NOMINEES.
 
NOMINEES
 
    Set forth below is certain information with respect to the nominees.
 
RICHARD L. BOGER                              DIRECTOR SINCE 1991       AGE: 49
 
    Richard L. Boger has  been President and Chief  Executive Officer of  Export
Insurance  Services, Inc.,  an insurance  company, and  a director  of CornerCap
Group of Funds, a "Series" investment company since prior to 1991. Mr. Boger  is
a  member of the  Executive Committee and Management  Personnel Committee of the
Board of Directors.
 
RALPH W. GABBARD                              DIRECTOR SINCE 1995       AGE: 50
 
    Ralph W. Gabbard has been President  of the Company since December 1,  1995.
Mr. Gabbard served as a Vice President of the Company and as President and Chief
Operating  Officer of the Company's broadcast  operations from September 2, 1994
until his election  as President of  the Company. He  was President and  General
Manager  of Kentucky Central Television, Inc. from  1982 to 1994. Mr. Gabbard is
Chairman of  the  National  Association  of  Broadcasters  Television  Board  of
Directors  and Chairman of the  CBS Affiliates Advisory Board.  Mr. Gabbard is a
member of the Executive Committee.
 
HILTON H. HOWELL, JR.                         DIRECTOR SINCE 1993       AGE: 34
 
    Hilton H. Howell,  Jr. has  been President  and Chief  Executive Officer  of
Atlantic  American Corporation, an insurance holding company, since May 1995. He
has been Executive Vice President of Delta Life Insurance Company and Delta Fire
and Casualty  Insurance Company  since  1994, and  Executive Vice  President  of
Atlantic  American  Life  Insurance  Company,  Bankers  Fidelity  Life Insurance
Company and Georgia  Casualty & Surety  Company since 1992.  In addition,  since
1994,  he has served as Vice President  and Secretary of Bull Run Corporation, a
designer and manufacturer of dot matrix printers.  He is also a director of  the
following  corporations:  Bull Run  Corporation, Atlantic  American Corporation,
Atlantic American  Life  Insurance  Company,  Bankers  Fidelity  Life  Insurance
Company,  Delta  Life  Insurance  Company,  Delta  Fire  and  Casualty Insurance
Company, Georgia Casualty & Surety Company, American Southern Insurance  Company
and  American Safety Insurance Company. From  1989 to 1991, Mr. Howell practiced
law in Houston, Texas with the law firm of Liddell, Sapp, Zivley, Hill & LaBoon.
Mr. Howell is a member of the Audit  Committee. He is the son-in-law of J.  Mack
Robinson.
 
   
WILLIAM E. MAYHER, III                        DIRECTOR SINCE 1990       AGE: 57
 
    William  E. Mayher,  III has  been a  neurosurgeon in  Albany, Georgia since
prior to 1991. Dr. Mayher is a member of the Executive Committee and has  served
as Chairman of the Board of Directors since August 1993.
    
 
                                       2
<PAGE>
 
HOWELL W. NEWTON                              DIRECTOR SINCE 1991       AGE: 49
 
    Howell W. Newton has been President and Treasurer of Trio Manufacturing Co.,
a  textile manufacturing company, since prior to 1991. Mr. Newton is a member of
the Audit Committee.
 
   
HUGH NORTON                                   DIRECTOR SINCE 1987       AGE: 64
 
    Hugh Norton has been  President of Norco, Inc.,  an insurance agency,  since
prior to 1991.
    
 
ROBERT S. PRATHER, JR.                        DIRECTOR SINCE 1993       AGE: 51
 
    Robert  S. Prather,  Jr. has been  President and Chief  Executive Officer of
Bull Run Corporation  since July  1992 and a  Director of  Bull Run  Corporation
since  1992. Prior to that time, he was President and Chief Executive Officer of
Phoenix Corporation, a  steel service center.  He is a  member of the  Executive
Committee and Management Personnel Committee.
 
   
J. MACK ROBINSON                              DIRECTOR SINCE 1993       AGE: 73
 
    J.  Mack Robinson  has been  Chairman of the  Board of  Bull Run Corporation
since March 1994, Chairman  of the Board and  President of Delta Life  Insurance
Company  and Delta Fire and Casualty  Insurance Company since 1958, President of
Atlantic American Corporation,  an insurance  holding company,  from 1974  until
1995  and Chairman of the Board of  Atlantic American Corporation since 1974. He
is also a director of the following corporations: Bull Run Corporation, Atlantic
American Corporation, Atlantic American Life Insurance Company, Bankers Fidelity
Life Insurance Company, Delta  Life Insurance Company,  Delta Fire and  Casualty
Insurance   Company,  Georgia  Casualty  &  Surety  Company,  American  Southern
Insurance Company, and American Safety  Insurance Company and director  emeritus
of Wachovia Corporation. Mr. Robinson is a member of the Executive Committee and
Management  Personnel Committee. Mr. Robinson is  the father-in-law of Hilton H.
Howell, Jr.
    
 
                                       3
<PAGE>
SECURITY OWNERSHIP OF DIRECTORS, EXECUTIVE OFFICERS AND OTHER PRINCIPAL HOLDERS
OF THE COMPANY'S VOTING SECURITIES
 
    The following table sets forth  certain information regarding the  ownership
of  Class A Common Stock as  of June 15, 1996 by (i)  any person who is known to
the Company to be the beneficial owner of more than five percent of the Class  A
Common  Stock  of the  Company, (ii)  all directors,  (iii) all  named executive
officers and (iv) all directors and executive officers as a group.
 
   
<TABLE>
<CAPTION>
                                            SHARES
       NAME AND ADDRESS OF               BENEFICIALLY         PERCENT OF
         BENEFICIAL OWNER                    OWNED              CLASS
- - ----------------------------------       ------------         ----------
<S>                                 <C>                       <C>
Bull Run Corporation (1)             1,211,590                   27.1%
George H. Nader (2)                    240,899                    5.4%
Ralph W. Gabbard                           918                   *
William A. Fielder III (3)               8,563                   *
Sabra H. Cowart                            195                   *
Robert A. Beizer                        --                       *
Thomas J. Stultz                         1,500                   *
Joseph A. Carriere                         594                   *
William E. Mayher III (3)               16,500                   *
Richard L. Boger (3)                    24,150                   *
Hilton H. Howell, Jr. (3)(4)(5)(6)   1,280,740                   28.6%
Howell W. Newton (3)                     9,250                   *
Hugh Norton (3)                         16,500                   *
Robert S. Prather, Jr. (3)(4)(7)     1,242,340                   27.8%
J. Mack Robinson (3)(4)(6)(8)        2,003,530                   44.8%
John T. Williams (9)                    78,752                    1.8%
All directors and executive          2,260,352(4)-(8),
 officers as a group (14 persons)             (10)               49.9%
</TABLE>
    
 
- - ------------------------
 *  Less than 1%
 
   
(1) Owned by Bull Run Corporation through its wholly-owned subsidiary, Datasouth
    Computer Corporation.  Does  not  include warrants  subject  to  shareholder
    approval. See "Issuance of Warrants to Bull Run Corporation (Item Five)" and
    "Issuance  of Additional Warrants  to Bull Run  Corporation (Item Six)." The
    address of  Bull Run  Corporation  is 4370  Peachtree Road,  N.E.,  Atlanta,
    Georgia 30319.
    
 
(2)  Mr. Nader's address is P.O. Box 271, 1011 Fifth Avenue, West Point, Georgia
    31833.
 
(3) Includes 7,500 currently exercisable options.
 
   
(4) Includes 1,211,590  shares owned  by Bull  Run Corporation  as described  in
    footnote  (1)  above,  because  Messrs.  Howell,  Prather  and  Robinson are
    directors and  officers of  Bull  Run Corporation  and Messrs.  Prather  and
    Robinson  are principal shareholders  of Bull Run  Corporation and, as such,
    may be deemed to have the right to  vote or dispose of such shares. Each  of
    Messrs.  Howell, Prather and Robinson  disclaims beneficial ownership of the
    shares owned by Bull Run Corporation.
    
 
(5) Includes 39,050 shares owned  by Mr. Howell's wife,  as to which shares  Mr.
    Howell  disclaims beneficial ownership. Excludes 63,000 shares held in trust
    for Mr. Howell's wife.
 
(6) Excludes as to Mr. Howell, and includes as to Mr. Robinson, an aggregate  of
    297,540  shares owned by certain companies of which Mr. Howell is an officer
    and director and  Mr. Robinson is  an officer, director  and a principal  or
    sole shareholder.
 
(7)  Includes 150  shares owned by  Mr. Prather's  wife, as to  which shares Mr.
    Prather disclaims beneficial ownership.
(8) Includes  an  aggregate of  256,650  shares  owned by  Mr.  Robinson's  wife
    directly and as trustee for their daughters, as to which shares Mr. Robinson
    disclaims  beneficial ownership.  Mr. Robinson's  address is  4370 Peachtree
    Road, N.E., Atlanta, Georgia 30319.
 
(9) Mr. Williams resigned his position as President and Chief Executive  Officer
    of the Company effective December 1, 1995.
 
(10) Includes 60,000 shares subject to current options.
 
                                       4
<PAGE>
EXECUTIVE OFFICERS
 
    Set  forth  below  is  certain information  with  respect  to  the executive
officers of the Company:
 
    Robert A.  Beizer,  age  56,  was  appointed  Vice  President  for  Law  and
Development  and Secretary in February 1996. From June 1994 to February 1996, he
was of counsel  to Venable,  Baetjer, Howard  & Civiletti,  a law  firm, in  its
regulatory  and legislative practice group. From 1990  to 1994, Mr. Beizer was a
partner at the law firm  of Sidley & Austin and  was head of its  communications
practice  group  in Washington,  D.C.  He is  a  past president  of  the Federal
Communications Bar Association and a member of the ABA House of Delegates.
 
    Joseph A. Carriere, age 62, was appointed Vice President -- Corporate  Sales
in February 1996. From November 1994, until his appointment as Vice President he
served  as  President and  General Manager  of  KTVE Inc.,  a subsidiary  of the
Company. Prior to  joining the  Company in 1994,  Mr. Carriere  was employed  by
Withers  Broadcasting Company of Colorado as  General Manager from 1991 to 1994.
He has served  as a past  chairman of the  CBS Advisory Board  and the  National
Association of Broadcasters.
 
    Sabra  H. Cowart,  age 29,  joined the  Company in  March 1994  as corporate
accounting manager.  In  April 1995,  she  was appointed  Controller  and  Chief
Accounting  Officer  of the  Company  and in  February  1996, she  was appointed
Assistant Secretary of the Company. Prior to joining the Company, Ms. Cowart was
employed from 1989 to 1994 by Deloitte & Touche LLP, an accounting firm.
 
    William A. Fielder, III, age 37, was appointed Controller of the Company  in
April  1991  and appointed  Vice President  and Chief  Financial Officer  of the
Company in August 1993. Prior to being appointed as Controller in April 1991, he
was employed by Ernst & Young LLP, the independent auditors for the Company.
 
    Ralph W.  Gabbard, age  50, has  served  as President  and Director  of  the
Company  since  December  1,  1995.  For  additional  information  regarding Mr.
Gabbard, see "Election of Directors."
 
    Thomas J. Stultz, age  44, was appointed Vice  President of the Company  and
was  appointed President of the Company's  publishing division in February 1996.
Prior to joining the Company, he was employed by Multimedia Newspaper Company, a
division of Multimedia,  Inc. where  he served as  Vice President  from 1990  to
1995.
 
COMPLIANCE WITH SECTION 16(A) OF THE SECURITIES EXCHANGE ACT OF 1934
 
    Section  16(a) of the  Securities Exchange Act of  1934 (the "Exchange Act")
requires the directors,  executive officers and  persons who own  more than  ten
percent  of a registered class of a company's equity securities to file with the
Securities and  Exchange Commission  (the "SEC")  initial reports  of  ownership
(Form  3) and reports of changes  in ownership (Forms 4 and  5) of such class of
equity securities. Officers, directors and greater than ten percent shareholders
of the Company are required by SEC regulation to furnish the Company with copies
of all such Section 16(a) reports that they file.
 
   
    To the Company's knowledge, based solely on its review of the copies of such
reports furnished to the  Company during the year  ended December 31, 1995,  all
Section  16(a) filing requirements applicable to its officers, directors and ten
percent beneficial owners  were met,  except for John  T. Williams'  inadvertent
failure  to file Forms  4 for three stock  awards made by  the Company under his
employment agreement. These awards of 37,500, 37,500 and 75,000 shares of  Class
A  Common  Stock  were  made  on  January  24,  March  2  and  March  14,  1995,
respectively. Mr. Williams also inadvertently failed to file a Form 4 disclosing
the sale of 75,000  shares of Class  A Common Stock  which occurred in  December
1995.  These transactions were reported  on his Form 5  filed timely in February
1996. Additionally, Ralph W. Gabbard inadvertently failed to file timely a  Form
4  regarding the purchase  of 150 shares of  Class A Common  Stock in 1995. This
transaction was reported on his Form 5 filed in February 1996. Mr. Gabbard  also
inadvertently  failed to  file timely a  Form 3  in 1994 upon  appointment as an
officer of the Company to report 300 shares of Class A Common Stock owned by him
prior to that election.
    
 
                                       5
<PAGE>
DIRECTORS COMMITTEES AND MEETINGS
 
    Six meetings of the Board of  Directors were held during the Company's  last
fiscal year. Each director of the Company attended at least 75% of the aggregate
of  (i)  all  meetings  of the  Board  of  Directors and  (ii)  all  meetings of
committees of the Board of Directors of which he was a member, during the period
he served during the year ended December 31, 1995. In addition to the  Executive
Committee,  the Board of  Directors has a Management  Personnel Committee and an
Audit Committee. The Audit Committee is comprised of Messrs. Newton and  Howell.
The  functions performed by the Audit Committee include review of the affairs of
the Company  with  its  independent  auditors  in  determining  whether  in  the
professional opinion of such auditors, the accounts are currently and accurately
kept  and the condition of the Company corresponds therewith, as well as whether
officers and employees  of the  Company have provided  adequate cooperation  and
assistance  to the Company's independent auditors  for the purpose of making its
determination. It held one meeting during 1995.
 
    The Management Personnel  Committee is comprised  of Messrs. Boger,  Prather
and  Robinson. Among  its functions is  to make recommendations  with respect to
executive salaries,  bonuses and  compensation and  to serve  as the  nominating
committee  with respect  to the principal  officers and other  committees of the
Board of Directors, as well as  making nominations respecting membership of  the
Board  of  Directors of  the Company.  The  Management Personnel  Committee will
consider  recommendations   for   nominees   for   directorship   submitted   by
shareholders.   Shareholders  wishing  to   recommend  director  candidates  for
consideration by the Management Personnel Committee may do so by writing to  the
Secretary  of the  Company, giving the  candidate's name,  biographical data and
qualifications. The Management  Personnel Committee  met four  times during  the
year ended December 31, 1995.
 
DIRECTOR'S COMPENSATION
 
   
    Directors  who are  not employed  by the  Company receive  an annual  fee of
$6,000. Non-employee directors are paid $500  for attendance at meetings of  the
Board  of Directors  and $500  for attendance at  meetings of  Committees of the
Board. Committee chairmen, not  employed by the  Company, receive an  additional
fee  of $800 for  each meeting they  attend. Any outside  director who serves as
Chairman of the Board receives an annual retainer of $12,000. Outside  directors
are  paid 40% of the usual fee  arrangement for attending any special meeting of
the Board of Directors or any Committee thereof conducted by telephone.
    
 
   
    In  addition,  the  Company  has  a  Non-Qualified  Stock  Option  Plan  for
non-employee  directors that currently provides for  the annual grant of options
to purchase up  to 7,500 shares  of Class A  Common Stock at  a price per  share
approximating  the recent market  price at the  time of grant.  Such options are
exercisable until  the  end  of the  first  month  following the  close  of  the
Company's  fiscal  year.  The  Company, subject  to  approval  by  the Company's
shareholders, intends to amend such  Non-Qualified Stock Option Plan to  provide
for  the issuance  of Class B  Common Stock, no  par value (the  "Class B Common
Stock"), of the Company in lieu of  Class A Common Stock. See "Amendment to  the
Non-Qualified  Stock Option Plan  for the Non-Employee  Directors of the Company
(Item Seven)."
    
 
                                       6
<PAGE>
                             EXECUTIVE COMPENSATION
 
    The following  table  sets  forth  a summary  of  the  compensation  of  the
Company's  President, its former Chief Executive Officer and the other executive
officers whose  annual  compensation exceeded  $100,000  during the  year  ended
December  31, 1995 ("named executives"). John T. Williams resigned as President,
Chief Executive  Officer and  director  and was  replaced  by Ralph  W.  Gabbard
effective December 1, 1995.
 
                           SUMMARY COMPENSATION TABLE
 
<TABLE>
<CAPTION>
                                                                        LONG TERM COMPENSATION
                                                                   ---------------------------------
                                                                                AWARDS
                                                                   ---------------------------------
                                      ANNUAL COMPENSATION                             SECURITIES
                               ----------------------------------    RESTRICTED       UNDERLYING         ALL OTHER
 NAME AND PRINCIPAL POSITION       YEAR       SALARY      BONUS     STOCK AWARDS   OPTIONS SARS (#)     COMPENSATION
- - -----------------------------  ------------  ---------  ---------  --------------  -----------------  ----------------
<S>                            <C>           <C>        <C>        <C>             <C>                <C>
John T. Williams,                   1995     $ 285,000  $  --      $ 2,081,250(2)         --           $   606,266(3)
 Former President, Chief            1994       286,867     71,910        --               --                 2,112(4)
 Executive Officer                  1993       258,400    112,500        --               --                 1,950(4)
 and Director (1)
 
Ralph W. Gabbard,                   1995(5)    261,000    150,000        --               15,000            12,628(6)
 President and Director             1994        77,000    118,941        --               30,509         1,200,000(7)
                                    1993(8)     --         --            --               --                 --
 
William A. Fielder, III,            1995       105,000     22,050        --                3,000             9,188(9)
 Vice President and Chief           1994        95,000     --            --               --                 6,055(10)
 Financial Officer                  1993        88,161     --            --                7,500             6,040(11)
 
Joseph A. Carriere,                 1995       115,000     65,922        --                3,750               878(4)
 Vice President                     1994(12)     6,635     --            --               --                 --
 Corporate Sales                    1993(8)     --         --            --               --                 --
</TABLE>
 
- - --------------------------
(1) Mr. Williams resigned his position as President, Chief Executive Officer and
    director of the Company effective December 1, 1995.
 
(2)  Pursuant to Mr. Williams' employment agreement, Mr. Williams received three
    restricted  stock  awards  (the  "Common  Stock  Award")  from  the  Company
    aggregating  150,000 shares of  Class A Common Stock  in 1995. In connection
    with Mr. Williams'  resignation from  the Company, the  Company removed  the
    restrictions  on  the Common  Stock Award  in December  1995 and  the shares
    subject to such Common Stock Award became fully vested.
 
(3) Upon  Mr.  Williams' resignation,  the  Company entered  into  a  separation
    agreement  dated  December  1,  1995  (the  "Separation  Agreement"),  which
    provided, among other things,  for the payment of  $596,000 over a  two-year
    period  ending November 1997  as consideration for  consulting services, his
    resignation and certain non-compete and confidentiality agreements.  $3,415,
    $2,117   and  $4,734  represent   payments  by  the   Company  for  matching
    contributions to the 401(k) plan, term life insurance premiums and long term
    disability premiums, respectively. The Company expensed the entire  $596,000
    in 1995.
 
(4) Represents payments by the Company for term life insurance premiums.
 
(5)  Mr. Gabbard was elected President and a director of the Company in December
    1995. Prior to this election he served as Vice President of the Company  and
    President  and Chief Operating Officer of the Company's broadcast operations
    from September 2, 1994 to December 1995.
 
(6) $3,750, $2,736  and $6,142 represent  payments by the  Company for  matching
    contributions to the 401(k) plan, term life insurance premiums and long term
    disability premiums, respectively.
 
(7)  Mr. Gabbard has an employment agreement with the Company which provides him
    122,034 shares of Class  A Common Stock if  his employment with the  Company
    continues  until September  1999. The  Company will  recognize approximately
    $1.2 million  of compensation  expense  for this  award over  the  five-year
    period.  Approximately $80,000 and $240,000 of  expense was recorded in 1994
    and 1995, respectively.
 
                                       7
<PAGE>
(8) Not employed by the Company during this year.
 
(9) $5,765, $2,406, $378 and $639 represent payments or accruals by the  Company
    for  supplemental retirement benefits, matching  contributions to the 401(k)
    plan, term  life  insurance  premiums and  long  term  disability  premiums,
    respectively.
 
(10)  $5,717  and  $338  represent  payments  or  accruals  by  the  Company for
    supplemental  retirement  benefits   and  term   life  insurance   premiums,
    respectively.
 
(11)  $5,700  and  $340  represent  payments  or  accruals  by  the  Company for
    supplemental  retirement  benefits   and  term   life  insurance   premiums,
    respectively.
 
   
(12)  Mr. Carriere joined the Company in  November 1994 as President and General
    Manager of KTVE Inc.
    
 
STOCK OPTIONS GRANTED
 
    The following table  contains information  on stock options  granted to  the
Company's  President and the named executives during the year ended December 31,
1995. Under the Company's 1992 Long  Term Incentive Plan (the "Incentive  Plan")
all  officers and  key employees  are eligible for  grants of  stock options and
other stock-based  awards. Options  granted are  exercisable over  a  three-year
period  beginning on  the second  anniversary of the  grant date  and expire one
month after termination  of employment. The  total number of  shares of Class  A
Common  Stock issuable under the Incentive Plan is not to exceed 600,000 shares,
subject to adjustment in the  event of any change  in the outstanding shares  of
such stock by reason of a stock dividend, stock split, recapitalization, merger,
consolidation  or other similar changes  generally affecting shareholders of the
Company.
 
    The Incentive  Plan  is  administered  by  the  members  of  the  Management
Personnel  Committee of  the Board  of Directors  (the "Committee")  who are not
eligible for selection as participants  under the Incentive Plan. The  Incentive
Plan  is  intended  to  provide additional  incentives  and  motivation  for the
Company's employees. The Committee, by majority action thereof, is authorized in
its sole discretion to  determine the individuals to  whom the benefits will  be
granted,  the type  and amount of  such benefits  and the terms  thereof; and to
prescribe, amend and  rescind rules  and regulations relating  to the  Incentive
Plan, among other things.
 
                       OPTION GRANTS IN LAST FISCAL YEAR
 
<TABLE>
<CAPTION>
                                                                                               POTENTIAL REALIZABLE
                                                                                                 VALUE AT ASSUMED
                                                                                               ANNUAL RATES OF STOCK
                              NUMBER OF         % OF TOTAL                                    PRICE APPRECIATION FOR
                             SECURITIES     OPTIONS GRANTED TO   EXERCISE OF                      OPTION TERM (1)
                             UNDERLYING        EMPLOYEES IN      BASE PRICE    EXPIRATION    -------------------------
          NAME             OPTIONS GRANTED     FISCAL YEAR        ($/SHARE)       DATE        5% ($)          10% ($)
- - -------------------------  ---------------  ------------------   -----------   -----------   ---------       ---------
<S>                        <C>              <C>                  <C>           <C>           <C>             <C>
Ralph W. Gabbard                 15,000             25.8%        $    13.33       3/30/00    $  55,242       $ 122,071
William A. Fielder III            3,000              5.2%        $    13.33       3/30/00    $  11,048       $  24,414
Joesph A. Carriere                3,750              6.5%        $    13.33       3/30/00    $  13,811       $  30,518
</TABLE>
 
- - ------------------------
(1)  Amounts reported  in these columns  represent amounts that  may be realized
    upon exercise of options immediately prior  to the expiration of their  term
    assuming  the specified compounded rates of appreciation (5% and 10%) on the
    Class A  Common  Stock over  the  term of  the  options. These  numbers  are
    calculated  based on  rules promulgated  by the SEC  and do  not reflect the
    Company's estimate of future  stock price growth. Actual  gains, if any,  on
    stock  option exercises and  Class A Common Stock  holdings are dependent on
    the timing of such exercise and the future performance of the Class A Common
    Stock. There can be no assurance  that the rates of appreciation assumed  in
    this table can be achieved or that the amounts reflected will be received by
    the option holder.
 
                                       8
<PAGE>
STOCK OPTIONS EXERCISED
 
    The  following table sets forth  information about unexercised stock options
held by the named executives. No  stock options were exercised by such  officers
during 1995.
 
                AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
                       AND FISCAL YEAR END OPTION VALUES
 
<TABLE>
<CAPTION>
                                                                 VALUE OF UNEXERCISED
                               NUMBER OF UNEXERCISED                 IN-THE-MONEY
                                 OPTIONS AT FY END                 OPTIONS AT FY END
          NAME             (#) EXERCISABLE/UNEXERCISABLE   ($) EXERCISABLE/UNEXERCISABLE (1)
- - -------------------------  -----------------------------   ---------------------------------
<S>                        <C>                             <C>
Ralph W. Gabbard                       0/45,509                              $0/$318,553
William A. Fielder III              7,500/3,000                          $61,562/$13,625
Joseph A. Carriere                      0/3,750                               $0/$17,031
</TABLE>
 
- - ------------------------
(1)  Closing price of the Class A Common  Stock at December 31, 1995 was $17 7/8
    per share.
 
SUPPLEMENTAL PENSION PLAN
 
    The Company  has  entered into  agreements  with certain  key  employees  to
provide  these employees with supplemental retirement benefits. The benefits are
disbursed after  retirement in  contractually  predetermined payments  of  equal
monthly  amounts over the employee's  life, or the life  of a surviving eligible
spouse, for a maximum of 15 years. The Company maintains life insurance coverage
on these individuals in adequate amounts to fund the agreements.
 
RETIREMENT PLAN
 
   
    The Company sponsors  a defined  benefit pension  plan, intended  to be  tax
qualified,  for  certain  of its  employees  and  the employees  of  any  of its
subsidiaries which have  been designated  as participating  companies under  the
plan.  A participating employee who retires on or after attaining age 65 and who
has completed five years of service  upon retirement may be eligible to  receive
during his lifetime, in the form of monthly payments, an annual pension equal to
(i)  22% of  the employee's  average earnings  for the  highest five consecutive
years during the employee's final 10 years of employment multiplied by a factor,
the numerator of  which is the  employee's years of  service credited under  the
plan  before 1994 and the denominator of which is the greater of 25 or the years
of service credited  under the  plan, plus (ii)  .9% of  the employee's  monthly
average  earnings for the highest five consecutive years in the employee's final
ten years of employment added  to .6% of monthly  average earnings in excess  of
Social  Security covered compensation, and multiplied by the employee's years of
service credited under the  plan after 1993,  with a maximum  of 25 years  minus
years  of service credited under (i) above.  For participants as of December 31,
1993, there is a
    
 
                                       9
<PAGE>
minimum benefit  equal to  the projected  benefit under  (i) at  that time.  For
purposes  of illustration, pensions  estimated to be  payable upon retirement of
participating employees in  specified salary  classifications are  shown in  the
following table:
 
                               PENSION PLAN TABLE
 
<TABLE>
<CAPTION>
                                                                          YEARS OF SERVICE
                                                  ----------------------------------------------------------------
REMUNERATION (1)                                     10         15         20         25         30         35
- - ------------------------------------------------  ---------  ---------  ---------  ---------  ---------  ---------
<S>                                               <C>        <C>        <C>        <C>        <C>        <C>
$ 15,000........................................  $   1,326  $   1,986  $   2,646  $   3,306  $   3,300  $   3,300
  25,000........................................      2,210      3,310      4,410      5,510      5,500      5,500
  50,000........................................      4,709      6,909      9,109     11,309     11,000     11,000
  75,000........................................      7,219     10,519     13,819     17,119     16,500     16,500
 100,000........................................      9,729     14,129     18,529     22,929     22,000     22,000
 150,000........................................     14,749     21,349     27,949     34,549     33,000     33,000
 200,000........................................     18,269     27,069     35,869     44,669     41,067     41,486
 250,000 and above..............................     19,622     29,268     38,914     48,560     45,014     45,473
</TABLE>
 
- - ------------------------
(1) Five-year average annual compensation.
 
    Employees  may  become participants  in the  plan,  provided that  they have
attained age 21  and have completed  one year of  service. Average earnings  are
based  upon  the salary  paid  to a  participating  employee by  a participating
company. Pension compensation for a particular year as used for the  calculation
of   retirement  benefits  includes  salaries,  overtime  pay,  commissions  and
incentive payments received during the  year and the employee's contribution  to
the  Capital  Accumulation  Plan  (as defined).  Pension  compensation  for 1995
differs from compensation  reported in  the Summary Compensation  Table in  that
pension  compensation includes any annual incentive  awards received in 1995 for
services in 1994 rather than the incentive  awards paid in 1996 for services  in
1995.  The maximum annual compensation considered for pension benefits under the
plan in 1995 was $150,000.
 
    As of December 31, 1995, full years of actual credited service in this  plan
are Mr. Williams -- 3 years; Mr. Fielder -- 4 years; and Mr. Carriere -- 1 year.
Mr. Gabbard had no full years of credited service under the plan at December 31,
1995.
 
CAPITAL ACCUMULATION PLAN
 
   
    Effective  October  1, 1994,  the  Company adopted  the  Gray Communications
Systems, Inc. Capital  Accumulation Plan (the  "Capital Accumulation Plan")  for
the  purpose of providing  additional retirement benefits  for substantially all
employees. The Capital Accumulation Plan is intended to meet the requirements of
Section 401(k) of the Internal Revenue Code of 1986 (the "Code").
    
 
   
    Contributions to the Capital Accumulation Plan are made by the employees  of
the  Company. The Company  matches a percentage  of each employee's contribution
which does not exceed 6%  of the employee's gross  pay. The percentage match  is
made  with a contribution of Class A Common  Stock, and is declared by the Board
of Directors before the  beginning of each Capital  Accumulation Plan year.  The
percentage  match declared  for the  year ended December  31, 1995  was 50%. The
Company's matching contributions vest based  upon an employee's number of  years
of  service, over a period not to  exceed five years. The Company has registered
150,000 shares of Class A Common Stock for issuance to the Capital  Accumulation
Plan.
    
 
EMPLOYMENT CONTRACTS AND TERMINATION OF EMPLOYMENT
 
    In  1995,  pursuant  to  Mr. Williams'  employment  agreement,  Mr. Williams
received the Common  Stock Award. In  December 1995, Mr.  Williams resigned  his
position as President, Chief Executive Officer and director of the Company. Upon
his  resignation, the  Company entered  into the  Separation Agreement  with Mr.
Williams which  provides for  the payment  of $596,000  over a  two-year  period
ending  November 1,  1997 as  consideration for  Mr. Williams'  agreement to (i)
resign from  the  Company  and  terminate  his  employment  agreement,  (ii)  be
available  as a consultant to  the Company from December  1, 1995 until November
30, 1997
 
                                       10
<PAGE>
and (iii) not compete  with the Company's business  and to keep all  information
regarding  the Company  confidential while he  is available as  a consultant. In
addition, under the Separation Agreement, Mr. Williams is to receive health  and
life  insurance  coverage  with premiums  paid  by  the Company  while  he  is a
consultant. Finally, the Separation Agreement provides that the restrictions  on
the  Common Stock Award  were removed and  such Common Stock  Award became fully
vested.
 
   
    Ralph W. Gabbard and the Company entered into an employment agreement  dated
September  3, 1994,  for a  five year  term. The  agreement provides  for annual
compensation of $250,000  during the term  of the agreement  (subject to  yearly
inflation  adjustment) and entitled  Mr. Gabbard to  certain fringe benefits. In
addition to his annual compensation, Mr. Gabbard was entitled to participate  in
an  annual incentive compensation plan and  the Incentive Plan. Under the annual
incentive compensation  plan, Mr.  Gabbard was  eligible to  receive  additional
compensation  if the operating profits of  the broadcasting group of the Company
reached or exceeded  certain goals. Under  the Incentive Plan,  Mr. Gabbard  has
received non-qualified stock options to purchase 45,509 shares of Class A Common
Stock.  These  options  are  exercisable  over  a  three-year  period  beginning
September 1996. The  exercise price for  such options is  $9.66. Upon the  fifth
anniversary  of Mr.  Gabbard's employment  with the  Company, Mr.  Gabbard shall
receive 122,034 shares  of Class  A Common Stock.  Mr. Gabbard  has agreed  that
during  the  term of  his agreement  and for  two years  thereafter, he  will be
subject to certain non-competition provisions.
    
 
   
    In February  1996, the  Board  of Directors  approved  an amendment  to  Mr.
Gabbard's  employment  agreement  to  increase Mr.  Gabbard's  base  salary from
$250,000 to $300,000, effective  January 1, 1996 and  to establish a new  annual
compensation  plan  (the  "Annual  Compensation  Plan")  to  be  based  upon the
achievement by the Company of certain  operating profit, the amount of which  is
to be established by the Board of Directors. Under the Annual Compensation Plan,
if  the Company achieves  the targeted amount  of operating profit  in any given
year, Mr. Gabbard shall receive $200,000 as additional compensation. The  Annual
Compensation  Plan further  provides that  if the  Company exceeds  the targeted
amount of operating profit in any given  year, Mr. Gabbard shall be entitled  to
receive  additional compensation  in excess  of $200,000,  as determined  by the
Board of Directors.
    
 
    William A. Fielder, III, Vice President  and Chief Financial Officer of  the
Company,  has an employment  agreement with the Company  dated April 1991, which
was amended March  1993, to provide  for the continuation  of his annual  salary
(currently  $135,000)  for a  period of  one  year in  the event  of termination
without cause.
 
    Robert A. Beizer and the Company entered into an employment agreement  dated
February  12, 1996,  for a two-year  term which automatically  extends for three
successive one-year  periods, subject  to  certain termination  provisions.  The
agreement  provides that Mr. Beizer shall be  employed as Vice President for Law
and Development of the  Company with an initial  annual base salary of  $200,000
and a grant of options to purchase 15,000 shares of Class A Common Stock with an
exercise price of $19.375 per share under the Incentive Plan at the inception of
his employment. Mr. Beizer's base salary shall be increased yearly, based upon a
cost of living index and he will receive non-qualified options to purchase 7,000
shares  of Class A Common Stock annually during  the term of the agreement at an
exercise price per share equal  to the fair market value  of the Class A  Common
Stock  on the  date of  the grant.  All options  granted are  exercisable over a
three-year period upon the second anniversary of  the grant date. If there is  a
"change  of control" of the  Company, Mr. Beizer will be  paid a lump sum amount
equal to his then current  base salary for the  remaining term of the  agreement
and  will be  granted any remaining  stock options  to which he  would have been
entitled. For purposes of the agreement,  "change of control" is defined as  any
change  in the control of  the Company that would be  required to be reported in
response to Item 6(e)  of Schedule 14A promulgated  under the Exchange Act.  Mr.
Beizer  has  agreed that  during the  term of  his agreement  and for  two years
thereafter, he will be subject to certain non-competition provisions.
 
        MANAGEMENT PERSONNEL COMMITTEE REPORT ON EXECUTIVE COMPENSATION
 
   
    The goals of the Company's executive  compensation program for 1995 were  to
attract,  retain,  motivate and  reward qualified  persons serving  as executive
officers. To achieve such goals, the Company relies
    
 
                                       11
<PAGE>
   
primarily  on  salaries,  annual  bonuses  and  stock  options.  The  Management
Personnel  Committee makes  determinations with  respect to  executive salaries,
bonuses, options  and other  compensation for  each of  the Company's  executive
officers,  except  that each  of the  salaries of  Messrs. Gabbard,  Fielder and
Williams (the former President of the Company) (in 1995, $261,000, $105,000  and
$285,000,  respectively)  is  specified  in his  employment  agreement  with the
Company. Such determinations of the Management Personnel Committee are  reported
to  the full  Board, which then  has the  opportunity to consider  or amend such
determinations concerning  the compensation  payable to  executive officers.  In
1995,  the  full Board  approved the  derminations  of the  Management Personnel
Committee with respect to compensation  without making any changes thereto.  The
Management  Personnel Committee's policy for  determining an executive's salary,
bonus and stock option grants is based on the responsibility of such  executive,
his  or her  impact on the  operations and  profitability of the  Company or the
business unit  for which  such executive  has operating  responsibility and  the
knowledge and experience of such executive.
    
 
   
    In  1995, the Management Personnel Committee utilized the foregoing criteria
to determine executive salaries,  bonuses and option  grants and such  salaries,
bonuses  and  option  grants  are  consistent  with  the  foregoing  policy.  An
executive's annual bonus  is based on  a percentage  of his or  her annual  base
salary.  In determining  the size  of a  bonus that  an executive  may earn, the
Management  Personnel  Committee   considers  the  executive's   responsibility,
experience,  knowledge  and  his  or  her impact  on  Company  or  business unit
profitability. These considerations are subjective in nature and the  Management
Personnel  Committee does not assign relative weights thereto. For 1995, bonuses
ranged from 12% to 113% of an executive's base salary. Whether or not a bonus is
in fact earned by an  executive is linked to the  attainment, by the Company  or
the  business unit  for which  such executive  has operating  responsibility, of
predetermined operating  profit targets  based  on budgeted  operating  revenues
(which  is  an  objective analysis)  and  the individual's  contribution  to the
Company or the  business unit (which  is a subjective  analysis). The  operating
profit targets are approved annually by the Management Personnel Committee. When
measuring an executive's individual contribution and performance, the Management
Personnel  Committee  examines  quantitative  factors,  as  well  as qualitative
factors that  necessarily  involve  a  subjective  judgment  by  the  Management
Personnel  Committee. In  making such  subjective determination,  the Management
Personnel Committee does not  base its determination  on any single  performance
factor  nor does it assign  relative weights to factors,  but considers a mix of
factors, including  evaluations  of  superiors, and  evaluates  an  individual's
performance  against such mix in absolute  terms in relation to other executives
at the Company. In deciding whether or  not to grant an option to an  individual
and  in determining the  number of shares  subject to an  option so granted, the
Management Personnel  Committee takes  into account  subjective  considerations,
including   the  level  of  such   executive's  position  and  the  individual's
contribution to the Company. In addition, in the case of the grant of options to
Mr. Gabbard in 1995,  the Management Personnel  Committee deemed it  appropriate
that the President of the Company should, through the ownership of options, have
a  significant  stake  in the  Company's  stock price.  Although  the Management
Personnel Committee believes that its compensation structure is similar to  that
of  other comparable communications  companies, it did  not specifically compare
such structure with that of other companies in 1995, except with respect to  Mr.
Gabbard, as described below.
    
 
   
    Mr. Williams' 1995 compensation was based on his employment agreement, which
was  the result of arms' length negotiation between Mr. Williams and the Company
prior to the commencement of his employment by the Company in 1992. Pursuant  to
his  employment agreement, Mr. Williams was awarded the Common Stock Award which
was based upon  the Class A  Common Stock attaining  certain designated  values.
Upon  Mr. Williams' resignation  in December 1995, the  Company entered into the
Separation Agreement, which  provided, among  other things, for  the payment  of
$596,000  over  a  two-year period  ending  November 1997  as  consideration for
consulting services, his resignation and certain non-compete and confidentiality
agreements. In addition, the  Separation Agreement provided  for the removal  of
the  restrictions on the Common  Stock Award and such  Common Stock Award became
fully vested.
    
 
                                       12
<PAGE>
   
    Mr. Gabbard's 1995 compensation was based on his employment agreement, which
in 1995 provided for a base salary and a cash bonus of $150,000, which was  paid
to  Mr.  Gabbard as  a  result of  the  attainment of  operating  profit targets
established  by  the  Management   Personnel  Committee  for  the   broadcasting
operations of the Company.
    
 
   
    Effective  January 1,  1996, Mr.  Gabbard's base  salary was  increased from
$250,000 to $300,000 and the Annual Compensation Plan was established to provide
for additional annual compensation of a minimum of $200,000 if certain operating
profit levels are achieved. The Management Personnel Committee believes that the
increase in Mr. Gabbard's base salary  and the incentive for an increased  bonus
is consistent with the responsibilities of his new position with the Company and
his  performance as measured by the  criteria discussed above. Such increase was
also based  on  a study  conducted  by  the Management  Personnel  Committee  on
compensation  paid by 12 other comparable television broadcasting companies. Mr.
Gabbard's annual compensation (salary and bonus)  is within the middle range  of
such  comparable television broadcasting companies.  Such study included five of
the 30 companies included  in the New York  Stock Exchange Industry Index  based
upon  the  Television Broadcasting  Stations Standard  Industrial Classification
Code to which the Company compares the total return on its Class A Common Stock.
See "Performance Graph."
    
 
    Submitted by Management Personnel Committee of the Board of Directors
 
           Richard L. Boger, Chairman
           Robert S. Prather, Jr.
           J. Mack Robinson
 
          COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
 
    Richard L.  Boger, Robert  S. Prather,  Jr.  and J.  Mack Robinson  are  the
members of the Management Personnel Committee.
 
   
    Gray   Kentucky  Television,  Inc.,  a  subsidiary  of  the  Company  ("Gray
Kentucky"), is a party to a  rights sharing agreement with Host  Communications,
Inc.  ("Host")  and  certain  other parties  not  affiliated  with  the Company,
pursuant to which the parties agreed  to exploit Host's rights to broadcast  and
market  certain University of Kentucky football and basketball games and related
activities. Pursuant to such agreement,  Gray Kentucky is licensed to  broadcast
certain  University  of  Kentucky  football  and  basketball  games  and related
activities.  Under  this  agreement,  Gray  Kentucky  also  provides  Host  with
production  and  certain marketing  services  and Host  provides  accounting and
various marketing services. During the year ended December 31, 1995, the Company
received  approximately  $332,000   from  this  joint   venture.  See   "Certain
Relationships   and  Related   Transactions"  for   a  description   of  certain
relationships between Messrs.  Prather and  Robinson and the  Company, Bull  Run
Corporation, Host and CSP (as defined below).
    
 
    Bull Run Corporation currently owns 51.5% of the outstanding common stock of
Capital  Sports Properties,  Inc. ("CSP").  CSP's assets  consist of  all of the
outstanding preferred stock of Host and warrants to purchase Host common  stock.
Bull   Run  Corporation  also  owns   approximately  9.4%  of  Host's  currently
outstanding common shares  directly, thereby giving  Bull Run Corporation  total
direct   and  indirect  ownership  of  Host  of  approximately  29.7%,  assuming
conversion of all currently outstanding  exercisable stock options and  warrants
for  Host common stock. Ralph W. Gabbard  and Robert S. Prather, Jr., members of
the Company's Board of Directors, are members of the Board of Directors of  both
CSP and Host.
 
   
    The  Company's Board of Directors approved  payments to Bull Run Corporation
of finders fees for  the acquisition of the  GWINNETT DAILY POST (the  "Gwinnett
Acquisition"),  all the assets of WRDW-TV,  a CBS affiliate serving the Augusta,
Georgia area (the "Augusta Acquisition")  and the Phipps Acquisition  (described
below).  The  Company agreed  to pay  finders  fees of  $75,000 and  $360,000 in
connection with the Gwinnett Acquisition and Augusta Acquisition,  respectively.
The  Board of Directors  has agreed to pay  a finders fee of  1% of the proposed
purchase price  of  the Phipps  Acquisition  for services  performed,  of  which
$550,000  and $950,000 was due and included  in accounts payable at December 31,
1995 and June 30, 1996, respectively. See "Recent Developments."
    
 
                                       13
<PAGE>
   
    On January 3, 1996,  Bull Run Corporation purchased  for $10.0 million  from
the  Company (i) an 8% subordinated note due in January 2005 (the "8% Note") and
(ii) warrants to purchase 487,500 shares of  Class A Common Stock at $17.88  per
share  (subject  to customary  antidilution  provisions), 300,000  of  which are
currently fully vested, with the remaining warrants vesting in five equal annual
installments  commencing  January  3,  1997,  provided  that  the  8%  Note   is
outstanding.  The warrants  must be approved  by the  Company's shareholders. On
January 3, 1996, the closing price of the  Class A Common Stock on The New  York
Stock  Exchange was $17.75. The warrants  (which represent 9.8% of the currently
issued and outstanding shares  of Class A Common  Stock, after giving effect  to
the  exercise of such warrants) expire in  January 2006 and may not be exercised
unless shareholder approval  of the issuance  of the warrants  is obtained.  See
"Issuance of Warrants to Bull Run Corporation (Item Five)." The Company obtained
an  opinion  from  The  Robinson-Humphrey Company,  Inc.,  one  of  the proposed
underwriters of  the Stock  Offering and  the Note  Offering (described  below),
stating that the terms and conditions of the 8% Note were fair, from a financial
point of view, to the shareholders of the Company. The proceeds from the sale of
the 8% Note and the warrants were used to fund, in part, the Augusta Acquisition
for approximately $35.9 million.
    
 
   
    In  connection with the issuance by the Company of a $10.0 million letter of
credit in connection with the Phipps  Acquisition, J. Mack Robinson, a  director
of  the  Company, executed  a put  agreement in  favor of  the letter  of credit
issuer, for which  he received no  consideration from the  Company. Pursuant  to
such  agreement, in the  event that such letter  of credit is  drawn upon by the
sellers of the Phipps Business (as hereinafter defined) and the Company defaults
on the  repayment of  such  amount so  drawn under  the  letter of  credit,  Mr.
Robinson has agreed to repay such amounts to the issuer of the letter of credit.
    
 
ISSUANCES OF PREFERRED STOCK AND WARRANTS
 
   
    As  part of the Financing (as described  below), the 8% Note will be retired
and the Company will issue to Bull Run Corporation, in exchange therefor,  1,000
shares  of Series A Preferred Stock (the "Series A Preferred Stock"). Subject to
certain limitations, holders  of the Series  A Preferred Stock  are entitled  to
receive, when, as and if declared by the Board of Directors, out of funds of the
Company  legally available for  payment, cumulative cash  dividends at an annual
rate of  $800  per share.  The  Series A  Preferred  Stock has  priority  as  to
dividends  over the Class A  Common Stock and Class  B Common Stock (the "Common
Stock") and any other series or class of the Company's stock which ranks  junior
as  to dividends as to the Series A Preferred Stock. In case of the voluntary or
involuntary liquidation, dissolution or  winding up of  the Company, holders  of
the  Series A Preferred Stock will be entitled to receive a liquidation price of
$10,000 per share, plus an amount equal  to any accrued and unpaid dividends  to
the  payment date, before any payment or  distribution is made to the holders of
Common Stock or any  other series or  class of the  Company's stock which  ranks
junior as to liquidation rights as to the Series A Preferred Stock. The Series A
Preferred  Stock may be  redeemed at the option  of the Company,  in whole or in
part, at $10,000  per share,  plus an  amount equal  to any  accrued and  unpaid
dividends  to the redemption date and such  redemption price may be paid, at the
Company's option, in cash or in shares  of Class A Common Stock. The holders  of
shares  of Series A Preferred  Stock will not be entitled  to vote on any matter
except (i)  with respect  to  the authorization  or  issuance of  capital  stock
ranking  senior to  the Series  A Preferred  Stock and  with respect  to certain
amendments to the Company's Articles of Incorporation, (ii) if the Company shall
have failed to declare and pay dividends on the Series A Preferred Stock for any
six quarterly  payment periods,  in which  event  the holders  of the  Series  A
Preferred  Stock shall be entitled to elect two directors to the Company's Board
of Directors until the  full dividends accumulated have  been declared and  paid
and  (iii) as required by law. The warrants issued with the 8% Note will vest in
accordance with  the  schedule  described  above, provided  that  the  Series  A
Preferred Stock remains outstanding.
    
 
   
    In  addition, as part of  the Financing, the Company  will issue to Bull Run
Corporation for $10 million,  1,000 shares of the  Company's Series B  Preferred
Stock  (the "Series B Preferred Stock" and, together with the Series A Preferred
Stock, the "Preferred Stock").  Subject to certain  limitations, holders of  the
Series  B Preferred Stock are  entitled to receive, when,  as and if declared by
the Board  of Directors,  out of  funds  of the  Company legally  available  for
payment,  cumulative dividends at an annual rate  of $600 per share, except that
the Company at its option may pay such dividends in cash or in additional shares
of Series B Preferred Stock valued, for the purpose of determining the number of
shares (or fraction thereof) of such Series B Preferred
    
 
                                       14
<PAGE>
   
Stock to be  issued, at  $10,000 per  share. The  Series B  Preferred Stock  has
priority  as to dividends over the Common Stock and any other series or class of
the Company's  stock which  ranks junior  as to  dividends as  to the  Series  B
Preferred   Stock.  In  case  of   the  voluntary  or  involuntary  liquidation,
dissolution or winding  up of  the Company, holders  of the  Series B  Preferred
Stock will be entitled to receive a liquidation price of $10,000 per share, plus
an  amount equal to any accrued and unpaid dividends to the payment date, before
any payment or distribution is made to the holders of Common Stock or any  other
series  or class  of the  Company's stock which  ranks junior  as to liquidation
rights to the  Series B Preferred  Stock. The  Series B Preferred  Stock may  be
redeemed  at the  option of  the Company, in  whole or  in part,  at $10,000 per
share, plus  an  amount  equal  to  any accrued  and  unpaid  dividends  to  the
redemption  date and such redemption price may be paid, at the Company's option,
in cash or in shares of Class A Common Stock. The holders of shares of Series  B
Preferred  Stock will  not be  entitled to  vote on  any matter  except (i) with
respect to the authorization or issuance of capital stock ranking senior to  the
Series B Preferred Stock and with respect to certain amendments to the Company's
Articles  of Incorporation, (ii) if the Company shall have failed to declare and
pay dividends on  the Series  B Preferred Stock  for any  six quarterly  payment
periods,  in which event  the holders of  the Series B  Preferred Stock shall be
entitled to elect two  directors to the Company's  Board of Directors until  the
full  dividends accumulated have been declared and paid and (iii) as required by
law. The shares of  the Series A  Preferred Stock and  Series B Preferred  Stock
will  rank PARI PASSU as  to the payment of dividends  and as to distribution of
assets upon liquidation, dissolution or winding up of the Company.
    
 
   
    In connection with the issuance of the  Series B Preferred Stock as part  of
the  Financing, (i)  the Company  will issue  to Bull  Run Corporation, warrants
entitling the holder thereof to purchase 500,000 shares of Class A Common  Stock
at   an  exercise  price  equal  to  $24.00  per  share  (subject  to  customary
antidilution  provisions),  representing  10.1%  of  the  currently  issued  and
outstanding  shares of Class A Common Stock, after giving effect to the exercise
of such warrants. Of these warrants,  300,000 will vest upon issuance, with  the
remaining  warrants vesting in  five equal installments  commencing on the first
anniversary of  the date  of issuance.  The  issuance of  the warrants  must  be
approved  by the Company's shareholders. See "Issuance of Additional Warrants to
Bull Run Corporation (Item Six)." The warrants may not be exercised prior to the
second anniversary  of  the  date of  issuance  and  will expire  on  the  tenth
anniversary  of the date  of issuance. The  Company expects to  obtain a written
opinion  from  The  Robinson-Humphrey  Company,   Inc.,  one  of  the   proposed
underwriters  of the Stock Offering and Note Offering stating that the terms and
conditions of the  Series B Preferred  Stock and  the warrants are  fair to  the
shareholders  of  the  Company  from  a financial  point  of  view.  See "Recent
Developments."
    
 
                                       15
<PAGE>
                               PERFORMANCE GRAPH
 
   
    The following graph compares, for the  period from March 27, 1992 (when  the
Company's  stock  first  became  publicly  traded)  to  December  31,  1995, the
Company's total return on its Class A  Common Stock as compared to stock  market
total  return indexes for (i) The New York Stock Exchange, (ii) a New York Stock
Exchange Industry Index based upon the Television Broadcasting Stations Standard
Industrial Classification Code, and  (iii) Nasdaq telecommunications stocks.  In
July  1995, the Class A Common Stock was  listed on The New York Stock Exchange.
Therefore, as of  such date, the  Company has  changed its peer  group from  the
Nasdaq telecommunications group to the Television Broadcasting Stations Standard
Industry  Classification Group. The graph assumes  that $100 was invested in the
Class A Common Stock in each such index on March 27, 1992 and all dividends were
reinvested.
    
 
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
 
<TABLE>
<CAPTION>
                                                MAR-92     DEC-92     DEC-93     DEC-94     DEC-95
<S>                                            <C>        <C>        <C>        <C>        <C>
Gray Communications Systems, Inc.                    100     145.22     176.16     194.91     322.55
The New York Stock Exchange                          100     108.91     123.66     121.26     157.23
Television Broadcasting Stations (SIC Code
4833)                                                100     109.67     143.69     111.67     132.89
Nasdaq Telecommunications Stocks                     100     120.02     185.07     153.01     184.17
</TABLE>
 
                              RECENT DEVELOPMENTS
 
    The Company has  entered into  discussions with  certain investment  bankers
(the  "Underwriters") and has filed registration statements under the Securities
Act of 1933 with  a view to  the issuance and  public offering of  approximately
3,500,000  shares  of  its  Class  B Common  Stock  (the  "Stock  Offering") and
$150,000,000 aggregate principal amount (the  "Note Offering") of the  Company's
senior  subordinated  notes  due  2006  (the  "Notes").  The  Company  currently
anticipates that the proceeds  of the Stock Offering  and the Note Offering,  if
any,  will  be  used to  consummate  the previously  announced  acquisition (the
"Phipps Acquisition") of two CBS-affiliated television stations, WCTV and  WKXT,
as  well  as a  satellite broadcasting  business  and a  paging business  in the
Southeast (the  "Phipps Business").  The closing  of the  Phipps Acquisition  is
subject  to the satisfaction or waiver of  a number of conditions, including the
approval of  the Federal  Communications Commission  (the "FCC").  The  purchase
price  for the  Phipps Business is  approximately $185  million, including fees,
expenses and  working capital  and other  adjustments. The  consummation of  the
Phipps Acquisition is expected to occur by September 1996, although there can be
no  assurance with respect thereto. Additionally, there can be no assurance that
the Company will issue the Class B Common Stock or the Notes in the near  future
or  at all  or that,  if so  issued, the  amount of  the consideration  that the
Company will receive therefor.
 
   
    In May 1996, the Company  entered into an agreement  to sell KTVE Inc.  (the
"KTVE  Sale") serving  Monroe, Louisiana/El  Dorado, Arkansas  for approximately
$9.5 million in cash plus the amount  of the accounts receivable on the date  of
the closing (estimated to be approximately $750,000), to the extent collected by
the buyer, to be paid to the Company 150 days following the date of closing. The
closing of the
    
 
                                       16
<PAGE>
   
KTVE  Sale is  expected to  occur by  September 1996,  although there  can be no
assurance with respect thereto.  The Company anticipates that  the gain, net  of
estimated  taxes,  and the  estimated  taxes will  aggregate  approximately $2.8
million and $2.8 million, respectively.
    
 
   
    In addition to the  consummation of the Stock  Offering, the Note  Offering,
the  Phipps Acquisition and  the KTVE Sale,  the Company intends  to implement a
financing plan (the "Financing") to increase liquidity and improve operating and
financial flexibility. Pursuant to  the Financing, the  Company will (i)  retire
approximately   $49.5   million  aggregate   principal  amount   of  outstanding
indebtedness under  its senior  secured credit  bank facility  (the "Old  Credit
Facility"),  together with  accrued interest thereon,  (ii) retire approximately
$25.0 million aggregate principal amount  of outstanding indebtedness under  its
senior note due 2003 (the "Senior Note"), together with accrued interest thereon
and  a prepayment fee,  (iii) issue $10.0 million  liquidation preference of its
Series A  Preferred  Stock in  exchange  for the  8%  Note issued  to  Bull  Run
Corporation,  (iv)  issue  to  Bull Run  Corporation  $10.0  million liquidation
preference of  its Series  B Preferred  Stock with  warrants to  purchase up  to
500,000  shares of  Class A  Common Stock,  representing 10.1%  of the currently
issued and outstanding Class A Common Stock after giving effect to the  exercise
of  such warrants, for cash  proceeds of $10.0 million and  (v) and enter into a
new senior  secured  bank credit  facility  (the "Senior  Credit  Facility")  to
provide  for  a  term  loan and  revolving  credit  facility  aggregating $125.0
million. For additional  information concerning  the issuance  of the  Preferred
Stock  and  the warrants,  see  "Compensation Committee  Interlocks  and Insider
Participation -- Issuances of Preferred  Stock and Warrants." The cash  required
for  the consummation of  the Phipps Acquisition,  the repayment of indebtedness
and related transaction costs will be provided by the net proceeds of the  Stock
Offering and the Note Offering, the sale of the Series B Preferred Stock and the
warrants  and the KTVE Sale and borrowings under the Senior Credit Facility. The
consummation of the Note  Offering is conditioned upon  the consummation of  the
Financing  and the Stock Offering, but  is not conditioned upon the consummation
of the Phipps Acquisition or the KTVE Sale. However, the Notes are subject to  a
mandatory redemption at a redemption price equal to 101% of the principal amount
of  the Notes plus accrued and unpaid  interest to the date fixed for redemption
if the Phipps  Acquisition is  not consummated prior  to a  specified date.  The
consummation  of  the  Stock Offering  is  not conditioned  upon  the concurrent
consummation of the Financing, the KTVE Sale, the Phipps Acquisition or the Note
Offering.
    
 
    THIS PROXY STATEMENT IS NOT A PROSPECTUS OR OFFERING DOCUMENT AND SHALL  NOT
CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY SECURITIES.
 
                 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
 
    J.  Mack Robinson, a  director of the  Company, is Chairman  of the Board of
Bull Run  Corporation and  the  beneficial owner  of  approximately 28%  of  the
outstanding  shares of common stock, par value  $.01 per share ("Bull Run Common
Stock"), of Bull  Run Corporation  (including certain  shares as  to which  such
beneficial  ownership is disclaimed by Mr.  Robinson). Robert S. Prather, Jr., a
director of the Company, is President, Chief Executive Officer and a director of
Bull Run  Corporation and  the  beneficial owner  of  approximately 12%  of  the
outstanding  shares of  Bull Run  Common Stock  (including certain  shares as to
which such beneficial ownership  is disclaimed by Mr.  Prather). Mr. Prather  is
also a member of the Board of Directors of CSP and Host. Hilton H. Howell, Jr. a
director of the Company, is Vice President, Secretary and a director of Bull Run
Corporation.  See "Compensation Committee  Interlocks and Insider Participation"
for a  description of  certain business  relationships between  the Company  and
Messrs. Prather and Robinson, Host, CSP and Bull Run Corporation.
 
                                       17
<PAGE>
                   AMENDMENT TO THE ARTICLES OF INCORPORATION
                                   (ITEM TWO)
 
   
    The  Board of Directors  has adopted a  resolution unanimously approving and
recommending to the Company's shareholders  for their approval, an amendment  to
the  Company's Articles of  Incorporation to provide therein  for an increase to
50,000,000 the number of shares of  all classes which the Company has  authority
to  issue.  The Company's  Articles  of Incorporation  currently  authorizes the
issuance of 40,000,000 shares, of which 10,000,000 shares are designated Class A
Common Stock with  no par  value and  possess all  voting powers  (one vote  per
share);  10,000,000 shares are designated Class B Common Stock with no par value
which have no voting power; and  20,000,000 shares are designated "blank  check"
preferred  stock for  which the  designations, preferences,  conversion or other
rights, voting powers, restrictions, limitations as to dividends, qualifications
or terms  and  conditions  of  redemption  (collectively  the  "Limitations  and
Restrictions") are determined by the Board of Directors of the Company. As such,
the  Board of Directors of the Company is entitled to authorize the creation and
issuance of up to  20,000,000 shares of  preferred stock in  one or more  series
with  such Limitations and Restrictions as may be determined in the Board's sole
discretion with no further  authorization by security  holders required for  the
creation or issuance thereof. As of the record date, there were 4,710,293 shares
of  Class  A Common  Stock outstanding  and no  shares of  Class B  Common Stock
outstanding.
    
 
   
    The Amendment provides  that 15,000,000  shares will be  designated Class  A
Common  Stock  with no  par  value and  shall possess  10  votes per  share, and
15,000,000 shares will  be designated  Class B Common  Stock, no  par value  and
shall  possess one  vote per share.  The Amendment provides  that each presently
issued and outstanding share of Class A  Common Stock having one vote per  share
will  be converted automatically to one share  of Class A Common Stock having 10
votes per share.  The proposed underwriters  of the Stock  Offering advised  the
Company  that the  non-voting nature  of the  Company's existing  Class B Common
Stock could negatively affect the  marketability thereof, and therefore  advised
that the stock to be sold in the Stock Offering should be voting stock. However,
in  view of the large number  of shares to be issued  in the Stock Offering, the
Company did not wish to dilute unduly the voting power of existing shareholders.
As a  result,  the  Board  authorized  (subject  to  shareholder  approval)  the
amendment  to the Company's Articles of Incorporation providing for the relative
voting rights of the  Class A Common  Stock and Class  B Common Stock  described
above.  If such amendment is approved by  shareholders and the Stock Offering is
completed, a holder of  shares of Class  A Common Stock will  have 10 times  the
voting power of the holder of an equal number of shares of Class B Common Stock.
The  Amendment would  also establish  certain shareholder  rights (the  "Class B
Rights"), which are intended  to insure that  a buyer who  acquires 100% of  the
Class  A Common  Stock tenders  for the  issued and  outstanding Class  B Common
Stock. Although the  Class B  Rights might make  the Company  a less  attractive
target for a takeover bid, the Class B Rights give holders of the Class B Common
Stock  the opportunity to participate in any  premium that might be paid for the
purchase of 100% of the Class A Common Stock.
    
 
CLASS B RIGHTS
 
    If, after the date  of the approval  of the Amendment,  any person or  group
acquires   beneficial  ownership  of  100%  of  the  Class  A  Common  Stock  (a
"Significant Shareholder"), and such person or group does not immediately  after
such  acquisition beneficially  own 100%  of Class B  Common Stock,  the Class B
Rights require  that  such  Significant  Shareholder,  within  a  90-day  period
beginning  the day after  becoming a Significant  Shareholder, commence a public
tender offer to acquire 100% of the shares  of Class B Common Stock (a "Class  B
Protection  Transaction"). The  requirement to  engage in  a Class  B Protection
Transaction is satisfied by  making the requisite  offer and purchasing  validly
tendered  shares, even if the  number of shares tendered  is less than 100%. The
Class B  Rights cannot  be amended  without the  approval of  the holders  of  a
majority of the Class B Common Stock, voting separately as a class.
 
    The  offer price for 100% of the shares  of Class B Common Stock required to
be purchased by  the Significant Shareholder  pursuant to a  Class B  Protection
Transaction  must be the greater of (i) the  highest price per share paid by the
Significant Shareholder for either class of Common Stock in the six-month period
ending on the  date such person  or group became  a Significant Shareholder  and
(ii) the highest price per
 
                                       18
<PAGE>
   
share  of either class of  Common Stock on The New  York Stock Exchange (or such
other quotation system or securities exchange constituting the principal trading
market for either class of Common  Stock) during the 30 calendar days  preceding
the acquisition of the shares of Class A Common Stock giving rise to the Class B
Rights.
    
 
    If  a  Significant  Shareholder  fails to  undertake  a  Class  B Protection
Transaction,  the  voting  rights  of  the  shares  of  Class  A  Common   Stock
beneficially  owned by such Significant  Shareholder that exceeded such holder's
comparable  percentage  of  Class  B  Common  Stock  would  be  suspended  until
completion  of  a Class  B Protection  Transaction or  until divestiture  of the
shares of Class A Common Stock that  were in excess of the percentage  ownership
of  Class B Common Stock. To  the extent that the voting  power of any shares of
Class A Common Stock is  so suspended, such shares will  not be included in  the
determination  of aggregate voting  shares for any purpose.  Neither the Class B
Protection Transaction  requirement  nor  the related  penalty  applies  to  any
increase in percentage ownership of Class A Common Stock resulting solely from a
change in the total amount of Class A Common Stock outstanding.
 
   
    For  purposes of  the Class B  Rights, the terms  "beneficial ownership" and
"group" generally have the same meanings as used in Rule 13d-1 promulgated under
the Exchange  Act, subject  to certain  exceptions set  forth in  the  Company's
Articles  of Incorporation.  In addition,  only shares  of Class  B Common Stock
acquired by a Significant Shareholder for an "equitable price" shall be  treated
as  being  beneficially owned  by  such Significant  Shareholder.  An "equitable
price" will be deemed to have been paid only when shares of Class B Common Stock
have been acquired at a price at least  equal to the greater of (i) the  highest
price  per share  paid by  the Significant Shareholder  for either  class of the
Common Stock in the  six-month period ending  on the date  such person or  group
became  a Significant Shareholder and (ii) the highest price per share of either
class of Common Stock on  The New York Stock  Exchange (or such other  quotation
system  or  securities exchange  constituting the  principal trading  market for
either class of  Common Stock) during  the 30 calendar  days preceding the  date
such person or group became a Significant Shareholder.
    
 
    The Class B Rights do not prevent any person or group from acquiring 100% of
the  Class A Common Stock,  provided that such person  or group acquires 100% of
the Class B  Common Stock at  the same or  greater price, undertakes  a Class  B
Protection  Transaction or  suffers suspension of  the voting  rights of certain
shares of Class A Common Stock as provided  by the Class B Rights. If a Class  B
Protection  Transaction is required, the purchase price to be paid in such offer
may be higher than the price at which a Significant Shareholder might  otherwise
be  able  to  acquire  100%  of the  Class  B  Common  Stock.  Such requirement,
therefore, could make  an acquisition of  the Company more  expensive and, if  a
Class  B  Protection  Transaction  is required,  time  consuming,  than  if such
requirement did not  exist. Consequently, a  person or group  might be  deterred
from acquiring the Company as a result of such requirement.
 
    DIVIDENDS.   Holders of  Class B Common  Stock are entitled  to receive cash
dividends on an equal per share basis as  Class A Common Stock if and when  such
dividends  are declared  by the  Board of  Directors of  the Company  from funds
legally available therefor.
 
    LIQUIDATION.  Holders of Class  A and Class B  Common Stock share with  each
other  on a ratable  basis as a  single class in  the net assets  of the Company
available for distribution in respect to Class A and Class B Common Stock in the
event of liquidation.
 
    PREEMPTIVE RIGHTS.    The  holders of  Class  B  Common Stock  do  not  have
preemptive  rights enabling them to subscribe for or receive shares of any class
of stock of the Company or any  other securities convertible into shares of  any
class of stock of the Company.
 
    In  order to  effect the foregoing,  the Board of  Directors has unanimously
approved and recommends that the shareholders approve the proposed amendment  to
Article  4 of the Articles of Incorporation  of the Company substantially in the
form attached hereto as Appendix A.
 
   
    The purpose  of this  proposal is  to provide  additional authorized  Common
Stock  for corporate  purposes such  as equity  offerings, employee  benefit and
stock option plans, future stock splits and future acquisitions and to create  a
Class  B Common Stock with one vote per  share to be used in the Stock Offering.
The Company currently anticipates that the gross proceeds of the Stock  Offering
will be approximately $73.5
    
 
                                       19
<PAGE>
   
million,  however, there  can be  no assurance that  the Stock  Offering will be
consummated or  as  to  the  proceeds to  be  received  therefrom.  See  "Recent
Developments."  Other than the Stock Offering, the Financing and the issuance of
shares of Common Stock pursuant to  the Company's existing option plans and  the
conversion or exercise of currently outstanding convertible securities, warrants
and  options, the  Company has no  present plans to  issue additional authorized
shares of  Common Stock.  If the  Board of  Directors determines  to issue  such
shares  in the  future, it  may do  so in  its sole  discretion with  no further
authorization by shareholders.
    
 
    The affirmative vote of the holders of a majority of the outstanding  shares
of the Class A Common Stock is required to approve the Amendment.
 
    THE  BOARD  OF  DIRECTORS  RECOMMENDS  A VOTE  "FOR"  THE  AMENDMENT  TO THE
COMPANY'S ARTICLES OF INCORPORATION.
 
                            AMENDMENT TO THE BYLAWS
                                  (ITEM THREE)
 
    In connection with Item Two, the amendment of the Articles of  Incorporation
of  the Company, the Board of Directors of the Company has unanimously adopted a
resolution approving and  recommending to the  Company's shareholders for  their
approval,  an amendment to  the Company's Bylaws  to provide for  two classes of
voting stock of  the Company.  The amendment to  the Bylaws,  if adopted,  would
delete the present provision of the Bylaws that limits each outstanding share of
Company  stock entitled to vote to one vote per share upon each matter submitted
to a vote of a  meeting of shareholders. The text  of the proposed amendment  to
the Bylaws is attached hereto as Appendix B. This amendment is necessary if Item
Two is approved by the required affirmative vote of the shareholders entitled to
vote thereon.
 
    The  affirmative vote of the holders of a majority of the outstanding shares
of the Class A Common Stock is required to approve the amendment of the Bylaws.
 
    THE BOARD  OF  DIRECTORS  RECOMMENDS  A VOTE  "FOR"  THE  AMENDMENT  TO  THE
COMPANY'S BYLAWS.
 
                                AMENDMENT TO THE
                    COMPANY'S 1992 LONG-TERM INCENTIVE PLAN
                                  (ITEM FOUR)
 
   
    In  1992, the Board of Directors adopted and the shareholders of the Company
approved, the Incentive Plan  which provides for the  granting of stock  options
and  other stock-based awards to key employees  of the Company. The total number
of shares of Class A Common Stock  issuable under the Incentive Plan was not  to
exceed  400,000 shares, subject to adjustment in  the event of any change in the
outstanding shares of  such stock by  reason of a  stock dividend, stock  split,
recapitalization,  merger,  consolidation  or  other  similar  changes generally
affecting shareholders of the Company. The  Company effected a 3-for-2 split  of
the  Class A Common  Stock in the  form of a  stock dividend on  October 2, 1995
resulting in 600,000  shares being  available for issuance  under the  Incentive
Plan.  The closing price of a share of Class A Common Stock on July 23, 1996 was
$22 5/8. The following executive officers have been granted options to  purchase
the  aggregate number of shares of Class A Common Stock, as follows: Mr. Gabbard
- - -- 45,509  shares; Mr.  Fielder --  10,500  shares; and  Mr. Carriere  --  3,750
shares.  All executive officers as a group have been granted options to purchase
an aggregate of 77,759 shares of Class  A Common Stock and all employees  (other
than executive officers) were granted options to purchase an aggregate of 50,641
shares of Class A Common Stock.
    
 
    The  Board of  Directors believes that  the Incentive Plan  will advance the
interests of the Company and its shareholders by providing additional incentives
and motivation toward superior performance and  by enabling the Company and  its
subsidiaries  to attract  and retain the  services of key  employees, upon whose
 
                                       20
<PAGE>
judgment, talents and special efforts  the successful conduct of its  operations
is  largely dependent. Currently, approximately 50 officers and key employees of
the Company and its  subsidiaries are eligible to  participate in the  Incentive
Plan.
 
    The  Incentive  Plan  is  administered  by  the  members  of  the Management
Personnel Committee of  the Board of  Directors (the "Committee"),  who are  not
eligible for selection as a participant under the Incentive Plan. The Committee,
by  majority action thereof,  is authorized in its  sole discretion to determine
the individuals to whom  the benefits will  be granted, the  type and amount  of
such  benefits and the terms of benefit grants; to interpret the Incentive Plan;
to prescribe, amend and rescind rules and regulations relating to the  Incentive
Plan;  and  to make  all  other determinations  necessary  or advisable  for the
administration of the Incentive Plan to  the extent not contrary to the  express
provisions  of the Incentive Plan. The complete  text of the Incentive Plan with
the proposed amendments is set forth in Appendix C to this Proxy Statement.  The
following  summary of certain provisions of  the Incentive Plan and the proposed
amendments is qualified in  its entirety by  reference to the  full text of  the
Incentive  Plan.  The amendments  will not  become effective  unless shareholder
approval is obtained.
 
INCENTIVE PLAN DESCRIPTION
 
   
    Under the terms of the Incentive Plan, key employees of the Company and  its
subsidiaries  (as determined  by the Committee  in its sole  discretion) will be
eligible to receive  (a) stock options  ("Stock Options") which  may or may  not
qualify  as incentive  stock options  within the meaning  of Section  422 of the
Code, (b) stock appreciation rights ("SARs"), (c) restricted stock  ("Restricted
Stock")  and/or (d)  performance awards  ("Performance Awards").  Of the 600,000
shares of Class A Common Stock issuable  under the Incentive Plan, no more  than
150,000  shares may be  issued as Restricted  Stock. As of  June 15, 1996, there
were 393,841 shares of Class A Common Stock available under the Incentive Plan.
    
 
AWARDS UNDER THE INCENTIVE PLAN
 
    STOCK OPTIONS. Stock Options granted under the Incentive Plan shall  entitle
the  holder thereof to purchase shares of Class A Common Stock at the base price
established therefor by  the Committee, which  price, in the  case of  incentive
stock options, shall not be less than the "Fair Market Value" (as defined in the
Incentive  Plan) of the  Class A Common Stock  at the time  of grant. Such Stock
Options are exercisable in the discretion of the Committee at any time from  and
after  the six-month  anniversary date of  the grant during  the option exercise
period. In no event will Stock Options be exercisable later than ten years after
the date of the grant. Stock Options outstanding and unexercised at the time  of
the  death, disability or retirement of  the holder generally shall terminate on
the first to occur of  either the expiration date  thereof or the expiration  of
twelve  months after the date of such event  (except in the case of an incentive
stock option, which shall expire not  later than three months after  termination
of employment upon retirement of the holder). Upon termination of the employment
of  the holder for any  other reason Stock Options  shall not remain exercisable
later than  three months  after  the date  of such  event  or, if  earlier,  the
expiration date of such option.
 
    There is no maximum or minimum number of shares for which a Stock Option may
be  granted; however, for any employee, the aggregate Fair Market Value of Class
A Common Stock subject to incentive stock options pursuant to the Incentive Plan
or any other stock option plan of the Company that are exercisable for the first
time in any calendar year may not exceed $100,000.
 
    SARS.  An SAR gives to the holder thereof a right to receive, at the time of
surrender, cash or Class A Common Stock or a combination thereof equal in  value
to  the difference between the Fair Market Value  of the Class A Common Stock at
the date of surrender of the SAR and the base price established by the Committee
therefor at the time of grant. The  base price established on any SAR shall  not
be  less than the Fair Market  Value of the Class A  Common Stock on the date of
the grant  of the  SAR. The  Committee may  impose any  limitation that  it  may
determine  in its discretion  on the maximum  amount of appreciation  to be paid
pursuant thereto. An SAR may be granted either independent of, or in conjunction
with, any Stock Option. If  granted in conjunction with  a Stock Option, at  the
discretion of the Committee, an SAR may either be surrendered (a) in lieu of the
exercise  of such  Stock Option,  (b) in conjunction  with the  exercise of such
Stock Option, or (c) upon lapse of such Stock Option.
 
                                       21
<PAGE>
    The term of an SAR shall be established by the Committee. Rights in  respect
of an SAR surrenderable in conjunction with a Stock Option shall expire upon the
death, disability, retirement or termination of employment of the holder thereof
at  times similar to those established in respect of such related Stock Options.
Rights with respect to an SAR  surrenderable independent of a Stock Option  will
be on the terms and conditions established by the Committee.
 
    RESTRICTED  STOCK.   The Committee  may issue shares  of the  Class A Common
Stock to a designated employee  at a purchase price,  if any, determined by  the
Committee.  Such Restricted Stock may be  subject to forfeiture or repurchase in
the event of the termination of employment  within a specified period or in  the
event  any other conditions specified by the  Committee at the time of grant are
not subsequently met. During  the period of  restriction, holders of  Restricted
Stock  shall  be  entitled  to  receive  and  retain  all  dividends  and  other
distributions made  in respect  of such  stock and  to vote  such stock  without
limitations.
 
    PERFORMANCE  AWARDS.  The  Committee may grant  Performance Awards which may
consist of  shares of  Class A  Common Stock,  monetary units  or a  combination
thereof.  In  the  event that  certain  performance  goals are  achieved  over a
designated  period  of  time,  the  Performance   Awards  will  be  made  in   a
predesignated  form  in a  single payment  or in  installments as  the Committee
determines in its sole  discretion. The goals established  by the Committee  may
include  return on average total capital employed, earnings per share, return on
shareholders' equity  and  such  other  goals  as  may  be  established  by  the
Committee.  The participant shall  have no right  to vote any  shares of Class A
Common Stock subject to a Performance Award, nor shall such participant have any
right to  receive dividends  on  such shares  until  the performance  goals  are
achieved and the shares are issued.
 
    CHANGE OF CONTROL OF THE COMPANY.  In the event of a "Change of Control" (as
defined  in the Incentive Plan),  if provided by the  terms of the participant's
award agreement, the following shall occur: (a) Stock Options, if not  otherwise
exercisable,  become  immediately  exercisable;  (b)  unexercised  Stock Options
automatically include an SAR feature for a  period of six months and seven  days
after  the  date  of a  Change  of Control,  which  is  in addition  to  any SAR
separately granted in connection with such Stock Option; (c) SARs become, if not
otherwise then surrenderable, immediately surrenderable; (d) restrictions  lapse
on   Restricted  Stock  already  earned,   and  such  Restricted  Stock  becomes
immediately vested; and (e) any outstanding Performance Award shall be deemed to
be fully earned and all payments on such awards shall be made in a lump sum.
 
    AMENDMENT AND TERMINATION.  The Incentive Plan is to remain in effect  until
(a)  all Class A Common Stock reserved  under the Incentive Plan shall have been
purchased or acquired; (b) the Board terminates the Incentive Plan; or (c)  July
1,  2002, whichever shall first occur. The  Board at any time may terminate and,
from time to time, may  amend or modify terms  of the Incentive Plan;  provided,
however,  that no  such action  of the  Board may,  without the  approval of the
shareholders of the Company: (a) increase the total amount of stock or  increase
the  amount and type of awards that may  be issued under the Incentive Plan; (b)
change the provisions of the Incentive Plan regarding the minimum price, if any,
of awards, or (c) change the class  of employees entitled to participate in  the
Incentive  Plan. No amendment, modification or termination of the Incentive Plan
may in any  manner adversely  affect any  awards theretofore  granted under  the
Incentive  Plan  without the  consent of  the  participant affected  thereby. In
addition, awards may  be substituted  or exchanged  for other  awards under  the
Incentive Plan by mutual agreement of the Company and the participant.
 
THE PROPOSED AMENDMENTS
 
    If  the amendment to the Company's  Articles of Incorporation is approved by
shareholders and the Stock Offering is  consummated, the Company will have  more
shares  of Class A Common  Stock outstanding than Class  B Common Stock, thereby
leaving a smaller  number of authorized  but unissued shares  of Class A  Common
Stock.  The Company believes that the utilization of Class A Common Stock may be
advantageous to the  Company in the  event of future  acquisitions or for  other
corporate  purposes  (although the  Company has  no  present plans  with respect
thereto). Therefore, in  order to  retain as many  shares as  possible for  such
 
                                       22
<PAGE>
purposes,  the Board  of Directors  believes it is  appropriate at  this time to
change the shares  to be  awarded under  the Incentive  Plan to  Class B  Common
Stock.  Therefore,  on February  22, 1996,  the Board  of Directors  adopted the
following resolution:
 
        "RESOLVED, that,  subject to  the approval  of the  shareholders of  the
    Company,  the  1992 Long-Term  Incentive Plan  is  hereby amended  to delete
    Subsection "u" of Section II in its entirety and substitute in lieu  thereof
    the following:
 
        '(u)  Stock means  the authorized and  unissued shares  of the Company's
    Class A Common Stock  and Class B  Common Stock or  shares of the  Company's
    Class A Common Stock or Class B Common Stock held in its treasury.'
 
        RESOLVED,  that,  subject to  the approval  of  the shareholders  of the
    Company, the 1992 Long-Term Incentive Plan is hereby amended by adding a new
    first sentence to Section 4 thereof as follows:
 
        'There is hereby reserved  for issuance under the  Plan an aggregate  of
    600,000  shares of  Stock, of  which 200,000  shares shall  be the Company's
    Class A  Common Stock  and 400,000  shares shall  be the  Company's Class  B
    Common Stock.'
 
        RESOLVED,  that,  subject to  the approval  of  the shareholders  of the
    Company, 400,000  shares of  Class A  Common Stock  previously reserved  for
    issuance  pursuant to the 1992 Long-Term Incentive Plan are hereby no longer
    reserved for issuance pursuant thereto and 400,000 shares of Class B  Common
    Stock  are  hereby  reserved for  issuance  pursuant to  the  1992 Long-Term
    Incentive Plan.
 
FEDERAL INCOME TAX CONSEQUENCES
 
    The following is a summary of the principal Federal income tax  consequences
of  transactions under the Incentive Plan. It  does not describe all Federal tax
consequences,  nor  does  it  address  possible  state,  local  or  foreign  tax
consequences.
 
    No  income will be  realized by a  participating officer or  employee on the
grant of an incentive stock option or an option which is not an incentive  stock
option  ("nonqualified option")  or upon the  award of Restricted  Stock, or the
grant of an SAR,  and the Company will  not be entitled to  a deduction at  such
time.  If a holder exercises  an incentive stock option  and does not dispose of
the shares acquired within two years from  the date of the grant, or within  one
year  from the date of exercise of the option, no income will be realized by the
holder at the time of  exercise. The exercise of  an incentive stock option  may
subject  the holder  to the  alternative minimum  tax. The  Company will  not be
entitled to a deduction by reason of the exercise.
 
    If a holder disposes of the  shares acquired pursuant to an incentive  stock
option  within two years from the date of grant of the option or within one year
from the date of exercise of the option, the holder will realize ordinary income
at the time of disposition which will equal the excess, if any, of the lesser of
(a) the amount realized on the disposition, or (b) the Fair Market Value of  the
shares  on the  date of  exercise, over  the holder's  basis in  the shares. The
Company will be entitled to a deduction in an amount equal to such income in the
year of such disposition,  provided the Company  complies with applicable  rules
and regulations of the Code, including Section 162(m) of the Code.
 
    Upon  the exercise of a nonqualified option, the excess, if any, of the Fair
Market Value of the  stock on the  date of exercise over  the purchase price  is
ordinary  income to the holder  as of the date of  exercise. The Company will be
entitled to a deduction  equal to such  excess amount in  the year of  exercise,
provided the Company complies with applicable rules and regulations of the Code,
including Section 162(m) of the Code.
 
    Subject to voluntary election by the holder under Section 83(b) of the Code,
a holder will realize income as a result of the award of Restricted Stock at the
time  the restrictions  expire on such  shares. An election  pursuant to Section
83(b) of the Code would have the effect of causing the holder to realize  income
in  the year in which such award was granted. The amount of income realized will
be the difference between the Fair Market  Value of the shares on the date  that
such restrictions expire (or on the date of issuance of the shares, in the event
of  a Section 83(b) election)  over the purchase price,  if any, of such shares.
The Company will be
 
                                       23
<PAGE>
entitled to a deduction equal  to the income realized in  the year in which  the
holder  is required  to report such  income, provided the  Company complies with
applicable rules and regulations  of the Code, including  Section 162(m) of  the
Code.
 
    A  holder will realize income as a result  of the surrender of an SAR at the
time the stock is issued or the cash is paid. The amount of income realized will
be equal to the Fair Market Value of  shares issued on the date of surrender  of
the  SAR, plus the amount of cash, if any received. The Company will be entitled
to a deduction  equal to the  income realized in  the year in  which the SAR  is
surrendered  for payment. A participant will  recognize income with respect to a
Performance Award at the time  the shares are issued or  the cash is paid  after
the  award is earned.  The amount of income  realized will be  equal to the Fair
Market Value of the award on the date it was paid. The Company will be  entitled
to a deduction equal to the income realized in the year that the award was paid,
provided the Company complies with applicable rules and regulations of the Code,
including Section 162(m) of the Code.
 
    If a quorum is present, the affirmative vote of a majority of the votes cast
is required to approve the proposed amendment to the Incentive Plan.
 
    THE  BOARD  OF  DIRECTORS  RECOMMENDS  A  VOTE  "FOR"  THE  ADOPTION  OF THE
AMENDMENTS TO THE COMPANY'S 1992 LONG TERM INCENTIVE PLAN.
 
                  ISSUANCE OF WARRANTS TO BULL RUN CORPORATION
                                  (ITEM FIVE)
 
    On January  3,  1996,  the Company  issued  (i)  the 8%  Note  to  Bull  Run
Corporation and (ii) warrants to purchase 487,500 shares of Class A Common Stock
at  $17.88  per  share  subject  to approval  of  a  majority  of  the Company's
shareholders. See "Certain Relationships and Related Transactions -- Issuance of
Preferred Stock and Warrants."  The regulations of The  New York Stock  Exchange
require  that, prior  to the issuance  of securities which  are convertible into
more than 1% of the outstanding common stock  or voting power of a company to  a
stockholder  owning 5% or  more of outstanding  common stock or  voting power of
such company, the issuance must be approved  by a majority of the votes cast  on
the  proposal, provided that the total vote cast on the proposal represents over
50% in interest of all securities entitled  to vote on the proposal. Since  Bull
Run Corporation is a greater than 5% shareholder of the Company and the warrants
are  exercisable into more than  1% of the outstanding  shares of Class A Common
Stock, the Company is seeking approval  of the shareholders for the issuance  of
such warrants.
 
    THE  BOARD OF DIRECTORS RECOMMENDS A VOTE  "FOR" APPROVAL OF THE ISSUANCE OF
THE WARRANTS TO BULL RUN CORPORATION.
 
            ISSUANCE OF ADDITIONAL WARRANTS TO BULL RUN CORPORATION
                                   (ITEM SIX)
 
   
    As part  of  the  Financing, the  Company  proposes  to issue  to  Bull  Run
Corporation 1,000 shares of Series B Preferred Stock and warrants to purchase an
aggregate  of 500,000  shares of Class  A Common  Stock at an  exercise price of
$24.00  per  share  subject  to  approval   of  a  majority  of  the   Company's
shareholders. See "Certain Relationships and Related Transactions -- Issuance of
Preferred  Stock and Warrants."  The regulations of The  New York Stock Exchange
require that, prior  to the issuance  of securities which  are convertible  into
more  than 1% of the outstanding common stock  or voting power of a company to a
stockholder owning 5%  or more of  outstanding common stock  or voting power  of
such  company, the issuance must be approved by  a majority of the votes cast on
the proposal, provided that the total vote cast on the proposal represents  over
50%  in interest of all securities entitled  to vote on the proposal. Since Bull
Run Corporation is a greater than 5% shareholder of the Company and the warrants
are exercisable into more than  1% of the outstanding  shares of Class A  Common
Stock,  the Company is seeking approval of  the shareholders for the issuance of
such warrants.
    
 
   
    THE BOARD OF DIRECTORS RECOMMENDS A  VOTE "FOR" APPROVAL OF THE ISSUANCE  OF
THE ADDITIONAL WARRANTS TO BULL RUN CORPORATION.
    
 
                                       24
<PAGE>
                AMENDMENT TO THE NON-QUALIFIED STOCK OPTION PLAN
                 FOR THE NON-EMPLOYEE DIRECTORS OF THE COMPANY
                                  (ITEM SEVEN)
 
    On  February 22,  1996, the  Board of  Directors of  the Company  approved a
Special Committee's recommendation  of an amendment  to the Non-Qualified  Stock
Option  Plan  for  the  non-employee directors  of  the  Company.  The following
resolution was adopted by  the Board of Directors  to become effective upon  the
approval  by the shareholders of the Company of the Amendment to the Articles of
Incorporation to provide for Class B Common Stock having one vote per share:
 
   
        "RESOLVED, that  subject to  the  approval of  the shareholders  at  the
    Annual  Meeting of  Shareholders in  1996, beginning  in 1996  and each year
    thereafter, each non-employee director of  the Company shall be granted  the
    opportunity  to purchase up to 7,500 shares  of the Company's Class B Common
    Stock directly from the Company by the end of the first month following  the
    close  of the Company's fiscal  year at a price  per share approximating the
    recent market  price at  the time  of grant.  Such maximum  amount shall  be
    automatically  adjusted for  any stock  dividends, splits,  or other similar
    distributions as they occur. The exact  number of shares or price per  share
    shall  be determined by  the Management Personnel Committee  of the Board of
    Directors each year, and the  Company's non-qualified stock option plan  for
    non-employee directors shall be amended to provide for the foregoing"
    
 
    The  following non-employee directors have  been granted options to purchase
the aggregate number of shares of Class  A Common Stock, as follows: Mr.  Mayher
- - --  7,500 shares,  Mr. Boger --  7,500 shares,  Mr. Howell --  7,500 shares, Mr.
Prather -- 7,500 shares, Mr.  Newton -- 7,500 shares  and Mr. Robinson --  7,500
shares.
 
    The  Company compensates non-employee directors  because of the judgment and
experience they provide, the responsibility they assume, and the time and effort
they  expend  in   informing  themselves  about   the  Company's  business   and
participating in meetings of the Board and its committees. In the opinion of the
Company's  management, compensation  of non-employee  directors should  be fair,
reasonable and competitive with what other companies of its size provide so that
the Company would not be disadvantaged  in seeking to attract and retain  highly
qualified directors.
 
    The  purpose  of  the  Non-Qualified  Stock  Option  Plan  for  non-employee
directors is to enhance  the Company's ability to  attract and retain  qualified
directors. Each director of the Company who is not an officer or director of the
Company  will be granted  annually an option  to purchase up  to 7,500 shares of
Class B  Common Stock.  The  Non-Qualified Stock  Option Plan  for  non-employee
directors   is  administered  by  the   Management  Personnel  Committee,  which
determines the number  of shares  underlying an  option grant  and the  exercise
price  per  share (approximately  the market  price  at the  time of  the option
grant).
 
    If a quorum is present, the affirmative vote of a majority of the votes cast
is required to approve the amendment to the Non-Qualified Stock Option Plan  for
non-employee directors.
 
    THE  BOARD  OF DIRECTORS  RECOMMENDS THAT  THE  SHAREHOLDERS VOTE  "FOR" THE
AMENDMENT TO THE NON-QUALIFIED STOCK OPTION PLAN FOR NON-EMPLOYEE DIRECTORS.
 
                 APPOINTMENT OF INDEPENDENT AUDITORS OF COMPANY
                                  (ITEM EIGHT)
 
    The Board of  Directors has appointed  Ernst & Young  LLP, certified  public
accountants, as independent auditors of the Company and its subsidiaries for the
year  ending December 31, 1996. The appointment  of this firm was recommended to
the Board by the Audit Committee.
 
    Ernst &  Young LLP  has served  the  Company and  its subsidiaries  in  this
capacity  since 1967. The firm has advised the Company that neither the firm nor
any of its partners holds any direct financial interest or any material indirect
financial interest in the Company or any of its subsidiaries in the capacity  of
promoter, underwriter, voting trustee, director, officer or employee.
 
                                       25
<PAGE>
    One  or more representatives  of Ernst &  Young LLP will  be present at this
year's Annual  Meeting of  Shareholders,  will have  an  opportunity to  make  a
statement  if he or  she desires to do  so, and will be  available to respond to
appropriate questions.
 
    The Board of Directors  recommends the appointment of  Ernst & Young LLP  as
independent  auditors for the Company.  If the appointment is  not approved by a
majority of the votes cast at the  meeting on this proposal, the appointment  of
independent auditors will be reconsidered by the Board.
 
    THE  BOARD  OF  DIRECTORS  RECOMMENDS  A  VOTE  "FOR"  THE  APPROVAL  OF THE
APPOINTMENT OF AUDITORS.
 
                    MANAGEMENT'S DISCUSSION AND ANALYSIS OF
                 FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
RESULTS OF OPERATIONS OF THE COMPANY
 
INTRODUCTION
 
    The following analysis of the financial condition and results of  operations
of  the Company  should be read  in conjunction with  the Company's consolidated
financial  statements  and  notes  thereto  included  elsewhere  in  this  Proxy
Statement.
 
   
    The  Company  derives  its  revenues from  its  television  broadcasting and
publishing operations. As a result of  the Kentucky Acquisition (as defined)  in
1994  and  the Augusta  Acquisition, which  was completed  in January  1996, the
proportion of the  Company's revenues derived  from television broadcasting  has
increased  and this  proportion will  continue to  increase as  a result  of the
Phipps Acquisition, which is expected to occur by September 1996. As a result of
the  higher  operating   margins  associated  with   the  Company's   television
broadcasting  operations,  the  profit  contribution of  these  operations  as a
percentage of revenues has exceeded, and is expected to continue to exceed,  the
profit contribution of the Company's publishing operations. Set forth below, for
the   periods  indicated,   is  certain  information   concerning  the  relative
contributions of the Company's television broadcasting and publishing operations
(dollars in thousands):
    
   
<TABLE>
<CAPTION>
                                                                                                                 SIX
                                                                                                               MONTHS
                                                                                                                ENDED
                                                          YEAR ENDED DECEMBER 31,                             JUNE 30,
                                ----------------------------------------------------------------------------  ---------
                                          1993                      1994                      1995              1995
                                ------------------------  ------------------------  ------------------------  ---------
                                            PERCENT OF                PERCENT OF                PERCENT OF
                                 AMOUNT        TOTAL       AMOUNT        TOTAL       AMOUNT        TOTAL       AMOUNT
                                ---------  -------------  ---------  -------------  ---------  -------------  ---------
<S>                             <C>        <C>            <C>        <C>            <C>        <C>            <C>
TELEVISION BROADCASTING
Revenues                        $15,003.7        59.8%    $22,826.4        62.5%    $36,750.0        62.7%    $18,260.9
Operating income (1)              4,070.6        66.9       6,556.0        78.4      10,585.2        94.1       5,416.1
PUBLISHING
Revenues                        $10,109.4        40.2%    $13,692.0        37.5%    $21,866.2        37.3%    $10,046.1
Operating income (1)              2,009.1        33.1       1,804.0        21.6         660.2         5.9         972.2
 
<CAPTION>
 
                                                         1996
                                               ------------------------
                                 PERCENT OF                PERCENT OF
                                    TOTAL       AMOUNT        TOTAL
                                -------------  ---------  -------------
<S>                             <C>            <C>        <C>
TELEVISION BROADCASTING
Revenues                              64.5%    $24,251.9        68.3%
Operating income (1)                  84.8       7,757.3        85.9
PUBLISHING
Revenues                              35.5%    $11,261.8        31.7%
Operating income (1)                  15.2       1,272.7        14.1
</TABLE>
    
 
- - ----------------------------------
(1)  Excludes any allocation of corporate and administrative expenses.
 
                                       26
<PAGE>
TELEVISION BROADCASTING
 
    Set forth below are the principal  types of broadcasting revenues earned  by
the  Company's television stations for the  periods indicated and the percentage
contribution of each to total Company revenues (dollars in thousands):
   
<TABLE>
<CAPTION>
                                                                                                                 SIX
                                                                                                               MONTHS
                                                                                                                ENDED
                                                          YEAR ENDED DECEMBER 31,                             JUNE 30,
                                ----------------------------------------------------------------------------  ---------
                                          1993                      1994                      1995              1995
                                ------------------------  ------------------------  ------------------------  ---------
                                            PERCENT OF                PERCENT OF                PERCENT OF
                                           TOTAL COMPANY             TOTAL COMPANY             TOTAL COMPANY
                                 AMOUNT      REVENUES      AMOUNT      REVENUES      AMOUNT      REVENUES      AMOUNT
                                ---------  -------------  ---------  -------------  ---------  -------------  ---------
<S>                             <C>        <C>            <C>        <C>            <C>        <C>            <C>
Net revenues:
  Local                         $ 7,312.3        29.2%    $12,191.4        33.4%    $20,888.1        35.6%    $10,294.6
  National                        6,102.8        24.3       7,804.4        21.4      10,881.1        18.6       5,497.4
  Network compensation            1,286.1         5.1       1,297.5         3.5       2,486.8         4.2       1,247.2
  Political                          17.7         0.1       1,029.0         2.8       1,174.2         2.0         437.9
  Production and other              284.8         1.1         504.1         1.4       1,319.8         2.3         783.8
                                ---------         ---     ---------         ---     ---------         ---     ---------
                                $15,003.7        59.8%    $22,826.4        62.5%    $36,750.0        62.7%    $18,260.9
                                ---------         ---     ---------         ---     ---------         ---     ---------
                                ---------         ---     ---------         ---     ---------         ---     ---------
 
<CAPTION>
 
                                                         1996
                                               ------------------------
                                 PERCENT OF                PERCENT OF
                                TOTAL COMPANY             TOTAL COMPANY
                                  REVENUES      AMOUNT      REVENUES
                                -------------  ---------  -------------
<S>                             <C>            <C>        <C>
Net revenues:
  Local                               36.4%    $13,745.3        38.7%
  National                            19.4       6,967.9        19.6
  Network compensation                 4.4       1,761.0         5.0
  Political                            1.5         786.3         2.2
  Production and other                 2.8         991.4         2.8
                                       ---     ---------         ---
                                      64.5%    $24,251.9        68.3%
                                       ---     ---------         ---
                                       ---     ---------         ---
</TABLE>
    
 
   
    In the Company's broadcasting operations, broadcast advertising is sold  for
placement   either  preceding  or  following   a  television  station's  network
programming and within local  and syndicated programming. Broadcast  advertising
is  sold in time increments and is priced  primarily on the basis of a program's
popularity among  the  specific audience  an  advertiser desires  to  reach,  as
measured  by Nielsen. In  addition, broadcast advertising  rates are affected by
the number  of  advertisers competing  for  the  available time,  the  size  and
demographic  makeup of the market served by  the station and the availability of
alternative advertising media  in the market  area. Broadcast advertising  rates
are  the highest  during the  most desirable  viewing hours,  with corresponding
reductions during other hours. The ratings of a local station affiliated with  a
major network can be affected by ratings of network programming.
    
 
   
    Most  broadcast advertising contracts are short-term, and generally run only
for a  few weeks.  The Company  estimates that  approximately 56.5%  and  56.2%,
respectively,  of the annual gross revenues of the Company's television stations
for the year ended  December 31, 1995  and the six months  ended June 30,  1996,
were  generated from local advertising, which is sold by a station's sales staff
directly to  local accounts,  and the  remainder primarily  represents  national
advertising,   which  is  sold   by  a  station's   national  advertising  sales
representative. The stations generally  pay commissions to advertising  agencies
on   local,  regional  and  national  advertising  and  the  stations  also  pay
commissions to the national sales representative on national advertising.
    
 
    Broadcast advertising  revenues  are generally  highest  in the  second  and
fourth  quarters of each year, due in part to increases in retail advertising in
the spring and in the period leading up to and including the holiday season.  In
addition,  broadcast  advertising  revenues  are  generally  higher  during even
numbered election years due to spending by political candidates, which  spending
typically is heaviest during the fourth quarter.
 
    The   broadcasting  operations'  primary  operating  expenses  are  employee
compensation,  related  benefits  and   programming  costs.  In  addition,   the
broadcasting  operations incur overhead expenses  such as maintenance, supplies,
insurance, rent and utilities. A large portion of the operating expenses of  the
broadcasting operations is fixed.
 
                                       27
<PAGE>
PUBLISHING
 
    Set forth below are the principal types of publishing revenues earned by the
Company's  publishing operations  for the  periods indicated  and the percentage
contribution of each to total Company revenues (dollars in thousands):
   
<TABLE>
<CAPTION>
                                                                                                                 SIX
                                                                                                               MONTHS
                                                                                                                ENDED
                                                          YEAR ENDED DECEMBER 31,                             JUNE 30,
                                ----------------------------------------------------------------------------  ---------
                                          1993                      1994                      1995              1995
                                ------------------------  ------------------------  ------------------------  ---------
                                            PERCENT OF                PERCENT OF                PERCENT OF
                                           TOTAL COMPANY             TOTAL COMPANY             TOTAL COMPANY
                                 AMOUNT      REVENUES      AMOUNT      REVENUES      AMOUNT      REVENUES      AMOUNT
                                ---------  -------------  ---------  -------------  ---------  -------------  ---------
<S>                             <C>        <C>            <C>        <C>            <C>        <C>            <C>
Revenues:
  Retail advertising            $ 5,734.3        22.8%    $ 7,460.3        20.4%    $11,044.2        18.8%    $ 5,089.5
  Classified                      2,336.5         9.3       3,174.2         8.7       5,323.8         9.1       2,493.7
  Circulation                     2,011.8         8.0       2,628.9         7.2       3,783.8         6.5       1,821.6
  Other                              26.8         0.1         428.6         1.2       1,714.4         2.9         641.3
                                ---------         ---     ---------         ---     ---------         ---     ---------
                                $10,109.4        40.2%    $13,692.0        37.5%    $21,866.2        37.3%    $10,046.1
                                ---------         ---     ---------         ---     ---------         ---     ---------
                                ---------         ---     ---------         ---     ---------         ---     ---------
 
<CAPTION>
 
                                                         1996
                                               ------------------------
                                 PERCENT OF                PERCENT OF
                                TOTAL COMPANY             TOTAL COMPANY
                                  REVENUES      AMOUNT      REVENUES
                                -------------  ---------  -------------
<S>                             <C>            <C>        <C>
Revenues:
  Retail advertising                  18.0%    $ 5,299.8        14.9%
  Classified                           8.8       3,036.5         8.5
  Circulation                          6.4       2,188.6         6.2
  Other                                2.3         736.9         2.1
                                       ---     ---------         ---
                                      35.5%    $11,261.8        31.7%
                                       ---     ---------         ---
                                       ---     ---------         ---
</TABLE>
    
 
    In the Company's publishing operations, advertising contracts are  generally
annual  and primarily provide for  a commitment as to  the volume of advertising
purchased by a  customer. The  publishing operations'  advertising revenues  are
primarily   generated  from   retail  advertising.  As   with  the  broadcasting
operations, the publishing  operations' revenues  are generally  highest in  the
second and fourth quarters of each year.
 
    The   publishing  operations'   primary  operating   expenses  are  employee
compensation, related  benefits and  newsprint  costs. In  addition,  publishing
operations  incur overhead  expenses such  as maintenance,  supplies, insurance,
rent and utilities. A large portion of the operating expenses of the  publishing
operations   is  fixed,   although  the  Company   has  experienced  significant
variability in its newsprint costs in recent years.
 
MEDIA CASH FLOW
 
   
    The following table sets forth certain operating data for both the broadcast
and publishing operations for the years  ended December 31, 1993, 1994 and  1995
and the six months ended June 30, 1995 and 1996 (dollars in thousands):
    
 
   
<TABLE>
<CAPTION>
                                                                                                              SIX MONTHS ENDED
                                                                               YEAR ENDED DECEMBER 31,            JUNE 30,
                                                                           -------------------------------  --------------------
                                                                             1993       1994       1995       1995       1996
                                                                           ---------  ---------  ---------  ---------  ---------
<S>                                                                        <C>        <C>        <C>        <C>        <C>
Operating income                                                           $ 3,530.7  $ 6,276.4  $ 6,859.7  $ 4,657.5  $ 7,311.2
Add:
  Amortization of program license rights                                       924.9    1,218.0    1,647.0      768.0    1,279.4
  Depreciation and amortization                                              1,564.8    2,141.6    3,958.9    1,821.7    2,900.7
  Corporate overhead                                                         2,326.7    1,958.4    2,258.3    1,012.0    1,570.8
  Non-cash compensation and contributions to the Company's
   401(k) plan, paid in common stock                                          --          109.5    2,612.2      976.4      250.8
Less:
  Payments for program license liabilities                                    (976.2)  (1,181.6)  (1,776.8)    (902.8)  (1,309.3)
                                                                           ---------  ---------  ---------  ---------  ---------
Media Cash Flow (1)                                                        $ 7,370.9  $10,522.3  $15,559.3  $ 8,332.8  $12,003.6
                                                                           ---------  ---------  ---------  ---------  ---------
                                                                           ---------  ---------  ---------  ---------  ---------
</TABLE>
    
 
- - ----------------------------------
   
(1)  Of  Media  Cash Flow,  $4.9  million, $8.0  million  and $13.6  million was
     attributable to the  Company's broadcasting  operations in  1993, 1994  and
     1995,  respectively; and $6.8 million and  $9.9 million was attributable to
     the Company's broadcasting operations during the six months ended June  30,
     1995 and 1996, respectively.
    
 
    "Media  Cash  Flow"  is  defined  as  operating  income  from  broadcast and
publishing operations (and includes paging  with regard to the Phipps  Business)
before  income taxes  and interest  expense, plus  depreciation and amortization
(including amortization of  program license rights),  non-cash compensation  and
corporate  overhead, less payments for  program license liabilities. The Company
has included Media  Cash Flow  data because  such data  are commonly  used as  a
measure of performance for broadcast companies and are also used by investors to
measure  a company's ability to service debt. Media Cash Flow is not, and should
 
                                       28
<PAGE>
not be used as, an indicator or  alternative to operating income, net income  or
cash  flow as reflected in the  consolidated financial statements of the Company
and is not  a measure  of financial  performance under  GAAP and  should not  be
considered  in isolation or as a substitute for measures of performance prepared
in accordance with GAAP.
 
ACQUISITIONS
 
   
    Since 1994, the  Company has completed  several broadcasting and  publishing
acquisitions. The operating results of the Company reflect significant increases
in  substantially all line items between the  six months ended June 30, 1995 and
1996, and the years ended December 31,  1994 and 1995. The principal reason  for
these increases is the acquisition by the Company in January 1996 of the Augusta
Business  for $35.9 million  and the assumption of  $1.3 million of liabilities,
and in September 1994 of WKYT  and WYMT (together, the "Kentucky Business")  for
$38.1  million and the assumption of  $2.3 million of liabilities (the "Kentucky
Acquisition"). In  addition,  during  1994 the  Company  acquired  THE  ROCKDALE
CITIZEN  for  approximately  $4.8  million  (May  1994)  and  four  shoppers for
approximately $1.5  million (October  1994) (collectively  the "1994  Publishing
Acquisitions"), and during 1995 the Company acquired the GWINNETT DAILY POST for
approximately  $3.7 million (January  1995) and three  shoppers for an aggregate
purchase price of approximately $1.4 million (September 1995) (collectively  the
"1995  Publishing Acquisitions"). The 1994  Publishing Acquisitions and the 1995
Publishing  Acquisitions  are  collectively  referred  to  as  the   "Publishing
Acquisitions."
    
 
CASH FLOW PROVIDED BY (USED IN) OPERATING, INVESTING AND FINANCING ACTIVITIES.
 
   
    The  following table sets  forth certain operating data  for the Company for
the years ended December 31, 1993, 1994  and 1995, and for the six months  ended
June 30, 1995 and 1996.
    
 
   
<TABLE>
<CAPTION>
                                                                            SIX MONTHS ENDED
                                             YEAR ENDED DECEMBER 31,            JUNE 30,
                                         -------------------------------  --------------------
(DOLLARS IN THOUSANDS)                     1993       1994       1995       1995       1996
- - ---------------------------------------  ---------  ---------  ---------  ---------  ---------
<S>                                      <C>        <C>        <C>        <C>        <C>
Cash flows provided by (used in):
    Operating activities                 $   1,324  $   5,798  $   7,600  $   3,828  $   6,801
    Investing activities                     3,062    (42,770)    (8,929)    (5,377)   (37,490)
    Financing activities                    (4,932)    37,200      1,331      1,208     31,416
</TABLE>
    
 
   
SIX MONTHS ENDED JUNE 30, 1996 COMPARED TO SIX MONTHS ENDED JUNE 30, 1995
    
 
   
    REVENUES.   Total revenues for the six  months ended June 30, 1996 increased
$7.2 million, or  25.5%, over the  six months  ended June 30,  1995, from  $28.3
million  to $35.5  million. This  increase was  attributable to  (i) the Augusta
Acquisition, which occurred on January 4, 1996 and (ii) increases in  publishing
and  broadcasting  (excluding  the Augusta  Acquisition)  revenues.  The Augusta
Acquisition accounted for $4.5 million, or 62.3%, of the revenue increase.
    
 
   
    Broadcast net  revenues increased  $6.0  million, or  32.8%, over  the  same
period  of  the  prior  year,  from $18.3  million  to  $24.3  million. Revenues
generated by WRDW accounted for  $4.5 million, or 74.9%,  of the increase. On  a
pro  forma basis, broadcast net revenues for  WRDW for the six months ended June
30, 1996 increased $130,000, or  3.0%, over the same  period of the prior  year.
Broadcast  net  revenues,  excluding  the  Augusta  Acquisition,  increased $1.5
million, or 8.2%, over  the six months ended  June 30, 1995. Approximately  $1.1
million,  $94,000 and $171,000  of the $1.5 million  increase in total broadcast
net revenues,  excluding the  Augusta  Acquisition, were  due to  higher  local,
national   and  political  advertising  spending,  respectively.  The  remaining
increase was due to greater tower rental and special projects revenue.
    
 
   
    Publishing revenues increased $1.2  million, or 12.1%,  over the six  months
ended  June  30, 1995,  from  $10.1 million  to  $11.3 million.  Advertising and
circulation revenues  comprised  $766,000  and $367,000,  respectively,  of  the
revenue  increase. The increase in advertising  revenue was primarily the result
of linage increases  in classified  advertising and retail  rate increases.  The
increase  in circulation revenue can be  attributed primarily to price increases
over the  same period  of the  prior year  at two  of the  Company's  publishing
operations  and the conversion  of the GWINNETT DAILY  POST to a five-day-a-week
paper. Approximately $81,000 of the  publishing revenue increase was the  result
of higher special events revenue.
    
 
                                       29
<PAGE>
   
    OPERATING  EXPENSES.  Operating  expenses for the six  months ended June 30,
1996 increased $4.6 million, or 19.3%, over the six months ended June 30,  1995,
from  $23.6  million  to  $28.2  million, due  to  the  Augusta  Acquisition and
increased expenses at  the broadcasting  and publishing operations,  as well  as
increased  corporate and administrative expenses, depreciation and amortization,
offset by a reduction in non-cash compensation paid in Class A Common Stock.
    
 
   
    Broadcasting expenses for the six months ended June 30, 1996 increased  $3.0
million, or 26.4%, over the same period of the prior year, from $11.4 million to
$14.4   million.  This  increase  was  primarily  attributable  to  the  Augusta
Acquisition. On  a pro  forma basis,  broadcast expenses  for WRDW  for the  six
months  ended June 30, 1996 decreased $129,000, or 4.5%, over the same period of
1995, from $2.9 million to $2.8 million. Broadcasting expenses, excluding  WRDW,
increased  $243,000, or 2.1%, primarily as  the result of higher payroll related
costs.
    
 
   
    Publishing expenses  for  the  six  months ended  June  30,  1996  increased
$603,000,  or 7.0%, over the same period of the prior year, from $8.6 million to
$9.2 million.  This  increase resulted  primarily  from the  conversion  of  the
GWINNETT  DAILY POST to a five-day-a-week  paper and the acquisition of shoppers
in September 1995. Newsprint costs increased approximately 12% while consumption
of newsprint  increased approximately  7%.  Payroll related  costs,  promotional
costs,  product delivery costs and outside service costs increased over the same
period of the prior year.
    
 
   
    Corporate and administrative expenses for the six months ended June 30, 1996
increased $559,000, or 55.2%, over the same period of the prior year, from  $1.0
million  to  $1.6  million.  This increase  was  attributable  primarily  to the
addition of several new officers.
    
 
   
    Depreciation of property and equipment and amortization of intangible assets
was $2.9  million for  the six  months ended  June 30,  1996, compared  to  $1.8
million  for the same period  of the prior year, an  increase of $1.1 million or
59.2%. This  increase  was  primarily  the result  of  higher  depreciation  and
amortization  costs  related  to the  Augusta  Acquisition and  $3.3  million of
capital expenditures made in 1995.
    
 
   
    Non-cash compensation  paid  in Class  A  Common Stock  resulting  from  the
Company's  employment agreement  with its  current President  and the Separation
Agreement (as  defined)  with  its  former  chief  executive  officer  decreased
$696,000,  or 85.3%, for  the six months  ended June 30,  1996, from $816,000 to
$120,000. This decrease  resulted from the  Company's award in  1995 of  150,000
shares  of  Class A  Common Stock  to  its former  chief executive  officer. The
expense for such award was recognized in 1995 (including $696,000 recognized  in
the six months ended June 30, 1995).
    
 
   
    INTEREST  EXPENSE.  Interest expense increased  $1.7 million, or 60.6%, from
$2.8 million for the six months ended June 30, 1995 to $4.4 million for the  six
months  ended  June  30,  1996.  This  increase  was  attributable  primarily to
increased  levels  of  debt  resulting   from  the  financing  of  the   Augusta
Acquisition.
    
 
   
    NET  INCOME.  Net income for the Company was $1.8 million for the six months
ended June 30, 1996, compared with $1.2 million for the same period in 1995,  an
increase of $620,000 or 52.5%.
    
 
YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994
 
   
    REVENUES.   Total  revenues for the  year ended December  31, 1995 increased
$22.1 million,  or 60.5%,  over the  year ended  December 31,  1994, from  $36.5
million  to $58.6 million. This  increase was attributable to  (i) the effect of
owning the Kentucky Business for all of 1995 versus the last four months of 1994
($12.9 million),  (ii)  the Publishing  Acquisitions  ($6.4 million)  and  (iii)
increases  in total revenues of the Company (excluding the Kentucky Business and
the Publishing  Acquisitions).  The  Kentucky  Acquisition  and  the  Publishing
Acquisitions accounted for $19.3 million, or 87.3%, of the revenue increase.
    
 
    Broadcast  net revenues  increased $13.9 million,  or 61.0%,  over the prior
year, from $22.8 million  to $36.7 million. Revenues  generated by the  Kentucky
Acquisition  accounted for $12.9  million, or 92.8%,  of the increase.  On a pro
forma basis, broadcast net revenues for the Kentucky Business for the year ended
December 31, 1995 increased $2.7 million, or 16.1%, over the year ended December
31, 1994, from $16.6 million to $19.3 million. Broadcast net revenues, excluding
the Kentucky Acquisition, increased 6.1%, or $1.0 million, over the prior  year.
Approximately  $889,000  and  $304,000 of  the  $1.0 million  increase  in total
 
                                       30
<PAGE>
broadcast net revenues, excluding the  Kentucky Acquisition, were due to  higher
local and national advertising spending, respectively. Approximately $417,000 of
the  $1.0  million  increase  in total  broadcast  net  revenues,  excluding the
Kentucky Acquisition, is a result  of higher network compensation negotiated  by
the Company with CBS and NBC. These increases were offset by a $617,000 decrease
in political advertising revenues associated with cyclical political activity.
 
    Publishing  revenues increased $8.2 million, or  59.7%, over the prior year,
from $13.7 million to $21.9 million. Approximately $6.4 million or 77.8% of  the
increase  was due to the Publishing Acquisitions. Publishing revenues, excluding
the Publishing Acquisitions, increased  $1.8 million, or  15.5%, over the  prior
year.   Advertising   and   circulation   revenue,   excluding   the  Publishing
Acquisitions, comprised approximately  $885,000 and  $511,000, respectively,  of
the  revenue increase.  This increase in  circulation revenue  can be attributed
primarily to price increases  over the prior year.  This increase in  classified
advertising,  excluding the Publishing Acquisitions, was primarily the result of
rate and  linage  increases. Approximately  $417,000  of the  revenue  increase,
excluding  the Publishing Acquisitions, was the  result of higher special events
and commercial printing revenues.
 
   
    OPERATING EXPENSES.  Operating expenses for the year ended December 31, 1995
increased $21.5 million, or 71.1%, over  the year ended December 31, 1994,  from
$30.2  million to $51.7 million, primarily due to the Kentucky Acquisition ($9.8
million) and the Publishing Acquisitions ($7.6 million).
    
 
    Broadcasting expenses increased $8.3 million, or 56.1%, over the prior year,
from $14.9 million to $23.2 million. The increase was attributable primarily  to
the  Kentucky  Acquisition. On  a pro  forma basis,  broadcast expenses  for the
Kentucky Business for the year ended  December 31, 1995 increased $1.5  million,
or  14.3%, over the  year ended December  31, 1994, from  $10.7 million to $12.2
million. The increase  in broadcast expenses  for the Kentucky  Business can  be
attributed  primarily to increased payroll  related costs and sales commissions.
Broadcasting expenses, excluding the  Kentucky Acquisition, remained  relatively
constant primarily as a result of lower syndicated film programming costs offset
by higher payroll related costs.
 
    Publishing  expenses increased $8.8 million, or  78.7%, over the prior year,
from $11.2 million to  $20.0 million. Approximately $7.1  million, or 80.6%,  of
the  increase  was  due  to the  Publishing  Acquisitions.  Publishing expenses,
excluding  the  Publishing  Acquisitions,  increased  $1.7  million,  or  18.5%,
primarily  due to  a 40% increase  in newsprint cost,  increased payroll related
costs and product delivery and promotion costs.
 
   
    Corporate and administrative expenses increased $300,000, or 15.3%, over the
prior year, from $2.0  million to $2.3 million.  This increase was  attributable
primarily  to the Separation Agreement with the Company's former chief executive
officer, which resulted in a $440,000 charge to expense.
    
 
    Depreciation of property and equipment and amortization of intangible assets
was $3.9 million for the year ended December 31, 1995, compared to $2.1  million
for  the prior year,  an increase of  $1.8 million, or  84.9%. This increase was
primarily the result of  higher depreciation and  amortization costs related  to
the Kentucky Acquisition and the Publishing Acquisitions.
 
   
    Non-cash  compensation  paid  in  Class A  Common  Stock  resulted  from the
Company's employment agreements with its current President and its former  chief
executive  officer. The  current President's  employment agreement  provides him
with 122,034 shares of  Class A Common Stock  if his employment continues  until
September  1999. The Company will recognize $1.2 million of compensation expense
for this award ratably over such five-year period. This agreement resulted in  a
charge  to expense of $240,000 for the  year ended December 31, 1995 as compared
to $80,000  for the  year ended  December  31, 1994.  In addition,  the  Company
awarded  150,000  shares of  Class  A Common  Stock,  pursuant to  an employment
agreement with its former chief executive officer, which resulted in an  expense
of $2.1 million, all of which was recognized in 1995.
    
 
    INTEREST  EXPENSE.  Interest expense increased $3.5 million, or 182.8%, from
$1.9 million for the year ended December  31, 1994 to $5.4 million for the  year
ended  December 31, 1995. This increase  was attributable primarily to increased
levels of  debt  resulting  from  the  financing  of  the  Kentucky  Acquisition
 
                                       31
<PAGE>
   
and the Publishing Acquisitions. The Company entered into a $25 million notional
amount  five year interest rate  swap agreement on June  2, 1995, to effectively
convert a portion of its floating rate debt to a fixed rate basis. The  interest
rate swap fixed the LIBOR base rate of the Old Credit Facility at 6.105% for the
notional amount. Under the terms of the interest rate swap, amounts were paid to
or received from Society National Bank ("Society"), the other party to the swap,
on  a  quarterly  basis. The  calculation  of  these amounts  was  based  upon a
comparison of the results of multiplying  the notional amount by (i) 6.105%  and
(ii)  Society's current three-month LIBOR rate. If Society's current three-month
LIBOR rate was lower  than 6.105%, the Company  paid Society the difference.  If
Society's  current three-month LIBOR  rate was higher  than 6.105%, Society paid
the Company  the difference.  Since  the inception  of  the interest  rate  swap
agreement,  the three-month LIBOR rates charged  by Society have been consistent
with the  three-month LIBOR  rates published  in THE  WALL STREET  JOURNAL.  The
Company  recorded  approximately $34,000  of  interest expense  relative  to the
interest rate  swap in  1995. The  effective  interest rate  of the  Old  Credit
Facility and interest rate swap at December 31, 1995 was approximately 8.64% and
9.10%, respectively.
    
 
   
    NET  INCOME.   Net income for  the Company  was $931,000 for  the year ended
December 31, 1995, compared  with $2.8 million for  the year ended December  31,
1994, a decrease of $1.8 million.
    
 
YEAR ENDED DECEMBER 31, 1994 COMPARED TO YEAR ENDED DECEMBER 31, 1993
 
    REVENUES.   Total  revenues for the  year ended December  31, 1994 increased
$11.4 million or 45.4% over the year ended December 31, 1993, from $25.1 million
to $36.5 million.  Excluding the  Kentucky Acquisition and  the 1994  Publishing
Acquisitions, the increase was $3.1 million or 12.3%.
 
    Broadcast  net revenues increased $7.8 million or 52.1% over the prior year,
from $15.0  million to  $22.8  million. Broadcast  net revenues,  excluding  the
Kentucky  Acquisition, increased 9.8%  or $1.5 million over  the prior year. The
Kentucky Acquisition contributed  $6.3 million to  this increase. Excluding  the
Kentucky  Acquisition, approximately $921,000 of the $1.5 million increase was a
result of  higher  levels of  political  advertising spending  due  to  cyclical
election  activity in  the Company's  broadcast markets.  Excluding the Kentucky
Acquisition, local and national  advertising contributed an additional  $668,000
to  the  revenue  increase. These  increases  were offset  by  decreased network
compensation related to the preemption of network programming in favor of  local
advertising.
 
    Publishing  revenues increased  $3.6 million or  35.4% over  the prior year,
from  $10.1  million  to  $13.7   million.  The  1994  Publishing   Acquisitions
contributed  $2.0 million to  this increase. Publishing  revenues, excluding the
1994 Publishing  Acquisitions,  increased  $1.6 million  over  the  prior  year.
Advertising   and   circulation  revenues   comprised  $833,000   and  $436,000,
respectively, of the  revenue increase. Special  events and commercial  printing
services accounted for $344,000 of the revenue increase.
 
    OPERATING EXPENSES.  Operating expenses for the year ended December 31, 1994
increased  $8.7 million  or 40.1%  over the year  ended December  31, 1993, from
$21.6  million  to  $30.3  million,  attributable  primarily  to  the   Kentucky
Acquisition ($4.4 million) and the 1994 Publishing Acquisitions ($2.1 million).
 
    Broadcasting  expenses increased $4.8 million or  48.2% over the prior year,
from $10.0 million to $14.8 million  primarily due to the Kentucky  Acquisition.
Broadcasting   expenses,   excluding   the   Kentucky   Acquisition,   increased
approximately $1.0 million, or 10.0%, over the prior year from $10.0 million  to
$11.0 million. This increase was attributable to increased payroll related costs
associated  with improvement of news programming, costs associated with coverage
of the 1994 flood in Albany, Georgia  and other costs related to on-air  product
upgrades at the stations.
 
    Publishing  expenses increased  $3.5 million or  46.1% over  the prior year,
from $7.7 million to $11.2 million primarily as a result of the 1994  Publishing
Acquisitions.  Publishing expenses, excluding  the 1994 Publishing Acquisitions,
increased approximately $1.6 million or 20.9% during the year ended December 31,
1994, as compared to the prior year. This increase was primarily attributable to
an 11.9% increase in  newsprint usage, payroll related  costs and other  product
improvement costs associated with format changes and expanded market coverage of
THE ALBANY HERALD.
 
                                       32
<PAGE>
    Corporate and administrative expenses decreased $368,000 or 15.8% during the
year  ended December 31, 1994, from $2.3  million to $1.9 million. This decrease
can be attributed to lower professional fees and related expenses.
 
    Depreciation of property and equipment and amortization of intangible assets
was $2.2 million for the year ended  December 31, 1994 compared to $1.6  million
for  the prior  year, an increase  of $577,000  or 36.9%. This  increase was due
principally from the depreciation and amortization expense related to the assets
acquired in the Kentucky Acquisition and 1994 Publishing Acquisitions.
 
    INTEREST EXPENSE.   Interest expense  was $1.9  million for  the year  ended
December  31,  1994 compared  to $985,000  for  the prior  year, an  increase of
$938,000 or 95.3%. This increase was  due primarily to increased levels of  debt
resulting from the financing of the Kentucky Acquisition and the 1994 Publishing
Acquisitions.  At December 31, 1993 and  1994 the Company's outstanding debt was
$7.3 million and $52.9 million, respectively.
 
   
    NET INCOME.  Net income for the Company was $2.8 million for the year  ended
December  31, 1994, compared with  $2.6 million for the  year ended December 31,
1993, an increase of $200,000.
    
 
RESULTS OF OPERATIONS OF THE PHIPPS BUSINESS
 
INTRODUCTION
 
    The following analysis of the financial condition and results of  operations
of  the Phipps Business should be read in conjunction with the Phipps Business's
consolidated financial statements and notes  thereto included elsewhere in  this
Prospectus.
 
    The  Phipps Business derives  its revenues from  its television broadcasting
operations which  consist  of  two CBS-affiliated  television  stations  serving
Tallahassee,  Florida/Thomasville, Georgia and Knoxville, Tennessee, a satellite
broadcasting business based in Tallahassee,  Florida and a paging business  also
based in Tallahassee, Florida.
 
    Set   forth  below,  for  the  periods  indicated,  is  certain  information
concerning the  relative contributions  of  the Phipps  Business's  broadcasting
(including satellite broadcasting) and paging operations (dollars in thousands):
   
<TABLE>
<CAPTION>
                                                                                                                 SIX
                                                                                                               MONTHS
                                                                                                                ENDED
                                                          YEAR ENDED DECEMBER 31,                             JUNE 30,
                                ----------------------------------------------------------------------------  ---------
                                          1993                      1994                      1995              1995
                                ------------------------  ------------------------  ------------------------  ---------
                                            PERCENT OF                PERCENT OF                PERCENT OF
                                 AMOUNT        TOTAL       AMOUNT        TOTAL       AMOUNT        TOTAL       AMOUNT
                                ---------  -------------  ---------  -------------  ---------  -------------  ---------
<S>                             <C>        <C>            <C>        <C>            <C>        <C>            <C>
TELEVISION BROADCASTING
Revenues                        $19,460.1        83.7%    $21,524.3        83.4%    $22,424.1        82.1%    $10,774.3
Operating income (1)              6,636.4        92.8       9,297.9        91.6       9,635.3        90.4       4,656.5
 
PAGING
Revenues                         $3,787.9        16.3%     $4,276.6        16.6%     $4,897.5        17.9%     $2,422.9
Operating income (1)                512.7         7.2         855.1         8.4       1,026.9         9.6         628.8
 
<CAPTION>
 
                                                         1996
                                               ------------------------
                                 PERCENT OF                PERCENT OF
                                    TOTAL       AMOUNT        TOTAL
                                -------------  ---------  -------------
<S>                             <C>            <C>        <C>
TELEVISION BROADCASTING
Revenues                              81.6%    $11,345.7        80.5%
Operating income (1)                  88.1       4,740.0        88.3%
PAGING
Revenues                              18.4%     $2,743.5        19.5%
Operating income (1)                  11.9         627.1        11.7
</TABLE>
    
 
- - ----------------------------------
(1)  Excludes any allocation of corporate and administrative expenses.
 
                                       33
<PAGE>
TELEVISION BROADCASTING AND PAGING REVENUES
 
    Set  forth below are the principal types of broadcast net revenues earned by
the Phipps Business's television stations (including the satellite  broadcasting
operation)  for the periods indicated and the percentage contribution of each to
the Phipps Business's total revenues (dollars in thousands):
   
<TABLE>
<CAPTION>
                                                                                                                   SIX
                                                                                                                 MONTHS
                                                                                                                  ENDED
                                                            YEAR ENDED DECEMBER 31,                             JUNE 30,
                                  ----------------------------------------------------------------------------  ---------
                                            1993                      1994                      1995              1995
                                  ------------------------  ------------------------  ------------------------  ---------
                                              PERCENT OF                PERCENT OF                PERCENT OF
                                                 TOTAL                     TOTAL                     TOTAL
                                               REVENUES                  REVENUES                  REVENUES
                                               OF PHIPPS                 OF PHIPPS                 OF PHIPPS
                                   AMOUNT      BUSINESS      AMOUNT      BUSINESS      AMOUNT      BUSINESS      AMOUNT
                                  ---------  -------------  ---------  -------------  ---------  -------------  ---------
<S>                               <C>        <C>            <C>        <C>            <C>        <C>            <C>
TELEVISION BROADCASTING
Net revenues:
  Local                            $9,732.8        41.9%    $10,412.2        40.4%    $11,149.2        40.8%     $5,359.3
  National                          7,057.2        30.4       7,217.0        27.9       7,844.9        28.7       3,808.7
  Network compensation              1,164.6         5.0       1,433.2         5.6       1,740.1         6.4         802.2
  Political                             9.1         0.0       1,147.1         4.4          33.9         0.1           7.7
  Production and other (1)          1,496.4         6.4       1,314.8         5.1       1,656.0         6.1         796.4
                                  ---------         ---     ---------         ---     ---------         ---     ---------
                                  $19,460.1        83.7%    $21,524.3        83.4%    $22,424.1        82.1%    $10,774.1
                                  ---------         ---     ---------         ---     ---------         ---     ---------
                                  ---------         ---     ---------         ---     ---------         ---     ---------
 
<CAPTION>
 
                                                           1996
                                                 ------------------------
                                   PERCENT OF                PERCENT OF
                                      TOTAL                     TOTAL
                                    REVENUES                  REVENUES
                                    OF PHIPPS                 OF PHIPPS
                                    BUSINESS      AMOUNT      BUSINESS
                                  -------------  ---------  -------------
<S>                               <C>            <C>        <C>
TELEVISION BROADCASTING
Net revenues:
  Local                                 40.6%     $5,788.6        41.1%
  National                              28.9       3,597.7        25.5
  Network compensation                   6.1         819.5         5.8
  Political                               --         239.2         1.7
  Production and other (1)               6.0         900.7         6.4
                                       -----     ---------       -----
                                        81.6%    $11,345.7        80.5%
                                       -----     ---------       -----
                                       -----     ---------       -----
</TABLE>
    
 
- - ----------------------------------
(1)  Includes satellite broadcasting business.
 
    Set forth below  are the principal  types of revenues  earned by the  Phipps
Business's  paging  operations  for  the periods  indicated  and  the percentage
contribution of  each  to  the  Phipps Business's  total  revenues  (dollars  in
thousands):
   
<TABLE>
<CAPTION>
                                                                                                                   SIX
                                                                                                                 MONTHS
                                                                                                                  ENDED
                                                            YEAR ENDED DECEMBER 31,                             JUNE 30,
                                  ----------------------------------------------------------------------------  ---------
                                            1993                      1994                      1995              1995
                                  ------------------------  ------------------------  ------------------------  ---------
                                              PERCENT OF                PERCENT OF                PERCENT OF
                                                 TOTAL                     TOTAL                     TOTAL
                                               REVENUES                  REVENUES                  REVENUES
                                               OF PHIPPS                 OF PHIPPS                 OF PHIPPS
                                   AMOUNT      BUSINESS      AMOUNT      BUSINESS      AMOUNT      BUSINESS      AMOUNT
                                  ---------  -------------  ---------  -------------  ---------  -------------  ---------
<S>                               <C>        <C>            <C>        <C>            <C>        <C>            <C>
PAGING
Net revenues:
  Paging lease and service         $3,741.6        16.1%     $4,201.4        16.3%     $5,004.9        18.3%     $2,485.3
  Other income (expense), net          46.3         0.2          75.2         0.3        (107.4)       (0.4)        (62.4)
                                  ---------         ---     ---------         ---     ---------         ---     ---------
                                   $3,787.9        16.3%     $4,276.6        16.6%     $4,897.5        17.9%     $2,422.9
                                  ---------         ---     ---------         ---     ---------         ---     ---------
                                  ---------         ---     ---------         ---     ---------         ---     ---------
 
<CAPTION>
 
                                                           1996
                                                 ------------------------
                                   PERCENT OF                PERCENT OF
                                      TOTAL                     TOTAL
                                    REVENUES                  REVENUES
                                    OF PHIPPS                 OF PHIPPS
                                    BUSINESS      AMOUNT      BUSINESS
                                  -------------  ---------  -------------
<S>                               <C>            <C>        <C>
PAGING
Net revenues:
  Paging lease and service              18.9%     $2,922.8        20.8%
  Other income (expense), net           (0.5)       (179.3)       (1.3)
                                       -----     ---------         ---
                                        18.4%     $2,743.5        19.5%
                                       -----     ---------         ---
                                       -----     ---------         ---
</TABLE>
    
 
                                       34
<PAGE>
MEDIA CASH FLOW
 
   
    The  following table sets forth certain operating data for the broadcast and
paging operations for the years ended December  31, 1993, 1994 and 1995 and  for
the six months ended June 30, 1995 and 1996 (dollars in thousands):
    
 
   
<TABLE>
<CAPTION>
                                                                                                       SIX MONTHS ENDED JUNE
                                                                     YEAR ENDED DECEMBER 31,                    30,
                                                             ----------------------------------------  ----------------------
                                                                 1993          1994          1995         1995        1996
                                                             ------------  ------------  ------------  ----------  ----------
<S>                                                          <C>           <C>           <C>           <C>         <C>
Operating income                                                 $4,686.9      $7,667.6      $7,381.8    $3,746.4    $4,632.6
Add:
  Amortization of program license rights                          1,552.4       1,021.4         844.8       422.4       463.9
  Depreciation and amortization                                   2,836.0       2,672.2       3,120.4     1,435.5     1,530.0
  Corporate overhead                                              2,462.2       2,485.4       3,280.4     1,538.7       734.5
Less:
  Payments for program license liabilities                       (1,072.0)       (863.3)       (931.0)     (464.5)     (592.0)
                                                             ------------  ------------  ------------  ----------  ----------
Media Cash Flow (1)                                             $10,465.5     $12,983.3     $13,696.4    $6,678.5    $6,769.0
                                                             ------------  ------------  ------------  ----------  ----------
                                                             ------------  ------------  ------------  ----------  ----------
</TABLE>
    
 
- - ------------------------
   
(1) Of  Media  Cash Flow,  $9.2  million, $11.5  million  and $11.9  million was
    attributable to the Phipps Business's broadcasting operations in 1993,  1994
    and  1995, respectively. Of  Media Cash Flow, $5.7  million and $5.8 million
    was attributable to  the Phipps Business's  broadcasting operations for  the
    six months ended June 30, 1995 and 1996, respectively.
    
 
CASH FLOW PROVIDED BY (USED IN) OPERATING, INVESTING AND FINANCING ACTIVITIES.
 
   
    The  following  table  sets  forth certain  operating  data  for  the Phipps
Business for the years ended  December 31, 1993, 1994 and  1995 and for the  six
months ended March 31, 1995 and 1996.
    
 
   
<TABLE>
<CAPTION>
                                                                                     SIX MONTHS ENDED
                                                      YEAR ENDED DECEMBER 31,            JUNE 30,
                                                  -------------------------------  --------------------
(DOLLARS IN THOUSANDS)                              1993       1994       1995       1995       1996
                                                  ---------  ---------  ---------  ---------  ---------
<S>                                               <C>        <C>        <C>        <C>        <C>
Cash flows provided by (used in):
  Operating activities                            $   7,397  $   9,808  $   9,259  $   4,136  $   6,190
  Investing activities                               (2,953)    (2,506)    (3,828)    (3,152)      (840)
  Financing activities                               (4,418)    (7,233)    (4,906)      (917)    (5,309)
</TABLE>
    
 
   
SIX MONTHS ENDED JUNE 30, 1996 COMPARED TO SIX MONTHS ENDED JUNE 30, 1995
    
 
   
    REVENUES.   Total revenues for the six  months ended June 30, 1996 increased
$893,000, or 6.8%, over the six months  ended June 30, 1995, from $13.2  million
to  $14.1 million. This increase was attributable to an improvement in local and
political  advertising   revenue  in   the  broadcasting   operations  and   the
implementation of a reseller program in the paging operations.
    
 
   
    Broadcast  net revenues increased $572,000, or 5.3%, over the same period of
the prior year,  from $10.8  million to $11.4  million. Approximately  $429,000,
$17,000,  $232,000 and $104,000 of the  increase in total broadcast net revenues
was due to  higher local  advertising revenue,  network compensation,  political
advertising  revenue and production revenues, respectively, offset by a $211,000
decrease in national advertising revenue.  In addition, revenues generated  from
satellite  broadcasting operations increased due  to additional equipment coming
on line.
    
 
   
    Net paging revenues increased  $321,000, or 13.2%, over  the same period  of
the prior year, from $2.4 million to $2.7 million. The increase was attributable
primarily  to higher  sales volume generated  by a  reseller program implemented
during 1995.
    
 
                                       35
<PAGE>
   
    OPERATING EXPENSES.  Operating  expenses for the six  months ended June  30,
1996  remained relatively unchanged from the six  months ended June 30, 1995. An
increase of $716,000 in broadcast and paging expenses was offset by a  reduction
in management fees of $804,000.
    
 
   
    Broadcasting  expenses increased $347,000, or 6.9%,  over the same period of
the prior year, from $5.1 million to $5.4 million. The increase was attributable
primarily  to  higher  payroll  and  related  costs,  higher  levels  of   other
expenditures  in the sales and news  departments and additional costs associated
with new equipment.
    
 
   
    Paging expenses increased $369,000,  or 26.1%, over the  same period of  the
prior  year, from  $1.4 million to  $1.8 million. The  increase was attributable
primarily to higher payroll, sales  and operating costs associated with  revenue
growth.
    
 
   
    Management  fees for the six months  ended June 30, 1996 decreased $804,000,
or 52.3%, from the same period of the prior year, from $1.5 million to $734,000.
The decrease was attributable  to lower personnel costs  and the termination  of
certain executive benefit plans.
    
 
   
    Depreciation of property and equipment and amortization of intangible assets
for the six months ended June 30, 1996 increased $94,000, or 6.6%, over the same
period  of the prior year, from $1.4  million to $1.5 million. This increase was
primarily the  result of  higher  depreciation costs  relating to  property  and
equipment  purchases and higher amortization  of intangible assets in connection
with the purchase of certain minority interests of WKXT in Knoxville, Tennessee.
    
 
   
    INTEREST EXPENSE.   Interest expense  decreased $64,000, or  29.1% from  the
same period of the prior year from $223,000 to $158,000.
    
 
   
    NET INCOME.  The net income for the Phipps Business was $4.2 million for the
six  months ended June  30, 1996 compared  with $3.3 million  for the six months
ended June 30, 1995, an increase of $910,000, or 27.9%.
    
 
YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994
 
    REVENUES.  Total  revenues for the  year ended December  31, 1995  increased
$1.5 million, or 5.9%, over the year ended December 31, 1994, from $25.8 million
to  $27.3 million. This increase was attributable to an improvement in local and
national  advertising   revenue  in   the   broadcasting  operations   and   the
implementation of a reseller program in the paging operations.
 
    Broadcast  net revenues  increased $900,000, or  4.2%, over  the prior year,
from $21.5 million to $22.4 million. Approximately $737,000, $628,000,  $307,000
and  $341,000 of the increase in total  broadcast net revenues was due to higher
local advertising revenue,  national advertising  revenue, network  compensation
and  production revenues,  respectively, offset  by a  $1.1 million  decrease in
political advertising spending associated  with cyclical political activity.  In
addition,  revenues generated  from satellite  broadcasting operations increased
due to additional equipment coming on line.
 
   
    Net paging revenues increased $620,000, or 14.5%, over the prior year,  from
$4.3  million to $4.9 million. The increase was attributable primarily to higher
sales volume generated by a reseller program implemented during 1995.
    
 
    OPERATING EXPENSES.  Operating expenses for the year ended December 31, 1995
increased $1.8 million, or  10.0%, over the year  ended December 31, 1994,  from
$18.1  million  to $19.9  million. The  increase  was attributable  primarily to
higher payroll and related costs  and sales expenses and commissions  associated
with  higher sales  volumes, increased  corporate overhead  and depreciation and
amortization costs.
 
    Broadcasting expenses increased $276,000, or 2.7%, over the prior year, from
$10.2 million  to $10.5  million.  The increase  was attributable  primarily  to
higher  payroll and  related costs offset  by lower  syndicated film programming
costs.
 
                                       36
<PAGE>
    Paging expenses increased $288,000, or 10.4%, over the prior year, from $2.8
million to  $3.1 million.  The  increase was  attributable primarily  to  higher
payroll, sales and operating costs associated with revenue growth.
 
   
    Management  fees for the year ended  December 31, 1995 increased $794,000 or
32.0% over the year ended December 31, 1994, from $2.5 million to $3.3  million.
The increase was attributable to higher personnel costs and overhead allocation.
    
 
    Depreciation of property and equipment and amortization of intangible assets
for the year ended December 31, 1995 increased $448,000, or 16.8%, over the year
ended  December 31, 1994, from  $2.7 million to $3.1  million. This increase was
primarily the  result of  higher  depreciation costs  relating to  property  and
equipment  purchases and higher amortization  of intangible assets in connection
with the purchase of certain minority interests of WKXT in Knoxville, Tennessee.
 
    INTEREST EXPENSE.  Interest expense remained relatively unchanged from  year
to year.
 
   
    NET  INCOME.  Net  income for the  Phipps Business was  $6.3 million for the
year ended  December 31,  1995 compared  with $7.2  million for  the year  ended
December 31, 1994, a decrease of $871,000.
    
 
YEAR ENDED DECEMBER 31, 1994 COMPARED TO YEAR ENDED DECEMBER 31, 1993
 
    REVENUES.   Total  revenues for the  year ended December  31, 1994 increased
$2.6 million,  or 11.0%,  over the  year  ended December  31, 1993,  from  $23.2
million  to  $25.8  million. This  increase  was attributable  to  higher local,
national  and  political  advertising  as   well  as  an  increase  in   network
compensation.  In  addition, paging  revenues  increased as  geographic coverage
expanded.
 
   
    Broadcast net  revenues increased  $2.1 million,  or 10.6%,  over the  prior
year,  from $19.4 million to $21.5  million. Approximately $679,000 and $160,000
of the $2.1 million increase  in total broadcast net  revenues is due to  higher
local  and national  advertising spending,  respectively. Approximately $269,000
and $1.1  million  of  the  $2.1  million increase  is  due  to  higher  network
compensation   and  political  advertising  revenues  associated  with  cyclical
political activity, respectively,  offset by  a $182,000  decrease in  satellite
broadcasting revenues.
    
 
    Net  paging revenues increased $489,000, or 12.9%, over the prior year, from
$3.8 million to $4.3 million. The increase was attributable primarily to  higher
sales volume due to increased geographical coverage.
 
    OPERATING EXPENSES.  Operating expenses for the year ended December 31, 1994
decreased  $428,000, or 2.3%, from the year  ended December 31, 1993, from $18.6
million to  $18.2 million.  The  decrease was  attributable primarily  to  lower
syndicated  programming costs, offset by slightly  higher paging expenses due to
higher sales volume and lower depreciation and amortization.
 
    Broadcasting expenses decreased $523,000, or 4.9%, from the prior year, from
$10.7 million to $10.2 million. The  decrease was attributable primarily to  the
write-off of certain syndicated programming in 1993 that was not being utilized.
 
   
    Paging  expenses increased $235,000, or 9.3%, over the prior year, from $2.5
million to  $2.7  million. The  increase  was attributable  primarily  to  costs
associated with higher sales volume.
    
 
    Corporate  and  administrative expenses  remained relatively  unchanged from
year to year.
 
   
    Depreciation of property and equipment and amortization of intangible assets
for the year ended December 31, 1994 decreased $164,000, or 5.8%, from the  year
ended  December 31, 1993, from  $2.8 million to $2.6  million. This decrease was
primarily the result  of the  completion of  depreciation for  certain items  of
equipment purchased in 1988.
    
 
    INTEREST  EXPENSE.   Interest expense for  the year ended  December 31, 1994
decreased $152,000 or 24.0% from the year ended December 31, 1993, from $632,000
to $480,000. This decrease  was attributable primarily to  lower levels of  debt
associated with WKXT.
 
                                       37
<PAGE>
    NET  INCOME.  Net  income for the  Phipps Business was  $7.2 million for the
year ended December  31, 1994,  compared with $3.9  million for  the year  ended
December 31, 1993, an increase of $3.3 million.
 
LIQUIDITY AND CAPITAL RESOURCES
 
   
    Following  the consummation  of the KTVE  Sale, the  Phipps Acquisition, the
Financing, the Stock Offering, and the Note Offering, the Company will be highly
leveraged. The Company anticipates that its principal uses of cash for the  next
several  years  will  be working  capital  and debt  service  requirements, cash
dividends,  capital  expenditures   and  expenditures   related  to   additional
acquisitions.  The Company  anticipates that  its operating  cash flow, together
with borrowings available  under the Old  Credit Facility or  the Senior  Credit
Facility, will be sufficient for such purposes for the remainder of 1996 and for
1997.
    
 
   
    The  Company's working capital (deficiency) was $1.1 million, $(221,000) and
$3.5 million at December 31, 1994 and 1995 and June 30, 1996, respectively.  The
working  capital of the Phipps Business was  $1.4 million, $2.6 million and $2.9
million at  December 31,  1994 and  1995 and  June 30,  1996, respectively.  The
Company's  cash provided from  operations was $5.8 million  and $7.6 million for
the years ended December 31, 1994  and 1995, respectively, and $3.8 million  and
$6.8  million for the six months ended June 30, 1995 and 1996, respectively. The
Phipps Business's  cash  provided from  operations  was $9.8  million  and  $9.3
million  for the years ended December 31,  1994 and 1995, respectively, and $4.1
million and  $6.2 million  for the  six months  ended June  30, 1995  and  1996,
respectively.
    
 
   
    The  Company was provided with  $3.0 million in cash  in 1993 from investing
activities and  used  $42.8  million  and $8.9  million  of  cash  in  investing
activities in 1994 and 1995, respectively. The change of $45.8 million from 1993
to  1994 was due primarily  to the Kentucky Acquisition  and the 1994 Publishing
Acquisitions. The change of $33.9 million from 1994 to 1995 was due primarily to
the Kentucky Acquisition and the 1994 Publishing Acquisitions, partially  offset
by  the  1995 Publishing  Acquisitions  and the  deferred  costs related  to the
Augusta Acquisition. The Phipps Business's cash used in investing activities was
$2.5 million and $3.8 million in 1994 and 1995, respectively. The Company's cash
used in investing  activities was  $5.4 million and  $37.5 million  for the  six
months  ended June 30, 1995 and 1996, respectively. The increased usage of $32.1
million was due primarily to the Augusta Acquisition. The Phipps Business's cash
used in investing activities  was $3.2 million and  $840,000 for the six  months
ended June 30, 1995 and 1996, respectively.
    
 
   
    The  Company  used $4.9  million in  cash  in 1993,  and was  provided $37.2
million and  $1.3 million  in cash  by financing  activities in  1994 and  1995,
respectively.  The use of cash in 1993  resulted primarily from the repayment of
debt  while  cash  provided  by  financing  activities  in  1994  and  1995  was
principally  due  to  increased  borrowings  in  1994  to  finance  the Kentucky
Acquisition  and  the  1994  Publishing  Acquisitions,  as  well  as   increased
borrowings  in 1995 to finance the  1995 Publishing Acquisitions and the funding
of the deposit  for the  Augusta Acquisition. On  January 4,  1996, the  Company
acquired  the Augusta  Business. The  cash consideration  of approximately $35.9
million, including  acquisition costs  of approximately  $600,000, was  financed
primarily through long-term borrowings under the Old Credit Facility and through
the  sale  of the  8% Note  to Bull  Run Corporation.  Long-term debt  was $54.3
million and $82.8 million at December 31, 1995 and June 30, 1996,  respectively.
The  balance of the Old Credit Facility  was $28.4 million and $49.5 million, at
December 31, 1995 and June 30, 1996, respectively. The weighted average interest
rate of the Old Credit Facility was 8.94% at June 30, 1996. Principal maturities
on long-term debt at  December 31, 1995 included  $2.9 million and $5.0  million
for  the years ended  1996 and 1997, respectively.  The Company anticipates that
its operating cash flows,  together with borrowings  available under the  Senior
Credit  Facility will be sufficient  to provide for such  payments. For the year
ended December  31,  1995,  the  Augusta  Business  reported  net  revenues  and
broadcast  cash flow of $8.7 million  and $2.8 million, respectively. The Phipps
Business used $7.2 million and $4.9 million in cash for financing activities  in
1994  and 1995,  respectively. The  Company was  provided with  $1.2 million and
$31.4 million in cash by financing activities for the six months ended June  30,
1995  and  1996, respectively,  due  primarily to  the  funding of  the Gwinnett
Acquisition in 1995  and the Augusta  Acquisition in 1996.  The Phipps  Business
used  $917,000 and  $5.3 million  in cash for  financing activities  for the six
months ended June 30, 1995 and 1996, respectively.
    
 
                                       38
<PAGE>
   
    Under the  terms of  the Old  Credit Facility,  the Company  had  additional
borrowing  capacity at June  30, 1996 of  approximately $4.8 million. Borrowings
under the Senior Credit Facility will be available upon the consummation of  the
Phipps  Acquisition. The availability of funds  under the Senior Credit Facility
will also be  subject to certain  conditions, including the  maintenance by  the
Company of certain financial ratios consisting, among others, of a total debt to
operating  cash  flow ratio,  a senior  debt  to operating  cash flow  ratio, an
operating cash flow to total interest  expense ratio and an operating cash  flow
to  pro forma debt service ratio. Under the Senior Credit Facility, after giving
effect to the consummation  of the Note Offering,  the Stock Offering, the  KTVE
Sale  and  the Phipps  Acquisition (of  which  there can  be no  assurance), the
Company would have additional borrowing capacity of $9.3 million as of June  30,
1996. Under the terms of the Old Credit Facility, the Company is allowed to make
$3.0  million of capital  expenditures annually. The terms  of the Senior Credit
Facility will  allow for  $5.0  million of  capital expenditures  annually.  The
Company  believes that cash flow from operations will be sufficient to fund such
expenditures, which  will  be  adequate for  the  Company's  normal  replacement
requirements.
    
 
   
    The  Company  regularly  enters  into program  contracts  for  the  right to
broadcast television programs produced by others and program commitments for the
right to  broadcast programs  in the  future. Such  programming commitments  are
generally  made to replace  expiring or canceled  program rights. Payments under
such contracts are made in cash or  the concession of advertising spots for  the
program  provider to  resell, or  a combination of  both. At  December 31, 1995,
payments on program license liabilities due in 1996 and 1997, which will be paid
with cash from operations, were $1.2 million and $110,000, respectively.
    
 
   
    In 1995, the  Company made  $3.3 million in  capital expenditures,  relating
primarily  to  the broadcasting  operations and  paid  $1.8 million  for program
broadcast rights. During the  six months ended June  30, 1996, the Company  made
$1.3  million  in  capital  expenditures,  relating  primarily  to  broadcasting
operations, and paid $1.3 million for program broadcast rights. During 1995, the
Phipps Business made $3.2 million in capital expenditures, and paid $931,000 for
program broadcast rights. During the six months ended June 30, 1996, the  Phipps
Business made $1.6 million in capital expenditures and paid $592,000 for program
broadcast rights. The Company anticipates making an aggregate of $3.0 million in
capital  expenditures and $2.7 million in  payments for program broadcast rights
during 1996.  Subsequent to  the  consummation of  the Phipps  Acquisition,  the
Company  anticipates that its annual  capital expenditures will approximate $5.0
million.
    
 
   
    In addition  to the  consummation  of the  Phipps Acquisition,  the  Company
intends  to implement the Financing to  increase liquidity and improve operating
and financial  flexibility. Pursuant  to  the Financing,  the Company  will  (i)
retire  approximately $49.5 million principal amount of outstanding indebtedness
under the  Old Credit  Facility,  together with  accrued interest  thereon  (ii)
retire  approximately $25.0  million aggregate  principal amount  of outstanding
indebtedness under the Senior Note, together with accrued interest thereon and a
prepayment fee, (iii) issue $10.0 million liquidation preference of its Series A
Preferred Stock in exchange for the 8% Note issued to Bull Run Corporation, (iv)
issue to Bull Run Corporation $10.0 million liquidation preference of its Series
B Preferred Stock  with warrants to  purchase up  to 500,000 shares  of Class  A
Common Stock (representing 10.1% of the currently issued and outstanding Class A
Common  Stock, after giving  effect to the  exercise of such  warrants) for cash
proceeds of  $10.0 million  and (v)  enter into  the Senior  Credit Facility  to
provide  for  a  term  loan and  revolving  credit  facility  aggregating $125.0
million.
    
 
   
    The Old Credit  Facility is  a $54.3 million  line of  credit available  for
working  capital  requirements and  general corporate  purposes. The  Old Credit
Facility matures in  March 2003, provides  for quarterly amortization,  includes
certain customary financial covenants and bears interest at a rate of 3.25% over
LIBOR  at July 31, 1996,  subject to adjustment based  on the Company's leverage
ratio. The  Old Credit  Facility also  requires the  Company to  use its  annual
Excess  Cash Flow (as  defined) to repay  indebtedness thereunder at  the end of
each year. The Old  Credit Facility is  and the Senior  Credit Facility will  be
guaranteed  by each of the Company's subsidiaries  and is and will be secured by
liens on substantially all of the assets of the Company and its subsidiaries.
    
 
   
    As part  of the  Financing and  as a  condition of  the Note  Offering,  the
Company  will enter into the Senior Credit  Facility and the Company has entered
into a commitment letter with respect thereto.
    
 
                                       39
<PAGE>
   
    The Company has entered into an agreement with GOCOM Television of Ouachita,
L.P. to sell KTVE for approximately $9.5 million in cash plus the amount of  the
accounts  receivable on the date  of the closing, which  is expected to occur by
September 1996, although  there can be  no assurance with  respect thereto.  The
Company  anticipates the gain,  net of estimated taxes,  and the estimated taxes
for the KTVE Sale  will aggregate approximately $2.8  million and $2.8  million,
respectively.
    
 
   
    In  connection with the Phipps Acquisition,  the Company will be required to
divest WALB and WJHG under current FCC regulations. However, these rules may  be
revised  by the FCC upon conclusion  of pending rulemaking proceedings. In order
to satisfy applicable FCC  requirements, the Company,  subject to FCC  approval,
intends  to swap such  assets for assets  of one or  more television stations of
comparable value  and  with comparable  broadcast  cash flow  in  a  transaction
qualifying  for deferred capital gains  treatment under the "like-kind exchange"
provision of Section 1031 of the Code. If the Company is unable to effect such a
swap on satisfactory terms within the time  period granted by the FCC under  the
waivers, the Company may transfer such assets to a trust with a view towards the
trustee  effecting a  swap or  sale of such  assets. Any  such trust arrangement
would be subject to the approval of the FCC. It is anticipated that the  Company
would  be required to relinquish  operating control of such  assets to a trustee
while retaining the economic risks and benefits of ownership. If the Company  or
such  trust is  required to  effect a sale  of WALB,  the Company  would incur a
significant gain and related  tax liability, the payment  of which could have  a
material  adverse effect on  the Company's ability  to acquire comparable assets
without incurring additional indebtedness.
    
 
   
    The Company  and its  subsidiaries file  a consolidated  federal income  tax
return  and such state or local tax returns as are required. As of June 30, 1996
on a pro forma basis after giving  effect to the KTVE Sale, the Stock  Offering,
the  Note Offering, the Financing and the Phipps Acquisition (of which there can
be no  assurance),  the  Company  anticipates  that  it  will  generate  taxable
operating losses for the foreseeable future.
    
 
    The  Company  does  not believe  that  inflation  in past  years  has  had a
significant impact  on the  Company's  results of  operations nor  is  inflation
expected  to have a significant  effect upon the Company's  business in the near
future.
 
                               OTHER INFORMATION
 
    All  information  contained  in  this   Proxy  Statement  relating  to   the
occupations  and security holdings  of directors and officers  of the Company is
based upon information received from the individual directors and officers.
 
         SHAREHOLDER PROPOSALS FOR PRESENTATION AT NEXT ANNUAL MEETING
 
   
    Any proposal of a  shareholder of the  Company to be  presented at the  next
Annual  Meeting  of the  Shareholders of  the  Company must  be received  by the
Secretary of the Company at  the address set forth  below on or before  February
27,  1997  for inclusion  in the  Company's  proxy statement  and form  of proxy
relating to that meeting.
    
 
   
    The above Notice  and Proxy  Statement are  sent by  order of  the Board  of
Directors.
    
 
                                          Robert A. Beizer
                                          SECRETARY
 
   
Dated: August 14, 1996
    
 
                                       40
<PAGE>
                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
 
   
<TABLE>
<S>                                                                         <C>
PRO FORMA FINANCIAL DATA..................................................   F-3
SELECTED HISTORICAL FINANCIAL DATA........................................  F-15
 
GRAY COMMUNICATIONS SYSTEMS, INC. (THE "COMPANY")
INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED):
  Condensed Consolidated Balance Sheets at December 31, 1995 and June 30,
   1996...................................................................  F-19
  Condensed Consolidated Statements of Income for the six months ended
   June 30, 1995 and 1996.................................................  F-20
  Condensed Consolidated Statement of Stockholders' Equity for the six
   months ended June 30, 1996.............................................  F-21
  Condensed Consolidated Statements of Cash Flows for the six months ended
   June 30, 1995 and 1996.................................................  F-22
  Notes to Condensed Consolidated Financial Statements....................  F-23
AUDITED CONSOLIDATED FINANCIAL STATEMENTS:
  Report of Independent Auditors..........................................  F-29
  Consolidated Balance Sheets at December 31, 1994 and 1995...............  F-30
  Consolidated Statements of Income for the years ended December 31, 1993,
   1994 and 1995..........................................................  F-31
  Consolidated Statements of Stockholders' Equity for the years ended
   December 31, 1993, 1994 and 1995.......................................  F-32
  Consolidated Statements of Cash Flows for the years ended December 31,
   1993, 1994 and 1995....................................................  F-33
  Notes to Consolidated Financial Statements..............................  F-34
 
WRDW-TV (THE "AUGUSTA BUSINESS")
AUDITED FINANCIAL STATEMENTS:
  Report of Independent Auditors..........................................  F-52
  Balance Sheet at December 31, 1995......................................  F-53
  Statement of Income for the year ended December 31, 1995................  F-54
  Statement of Partnership's Equity for the year ended December 31,
   1995...................................................................  F-55
  Statement of Cash Flows for the year ended December 31, 1995............  F-56
  Notes to Financial Statements...........................................  F-57
  Independent Auditors' Report............................................  F-60
  Balance Sheet at December 31, 1994......................................  F-61
  Statements of Income for the years ended December 31, 1993 and 1994.....  F-62
  Statements of Partnership's Equity for the years ended December 31, 1993
   and 1994...............................................................  F-63
  Statements of Cash Flows for the years ended December 31, 1993 and
   1994...................................................................  F-64
  Notes to Financial Statements...........................................  F-65
 
BROADCASTING AND PAGING OPERATIONS OF JOHN H. PHIPPS, INC. (THE "PHIPPS
 BUSINESS")
INTERIM CONDENSED FINANCIAL STATEMENTS (UNAUDITED):
  Condensed Balance Sheets at December 31, 1995 and June 30, 1996.........  F-69
  Condensed Statements of Income for the six months ended June 30, 1995
   and 1996...............................................................  F-70
  Condensed Statements of Cash Flows for the six months ended June 30,
   1995 and 1996..........................................................  F-71
</TABLE>
    
 
                                      F-1
<PAGE>
<TABLE>
<S>                                                                         <C>
  Notes to Condensed Financial Statements.................................  F-72
Audited Financial Statements:
  Report of Independent Auditors..........................................  F-73
  Balance Sheets at December 31, 1994 and 1995............................  F-74
  Statements of Income for the years ended December 31, 1993, 1994 and
   1995...................................................................  F-75
  Statements of Cash Flows for the years ended December 31, 1993, 1994 and
   1995...................................................................  F-76
  Notes to Financial Statements...........................................  F-77
</TABLE>
 
                                      F-2
<PAGE>
                            PRO FORMA FINANCIAL DATA
 
   
    The following unaudited condensed combined pro forma financial statements of
the  Company give effect  to the Augusta  Acquisition, the KTVE  Sale, the Stock
Offering, the Note Offering, the Phipps Acquisition and the Financing as if such
transactions had occurred as of January 1, 1995 with respect to the statement of
operations for the  year ended December  31, 1995 and  as of July  1, 1995  with
respect  to the 12  months ended June  30, 1996 and  as of January  1, 1996 with
respect to the six  months ended and as  of June 30, 1996,  with respect to  the
balance  sheet. The Augusta Acquisition and the Phipps Acquisition are reflected
using the purchase method of accounting for business combinations. The pro forma
financial information is  provided for  comparative purposes only  and does  not
purport  to be indicative of the results  that actually would have been obtained
if the events set  forth above had  been effected on the  dates indicated or  of
those  results  that may  be obtained  in  the future.  The pro  forma financial
statements are based on preliminary  estimates of values and transaction  costs.
The  actual recording  of the  transactions will  be based  on final appraisals,
values  and  transaction  costs.  Accordingly,  the  actual  recording  of   the
transactions   can  be  expected  to  differ  from  these  pro  forma  financial
statements.
    
 
                                      F-3
<PAGE>
   
<TABLE>
<CAPTION>
                                                       UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
                                                                        YEAR ENDED DECEMBER 31, 1995
                                                                    (IN THOUSANDS EXCEPT PER SHARE DATA)
                                                  HISTORICAL              PRO FORMA
                                            -----------------------     ADJUSTMENTS          PRO
                                                            AUGUSTA     FOR AUGUSTA        FORMA           STOCK        PRO FORMA
                                             COMPANY       BUSINESS     ACQUISITION      COMPANY        OFFERING          COMPANY
                                            --------    -----------     -----------     --------     -----------     ------------
<S>                                         <C>         <C>             <C>             <C>          <C>             <C>
STATEMENT OF OPERATIONS DATA:
Operating revenues:
  Broadcasting (less agency commissions)    $36,750         $8,660      $   228(1)      $45,638      $    --             $45,638
  Publishing                                 21,866             --           --          21,866           --              21,866
  Paging                                         --             --           --              --           --                  --
                                            --------    -----------     -----------     --------     -----------     ------------
Total revenues                               58,616          8,660          228          67,504           --              67,504
Expenses:
  Broadcasting                               23,202          5,774          228(1)       29,204           --              29,204
  Publishing                                 20,016             --           --          20,016           --              20,016
  Paging                                         --             --           --              --           --                  --
  Corporate and administrative                2,258             --           --           2,258           --               2,258
  Depreciation                                2,633            272          (52)(2)       2,853           --               2,853
  Amortization of intangible assets           1,326            152          769(3)        2,247          (97)(7)           2,150
  Non-cash compensation paid in common
    stock                                     2,321             --           --           2,321           --               2,321
  Management fee                                 --             --           --              --           --                  --
                                            --------    -----------     -----------     --------     -----------     ------------
Total expenses                               51,756          6,198          945          58,899          (97)             58,802
                                            --------    -----------     -----------     --------     -----------     ------------
Operating income                              6,860          2,462         (717)          8,605           97               8,702
Miscellaneous income (expense), net             143           (220)         128(4)           51           --                  51
                                            --------    -----------     -----------     --------     -----------     ------------
Income before interest expense, minority
 interests and income taxes                   7,003          2,242         (589)          8,656           97               8,753
Interest expense                              5,438             --        3,644(5)        9,082       (8,172) (7)            910
                                            --------    -----------     -----------     --------     -----------     ------------
Income (loss) before minority interests
 and income taxes                             1,565          2,242       (4,233)           (426)       8,269               7,843
Minority interests                               --             --           --              --           --                  --
                                            --------    -----------     -----------     --------     -----------     ------------
Income (loss) before income taxes             1,565          2,242       (4,233)           (426)       8,269               7,843
Income tax expense (benefit)                    634             --         (773) (6)       (139)       3,283(6)            3,144
                                            --------    -----------     -----------     --------     -----------     ------------
  Net income (loss)                             931          2,242       (3,460)           (287)       4,986               4,699
Preferred stock dividends                        --             --           --              --        1,400(8)            1,400
                                            --------    -----------     -----------     --------     -----------     ------------
  Net income (loss) available to common
    stockholders                            $   931         $2,242      $(3,460)        $  (287)     $ 3,586             $ 3,299
                                            --------    -----------     -----------     --------     -----------     ------------
                                            --------    -----------     -----------     --------     -----------     ------------
Average shares outstanding (19)               4,481                                       4,354                            7,999
                                            --------                                    --------                     ------------
                                            --------                                    --------                     ------------
Earnings (loss) per share                   $  0.21                                     $ (0.07)                         $  0.41
                                            --------                                    --------                     ------------
                                            --------                                    --------                     ------------
 
<CAPTION>
 
                                                            PRO FORMA        PHIPPS         PRO FORMA        PRO FORMA
                                          KTVE SALE(9)       COMPANY        BUSINESS       ADJUSTMENTS      COMBINED(20)
                                          ------------     ------------    -----------    -------------     ------------
<S>                                         <C>            <C>             <C>            <C>               <C>
STATEMENT OF OPERATIONS DATA:
Operating revenues:
  Broadcasting (less agency commissions)      $(4,188)         $41,450         $22,424    $     --              $63,874
  Publishing                                       --           21,866             --           --               21,866
  Paging                                           --               --          4,897           --                4,897
                                          ------------     ------------    -----------    -------------     ------------
Total revenues                                 (4,188)          63,316         27,321           --               90,637
Expenses:
  Broadcasting                                 (3,313)          25,891         10,487          220(10)           37,034
                                                                                               436(11)
  Publishing                                       --           20,016             --           --               20,016
  Paging                                           --               --          3,052          143(11)            3,195
  Corporate and administrative                     --            2,258             --           --                2,258
  Depreciation                                   (438)           2,415          2,385         (625)(12)           4,175
                                                                                             3,514(13)
  Amortization of intangible assets                --            2,150            735         (174)(14)           6,225
  Non-cash compensation paid in common
    stock                                          --            2,321             --           --                2,321
  Management fee                                   --               --          3,280       (3,280)(15)              --
                                          ------------     ------------    -----------    -------------     ------------
Total expenses                                 (3,751)          55,051         19,939          234               75,224
                                          ------------     ------------    -----------    -------------     ------------
Operating income                                 (437)           8,265          7,382         (234)              15,413
Miscellaneous income (expense), net               (27)              24             12           --                   36
                                          ------------     ------------    -----------    -------------     ------------
Income before interest expense, minority
 interests and income taxes                      (464)           8,289          7,394         (234)              15,449
Interest expense                                   --              910            499         (499)(16)          20,664
                                                                                            19,754(17)
                                          ------------     ------------    -----------    -------------     ------------
Income (loss) before minority interests
 and income taxes                                (464)           7,379          6,895      (19,489)              (5,215)
Minority interests                                 --               --            547         (547)(18)              --
                                          ------------     ------------    -----------    -------------     ------------
Income (loss) before income taxes                (464)           7,379          6,348      (18,942)              (5,215)
Income tax expense (benefit)                     (186)           2,958             --       (4,724)(6)            1,766
                                          ------------     ------------    -----------    -------------     ------------
  Net income (loss)                              (278)           4,421          6,348      (14,218)              (3,449)
Preferred stock dividends                          --            1,400             --           --                1,400
                                          ------------     ------------    -----------    -------------     ------------
  Net income (loss) available to common
    stockholders                              $  (278)         $ 3,021         $6,348     $(14,218)             $(4,849)
                                          ------------     ------------    -----------    -------------     ------------
                                          ------------     ------------    -----------    -------------     ------------
Average shares outstanding (19)                                  7,999                                            7,854
                                                           ------------                                     ------------
                                                           ------------                                     ------------
Earnings (loss) per share                                      $  0.38                                          $ (0.62)
                                                           ------------                                     ------------
                                                           ------------                                     ------------
</TABLE>
    
 
                                      F-4
<PAGE>
    The pro  forma adjustments  to reflect  the Augusta  Acquisition, the  Stock
Offering,  the KTVE  Sale, the  Phipps Acquisition,  the Financing  and the Note
Offering are as follows:
 
STATEMENT OF OPERATIONS -- YEAR ENDED DECEMBER 31, 1995
 
1.  Reflects the classification of national sales representative commissions  as
    an expense consistent with the presentation by the Company.
 
2.   Reflects decreased  annual depreciation resulting from  the change in asset
    lives  in  connection  with  the  preliminary  allocation  of  the   Augusta
    Acquisition  purchase price to the newly acquired property and equipment, at
    fair market value.
 
3.  Reflects annual amortization of $107,000 on the Augusta Business'  financing
    costs  over a  seven-year period. Also  reflects the  annual amortization of
    $813,000 on the  intangible assets associated  with the Augusta  Acquisition
    over a 40-year period.
 
4.  Reflects the elimination of the corporate allocation to the Augusta Business
    by its previous owner which will not be incurred by the Company.
 
   
5.   Reflects increased annual interest expense of $155,000 for an interest rate
    adjustment on the  Senior Note;  increased annual interest  expense of  $2.4
    million  on the Old Credit Facility at LIBOR plus 3.5%, based on an increase
    in the debt level subsequent to the Augusta Acquisition; and annual interest
    expense of $1.1 million on the 8% Note. Three month LIBOR on January 4, 1996
    was approximately 5.625%.
    
 
6.   Reflects  the adjustment  of  the income  tax  provision to  the  estimated
    effective tax rate.
 
   
7.    Reflects  decreased annual  amortization  of deferred  financing  costs in
    connection with  retirement  of the  Senior  Note. Also  reflects  decreased
    annual interest expense of $4.4 million on the Old Credit Facility resulting
    from the repayment of $49.2 million in principal on the Old Credit Facility,
    bearing  interest at an  estimated weighted average rate  of 8.96% per annum
    with the proceeds of the Stock Offering. Also reflects a reduction of annual
    interest expense of $2.7 million resulting from the retirement of the Senior
    Note and a reduction of  annual interest expense of  $1.1 million on the  8%
    Note  which will be converted  into Series A Preferred  Stock. The pro forma
    statement of  operations for  the  year ended  December  31, 1995  does  not
    include  an extraordinary loss relating to  a prepayment fee associated with
    the retirement of the Senior Note. See Pro Forma Statement of Operations for
    the Six Months Ended June 30, 1996.
    
 
8.  Reflects annual dividends on the Series A and Series B Preferred Stock.
 
9.  Reflects the elimination of the results of operations of KTVE. The pro forma
    adjustments exclude an estimated gain  of $5.4 million and estimated  income
    taxes of $2.8 million from the KTVE Sale.
 
10.  Reflects additional accounting and  administrative expenses associated with
    the Phipps Business.
 
11. Reflects increased pension expense for the Phipps Business subsequent to the
    Phipps Acquisition. Historical pension expense for the Phipps Business was a
    credit of $449,000 while pension expense for these operations subsequent  to
    the  Phipps  Acquisition  is  expected to  be  an  expense  of approximately
    $130,000.
 
12. Reflects decreased annual  depreciation resulting from  the change in  asset
    lives  in connection with the newly acquired property and equipment (at fair
    market value) of the Phipps Acquisition.
 
13. Reflects annual amortization of intangible assets associated with the Phipps
    Acquisition over a 40-year period.
 
   
14. Reflects decreased annual amortization  of debt acquisition costs  resulting
    from  the retirement of the Old Credit  Facility. The pro forma statement of
    operations for  the  year  ended  December 31,  1995  does  not  include  an
    extraordinary  loss relating to deferred financing costs associated with the
    assumed retirement of the  Old Credit Facility. See  Pro Forma Statement  of
    Operations for the Six Months Ended June 30, 1996.
    
 
15.  Reflects elimination  of the corporate  allocation to  the Phipps Business.
    Such amounts will  not be  incurred by the  Company in  connection with  its
    operations of the Phipps Business.
 
16.  Reflects the elimination of interest  expense associated with borrowings of
    the Phipps Business which will not be assumed by the Company.
 
   
17. Reflects increased annual  interest expense of $16.7  million on the  Notes,
    which  includes annual amortization  expense of $525,000  resulting from the
    transaction costs relating  to the  issuance of the  Notes, annual  interest
    expense  of $2.9 million relating to  additional borrowings under the Senior
    Credit Facility of $32.3 million  at an estimated weighted average  interest
    rate  of 8.96% plus  amortization of additional  deferred financing costs of
    $214,000.
    
 
18. Reflects the elimination  of minority interests  associated with the  Phipps
    Business,  because such minority interests will be acquired as a part of the
    Phipps Acquisition.
 
   
19. Average outstanding shares used to  calculate pro forma earnings (loss)  per
    share  are based  on weighted average  common shares  outstanding during the
    period, adjusted for the Stock Offering.
    
 
   
20. In  connection with  the  Phipps Acquisition,  the  Company is  seeking  FCC
    approval of the assignment of the television broadcast licenses for WCTV and
    WKXT.  Current  FCC  regulations  will require  the  Company  to  divest its
    ownership interest in  WALB and  WJHG. In  order to  satisfy applicable  FCC
    requirements,  the Company,  subject to FCC  approval, intends  to swap such
    assets for
    
 
                                      F-5
<PAGE>
   
    assets of  one or  more television  stations of  comparable value  and  with
    comparable  broadcast  cash flow  in a  transaction qualifying  for deferred
    capital gains treatment under the "like-kind exchange" provision of  Section
    1031  of  the Code.  If  the Company  is  unable to  effect  such a  swap on
    satisfactory terms within the  time period granted by  the FCC, the  Company
    may  transfer  such  assets to  a  trust  with a  view  towards  the trustee
    effecting a swap or sale of such assets. Any such trust arrangement would be
    subject to the approval of the FCC.
    
 
Condensed income statement data of WALB and WJHG are as follows:
 
<TABLE>
<CAPTION>
                                                                YEAR ENDED
                                                            DECEMBER 31, 1995
                                                           --------------------
(IN THOUSANDS)                                               WALB       WJHG
                                                           ---------  ---------
 
<S>                                                        <C>        <C>
Broadcasting revenues                                      $   9,445  $   3,843
Expenses                                                       4,650      3,573
                                                           ---------  ---------
Operating income                                               4,795        270
Other income                                                      17         60
                                                           ---------  ---------
Income before income taxes                                     4,812        330
                                                           ---------  ---------
                                                           ---------  ---------
Net income                                                 $   2,984  $     205
                                                           ---------  ---------
                                                           ---------  ---------
Media Cash Flow                                            $   5,103  $     549
                                                           ---------  ---------
                                                           ---------  ---------
</TABLE>
 
                                      F-6
<PAGE>
   
<TABLE>
<CAPTION>
                                                         UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
                                                                               SIX MONTHS ENDED JUNE 30, 1996
                                                                            (IN THOUSANDS EXCEPT PER SHARE DATA)
                                            HISTORICAL        STOCK        PRO FORMA                      PRO FORMA        PHIPPS
                                             COMPANY       OFFERING          COMPANY    KTVE SALE(4)       COMPANY        BUSINESS
                                            --------    -----------     ------------    ------------     ------------    -----------
STATEMENT OF OPERATIONS DATA:
<S>                                         <C>         <C>             <C>             <C>              <C>             <C>
Operating revenues:
  Broadcasting (less agency commissions)    $24,252     $    --             $24,252         $(2,303)         $21,949         $11,346
  Publishing                                 11,262          --              11,262              --           11,262             --
  Paging                                         --          --                  --              --               --          2,744
                                            --------    -----------     ------------    ------------     ------------    -----------
Total revenues                               35,514          --              35,514          (2,303)          33,211         14,090
Expenses:
  Broadcasting                               14,418          --              14,418          (1,723)          12,695          5,412
  Publishing                                  9,193          --               9,193              --            9,193             --
  Paging                                         --          --                  --              --               --          1,780
  Corporate and administrative                1,571          --               1,571              --            1,571             --
  Depreciation                                1,648          --               1,648            (220)           1,428          1,168
  Amortization of intangible assets           1,253         (49)(1)           1,204              --            1,204            362
  Non-cash compensation paid in common
    stock                                       120          --                 120              --              120             --
  Management fee                                 --          --                  --              --               --            735
                                            --------    -----------     ------------    ------------     ------------    -----------
Total expenses                               28,203         (49)             28,154          (1,943)          26,211          9,457
                                            --------    -----------     ------------    ------------     ------------    -----------
Operating income                              7,311          49               7,360            (360)           7,000          4,633
Miscellaneous income (expense), net              81          --                  81              (1)              80             (5)
                                            --------    -----------     ------------    ------------     ------------    -----------
Income before interest expense, minority
 interests and income taxes                   7,392          49               7,441            (361)           7,080          4,628
Interest expense                              4,445      (4,086) (1)            359              --              359            159
                                            --------    -----------     ------------    ------------     ------------    -----------
Income (loss) before minority interests
 and income taxes                             2,947       4,135               7,082            (361)           6,721          4,469
Minority interests                               --          --                  --              --               --            296
                                            --------    -----------     ------------    ------------     ------------    -----------
Income (loss) before income taxes             2,947       4,135               7,082            (361)           6,721          4,173
Income tax expense (benefit)                  1,146       1,693(2)            2,839            (145)           2,694             --
                                            --------    -----------     ------------    ------------     ------------    -----------
  Net income (loss)                           1,801       2,442               4,243            (216)           4,027          4,173
Preferred stock dividends                        --         700(3)              700              --              700             --
                                            --------    -----------     ------------    ------------     ------------    -----------
  Net income (loss) available to common
    stockholders                            $ 1,801     $ 1,742             $ 3,543         $  (216)         $ 3,327         $4,173
                                            --------    -----------     ------------    ------------     ------------    -----------
                                            --------    -----------     ------------    ------------     ------------    -----------
Average shares outstanding (14)               4,657                           8,157                            8,157
                                            --------                    ------------                     ------------
                                            --------                    ------------                     ------------
Earnings (loss) per share                   $  0.39                         $  0.43                          $  0.41
                                            --------                    ------------                     ------------
                                            --------                    ------------                     ------------
 
<CAPTION>
 
                                            PRO FORMA        PRO FORMA
                                           ADJUSTMENTS      COMBINED(15)
                                          -------------     ------------
STATEMENT OF OPERATIONS DATA:
<S>                                         <C>             <C>
Operating revenues:
  Broadcasting (less agency commissions)  $     --              $33,295
  Publishing                                    --               11,262
  Paging                                        --                2,744
                                          -------------     ------------
Total revenues                                  --               47,301
Expenses:
  Broadcasting                                 110(5)            18,435
                                               218(6)
  Publishing                                    --                9,193
  Paging                                        72(6)             1,852
  Corporate and administrative                  --                1,571
  Depreciation                                (312)(7)            2,284
  Amortization of intangible assets          1,768(8)             3,261
                                               (73)(9)
  Non-cash compensation paid in common
    stock                                                           120
  Management fee                              (735)(10)              --
                                          -------------     ------------
Total expenses                               1,048               36,716
                                          -------------     ------------
Operating income                            (1,048)              10,585
Miscellaneous income (expense), net             --                   75
                                          -------------     ------------
Income before interest expense, minority
 interests and income taxes                 (1,048)              10,660
Interest expense                              (159)(11)          10,236
                                             9,877(12)
                                          -------------     ------------
Income (loss) before minority interests
 and income taxes                          (10,766)                 424
Minority interests                            (296)(13)              --
                                          -------------     ------------
Income (loss) before income taxes          (10,470)                 424
Income tax expense (benefit)                (2,524)(2)              170
                                          -------------     ------------
  Net income (loss)                         (7,946)                 254
Preferred stock dividends                       --                  700
                                          -------------     ------------
  Net income (loss) available to common
    stockholders                          $ (7,946)             $  (446)
                                          -------------     ------------
                                          -------------     ------------
Average shares outstanding (14)                                   7,954
                                                            ------------
                                                            ------------
Earnings (loss) per share                                       $ (0.06)
                                                            ------------
                                                            ------------
</TABLE>
    
 
                                      F-7
<PAGE>
    The pro forma adjustments to reflect the Stock Offering, the KTVE Sale,  the
Phipps Acquisition, the Financing and the Note Offering are as follows:
 
   
STATEMENT OF OPERATIONS -- SIX MONTHS ENDED JUNE 30, 1996
    
 
   
1.    Reflects decreased semiannual  amortization of deferred financing costs in
    connection with  retirement  of the  Senior  Note. Also  reflects  decreased
     semiannual  interest expense  of $2.2  million on  the Old  Credit Facility
     resulting from repayment from the proceeds  of the Stock Offering of  $49.2
     million  in principal  at an  estimated weighted  average interest  rate of
     8.96% per  annum; decreased  semiannual interest  expense of  $1.3  million
     resulting  from  the retirement  of  the Senior  Note;  and a  reduction of
     semiannual interest  expense of  $544,000  on the  8%  Note which  will  be
     converted  into  Series  A  Preferred Stock.  The  Pro  Forma  Statement of
     Operations for  the Six  Months Ended  June 30,  1996 does  not include  an
     extraordinary  loss of approximately $2.7  million (net of estimated income
     tax benefit of  $1.4 million) relating  to deferred financing  costs and  a
     prepayment fee associated with the assumed retirement of the Senior Note.
    
 
2.    Reflects the  adjustment  of the  income  tax provision  to  the estimated
    effective tax rate.
 
   
3.  Reflects semiannual dividends on the Series A and Series B Preferred Stock.
    
 
   
4.  Reflects the elimination of the results of operations of KTVE. The pro forma
    adjustments exclude an estimated gain  of $5.6 million and estimated  income
    taxes of $2.8 million from the KTVE Sale.
    
 
5.   Reflects accounting and administrative  expenses associated with the Phipps
    Business.
 
   
6.  Reflects increased pension expense for the Phipps Business subsequent to the
    Phipps Acquisition.  Historical semiannual  pension expense  for the  Phipps
    Business  was  a credit  of $226,000  while pension  expense for  the Phipps
    Business subsequent to the Phipps Acquisition is expected to be a semiannual
    expense of approximately $64,000.
    
 
   
7.   Reflects decreased  semiannual depreciation  resulting from  the change  in
    asset lives in connection with the newly acquired property and equipment (at
    fair market value) of the Phipps Acquisition.
    
 
   
8.   Reflects semiannual  amortization of intangible  assets associated with the
    Phipps Acquisition over a 40-year period.
    
 
   
9.   Reflects  decreased  semiannual  amortization  of  debt  acquisition  costs
    resulting  from the  retirement of  the Old  Credit Facility.  The Pro Forma
    Statement of Operations  for the  Six Months Ended  June 30,  1996 does  not
    include  an extraordinary loss  of approximately $780,000  (net of estimated
    tax benefit of  $402,000) relating  to deferred  financing costs  associated
    with the assumed retirement of the Old Credit Facility.
    
 
10.  Reflects elimination  of the corporate  allocation to  the Phipps Business.
    Such amounts will  not be  incurred by the  Company in  connection with  its
    operations of the Phipps Business.
 
11.  Reflects the  elimination of  interest expense  associated with  the Phipps
    Business which will not be incurred by the Company.
 
   
12. Reflects increased semiannual interest expense of $8.3 million on the Notes,
    which includes semiannual  amortization expense of  $263,000 resulting  from
    the  transaction costs relating to the  issuance of the Notes, and increased
    semiannual  interest  expense  of   $1.3  million  relating  to   additional
    borrowings under the Senior Credit Facility at an estimated weighted average
    interest  rate of 8.96%  plus amortization of  additional deferred financing
    costs of $107,000.
    
 
13. Reflects the elimination  of minority interests  associated with the  Phipps
    Business,  because such minority  interests will be acquired  as part of the
    Phipps Acquisition.
 
   
14. Average outstanding shares used to  calculate pro forma earnings (loss)  per
    share  are based  on weighted average  common shares  outstanding during the
    period, adjusted for the Stock Offering.
    
 
   
15. In  connection with  the  Phipps Acquisition,  the  Company is  seeking  FCC
    approval of the assignment of the television broadcast licenses for WCTV and
    WKXT.  Current  FCC  regulations  will require  the  Company  to  divest its
    ownership interest in  WALB and  WJHG. In  order to  satisfy applicable  FCC
    requirements,  the Company,  subject to FCC  approval, intends  to swap such
    assets for assets of one or more television stations of comparable value and
    with comparable broadcast cash flow in a transaction qualifying for deferred
    capital gains treatment under the "like-kind exchange" provision of  Section
    1031  of  the Code.  If  the Company  is  unable to  effect  such a  swap on
    satisfactory terms within the  time period granted by  the FCC, the  Company
    may  transfer  such  assets to  a  trust  with a  view  towards  the trustee
    effecting a swap or sale of such assets. Any such trust arrangement would be
    subject to the approval of the FCC.
    
 
    Condensed income statement data of WALB and WJHG are as follows:
 
   
<TABLE>
<CAPTION>
                                                               SIX MONTHS ENDED
                                                                MARCH 31, 1996
(IN THOUSANDS)                                                WALB         WJHG
                                                           -----------  -----------
<S>                                                        <C>          <C>
Broadcasting revenues                                       $   5,098    $   2,409
Expenses                                                        2,440        1,933
                                                           -----------  -----------
Operating income                                                2,658          476
Other income                                                        9           16
                                                           -----------  -----------
Income before income taxes                                  $   2,667    $     492
                                                           -----------  -----------
                                                           -----------  -----------
Net income                                                  $   1,654    $     305
                                                           -----------  -----------
                                                           -----------  -----------
Media Cash Flow                                             $   2,809    $     624
                                                           -----------  -----------
                                                           -----------  -----------
</TABLE>
    
 
                                      F-8
<PAGE>
   
<TABLE>
<CAPTION>
                                                       UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
 
                                                                      TWELVE MONTHS ENDED JUNE 30, 1996
                                                                    (IN THOUSANDS, EXCEPT PER SHARE DATA)
                                                  HISTORICAL              PRO FORMA
                                            -----------------------     ADJUSTMENTS          PRO
                                                            AUGUSTA     FOR AUGUSTA        FORMA           STOCK        PRO FORMA
                                             COMPANY       BUSINESS     ACQUISITION      COMPANY        OFFERING          COMPANY
                                            --------    -----------     -----------     --------     -----------     ------------
STATEMENT OF OPERATIONS DATA:
<S>                                         <C>         <C>             <C>             <C>          <C>             <C>
Operating revenues:
  Broadcasting (less agency commissions)    $42,741         $4,419      $   110(1)      $47,270      $    --             $47,270
  Publishing                                 23,082             --           --          23,082           --              23,082
  Paging                                         --             --           --              --           --                  --
                                            --------    -----------     -----------     --------     -----------     ------------
Total revenues                               65,823          4,419          110          70,352           --              70,353
Expenses:
  Broadcasting                               26,211          2,997          110(1)       29,318           --              29,318
  Publishing                                 20,619             --           --          20,619           --              20,619
  Paging                                         --             --           --              --           --                  --
  Corporate and administrative                2,817             --           --           2,817           --               2,817
  Depreciation                                3,048            135          (26)(2)       3,157           --               3,157
  Amortization of intangible assets           1,990             76          384(3)        2,450          (97)(7)           2,353
  Non-cash compensation paid in common
    stock                                     1,625             --           --           1,625           --               1,625
  Management fee                                 --             --           --              --           --                  --
                                            --------    -----------     -----------     --------     -----------     ------------
Total expenses                               56,310          3,208          461          59,986          (97)             59,889
                                            --------    -----------     -----------     --------     -----------     ------------
Operating income                              9,513          1,211         (358)         10,366           97              10,463
Miscellaneous income (expense),
 net                                            157           (126)          69(4)          100           --                 100
                                            --------    -----------     -----------     --------     -----------     ------------
Income before interest expense, minority
 interests and income taxes                   9,670          1,085         (289)         10,466           97              10,563
Interest expense                              7,115             --        1,859(5)        8,974       (8,172)                802
                                            --------    -----------     -----------     --------     -----------     ------------
Income (loss) before minority interests
 and income taxes                             2,555          1,085       (2,148)          1,492        8,269               9,761
Minority interests                               --             --           --              --           --                  --
                                            --------    -----------     -----------     --------     -----------     ------------
Income (loss) before income taxes             2,555          1,085       (2,148)          1,492        8,269               9,761
Income tax expense (benefit)                  1,004             --         (412)(6)         592        3,316(6)            3,908
                                            --------    -----------     -----------     --------     -----------     ------------
  Net income (loss)                           1,551          1,085       (1,736)            900        4,953               5,853
Preferred stock dividends                        --             --           --              --        1,400(8)            1,400
                                            --------    -----------     -----------     --------     -----------     ------------
  Net income (loss) available to common
    stockholders                            $ 1,551         $1,085      $(1,736)        $   900      $ 3,553             $ 4,453
                                            --------    -----------     -----------     --------     -----------     ------------
                                            --------    -----------     -----------     --------     -----------     ------------
Average shares outstanding (19)               4,624                                       8,124                            8,124
                                            --------                                    --------                     ------------
                                            --------                                    --------                     ------------
Earnings (loss) per share                   $  0.34                                     $  0.11                          $  0.55
                                            --------                                    --------                     ------------
                                            --------                                    --------                     ------------
 
<CAPTION>
 
                                                            PRO FORMA        PHIPPS         PRO FORMA        PRO FORMA
                                          KTVE SALE(9)       COMPANY        BUSINESS       ADJUSTMENTS      COMBINED(20)
                                          ------------     ------------    -----------    -------------     ------------
STATEMENT OF OPERATIONS DATA:
<S>                                         <C>            <C>             <C>            <C>               <C>
Operating revenues:
  Broadcasting (less agency commissions)      $(4,533)         $42,737         $22,995    $     --              $65,733
  Publishing                                       --           23,082             --           --               23,082
  Paging                                           --               --          5,219           --                5,219
                                          ------------     ------------    -----------    -------------     ------------
Total revenues                                 (4,533)          65,819         28,214           --               94,033
Expenses:
  Broadcasting                                 (3,399)          25,919         10,835          220(10)           37,410
                                                                                               436(11)
  Publishing                                       --           20,619             --           --               20,619
  Paging                                           --               --          3,420          143(11)            3,563
  Corporate and administrative                     --            2,817             --           --                2,817
  Depreciation                                   (442)           2,715          2,462         (625)(12)           4,552
  Amortization of intangible assets                --            2,353            753        3,525(13)            6,521
                                                                                              (110)(14)
  Non-cash compensation paid in common
    stock                                          --            1,625             --           --                1,625
  Management fee                                   --               --          2,476       (2,476)(15)              --
                                          ------------     ------------    -----------    -------------     ------------
Total expenses                                 (3,841)          56,048         19,946        1,113               77,107
                                          ------------     ------------    -----------    -------------     ------------
Operating income                                 (692)           9,771          8,268       (1,113)              16,926
Miscellaneous income (expense),
 net                                              (20)              80             13           --                   93
                                          ------------     ------------    -----------    -------------     ------------
Income before interest expense, minority
 interests and income taxes                      (712)           9,851          8,281       (1,113)              17,019
Interest expense                                   --              802            435         (435)(16)          20,556
                                                                                            19,754(17)
                                          ------------     ------------    -----------    -------------     ------------
Income (loss) before minority interests
 and income taxes                                (712)           9,049          7,846      (20,432)              (3,537)
Minority interests                                 --               --            587         (587)(18)              --
                                          ------------     ------------    -----------    -------------     ------------
Income (loss) before income taxes                (712)           9,049          7,259      (19,845)              (3,537)
Income tax expense (benefit)                     (285)           3,623             --       (4,823)(6)           (1,200)
                                          ------------     ------------    -----------    -------------     ------------
  Net income (loss)                              (427)           5,426          7,259      (15,022)              (2,337)
Preferred stock dividends                          --            1,400             --           --                1,400
                                          ------------     ------------    -----------    -------------     ------------
  Net income (loss) available to common
    stockholders                              $  (427)         $ 4,026         $7,259     $(15,022)             $(3,737)
                                          ------------     ------------    -----------    -------------     ------------
                                          ------------     ------------    -----------    -------------     ------------
Average shares outstanding (19)                                  8,124                                            7,926
                                                           ------------                                     ------------
                                                           ------------                                     ------------
Earnings (loss) per share                                      $  0.50                                          $ (0.47)
                                                           ------------                                     ------------
                                                           ------------                                     ------------
</TABLE>
    
 
                                      F-9
<PAGE>
    The pro forma adjustments to reflect the Stock Offering, the KTVE Sale,  the
Phipps Acquisition, the Financing and the Note Offering are as follows:
 
   
STATEMENT OF OPERATIONS -- TWELVE MONTHS ENDED JUNE 30, 1996
    
 
1.   Reflects the classification of national sales representative commissions as
    an expense consistent with the presentation by the Company.
 
   
2.   Reflects decreased  depreciation prior  to acquisition  resulting from  the
    change  in asset lives in connection  with the preliminary allocation of the
    Augusta Acquisition  purchase  price  to the  newly  acquired  property  and
    equipment, at fair market value, for the six months ended December 31, 1995.
    
 
   
3.    Reflects  amortization prior  to  acquisition  of $54,000  on  the Augusta
    Business' financing  costs  over  a seven-year  period.  Also  reflects  the
    amortization  prior  to acquisition  of  $406,000 on  the  intangible assets
    associated with the Augusta Acquisition over a 40-year period.
    
 
4.  Reflects the elimination of overhead allocated to the Augusta Business prior
    to acquisition  by its  previous owner  which will  not be  incurred by  the
    Company.
 
   
5.   Reflects increased interest expense prior to the acquisition of the Augusta
    Business of $77,000  for an  interest rate  adjustment on  the Senior  Note;
    increased  interest expense prior to the acquisition of the Augusta Business
    of $1.2 million on the Old Credit  Facility at LIBOR plus 3.5%, based on  an
    increase  in  the  debt level  subsequent  to the  Augusta  Acquisition; and
    interest expense  prior  to  the  acquisition of  the  Augusta  Business  of
    $544,000 on the 8% Note.
    
 
6.    Reflects the  adjustment  of the  income  tax provision  to  the estimated
    effective tax rate.
 
   
7.   Reflects  decreased annual  amortization  of deferred  financing  costs  in
    connection  with  retirement of  the  Senior Note.  Also  reflects decreased
    annual interest expense of $4.4 million on the Old Credit Facility resulting
    from repayment  of  $49.5 million  in  principal at  an  estimated  weighted
    average  interest rate  of 8.96%  per annum from  the proceeds  of the Stock
    Offering; decreased annual interest expense  of $2.7 million resulting  from
    the  retirement  of the  Senior  Note; and  a  reduction of  annual interest
    expense of $1.1 million on the 8%  Note which will be converted to Series  A
    Preferred Stock. The Pro Forma Statement of Operations for the Twelve Months
    Ended  June 30, 1996 does not include an extraordinary loss of approximately
    $2.7 million (net of estimated income  tax benefit of $1.4 milion)  relating
    to deferred financing costs and a prepayment fee associated with the assumed
    retirement of the Senior Note.
    
 
8.  Reflects annual dividends on the Series A and Series B Preferred Stock.
 
   
9.  Reflects the elimination of the results of operations of KTVE. The pro forma
    adjustments  exclude an estimated gain of  $5.6 million and estimated income
    taxes of $2.8 million from the KTVE Sale.
    
 
10. Reflects accounting and administrative  expenses associated with the  Phipps
    Business.
 
11. Reflects increased pension expense for the Phipps Business subsequent to the
    Phipps Acquisition. Historical pension expense for the Phipps Business was a
    credit  of $449,000 while pension expense for these operations subsequent to
    the Phipps  Acquisition  is  expected  to be  an  expense  of  approximately
    $130,000.
 
12.  Reflects decreased annual  depreciation resulting from  the change in asset
    lives in connection with the newly acquired property and equipment (at  fair
    market value) of the Phipps Acquisition.
 
13. Reflects annual amortization of intangible assets associated with the Phipps
    Acquisition over a 40-year period.
 
   
14.  Reflects decreased annual amortization  of debt acquisition costs resulting
    from the retirement of  the Old Credit  Facility at June  30, 1996. The  Pro
    Forma Statement of Operations for the Twelve Months Ended June 30, 1996 does
    not  include  an  extraordinary  loss  of  approximately  $780,000  (net  of
    estimated tax  benefit of  $402,000) relating  to deferred  financing  costs
    associated with the assumed retirement of the Old Credit Facility.
    
 
15.  Reflects elimination  of the corporate  allocation to  the Phipps Business.
    Such amounts will  not be  incurred by the  Company in  connection with  its
    operations of the Phipps Business.
 
16.  Reflects the  elimination of  interest expense  associated with  the Phipps
    Business which will not be assumed by the Company.
 
   
17. Reflects increased annual  interest expense of $16.7  million on the  Notes,
    which  includes annual amortization  expense of $525,000  resulting from the
    transaction costs relating  to the  issuance of the  Notes, annual  interest
    expense  of $2.9  million relating  to the  additional borrowings  under the
    Senior Credit Facility  at an  estimated weighted average  interest rate  of
    8.96% plus amortization of additional deferred financing costs of $214,000.
    
 
18.  Reflects the elimination  of minority interests  associated with the Phipps
    Business, because such minority interests will be acquired as a part of  the
    Phipps Acquisition.
 
   
19.  Average outstanding shares used to  calculate pro forma earnings (loss) per
    share are based  on weighted  average common shares  outstanding during  the
    period, adjusted for the Stock Offering.
    
 
   
20.  In  connection with  the  Phipps Acquisition,  the  Company is  seeking FCC
    approval of the assignment of the television broadcast licenses for WCTV and
    WKXT. Current  FCC  regulations  will  require the  Company  to  divest  its
    ownership interest in WALB and
    
 
                                      F-10
<PAGE>
   
    WJHG.  In order to satisfy applicable FCC requirements, the Company, subject
    to FCC approval,  intends to  swap such  assets for  assets of  one or  more
    television  stations of comparable value  and with comparable broadcast cash
    flow in a transaction qualifying for deferred capital gains treatment  under
    the  "like-kind  exchange" provision  of Section  1031 of  the Code.  If the
    Company is unable  to effect such  a swap on  satisfactory terms within  the
    time  period granted by the  FCC, the Company may  transfer such assets to a
    trust with a  view towards  the trustee  effecting a  swap or  sale of  such
    assets.  Any such trust arrangement would be  subject to the approval of the
    FCC.
    
 
Condensed income statement data of WALB and WJHG are as follows:
 
   
<TABLE>
<CAPTION>
                                                           ------------------------
                                                             TWELVE MONTHS ENDED
                                                                JUNE 30, 1996
(IN THOUSANDS)                                                WALB         WJHG
                                                           -----------  -----------
 
<S>                                                        <C>          <C>
Broadcasting revenues                                       $   9,829    $   4,426
Expenses                                                        4,735        3,816
                                                           -----------  -----------
Operating income                                                5,094          610
Other income                                                       17           45
                                                           -----------  -----------
Income before income taxes                                  $   5,111    $     655
                                                           -----------  -----------
                                                           -----------  -----------
Net income                                                  $   3,170    $     407
                                                           -----------  -----------
                                                           -----------  -----------
Media Cash Flow                                             $   5,409    $     912
                                                           -----------  -----------
                                                           -----------  -----------
</TABLE>
    
 
                                      F-11
<PAGE>
   
<TABLE>
<CAPTION>
                                                          UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
                                                                                    JUNE 30, 1996
                                                                                (DOLLARS IN THOUSANDS)
                                            HISTORICAL         STOCK     PRO FORMA           KTVE     PRO FORMA       PHIPPS
                                              COMPANY       OFFERING       COMPANY        SALE(4)       COMPANY     BUSINESS
                                            ---------     ----------     ---------    -----------     ---------     --------
ASSETS:
<S>                                         <C>           <C>            <C>          <C>             <C>           <C>
Cash                                          $1,287            $--        $1,287         $9,500       $10,787         $663
Trade accounts receivable                     10,818             --        10,818             --        10,818        5,188
Recoverable income taxes                         797          1,394(1)      2,191         (2,191)           --           --
Inventories                                      109             --           109             --           109           --
Current portion of program broadcast
 rights                                          711             --           711            (56)          655          924
Prepaid expenses and other current
 assets                                          759             --           759            (50)          709          338
                                            ---------     ----------     ---------    -----------     ---------     --------
Total current assets                          14,481          1,394        15,875          7,203        23,078        7,113
Property and equipment-net                    18,798             --        18,798         (1,531)       17,267        9,985
Other assets
Deferred acquisition costs                     2,819             --         2,819             --         2,819           --
Deferred loan costs                            1,882           (804)(1)     1,078             --         1,078           --
Goodwill and other intangibles                73,299             --        73,299         (2,322)       70,977        9,097
Other                                          1,237             --         1,237             (8)        1,229          111
                                            ---------     ----------     ---------    -----------     ---------     --------
Total other assets                            79,237           (804)       78,433         (2,330)       76,103        9,208
                                            ---------     ----------     ---------    -----------     ---------     --------
  Total assets                              $112,516           $590      $113,106         $3,342      $116,448      $26,306
                                            ---------     ----------     ---------    -----------     ---------     --------
                                            ---------     ----------     ---------    -----------     ---------     --------
LIABILITIES AND STOCKHOLDERS' EQUITY:
Trade accounts payable                        $3,169            $--        $3,169            $--        $3,169         $308
Employee compensation and benefits             4,114             --         4,114             --         4,114           --
Accrued expenses                                 924             --           924             --           924          996
Accrued interest                               2,026             --         2,026             --         2,026           --
Income taxes payable                              --             --            --            617           617           --
Current portion of broadcast program
 obligations                                     710             --           710            (53)          657          458
Deferred paging service income                    --             --            --             --            --          975
Current portion of long-term debt                 --             --            --             --            --        1,474
                                            ---------     ----------     ---------    -----------     ---------     --------
Total current liabilities                     10,943             --        10,943            564        11,507        4,211
Long-term debt                                82,846         (7,545) (2)    1,101             --         1,101        2,560
                                                            (74,200)(3)
Deferred credits                               4,914             --         4,914             (3)        4,911          214
Minority interests                                --             --            --             --            --          655
Stockholders' equity
  Series A Preferred Stock                        --          9,896(2)      9,896             --         9,896           --
  Series B Preferred Stock                        --         10,000(2)     10,000             --        10,000           --
  Class A Common Stock, no par value          10,000         (2,455) (2)    7,545             --         7,545           --
  Class B Common Stock, no par value              --         67,600(2)     67,600             --        67,600           --
  Retained earnings                           10,451         (2,706)(1)     7,745          2,781        10,526           --
  Net equity of acquired operations               --             --            --             --            --       18,666
                                            ---------     ----------     ---------    -----------     ---------     --------
                                              20,451         82,335       102,786          2,781       105,567       18,666
Treasury stock                                (6,638)            --        (6,638 )           --        (6,638)          --
                                            ---------     ----------     ---------    -----------     ---------     --------
                                              13,813         82,335        96,148          2,781        98,929       18,666
                                            ---------     ----------     ---------    -----------     ---------     --------
  Total liabilities and stockholders'
   equity                                   $112,516           $590      $113,106         $3,342      $116,448      $26,306
                                            ---------     ----------     ---------    -----------     ---------     --------
                                            ---------     ----------     ---------    -----------     ---------     --------
 
<CAPTION>
 
                                            PRO FORMA          PRO FORMA
                                           ADJUSTMENTS        COMBINED(10)
                                          --------------     --------------
ASSETS:
<S>                                         <C>              <C>
Cash                                      $(185,000)(5)             $1,287
                                            144,750(7)
                                             30,750(8)
                                               (663)(6)
Trade accounts receivable                        --                 16,006
Recoverable income taxes                         --                     --
Inventories                                      --                    109
Current portion of program broadcast
 rights                                          --                  1,579
Prepaid expenses and other current
 assets                                        (338)(6)                709
                                          --------------     --------------
Total current assets                        (10,501)                19,690
Property and equipment-net                       --                 27,252
Other assets
Deferred acquisition costs                       --                  2,819
Deferred loan costs                           5,250(7)               6,750
                                              1,500(8)
                                             (1,078)(9)
Goodwill and other intangibles               (9,097)(6)            241,416
                                            170,439(5)
Other                                            --                  1,340
                                          --------------     --------------
Total other assets                          167,014                252,325
                                          --------------     --------------
  Total assets                             $156,513               $299,267
                                          --------------     --------------
                                          --------------     --------------
LIABILITIES AND STOCKHOLDERS' EQUITY:
Trade accounts payable                        $(308)(6)             $3,169
Employee compensation and benefits               --                  4,114
Accrued expenses                               (996)(6)                924
Accrued interest                                 --                  2,026
Income taxes payable                           (366)(9)                251
Current portion of broadcast program
 obligations                                     --                  1,115
Deferred paging service income                   --                    975
Current portion of long-term debt            (1,474)(6)                 --
                                          --------------     --------------
Total current liabilities                    (3,144)                12,574
Long-term debt                               (2,560)(6)            183,351
                                             32,250(8)
                                            150,000(7)
Deferred credits                                 --                  5,125
Minority interests                             (655)(6)                 --
Stockholders' equity
  Series A Preferred Stock                       --                  9,896
  Series B Preferred Stock                       --                 10,000
  Class A Common Stock, no par value             --                  7,545
  Class B Common Stock, no par value             --                 67,600
  Retained earnings                            (712)(9)              9,814
  Net equity of acquired operations         (18,666)(5)                 --
                                          --------------     --------------
                                            (19,378)               104,855
Treasury stock                                   --                 (6,638)
                                          --------------     --------------
                                            (19,378)                98,217
                                          --------------     --------------
  Total liabilities and stockholders'
   equity                                  $156,513               $299,267
                                          --------------     --------------
                                          --------------     --------------
</TABLE>
    
 
                                      F-12
<PAGE>
    The  pro forma adjustments to reflect the Stock Offering, the KTVE Sale, the
Phipps Acquisition, the Financing and the Note Offering are as follows:
 
   
BALANCE SHEET - JUNE 30, 1996
    
 
   
1.   Reflects the prepayment fee  associated with the  retirement of the  Senior
     Note,  the  write-off  of  deferred  loan  costs  in  connection  with  the
     retirement of the Senior  Note and the exchange  of the Series A  Preferred
     Stock  for the  8% Note,  and the  income tax  benefit associated  with the
     prepayment fee and write-off of deferred loan costs.
    
 
   
2.   Reflects the  issuances, net  of fees  and expenses,  of (i)  approximately
     3,500,000  shares of  Class B  Common Stock at  an estimated  $21 per share
     pursuant to the Stock Offering, (ii)  Series A Preferred Stock in  exchange
     for  the 8%  Note and (iii)  $10.0 million  of Series B  Preferred Stock to
     certain affiliates of the Company.
    
 
   
3.   Reflects retirement of $25.0  million in aggregate  principal amount and  a
     prepayment fee of $3.4 million on the Senior Note and a retirement of $49.2
     million  on  the  Old Credit  Facility  with  the net  proceeds  from Stock
     Offering and the sale of Series B Preferred Stock of $77.6 million.
    
 
4.   Reflects the proposed  KTVE Sale for  $9.5 million plus  the amount of  the
     accounts  receivable on the date of the closing. The transaction is subject
     to regulatory approval and is expected to close by September 1996, although
     there can be no assurance with respect thereto.
 
   
5.   Reflects the purchase of the  Phipps Business and a preliminary  allocation
     of  the  purchase  price  of  $185.0 million  to  the  tangible  assets and
     liabilities based upon estimates of fair  market value at June 30, 1996  as
     follows:
    
 
   
<TABLE>
<S>                                                                                     <C>
Assets acquired and (liabilities assumed) in connection with the acquisition of the
 Phipp Business are as follows:
(IN THOUSANDS)
  Trade accounts receivable                                                             $    5,188
  Current portion of program broadcast rights                                                  924
  Property and equipment                                                                     9,985
  Goodwill and other intangibles                                                           170,439
  Other                                                                                        111
  Current portion of program broadcast obligations                                            (458)
  Deferred paging service income                                                              (975)
  Deferred credits                                                                            (214)
                                                                                        ----------
  Purchase price of Phipps Business including expenses                                  $  185,000
                                                                                        ----------
                                                                                        ----------
  Historical book value of Phipps Business                                              $  (18,666)
  Assets not acquired and liabilities not assumed--net                                       4,105
                                                                                        ----------
  Net assets acquired                                                                      (14,561)
  Purchase price of Phipps Business                                                        185,000
                                                                                        ----------
  Goodwill and other intangibles                                                        $  170,439
                                                                                        ----------
                                                                                        ----------
</TABLE>
    
 
     The  excess of purchase price over amounts allocated to net tangible assets
     will be  amortized on  a straight-line  basis over  a 40-year  period.  The
     allocation  of the purchase  price is subject to  adjustment based upon the
     results of pending appraisals.
 
6.   Reflects the elimination of  certain of the assets  and liabilities of  the
     Phipps Business, which were not included in the Phipps Acquisition.
 
7.   Reflects  the issuance of the Notes pursuant  to the Note Offering and fees
     and expenses associated with the Note Offering.
 
   
8.   Reflects borrowings of $32.3  million under the  Senior Credit Facility  in
     order  to complete  the Phipps Acquisition  and estimated  expenses of $1.5
     million in connection with the  negotiation and execution of Senior  Credit
     Facility.
    
 
   
9.   Reflects  the write-off of  debt acquisition costs  and related tax benefit
     resulting from the retirement of the Old Credit Facility at June 30, 1996.
    
 
   
10.  In connection  with the  Phipps  Acquisition, the  Company is  seeking  FCC
     approval  of the assignment  of the television  broadcast licenses for WCTV
     and WKXT. Current FCC  regulations will require the  Company to divest  its
     ownership  interest in  WALB and WJHG.  In order to  satisfy applicable FCC
     requirements, the Company, subject  to FCC approval,  intends to swap  such
     assets  for assets of  one or more television  stations of comparable value
     and with comparable  broadcast cash  flow in a  transaction qualifying  for
     deferred  capital gains treatment under  the "like-kind exchange" provision
     of Section 1031 of the Code. If the Company is
    
 
                                      F-13
<PAGE>
     unable to effect such a swap  on satisfactory terms within the time  period
     granted  by the FCC, the Company may transfer such assets to a trust with a
     view towards the trustee effecting a swap or sale of such assets. Any  such
     trust arrangement would be subject to the approval of the FCC.
 
        Condensed balance sheets of WALB and WJHG are as follows:
 
   
<TABLE>
<CAPTION>
                                                                                            JUNE 30, 1996
(IN THOUSANDS)                                                                            WALB         WJHG
                                                                                       -----------  -----------
 
<S>                                                                                    <C>          <C>
Current assets                                                                          $   1,801    $     913
Property and equipment                                                                      1,714        1,014
Other assets                                                                                   66            3
                                                                                       -----------  -----------
Total assets                                                                            $   3,581    $   1,930
                                                                                       -----------  -----------
                                                                                       -----------  -----------
Current liabilities                                                                     $   1,756    $     474
Other liabilities                                                                             214       --
Stockholder's equity                                                                        1,611        1,456
                                                                                       -----------  -----------
Total liabilities and stockholder's equity                                              $   3,581    $   1,930
                                                                                       -----------  -----------
                                                                                       -----------  -----------
</TABLE>
    
 
                                      F-14
<PAGE>
                       SELECTED HISTORICAL FINANCIAL DATA
 
SELECTED FINANCIAL DATA OF THE COMPANY
 
   
    Set  forth below are certain selected historical consolidated financial data
of the  Company.  This  information  should be  read  in  conjunction  with  the
consolidated  financial  statements of  the  Company and  related  notes thereto
appearing  elsewhere  herein  and  "Management's  Discussion  and  Analysis   of
Financial  Condition  and Results  of  Operations-Results of  Operations  of the
Company." The selected consolidated  financial data for, and  as of the end  of,
each  of the years in  the four-year period ended  December 31, 1995 are derived
from the audited consolidated financial statements of the Company. The  selected
consolidated  financial data for, and as of the year ended December 31, 1991 are
derived from unaudited  financial statements, since  the Company had  a June  30
fiscal year end. The selected consolidated financial data for, and as of the six
months  ended June 30, 1995 and 1996 are derived from the unaudited consolidated
financial statements of the Company and have been prepared on the same basis  as
the  audited  consolidated  financial  statements  and  in  the  opinion  of the
management of  the Company  include  all normal  and recurring  adjustments  and
accruals necessary for a fair presentation of such information.
    
 
   
<TABLE>
<CAPTION>
                                                                                                            SIX MONTHS ENDED JUNE
                                                                  YEAR ENDED DECEMBER 31                              30
                                                      1991        1992        1993        1994        1995        1995        1996
                                                ----------  ----------  ----------  ----------  ----------  ----------  ----------
<S>                                             <C>         <C>         <C>         <C>         <C>         <C>         <C>
(IN THOUSANDS, EXCEPT RATIOS AND PER SHARE
 DATA)                                          (UNAUDITED)                                                      (UNAUDITED)
STATEMENT OF INCOME DATA:
Operating revenues:
  Broadcasting (less agency commissions)        $   13,553  $   15,131  $   15,004  $   22,826  $   36,750  $   18,261  $   24,252
  Publishing                                         8,968       9,512      10,109      13,692      21,866      10,046      11,262
                                                ----------  ----------  ----------  ----------  ----------  ----------  ----------
Total revenues                                      22,521      24,643      25,113      36,518      58,616      28,307      35,514
Expenses:
  Broadcasting                                       9,672       9,753      10,029      14,864      23,202      11,410      14,418
  Publishing                                         6,444       6,752       7,662      11,198      20,016       8,590       9,193
  Corporate and administrative                       1,889       2,627       2,326       1,959       2,258       1,012       1,571
  Depreciation                                       1,487       1,197       1,388       1,745       2,633       1,234       1,648
  Amortization of intangible assets                     14          44         177         396       1,326         588       1,253
  Non-cash compensation paid in common stock            --          --          --          80       2,321         816         120
                                                ----------  ----------  ----------  ----------  ----------  ----------  ----------
Total expenses                                      19,506      20,373      21,582      30,242      51,756      23,650      28,203
                                                ----------  ----------  ----------  ----------  ----------  ----------  ----------
Operating income                                     3,015       4,270       3,531       6,276       6,860       4,657       7,311
Miscellaneous income (expense), net                    778      (1,519)        202         189         143          69          81
                                                ----------  ----------  ----------  ----------  ----------  ----------  ----------
Income from continuing operations before
 interest expense and income taxes                   3,793       2,751       3,733       6,465       7,003       4,726       7,392
Interest expense                                       787       1,486         985       1,923       5,438       2,768       4,445
                                                ----------  ----------  ----------  ----------  ----------  ----------  ----------
Income from continuing operations before
 income taxes                                        3,006       1,265       2,748       4,542       1,565       1,958       2,947
Income tax expense                                   1,156         869       1,068       1,776         634         776       1,146
                                                ----------  ----------  ----------  ----------  ----------  ----------  ----------
Income from continuing operations                    1,850         396       1,680       2,766         931       1,182       1,801
Discontinued business:
  Income (loss) from operations of
   discontinued business, net of applicable
   income tax expense (benefit) of ($55),
   ($79) and $30, respectively                         (90)       (129)         48          --          --          --          --
  Gain on disposal of discontinued business,
   net of applicable income tax expense of
   $501                                                 --          --         818          --          --          --          --
                                                ----------  ----------  ----------  ----------  ----------  ----------  ----------
Net income                                      $    1,760  $      267  $    2,546  $    2,766  $      931  $    1,182  $    1,801
                                                ----------  ----------  ----------  ----------  ----------  ----------  ----------
                                                ----------  ----------  ----------  ----------  ----------  ----------  ----------
Average outstanding common shares                    6,469       4,668       4,611       4,689       4,481       4,383       4,657
                                                ----------  ----------  ----------  ----------  ----------  ----------  ----------
                                                ----------  ----------  ----------  ----------  ----------  ----------  ----------
Income from continuing operations per common
 share                                          $     0.29  $     0.09  $     0.36  $     0.59  $     0.21  $     0.27  $     0.39
                                                ----------  ----------  ----------  ----------  ----------  ----------  ----------
                                                ----------  ----------  ----------  ----------  ----------  ----------  ----------
Cash dividends per common share                 $     0.05  $     0.07  $     0.07  $     0.07  $     0.08  $     0.04  $     0.04
                                                ----------  ----------  ----------  ----------  ----------  ----------  ----------
                                                ----------  ----------  ----------  ----------  ----------  ----------  ----------
</TABLE>
    
 
                                      F-15
<PAGE>
   
<TABLE>
<CAPTION>
                                                                                                                  SIX MONTHS
                                                                  YEAR ENDED DECEMBER 31                        ENDED JUNE 30
                                                      1991        1992        1993        1994        1995        1995        1996
                                                ----------  ----------  ----------  ----------  ----------  ----------  ----------
(IN THOUSANDS, EXCEPT RATIOS AND PER SHARE
 DATA)                                          (UNAUDITED)                                                      (UNAUDITED)
<S>                                             <C>         <C>         <C>         <C>         <C>         <C>         <C>
BALANCE SHEET DATA (AT END OF PERIOD):
Working capital (deficiency)                    $    6,740  $    2,976  $    2,579  $    1,075  $     (221) $      237  $   3,538
Total assets                                        31,548      24,173      21,372      68,789      78,240      73,932    112,516
Total debt                                          20,378      12,412       7,759      52,940      54,325      54,319     82,846
Total stockholders' equity                      $    5,853  $    4,850  $    7,118  $    5,001  $    8,986  $    7,375  $  13,813
 
OTHER DATA:
Media Cash Flow (1)                             $    6,405  $    8,079  $    7,371  $   10,522  $   15,559  $    8,333  $  12,004
Operating cash flow (2)                              4,516       5,452       5,044       8,567      13,309       7,329     10,442
EBITDA (3)                                           4,516       5,512       5,095       8,498      13,140       7,296     10,332
Cash flows provided by (used in):
  Operating activities                               3,499       4,832       1,324       5,798       7,600       3,828      6,801
  Investing activities                              (2,073)     (1,041)      3,062     (42,770)     (8,929)     (5,377)   (37,490)
  Financing activities                             (10,424)     (9,300)     (4,932)     37,200       1,331       1,208     31,416
Capital expenditures                            $    2,235  $    2,216  $    2,582  $    1,768  $    3,280  $    1,852  $   1,317
Ratio of Media Cash Flow to interest expense           8.1         5.4         7.5         5.5         2.9         3.0        2.7
Ratio of operating cash flow to interest
 expense                                               5.7         3.7         5.1         4.5         2.4         2.6        2.3
Ratio of total debt to Media Cash Flow                 3.2         1.5         1.1         5.0         3.5         3.5(5)     4.4(5)
Ratio of total debt to operating cash flow             4.5         2.3         1.5         6.2         4.1         4.1(5)     5.0(5)
Ratio of earnings to fixed charges (4)                 4.7         1.8         3.4         3.1         1.3         1.7        1.6
</TABLE>
    
 
- - ------------------------------
(1)  Media   Cash  Flow  represents  operating   income  plus  depreciation  and
     amortization (including amortization of  program license rights),  non-cash
     compensation  and  corporate  overhead, less  payments  of  program license
     liabilities.
(2)  Operating  cash  flow  represents   operating  income  plus   depreciation,
     amortization   (including  amortization  of  program  license  rights)  and
     non-cash compensation, less payments for program license liabilities.
(3)  EBITDA represents operating income  plus (i) depreciation and  amortization
     (excluding  amortization  of  program  license  rights)  and  (ii) non-cash
     compensation paid in  common stock  (excluding stock payments  made to  the
     401(k)  plan). EBITDA is  presented not as a  measure of operating results,
     but rather  to  provide additional  information  related to  the  Company's
     ability  to service debt. EBITDA should not be considered as an alternative
     to either (x)  operating income determined  in accordance with  GAAP as  an
     indicator  of  operating  performance  or  (y)  cash  flows  from operating
     activities (determined in accordance with GAAP) as a measure of liquidity.
(4)  For purposes of this item, "fixed charges" represent interest, the interest
     element of rental  expense, capitalized interest  and amortization of  debt
     issuance  costs and  "earnings" represent  net income  (loss) before income
     taxes, discontinued operations, extraordinary  items, cumulative effect  of
     change in accounting principles and fixed charges.
   
(5)  Represents  applicable ratios for the 12  month periods ended June 30, 1995
     and 1996.
    
 
                                      F-16
<PAGE>
SELECTED FINANCIAL DATA OF THE PHIPPS BUSINESS
 
   
    Set forth below are certain selected historical financial data of the Phipps
Business. This  information should  be read  in conjunction  with the  financial
statements  of the Phipps Business and related notes thereto appearing elsewhere
herein and  "Management's Discussion  and Analysis  of Financial  Condition  and
Results  of  Operations--Results  of  Operations of  the  Phipps  Business." The
selected historical financial data for, and as of the end of, each of the  years
in  the three-year period ended  December 31, 1995 are  derived from the audited
financial statements of the  Phipps Business. The  selected financial data  for,
and  as of the end  of, each of the  years ended December 31,  1991 and 1992 are
derived from  the  unaudited accounting  records  of the  Phipps  Business.  The
selected  financial data for, and  as of the six months  ended June 30, 1995 and
1996 are derived from the unaudited financial statements of the Phipps  Business
and have been prepared on the same basis as the audited financial statements and
in  the opinion of  management of the  Company include all  normal and recurring
adjustments and accruals necessary for a fair presentation of such information.
    
 
   
<TABLE>
<CAPTION>
                                                                                                   SIX MONTHS ENDED JUNE
                                                         YEAR ENDED DECEMBER 31                              30
                                       ----------------------------------------------------------  ----------------------
                                             1991     1992(1)        1993        1994        1995        1995        1996
                                       ----------  ----------  ----------  ----------  ----------  ----------  ----------
<S>                                    <C>         <C>         <C>         <C>         <C>         <C>         <C>
(IN THOUSANDS EXCEPT RATIOS)                (UNAUDITED)                                                 (UNAUDITED)
STATEMENT OF INCOME DATA:
Operating revenues:
  Broadcasting (less agency
   commissions)                        $   10,492  $   14,523  $   19,460  $   21,524  $   22,424  $   10,774  $   11,346
  Paging                                    3,369       3,646       3,788       4,277       4,897       2,423       2,744
                                       ----------  ----------  ----------  ----------  ----------  ----------  ----------
Total revenues                             13,861      18,169      23,248      25,801      27,321      13,197      14,090
Expenses:
  Broadcasting                              5,298       7,518      10,734      10,211      10,487       5,065       5,412
  Paging                                    2,356       2,298       2,529       2,764       3,052       1,411       1,780
  Management fees                             579         973       2,462       2,486       3,280       1,539         735
  Depreciation and amortization             1,513       1,734       2,836       2,672       3,120       1,436       1,530
                                       ----------  ----------  ----------  ----------  ----------  ----------  ----------
Total expenses                              9,746      12,523      18,561      18,133      19,939       9,451       9,457
                                       ----------  ----------  ----------  ----------  ----------  ----------  ----------
Operating income                            4,115       5,646       4,687       7,668       7,382       3,746       4,633
Miscellaneous income (expense), net             5           8          16         666          12          (4)         (5)
                                       ----------  ----------  ----------  ----------  ----------  ----------  ----------
Income before interest expense and
 minority interests                         4,120       5,654       4,703       8,334       7,394       3,742       4,628
Interest expense                              162         442         632         480         499         223         159
                                       ----------  ----------  ----------  ----------  ----------  ----------  ----------
Income before minority interests            3,958       5,212       4,071       7,854       6,895       3,519       4,469
Minority interests                             --         331         140         635         547         256         296
                                       ----------  ----------  ----------  ----------  ----------  ----------  ----------
Net income                             $    3,958  $    4,881  $    3,931  $    7,219  $    6,348  $    3,263  $    4,173
                                       ----------  ----------  ----------  ----------  ----------  ----------  ----------
                                       ----------  ----------  ----------  ----------  ----------  ----------  ----------
Supplemental unaudited pro forma
 information: (2)
  Net income, as above                 $    3,958  $    4,881  $    3,931  $    7,219  $    6,348  $    3,263  $    4,173
  Pro forma provision for income tax
   expense                                  1,504       1,855       1,500       2,743       2,413  $    1,240  $    1,586
                                       ----------  ----------  ----------  ----------  ----------  ----------  ----------
Pro forma net income                   $    2,454  $    3,026  $    2,431  $    4,476  $    3,935  $    2,023  $    2,587
                                       ----------  ----------  ----------  ----------  ----------  ----------  ----------
                                       ----------  ----------  ----------  ----------  ----------  ----------  ----------
 
BALANCE SHEET DATA (AT END OF
 PERIOD):
Working capital                        $      595  $      615  $    1,127  $    1,421  $    2,622  $    2,228  $    2,902
Total assets                                8,931      25,068      24,819      25,298      27,562      27,633      26,306
Total debt                                  1,388       7,697       6,542       6,065       4,810       5,198       4,034
Minority interests                             --       1,154         824         728         586         648         655
Owner's equity                         $    6,351  $   13,276  $   14,306  $   15,465  $   18,794  $   18,764  $   18,666
</TABLE>
    
 
                                      F-17
<PAGE>
 
   
<TABLE>
<CAPTION>
                                                                                               SIX MONTHS ENDED JUNE
                                                                 YEAR ENDED DECEMBER 31                  30
                                                                 1993        1994        1995        1995        1996
                                                           ----------  ----------  ----------  ----------  ----------
<S>                                                        <C>         <C>         <C>         <C>         <C>
(IN THOUSANDS)                                                                                      (UNAUDITED)
OTHER DATA:
Media Cash Flow (3)                                         $  10,466   $  12,983   $  13,696   $   6,678   $   6,769
Operating cash flow (4)                                         8,003      10,498      10,416       5,140       6,035
EBITDA (5)                                                      7,523      10,340      10,502       5,183       6,163
Net cash flows provided by (used in):
  Operating activities                                          7,397       9,808       9,259       4,136       6,191
  Investing activities                                         (2,953)     (2,506)     (3,828)     (3,152)       (840)
  Financing activities                                         (4,418)     (7,233)     (4,906)       (917)     (5,309)
Capital expenditures                                        $   3,538   $   3,353   $   3,188   $   1,902   $   1,647
</TABLE>
    
 
- - ------------------------------
(1) Includes the acquisition of a majority interest in WKXT in July 1992,  which
    was accounted for using the purchase method of accounting.
 
(2) John H. Phipps, Inc. and its subsidiaries file a consolidated federal income
    tax return and separate state tax returns. Income tax expense for the Phipps
    Business  is not presented  in the financial statements  as such amounts are
    computed and paid by John H. Phipps, Inc. Pro forma federal and state income
    taxes for the Phipps Business are calculated on a pro forma, separate return
    basis.
 
(3) Media Cash Flow represents operating income plus depreciation,  amortization
    (including  amortization of  program license rights)  and corporate overhead
    less payments of program license liabilities.
 
(4) Operating cash  flow  represents  operating  income  plus  depreciation  and
    amortization   (including  amortization  of  program  license  rights)  less
    payments for program license liabilities.
 
   
(5) EBITDA  represents  operating  income  plus  depreciation  and  amortization
    (excluding  amortization of program license rights). EBITDA is presented not
    as a  measure  of  operating  results,  but  rather  to  provide  additional
    information  related  to Phipps  Business' ability  to service  debt. EBITDA
    should not be considered  as an alternative to  either (x) operating  income
    determined  in accordance with GAAP as an indicator of operating performance
    or (y) cash flows from  operating activities (determined in accordance  with
    GAAP) as a measure of liquidity.
    
 
                                      F-18
<PAGE>
   
                       GRAY COMMUNICATIONS SYSTEMS, INC.
               CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
    
 
   
<TABLE>
<CAPTION>
                                                       DECEMBER 31,         JUNE 30,
                                                               1995             1996
                                                    ---------------  ---------------
Current Assets
<S>                                                 <C>              <C>
  Cash and cash equivalents                                $559,991       $1,287,096
  Trade accounts receivable, less allowance for
   doubtful accounts of $450,000 and $537,000,
   respectively                                           9,560,274       10,817,791
  Recoverable income taxes                                1,347,007          797,455
  Inventories                                               553,032          109,028
  Current portion of program broadcast rights             1,153,058          710,424
  Other current assets                                      263,600          758,808
                                                    ---------------  ---------------
                                                         13,436,962       14,480,602
Property and equipment                                   37,618,893       40,178,694
  Less allowance for depreciation                       (20,601,819)     (21,380,407)
                                                    ---------------  ---------------
                                                         17,017,074       18,798,287
Other assets
  Deferred acquisition costs (includes $910,000
   and $1,050,000 to Bull Run Corporation at
   December 31, 1995 and June 30, 1996,
   respectively) (NOTE C)                                 3,330,481        2,818,851
  Deferred loan costs (NOTE C)                            1,232,261        1,881,648
  Goodwill and other intangibles (NOTE C)                42,004,050       73,299,223
  Other                                                   1,219,650        1,237,021
                                                    ---------------  ---------------
                                                         47,786,442       79,236,743
                                                    ---------------  ---------------
                                                        $78,240,478     $112,515,632
                                                    ---------------  ---------------
                                                    ---------------  ---------------
 
Current liabilities:
  Trade accounts payable (includes $670,000 and
   $950,000 payable to Bull Run Corporation at
   December 31, 1995 and June 30, 1996,
   respectively)                                         $3,752,742       $3,169,283
  Accrued expenses                                        5,839,007        7,063,971
  Current portion of program broadcast obligations        1,205,784          709,782
  Current portion of long-term debt                       2,861,672                0
                                                    ---------------  ---------------
                                                         13,659,205       10,943,036
Long-term debt (including a $7,544,000 8% Note to
 Bull Run Corporation at June 30, 1996) (NOTES C
 AND D)                                                  51,462,645       82,845,688
Non-current liabilities                                   4,133,030        4,913,624
Commitments and Contingencies (NOTE E)
Stockholders' Equity (NOTE B AND D)
  Class A Common Stock, no par value; authorized
   10,000,000 shares; issued 5,082,756 and
   5,130,385 shares, respectively                         6,795,976       10,000,365
  Retained earnings                                       8,827,906       10,451,203
                                                    ---------------  ---------------
                                                         15,623,882       20,451,568
  Treasury stock, 663,180 shares at cost                 (6,638,284)      (6,638,284)
                                                    ---------------  ---------------
                                                          8,985,598       13,813,284
                                                    ---------------  ---------------
                                                        $78,240,478     $112,515,632
                                                    ---------------  ---------------
                                                    ---------------  ---------------
</TABLE>
    
 
           See notes to condensed consolidated financial statements.
 
                                      F-19
<PAGE>
   
                       GRAY COMMUNICATIONS SYSTEMS, INC.
            CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
    
 
   
<TABLE>
<CAPTION>
                                                       SIX MONTHS ENDED
                                                           JUNE 30
                                                    ----------------------
                                                          1995        1996
                                                    ----------  ----------
Operating revenues:
<S>                                                 <C>         <C>
  Broadcasting (net of agency commissions)          $18,260,940 $24,251,901
  Publishing                                        10,046,114  11,261,792
                                                    ----------  ----------
                                                    28,307,054  35,513,693
Expenses:
  Broadcasting                                      11,409,511  14,418,200
  Publishing                                         8,589,861   9,192,751
  Corporate and administrative                       1,012,024   1,570,806
  Depreciation and amortization                      1,821,700   2,900,724
  Non-cash compensation paid in common stock (NOTE
   B)                                                  816,474     120,000
                                                    ----------  ----------
                                                    23,649,570  28,202,481
                                                    ----------  ----------
                                                     4,657,484   7,311,212
Miscellaneous income                                    68,514      81,361
                                                    ----------  ----------
                                                     4,725,998   7,392,573
Interest expense                                     2,768,187   4,444,878
                                                    ----------  ----------
    Income before income taxes                       1,957,811   2,947,695
Income tax expense                                     776,000   1,146,000
                                                    ----------  ----------
    Net earnings                                    $1,181,811  $1,801,695
                                                    ----------  ----------
                                                    ----------  ----------
Average outstanding common shares                    4,383,263   4,656,691
                                                    ----------  ----------
                                                    ----------  ----------
Net earnings per common share                            $0.27       $0.39
                                                    ----------  ----------
                                                    ----------  ----------
</TABLE>
    
 
   
           See notes to condensed consolidated financial statements.
    
 
                                      F-20
<PAGE>
   
                       GRAY COMMUNICATIONS SYSTEMS, INC.
     CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (UNAUDITED)
    
 
   
<TABLE>
<CAPTION>
                                   CLASS A COMMON STOCK           TREASURY STOCK
                                --------------------------  --------------------------      RETAINED
                                      SHARES        AMOUNT        SHARES        AMOUNT      EARNINGS         TOTAL
                                ------------  ------------  ------------  ------------  ------------  ------------
Balance at December 31, 1995       5,082,756    $6,795,976      (663,180)  $(6,638,284)   $8,827,906    $8,985,598
<S>                             <C>           <C>           <C>           <C>           <C>           <C>
Net income for the six months
 ended
 June 30, 1996                           -0-           -0-           -0-           -0-     1,801,695     1,801,695
Cash dividends ($.04 per
 share)                                  -0-           -0-           -0-           -0-      (178,398)     (178,398)
Issuance of common stock
 warrants (Note C)                       -0-     2,600,000           -0-           -0-           -0-     2,600,000
Income tax benefits relating
 to stock plans                          -0-        62,000           -0-           -0-           -0-        62,000
Issuance of Class A Common
 Stock:
  401(k) Plan                          7,129       139,640           -0-           -0-           -0-       139,640
  Directors stock plan                22,500       228,749           -0-           -0-           -0-       228,749
  Non-qualified stock plan            18,000       174,000           -0-           -0-           -0-       174,000
                                ------------  ------------  ------------  ------------  ------------  ------------
Balance at June 30, 1996           5,130,385   $10,000,365      (663,180)  $(6,638,284)  $10,451,203   $13,813,284
                                ------------  ------------  ------------  ------------  ------------  ------------
                                ------------  ------------  ------------  ------------  ------------  ------------
</TABLE>
    
 
   
           See notes to condensed consolidated financial statements.
    
 
                                      F-21
<PAGE>
   
                       GRAY COMMUNICATIONS SYSTEMS, INC.
          CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
    
 
   
<TABLE>
<CAPTION>
                                              SIX MONTHS ENDED JUNE 30
                                                     1995             1996
                                          ---------------  ---------------
Operating activities
<S>                                       <C>              <C>
  Net income                                   $1,181,811       $1,801,695
  Items which did not use (provide)
   cash:
    Depreciation                                1,233,847        1,648,014
    Amortization of intangible assets             587,853        1,252,710
    Amortization of program broadcast
     rights                                       767,964        1,279,357
    Amortization of original issue
     discount on subordinated note                      0          144,444
    Payments for program broadcast
     rights                                      (902,858)      (1,309,364)
    Income tax benefit relating to stock
     plan                                               0           62,000
    Compensation paid in Class A common
     stock                                        816,474          120,000
    Supplemental employee benefits               (154,216)        (203,708)
    Class A common stock contributed to
     401(k) Plan                                  168,023          139,640
    Deferred income taxes                         109,000          676,059
    (Gain) loss on disposal of assets               1,952          (17,968)
    Changes in operating assets and
     liabilities:
      Receivables, inventories, and
      other current assets                       (599,165)       1,081,052
      Accounts payable and other current
      liabilities                                 616,978          126,622
                                          ---------------  ---------------
    Net cash provided by operating
     activities                                 3,827,663        6,800,553
Investing activities
  Acquisition of newspaper business            (1,232,509)               0
  Acquisition of television business                    0      (34,330,365)
  Purchases of property and equipment          (1,852,431)      (1,317,345)
  Deferred acquisition costs                   (2,033,892)      (1,797,772)
  Proceeds from asset sales                         2,742          113,297
  Other                                          (261,233)        (157,538)
                                          ---------------  ---------------
  Net cash used in investing activities        (5,377,323)     (37,489,723)
Financing activities
  Dividends paid                                 (172,110)        (178,398)
  Class A common stock transactions                     0          402,749
  Proceeds from settlement of interest
   rate swap                                            0          215,000
  Proceeds from borrowings of long-term
   debt                                         2,200,000       36,725,000
  Payments on long-term debt                     (820,281)      (5,748,076)
                                          ---------------  ---------------
  Net cash provided by financing
   activities                                   1,207,609       31,416,275
                                          ---------------  ---------------
Increase (decrease) in cash and cash
 equivalents                                     (342,051)         727,105
  Cash and cash equivalents at beginning
   of period                                      558,520          559,991
                                          ---------------  ---------------
  Cash and cash equivalents at end of
   period                                        $216,469       $1,287,096
                                          ---------------  ---------------
                                          ---------------  ---------------
</TABLE>
    
 
   
           See notes to condensed consolidated financial statements.
    
 
                                      F-22
<PAGE>
                       GRAY COMMUNICATIONS SYSTEMS, INC.
        NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 
NOTE A -- BASIS OF PRESENTATION
   
    The   accompanying  unaudited  consolidated  financial  statements  of  Gray
Communications Systems, Inc.  (the "Company") have  been prepared in  accordance
with  generally accepted accounting principles for interim financial information
and instructions to  Form 10-Q and  Article 10 of  Regulation S-X.  Accordingly,
they  do not include all of the  information and footnotes required by generally
accepted accounting principles for complete financial statements. In the opinion
of  management,  all  adjustments  (consisting  of  normal  recurring  accruals)
considered  necessary  for a  fair  presentation have  been  included. Operating
results for  the six  month period  ended  June 30,  1996, are  not  necessarily
indicative  of the results that may be expected for the year ending December 31,
1996. For further  information, refer to  the consolidated financial  statements
and footnotes thereto included herein.
    
 
    Certain   amounts  in  the  accompanying  unaudited  consolidated  financial
statements have been reclassified to conform to the 1996 format.
 
NOTE B -- EMPLOYMENT AGREEMENTS
 
   
    During the quarter ended March 31, 1995, the Company awarded 150,000  shares
of  its Class A Common Stock to its former president and chief executive officer
under his employment agreement.  Compensation expense of approximately  $696,000
was recognized for these awards in the six months ended June 30, 1995.
    
 
   
    The  Company has  an employment agreement  with its  current President which
provides for  an  award  of 122,034  shares  of  Class A  Common  Stock  if  his
employment  with  the  Company  continues  until  September  1999. Approximately
$60,000 of expense was recognized in each  quarter of 1995 and 1996 relating  to
this award and approximately $1.2 million of expense will be recognized over the
five-year period ending in 1999.
    
 
NOTE C -- BUSINESS ACQUISITIONS
 
   
    The  Company's acquisitions in  1995 and 1996 have  been accounted for under
the purchase method of accounting. Under the purchase method of accounting,  the
results   of  operations  of  the  acquired   businesses  are  included  in  the
accompanying unaudited condensed consolidated  financial statements as of  their
respective  acquisition dates. The assets and liabilities of acquired businesses
are included based on an allocation of the purchase price.
    
 
PENDING ACQUISITIONS
 
   
    In December 1995 and as amended in  March 1996, the Company entered into  an
asset   purchase   agreement   to  acquire   (the   "Phipps   Acquisition")  two
CBS-affiliated stations, WCTV-TV ("WCTV") serving Tallahassee,
Florida/Thomasville, Georgia  and WKXT-TV  ("WKXT") in  Knoxville, Tennessee,  a
satellite broadcasting business and a paging business (collectively, the "Phipps
Business"). The purchase price is estimated at approximately $185.0 million. The
Company's  Board  of Directors  has agreed  to pay  Bull Run  Corporation ("Bull
Run"), a principal stockholder of the Company, a finder's fee equal to 1% of the
proposed purchase  price  for services  performed,  of which  $1.05  million  is
included  in  deferred acquisition  costs and  $950,000 is  due and  included in
accounts payable at June 30, 1996.
    
 
    The consummation of the  Phipps Acquisition, which is  expected to occur  by
September  1996, is subject to approval  by the appropriate regulatory agencies.
In connection with the Phipps Acquisition, the Company is seeking approval  from
the   Federal  Communications  Commission  ("FCC")  of  the  assignment  of  the
television broadcast licenses for  WCTV and WKXT.  Current FCC regulations  will
require  the Company to divest itself of WALB-TV ("WALB") in Albany, Georgia and
WJHG-TV ("WJHG") in Panama City, Florida due to common ownership restrictions on
stations  with  overlapping  signals.  In   order  to  satisfy  applicable   FCC
requirements,  the Company, subject to FCC approval, intends to swap such assets
for assets  of one  or more  television stations  of comparable  value and  with
comparable broadcast cash flow in a
 
                                      F-23
<PAGE>
                       GRAY COMMUNICATIONS SYSTEMS, INC.
  NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
 
NOTE C -- BUSINESS ACQUISITIONS (CONTINUED)
   
transaction qualifying for deferred capital gains treatment under the "like-kind
exchange"  provision of Section  1031 of the  Internal Revenue Code  of 1986, as
amended (the  "Code").  If the  Company  is unable  to  effect such  a  swap  on
satisfactory  terms within the time  period granted by the  FCC, the Company may
transfer such assets to a trust with a view towards the trustee effecting a swap
or sale of  such assets.  Any such  trust arrangement  would be  subject to  the
approval of the FCC.
    
 
    Condensed balance sheets of WALB and WJHG are as follows (in thousands):
 
   
<TABLE>
<CAPTION>
                                                    --------------------------------
<S>                                                 <C>              <C>
                                                             JUNE 30, 1996
                                                    --------------------------------
                                                               WALB             WJHG
                                                    ---------------  ---------------
Current assets                                               $1,801            $ 913
Property and equipment                                        1,714            1,014
Other assets                                                     66                3
                                                    ---------------  ---------------
Total assets                                                 $3,581           $1,930
                                                    ---------------  ---------------
                                                    ---------------  ---------------
Current liabilities                                          $1,756            $ 474
Other liabilities                                               214                0
Stockholder's equity                                          1,611            1,456
                                                    ---------------  ---------------
Total liabilities and stockholder's equity                   $3,581           $1,930
                                                    ---------------  ---------------
                                                    ---------------  ---------------
</TABLE>
    
 
   
    Condensed income statement data of WALB is as follows (in thousands):
    
 
   
<TABLE>
<CAPTION>
                                                    --------------------------------
                                                               SIX MONTHS
                                                             ENDED JUNE 30,
                                                    --------------------------------
                                                               1995             1996
                                                    ---------------  ---------------
<S>                                                 <C>              <C>
Broadcasting revenues                                        $4,715           $5,098
Expenses                                                      2,356            2,440
                                                    ---------------  ---------------
Operating income                                              2,359            2,658
Other income                                                      9                9
                                                    ---------------  ---------------
Income before income taxes                                    2,368            2,667
                                                    ---------------  ---------------
                                                    ---------------  ---------------
Net income                                                   $1,468           $1,654
                                                    ---------------  ---------------
                                                    ---------------  ---------------
</TABLE>
    
 
   
    Condensed income statement data of WJHG is as follows (in thousands):
    
 
   
<TABLE>
<CAPTION>
                                                    --------------------------------
                                                               SIX MONTHS
                                                             ENDED JUNE 30,
                                                    --------------------------------
                                                               1995             1996
                                                    ---------------  ---------------
<S>                                                 <C>              <C>
Broadcasting revenues                                        $1,826           $2,408
Expenses                                                      1,690            1,933
                                                    ---------------  ---------------
Operating income                                                136              476
Other income                                                     31               16
                                                    ---------------  ---------------
Income before income taxes                                      167              492
                                                    ---------------  ---------------
                                                    ---------------  ---------------
Net income                                                    $ 103            $ 305
                                                    ---------------  ---------------
                                                    ---------------  ---------------
</TABLE>
    
 
                                      F-24
<PAGE>
                       GRAY COMMUNICATIONS SYSTEMS, INC.
  NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
 
NOTE C -- BUSINESS ACQUISITIONS (CONTINUED)
   
    The  Phipps Acquisition will be funded with a portion of the anticipated net
proceeds of proposed public offerings by the Company of $150.0 million principal
amount of the Company's senior subordinated notes and 3.5 million shares of  the
Company's Class B Common Stock, the sale of 1,000 shares of the Company's Series
B  Preferred Stock ($10.0 million) and warrants to Bull Run and the sale of KTVE
Inc., the Company's broadcast station in Monroe, Louisiana/El Dorado,  Arkansas.
Additionally,  the Company plans to retire its existing bank credit facility and
other senior indebtedness (See Notes E and  F) and enter into a new bank  credit
facility.
    
 
    In  connection  with the  Phipps Acquisition,  a bank  has provided  a $10.0
million stand-by letter of credit to the seller of the Phipps Business on behalf
of the Company. The letter of credit will be payable under certain conditions if
the Phipps Acquisition is not completed. In connection with the issuance of  the
letter  of credit,  a stockholder  of the Company  has executed  a put agreement
which the bank can exercise if the Company defaults on repayment of any  amounts
that might be paid in accordance with the terms of the letter of credit.
 
1996 ACQUISITIONS
 
   
    On January 4, 1996, the Company purchased substantially all of the assets of
WRDW-TV,  a  CBS television  affiliate serving  the Augusta,  Georgia television
market (the "Augusta  Acquisition"). The purchase  price of approximately  $35.9
million,  excluding  assumed  liabilities  of  approximately  $1.3  million, was
financed primarily through long-term  borrowings. The assets acquired  consisted
of  office equipment and broadcasting operations located in North Augusta, South
Carolina. Based on a preliminary allocation of the purchase price, the excess of
the purchase  price over  the fair  value of  net tangible  assets acquired  was
approximately  $32.5 million.  In connection  with the  Augusta Acquisition, the
Company's Board of Directors approved the payment of a $360,000 finder's fee  to
Bull Run.
    
 
   
    Funds for the Augusta Acquisition were obtained from the modification of the
Company's  existing  bank  debt to  a  variable rate  reducing  revolving credit
facility (the  "Senior Credit  Facility") and  the sale  to Bull  Run of  an  8%
subordinated  note due January 3, 2005 in  the principal amount of $10.0 million
(the "8% Note"). In connection  with the sale of the  8% Note, the Company  also
issued  warrants to Bull Run to purchase  487,500 shares of Class A Common Stock
at $17.88 per  share, 300,000  shares of which  are currently  vested, with  the
remainder  vesting in five equal annual installments commencing in 1997 provided
that the  8% Note  is outstanding.  The Senior  Credit Facility  provides for  a
credit  line up to $54.2 million, of which $49.5 million was outstanding at June
30, 1996. This transaction also required a modification of the interest rate  of
the  Company's $25.0  million senior  secured note  (the "Senior  Note") with an
institutional investor from 10.08% to 10.7%.
    
 
    As part of  the financing arrangements  for the Phipps  Acquisition, the  8%
Note will be retired and the Company will issue to Bull Run, in exchange for the
8%  Note, 1,000 shares of Series A Preferred Stock. The warrants issued with the
8% Note will vest in accordance  with the schedule described above provided  the
Series A Preferred Stock remains outstanding.
 
   
    An unaudited pro forma statement of income for the six months ended June 30,
1995,  is presented below  and assumes that the  Augusta Acquisition occurred on
January 1, 1995.
    
 
    This pro forma unaudited statement of  income does not purport to  represent
the  Company's actual results of operations had the Augusta Acquisition occurred
on January  1,  1995, and  should  not serve  as  a forecast  of  the  Company's
operating  results for any  future periods. The pro  forma adjustments are based
solely upon certain  assumptions that management  believes are reasonable  under
the circumstances at this
 
                                      F-25
<PAGE>
                       GRAY COMMUNICATIONS SYSTEMS, INC.
  NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
 
NOTE C -- BUSINESS ACQUISITIONS (CONTINUED)
   
time.  Subsequent  adjustments  are  expected upon  final  determination  of the
allocation of the purchase price. An unaudited pro form statement of income  for
the six months ended June 30, 1995 is as follows (in thousands, except per share
data):
    
 
   
<TABLE>
<CAPTION>
                                                                                 SIX MONTHS
                                                                                 ENDED JUNE
                                                                                   30, 1995
                                                                                 ----------
Operating revenues                                                                  $32,666
<S>                                                                              <C>
Expenses                                                                             23,906
Depreciation and amortization                                                         2,396
Non-cash compensation paid in Class A Common Stock                                      816
                                                                                 ----------
                                                                                      5,548
Miscellaneous income, net                                                                33
Interest expense                                                                      4,572
                                                                                 ----------
Pro forma income before income taxes                                                  1,009
Income tax expense                                                                      407
                                                                                 ----------
Pro forma net income                                                                 $  602
                                                                                 ----------
                                                                                 ----------
Pro forma average shares outstanding                                                  4,436
                                                                                 ----------
                                                                                 ----------
Pro forma earnings per share                                                        $  0.14
                                                                                 ----------
                                                                                 ----------
</TABLE>
    
 
1995 ACQUISITION
 
   
    On January 6, 1995, the Company purchased substantially all of the assets of
the   GWINNET  POST-TRIBUNE  and  assumed  certain  liabilities  (the  "Gwinnett
Acquisition"). The assets consist of office equipment and publishing  operations
located in Lawrenceville, Georgia. The purchase price of $3.7 million, including
assumed  liabilities of approximately  $370,000, was paid  by approximately $1.2
million  in  cash   (financed  through  long-term   borrowings  and  cash   from
operations),  the issuance of 44,117 shares of Class A Common Stock (having fair
value of  $500,000),  and  $1.5  million payable  to  the  sellers  pursuant  to
non-compete  agreements. The excess of the purchase price over the fair value of
net tangible assets acquired was approximately $3.4 million. In connection  with
the  Gwinnett Acquisition the Company's Board  of Directors approved the payment
of a $75,000 finder's fee to Bull Run.
    
 
   
NOTE D -- STOCKHOLDERS' EQUITY
    
 
   
    A portion of the funds for the Augusta Acquisition was obtained from the  8%
Note,  which included the issuance  of warrants to Bull  Run to purchase 487,500
shares of Class A Common Stock at $17.88 per share, 300,000 shares of which  are
currently  vested, with the remainder vesting  in five equal annual installments
commencing in 1997 provided that the 8% Note is outstanding. Approximately  $2.6
million  of the $10.0 million of proceeds from  the 8% Note was allocated to the
warrants and increased Class A Common Stock. This allocation of the proceeds was
based on an estimate of the relative fair values of the 8% Note and the warrants
on the date of issuance. The  Company is amortizing the original issue  discount
over  the period of time that  the 8% Note is to  be outstanding. During the six
months ended June  30, 1996,  the Company recognized  approximately $144,000  in
amortization costs for the $2.6 million original issue discount.
    
 
   
NOTE E -- COMMITMENTS AND CONTINGENCIES
    
 
   
    The  Company entered  into an  interest rate  swap agreement  (the "Interest
Swap") on June 2, 1995,  to effectively convert a  portion of its floating  rate
debt   to   a  fixed   rate  basis.   The  Interest   Swap  was   effective  for
    
 
                                      F-26
<PAGE>
                       GRAY COMMUNICATIONS SYSTEMS, INC.
  NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
 
   
NOTE E -- COMMITMENTS AND CONTINGENCIES (CONTINUED)
    
   
five years. Approximately $25.0 million  of the Company's outstanding  long-term
debt  was subject  to this  Interest Swap. Effective  May 14,  1996, the Company
received $215,000 as settlement of this  Interest Swap, which will be  reflected
as  a reduction  of interest  expense over  the remaining  term of  the original
five-year Interest Swap.
    
 
   
    Upon termination of the Interest Swap, the Company entered into an  interest
rate  cap  agreement (the  "Interest Cap")  on  May 16,  1996, which  expires on
September 6,  1996. Approximately  $25.0 million  of the  Company's  outstanding
long-term  debt is subject to this Interest Cap. This Interest Cap serves to cap
the base rate of the Company's Senior Credit Facility at 7%. The base rate  used
to  compare against the  Interest Cap at  June 30, 1996  was approximately 5.5%.
Accordingly, the Interest Cap had no value at June 30, 1996. The effective  rate
of  the  Senior  Credit  Facility  at June  30,  1996  was  approximately 8.94%.
Effective July 19, 1996,  the Company's interest rates,  based on a spread  over
LIBOR,  were  reduced 0.25%  as the  result  of the  attainment of  certain debt
provisions.
    
 
   
    The Company has entered into an agreement with GOCOM Television of Ouachita,
L.P. to sell  KTVE Inc.,  the Company's NBC-affiliated  station serving  Monroe,
Louisiana/El  Dorado, Arkansas, for approximately $9.5  million in cash plus the
amount of  the accounts  receivable on  the  date of  closing (estimated  to  be
approximately  $750,000) to the extent collected by the buyer, to be paid to the
Company 150 days  following the date  of closing. The  sale agreement  regarding
KTVE  includes a number of closing conditions, including final FCC approval, and
there can  be no  assurance that  such closing  conditions can  be satisfied  or
waived.  The closing of  the KTVE sale  is expected to  occur by September 1996,
although there can be no assurance with respect thereto. The Company anticipates
the gain, net of estimated income taxes,  and the income taxes on the KTVE  sale
will be approximately $2.8 million and $2.8 million, repsectively.
    
 
   
    A condensed balance sheet of KTVE is as follows (in thousands):
    
 
   
<TABLE>
<CAPTION>
                                                                                                     JUNE 30, 1996
                                                                                                     -------------
<S>                                                                                                  <C>
Current assets                                                                                               $ 864
Property and equipment                                                                                       1,540
Other assets                                                                                                   550
                                                                                                     -------------
Total assets                                                                                                $2,954
                                                                                                     -------------
Current liabilities                                                                                           $333
Other liabilities                                                                                              476
Stockholders' equity                                                                                         2,145
                                                                                                     -------------
Total liabilities and stockholders' equtiy                                                                  $2,954
                                                                                                     -------------
                                                                                                     -------------
</TABLE>
    
 
                                      F-27
<PAGE>
                       GRAY COMMUNICATIONS SYSTEMS, INC.
  NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
 
   
NOTE E -- COMMITMENTS AND CONTINGENCIES (CONTINUED)
    
   
    Condensed statement of operations data of KTVE is as follows (in thousands):
    
 
   
<TABLE>
<CAPTION>
                                                                      ----------------------
<S>                                                                   <C>         <C>
                                                                            SIX MONTHS
                                                                          ENDED JUNE 30,
                                                                      ----------------------
                                                                            1995        1996
                                                                      ----------  ----------
 
Broadcasting revenues                                                     $1,958      $2,303
Expenses                                                                   1,891       1,943
                                                                      ----------  ----------
Operating income                                                              67         360
Other income                                                                   9           1
                                                                      ----------  ----------
Income before income taxes                                                    76         361
                                                                      ----------  ----------
                                                                      ----------  ----------
Net income                                                                 $  47       $ 224
                                                                      ----------  ----------
                                                                      ----------  ----------
</TABLE>
    
 
   
NOTE F -- SUBSEQUENT EVENTS
    
 
   
    On  May  2,  1996,  the  Company filed  a  Registration  Statement  with the
Securities and Exchange Commission (the "SEC") on Form S-1 to register the  sale
of  4,025,000 shares of Class B Common Stock, including an over-allotment option
granted by  the  Company  to  the underwriters  of  such  offering,  subject  to
shareholder  approval. Also  on May  2, 1996,  the Company  filed a Registration
Statement with the SEC on Form S-1  to register the sale of $150,000,000  Senior
Subordinated  Notes due in 2006 (the "Notes"). On  May 13, July 9, and August 9,
1996, the Company filed amendments to such Registration Statements.
    
 
                                      F-28
<PAGE>
                         REPORT OF INDEPENDENT AUDITORS
 
Board of Directors and Stockholders
Gray Communications Systems, Inc.
 
    We  have  audited  the  accompanying  consolidated  balance  sheets  of Gray
Communications Systems, Inc. as  of December 31, 1994  and 1995 and the  related
consolidated  statements of income, stockholders' equity and cash flows for each
of the  three years  in the  period  ended December  31, 1995.  These  financial
statements   are   the   responsibility  of   the   Company's   management.  Our
responsibility is to express an opinion  on these financial statements based  on
our audits.
 
    We  conducted  our audits  in  accordance with  generally  accepted auditing
standards. 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 financial statements  referred to above present fairly,
in  all  material  respects,  the   consolidated  financial  position  of   Gray
Communications Systems, Inc. at December 31, 1994 and 1995, and the consolidated
results  of its operations and its cash flows for each of the three years in the
period ended December 31, 1995, in conformity with generally accepted accounting
principles.
 
                                             ERNST & YOUNG LLP
   
Columbus, Georgia
February 14, 1996, except for Note K, as
to which the date is August 9, 1996
    
 
                                      F-29
<PAGE>
                       GRAY COMMUNICATIONS SYSTEMS, INC.
                          CONSOLIDATED BALANCE SHEETS
 
<TABLE>
<CAPTION>
                                                    --------------------------------
                                                              DECEMBER 31,
                                                               1994             1995
                                                    ---------------  ---------------
<S>                                                 <C>              <C>
                                       ASSETS
Current assets (NOTE C):
  Cash and cash equivalents                                $558,520         $559,991
  Trade accounts receivable, less allowance for
   doubtful accounts of $694,000 and $450,000,
   respectively                                           8,448,366        9,560,274
  Recoverable income taxes                                      -0-        1,347,007
  Inventories                                               368,202          553,032
  Current portion of program broadcast rights             1,195,633        1,153,058
  Other current assets                                      247,687          263,600
                                                    ---------------  ---------------
      Total current assets                               10,818,408       13,436,962
Property and equipment (NOTES B AND C):
  Land                                                      646,562          758,944
  Buildings and improvements                              8,594,343        8,630,694
  Equipment                                              24,781,964       28,229,255
                                                    ---------------  ---------------
                                                         34,022,869       37,618,893
  Allowance for depreciation                            (17,999,752)     (20,601,819)
                                                    ---------------  ---------------
                                                         16,023,117       17,017,074
Other assets (NOTE C):
  Deferred acquisition costs (including $860,000
   to Bull Run Corporation) (NOTE B)                            -0-        3,330,481
  Deferred loan costs                                     1,381,908        1,232,261
  Goodwill and other intangibles (NOTE B)                38,538,413       42,004,050
  Other                                                   2,026,938        1,219,650
                                                    ---------------  ---------------
                                                         41,947,259       47,786,442
                                                    ---------------  ---------------
                                                        $68,788,784      $78,240,478
                                                    ---------------  ---------------
                                                    ---------------  ---------------
                        LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
  Trade accounts payable (including $670,000
   payable to Bull Run Corporation at December 31,
   1995)                                                 $2,114,008       $3,752,742
  Employee compensation and benefits                      3,150,154        4,213,639
  Accrued expenses                                          512,483          560,877
  Accrued interest                                          985,955        1,064,491
  Current portion of program broadcast obligations        1,687,481        1,205,784
  Current portion of long term debt                       1,293,481        2,861,672
                                                    ---------------  ---------------
      Total current liabilities                           9,743,562       13,659,205
Long-term debt (NOTE C)                                  51,646,265       51,462,645
Other long-term liabilities:
  Program broadcast obligations, less current
   portion                                                   54,489          109,971
  Supplemental employee benefits (NOTE D)                 2,343,379        2,212,685
  Deferred income taxes (NOTE F)                                -0-          201,348
  Other acquisition related liabilities (NOTES B
   AND C)                                                       -0-        1,609,026
                                                    ---------------  ---------------
                                                          2,397,868        4,133,030
Commitments and contingencies (NOTES B, C AND H)
Stockholders' equity (NOTES B, C AND E)
  Class A Common Stock, no par value; authorized
   10,000,000 shares; issued 4,841,785 and
   5,082,756 shares, respectively                         3,393,747        6,795,976
  Retained earnings                                       8,245,626        8,827,906
                                                    ---------------  ---------------
                                                         11,639,373       15,623,882
  Treasury Stock, 663,180 shares, at cost                (6,638,284)      (6,638,284)
                                                    ---------------  ---------------
                                                          5,001,089        8,985,598
                                                    ---------------  ---------------
                                                        $68,788,784      $78,240,478
                                                    ---------------  ---------------
                                                    ---------------  ---------------
</TABLE>
 
                            See accompanying notes.
 
                                      F-30
<PAGE>
                       GRAY COMMUNICATIONS SYSTEMS, INC.
                       CONSOLIDATED STATEMENTS OF INCOME
 
<TABLE>
<CAPTION>
                                                    -------------------------------------------------
                                                                 YEAR ENDED DECEMBER 31,
                                                               1993             1994             1995
                                                    ---------------  ---------------  ---------------
<S>                                                 <C>              <C>              <C>
Operating revenues:
  Broadcasting (less agency commissions)                $15,003,752      $22,826,392      $36,750,035
  Publishing                                             10,109,368       13,692,073       21,866,220
                                                    ---------------  ---------------  ---------------
                                                         25,113,120       36,518,465       58,616,255
Expenses:
  Broadcasting                                           10,028,837       14,864,011       23,201,990
  Publishing                                              7,662,127       11,198,011       20,016,137
  Corporate and administrative                            2,326,691        1,958,449        2,258,261
  Depreciation                                            1,387,698        1,745,293        2,633,360
  Amortization of intangible assets                         177,063          396,342        1,325,526
  Non-cash compensation paid in common stock (NOTE
   D)                                                           -0-           80,000        2,321,250
                                                    ---------------  ---------------  ---------------
                                                         21,582,416       30,242,106       51,756,524
                                                    ---------------  ---------------  ---------------
                                                          3,530,704        6,276,359        6,859,731
Miscellaneous income, net                                   202,465          188,307          143,612
                                                    ---------------  ---------------  ---------------
                                                          3,733,169        6,464,666        7,003,343
Interest expense                                            984,706        1,922,965        5,438,374
                                                    ---------------  ---------------  ---------------
Income from continuing operations before income
 taxes                                                    2,748,463        4,541,701        1,564,969
Federal and state income taxes (NOTE F)                   1,068,000        1,776,000          634,000
                                                    ---------------  ---------------  ---------------
    INCOME FROM CONTINUING OPERATIONS                     1,680,463        2,765,701          930,969
Discontinued business (NOTE I):
 Income from operations of discontinued business,
 net of applicable income tax expense
  of $30,000                                                 48,174              -0-              -0-
Gain on disposal of discontinued business, net of
 applicable income tax expense of
  $501,000                                                  817,717              -0-              -0-
                                                    ---------------  ---------------  ---------------
    NET EARNINGS                                         $2,546,354       $2,765,701         $930,969
                                                    ---------------  ---------------  ---------------
                                                    ---------------  ---------------  ---------------
Average outstanding common shares                         4,610,625        4,689,453        4,481,317
                                                    ---------------  ---------------  ---------------
                                                    ---------------  ---------------  ---------------
Earnings per common share
  Continuing operations                                        $.36             $.59             $.21
  Discontinued operations                                       .01              -0-              -0-
  Gain on disposal of discontinued operations                   .18              -0-              -0-
                                                    ---------------  ---------------  ---------------
    NET EARNINGS
     PER COMMON SHARE                                          $.55             $.59             $.21
                                                    ---------------  ---------------  ---------------
                                                    ---------------  ---------------  ---------------
</TABLE>
 
                            See accompanying notes.
 
                                      F-31
<PAGE>
                       GRAY COMMUNICATIONS SYSTEMS, INC.
                CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
 
   
<TABLE>
<CAPTION>
                                ------------------------------------------------------------------------------------------------
                                   CLASS A COMMON STOCK       RESTRICTED        TREASURY STOCK
                                --------------------------         STOCK  --------------------------      RETAINED
                                      SHARES        AMOUNT     DEFERRALS        SHARES        AMOUNT      EARNINGS         TOTAL
                                ------------  ------------  ------------  ------------  ------------  ------------  ------------
<S>                             <C>           <C>           <C>           <C>           <C>           <C>           <C>
Balance at December 31, 1992       4,610,625    $1,307,071          $-0-           -0-          $-0-    $3,542,901    $4,849,972
Net income                               -0-           -0-           -0-           -0-           -0-     2,546,354     2,546,354
Cash dividends ($.07 per
 share)                                  -0-           -0-           -0-           -0-           -0-      (307,376)     (307,376)
Issuance of Common Stock-
 Directors' Stock Plan (NOTE
 E)                                    3,000        29,000           -0-           -0-           -0-           -0-        29,000
                                ------------  ------------  ------------  ------------  ------------  ------------  ------------
Balance at December 31, 1993       4,613,625     1,336,071           -0-           -0-           -0-     5,781,879     7,117,950
Net income                               -0-           -0-           -0-           -0-           -0-     2,765,701     2,765,701
Cash dividends ($.07 share)              -0-           -0-           -0-           -0-           -0-      (301,954)     (301,954)
Purchase of Common Stock (NOTE
 E)                                      -0-           -0-           -0-      (663,180)   (6,638,284)          -0-    (6,638,284)
Issuance of Common Stock
 (NOTES B AND G):
  401(k) Plan                          3,160        32,676           -0-           -0-           -0-           -0-        32,676
  Rockdale Acquisition               225,000     2,025,000           -0-           -0-           -0-           -0-     2,025,000
                                ------------  ------------  ------------  ------------  ------------  ------------  ------------
Balance at December 31, 1994       4,841,785     3,393,747           -0-      (663,180)   (6,638,284)    8,245,626     5,001,089
Net income                               -0-           -0-           -0-           -0-           -0-       930,969       930,969
Cash dividends ($.08 share)              -0-           -0-           -0-           -0-           -0-      (348,689)     (348,689)
Issuance of Common Stock
 (NOTES B, D, E, AND G):
  401(k) Plan                         18,354       298,725           -0-           -0-           -0-           -0-       298,725
  Directors' Stock Plan               23,500       238,919           -0-           -0-           -0-           -0-       238,919
  Non-qualified Stock Plan             5,000        48,335           -0-           -0-           -0-           -0-        48,335
  Gwinnett Acquisition                44,117       500,000           -0-           -0-           -0-           -0-       500,000
  Restricted Stock Plan              150,000     2,081,250    (2,081,250)          -0-           -0-           -0-           -0-
Amortization of Restricted
 Stock Plan deferrals                    -0-           -0-     2,081,250           -0-           -0-           -0-     2,081,250
Income tax benefits relating
 to stock plans                          -0-       235,000           -0-           -0-           -0-           -0-       235,000
                                ------------  ------------  ------------  ------------  ------------  ------------  ------------
Balance at December 31, 1995       5,082,756    $6,795,976          $-0-      (663,180)  $(6,638,284)   $8,827,906    $8,985,598
                                ------------  ------------  ------------  ------------  ------------  ------------  ------------
                                ------------  ------------  ------------  ------------  ------------  ------------  ------------
</TABLE>
    
 
                            See accompanying notes.
 
                                      F-32
<PAGE>
                       GRAY COMMUNICATIONS SYSTEMS, INC.
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
 
<TABLE>
<CAPTION>
                                          -------------------------------------------------
                                                       YEAR ENDED DECEMBER 31,
                                                     1993             1994             1995
                                          ---------------  ---------------  ---------------
<S>                                       <C>              <C>              <C>
OPERATING ACTIVITIES
  Net income                                   $2,546,354       $2,765,701         $930,969
  Items which did not use (provide)
   cash:
    Depreciation                                1,612,040        1,745,293        2,633,360
    Amortization of intangible assets             177,063          396,342        1,325,526
    Amortization of program broadcast
     rights                                       924,878        1,217,976        1,647,035
    Payments for program broadcast
     rights                                      (976,150)      (1,181,598)      (1,776,796)
    Compensation paid in Common Stock                 -0-           80,000        2,321,250
    Supplemental employee benefits               (608,729)        (454,703)        (370,694)
    Common Stock contributed to 401(k)
     Plan                                             -0-           32,676          298,725
    Deferred income taxes                         196,000          523,000          863,000
    (Gain) loss on asset sales                    (52,819)         (21,419)           1,652
    Changes in operating assets and
     liabilities:
      Trade accounts receivable                  (116,526)      (1,444,159)        (852,965)
      Recoverable income taxes                 (1,066,422)         589,942       (1,347,007)
      Inventories                                 (92,526)        (179,930)        (181,034)
      Other current assets                       (352,174)         (24,361)         (11,208)
      Trade accounts payable                      701,556         (306,493)       1,441,745
      Employee compensation and benefits           10,755        1,246,726        1,011,667
      Accrued expenses                           (163,458)         (45,335)        (414,087)
      Accrued interest                            (97,419)         858,164           78,536
    Reduction in value of net assets of
     discontinued business                      1,135,394              -0-              -0-
    Gain on disposal of warehouse
     operations                                (2,454,111)             -0-              -0-
                                          ---------------  ---------------  ---------------
Net cash provided by operating
 activities                                     1,323,706        5,797,822        7,599,674
 
INVESTING ACTIVITIES
  Acquisitions of newspaper businesses                -0-       (3,442,836)      (2,084,621)
  Acquisition of television business           (1,505,655)     (37,492,643)             -0-
  Purchases of property and equipment          (2,582,225)      (1,767,800)      (3,279,721)
  Proceeds from asset sales                     3,076,764          103,434            2,475
  Deferred acquisition costs                          -0-              -0-       (3,330,481)
  Deferred loan costs                                 -0-       (1,251,287)             -0-
  Proceeds from disposals of operating
   units                                        2,922,893        1,222,697              -0-
  Other                                         1,150,104         (141,767)        (236,904)
                                          ---------------  ---------------  ---------------
Net cash provided by (used in) investing
 activities                                     3,061,881      (42,770,202)      (8,929,252)
 
FINANCING ACTIVITIES
  Proceeds from borrowings:
    Short-term debt                               650,000              -0-        1,200,000
    Long-term debt                                    -0-       55,826,260        2,950,000
  Repayments of borrowings:
    Short-term debt                              (170,000)        (480,000)      (1,200,000)
    Long-term debt                             (5,133,349)     (11,206,281)      (1,792,516)
    Dividends paid                               (307,376)        (301,954)        (348,689)
    Common Stock transactions                      29,000       (6,638,284)         522,254
                                          ---------------  ---------------  ---------------
  Net cash provided by (used in)
   financing activities                        (4,931,725)      37,199,741        1,331,049
                                          ---------------  ---------------  ---------------
  Increase (decrease) in cash and cash
   equivalents                                   (546,138)         227,361            1,471
  Cash and cash equivalents at beginning
   of year                                        877,297          331,159          558,520
                                          ---------------  ---------------  ---------------
  Cash and cash equivalents at end of
   year                                          $331,159         $558,520         $559,991
                                          ---------------  ---------------  ---------------
                                          ---------------  ---------------  ---------------
</TABLE>
 
                            See accompanying notes.
 
                                      F-33
<PAGE>
                       GRAY COMMUNICATIONS SYSTEMS, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                               DECEMBER 31, 1995
 
A.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
DESCRIPTION OF BUSINESS
 
    The  Company's  operations, which  are located  in six  southeastern states,
include six television  stations, three  daily newspapers, and  six area  weekly
advertising only direct mail publications.
 
PRINCIPLES OF CONSOLIDATION
 
    The  consolidated financial statements  include the accounts  of the Company
and its  subsidiaries. All  significant intercompany  accounts and  transactions
have been eliminated.
 
REVENUE RECOGNITION
 
    The Company recognizes revenues as services are performed.
 
USE OF ESTIMATES
 
    The  preparation  of  financial  statements  in  conformity  with  generally
accepted  accounting  principles  requires  management  to  make  estimates  and
assumptions  that affect  the amounts reported  in the  financial statements and
accompanying notes. Actual results could differ from those estimates.
 
CASH AND CASH EQUIVALENTS
 
    Cash and cash equivalents include cash on deposit with a bank. Deposits with
the bank are generally insured in limited amounts.
 
INVENTORIES
 
    Inventories, principally newsprint and supplies, are stated at the lower  of
cost  or  market. The  Company uses  the last-in,  first-out ("LIFO")  method of
determining costs  for  substantially  all  of  its  inventories.  Current  cost
exceeded  the LIFO value of inventories by approximately $36,000 and $170,000 at
December 31, 1994 and 1995, respectively.
 
PROGRAM BROADCAST RIGHTS
 
    Rights to programs  available for  broadcast are initially  recorded at  the
amounts  of  total license  fees payable  under the  license agreements  and are
charged to operating expense on the basis of total programs available for use on
the straight-line method. The portion of the unamortized balance expected to  be
charged  to operating expense in the succeeding  year is classified as a current
asset, with the remainder classified as  a non-current asset. The liability  for
program  broadcast rights is  classified as current  or long-term, in accordance
with the payment terms of the various licenses. The liability is not  discounted
for imputation of interest.
 
PROPERTY AND EQUIPMENT
 
    Property  and  equipment  are  carried  at  cost.  Depreciation  is computed
principally by the straight-line method for financial reporting purposes and  by
accelerated methods for income tax purposes.
 
INTANGIBLE ASSETS
 
    Intangible  assets are  stated at cost,  and with the  exception of goodwill
acquired prior to November 1, 1970 (approximately $2.47 million at December  31,
1994  and  1995),  are amortized  using  the straight-line  method.  Goodwill is
amortized over 40 years.  Loan acquisition fees are  amortized over the life  of
the  applicable indebtedness. Non-compete agreements are amortized over the life
of  the  specific  agreement.  Accumulated  amortization  of  intangible  assets
resulting  from business  acquisitions was $0.4  million and $1.7  million as of
December 31, 1994 and 1995, respectively.
 
                                      F-34
<PAGE>
                       GRAY COMMUNICATIONS SYSTEMS, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
A.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
    If facts and circumstances  indicate that the goodwill  may be impaired,  an
evaluation of continuing value would be performed. If an evaluation is required,
the estimated future undiscounted cash flows associated with this asset would be
compared  to its  carrying amount to  determine if  a write down  to fair market
value or discounted cash flow value is required.
 
INCOME TAXES
 
    Deferred income taxes are provided on the differences between the  financial
statement  and income tax basis  of assets and liabilities.  The Company and its
subsidiaries file a consolidated  federal income tax  return and separate  state
and local tax returns.
 
CAPITAL STOCK
 
    The  Company has authorized 10 million shares of Class B Common Stock and 20
million shares of Preferred  Stock, none of which  have been issued at  December
31,  1995. All references made to Common  Stock in the December 31, 1995 Audited
Consolidated Financial Statements of the Company and the Notes thereto refer  to
the Company's Class A Common Stock.
 
    On  August 17, 1995, the Board of Directors declared a 50% stock dividend on
the Company's Common Stock payable October 2, 1995 to stockholders of record  on
September  8, 1995 to effect  a three for two  stock split. All applicable share
and per share data have been adjusted to give effect to the stock split.
 
EARNINGS PER COMMON SHARE
 
    Earnings per  common share  are based  on the  weighted average  common  and
common  equivalent  shares outstanding  during the  period determined  using the
treasury stock method.  Common equivalent  shares are attributable  to a  Common
Stock  award to be paid  in 1999 and outstanding stock  options (SEE NOTES D AND
E).
 
STOCK OPTION PLAN
 
    The Company has elected  to follow Accounting  Principles Board Opinion  No.
25,   "Accounting  for  Stock  Issued  to  Employees"  ("APB  25")  and  related
interpretations in  accounting for  its  stock options.  Under  APB 25,  if  the
exercise  price of the  stock options granted  by the Company  equals the market
price of the underlying stock on the date of the grant, no compensation  expense
is recognized.
 
CONCENTRATION OF CREDIT RISK
 
    The  Company provides advertising  air time to  national, regional and local
advertisers within the geographic areas in which the Company operates. Credit is
extended based  on an  evaluation  of the  customer's financial  condition,  and
generally advance payment is not required. Credit losses are provided for in the
financial   statements   and   consistently   have   been   within  management's
expectations.
 
INTEREST SWAP
 
    The Company has entered into an  interest rate swap agreement to modify  the
interest  characteristics of a portion of its outstanding debt (see Note C). The
agreement involves the exchange  of amounts based on  a fixed interest rate  for
amounts  based on variable interest rates over the life of the agreement without
an exchange  of the  notional amount  upon  which the  payments are  based.  The
differential  to be  paid or  received as interest  rates change  is accrued and
recognized as an adjustment of interest expense related to the debt (the accrual
accounting  method).  The   related  amount  payable   to  or  receivable   from
counter-parties  is included in  other liabilities or assets.  The fair value of
the swap agreement is not recognized  in the financial statements. In the  event
of  the early  extinguishment of a  designated debt obligation,  any realized or
unrealized gain or loss from the  swap would be recognized in income  coincident
with the extinguishment.
 
                                      F-35
<PAGE>
                       GRAY COMMUNICATIONS SYSTEMS, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
A.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
FAIR VALUE OF FINANCIAL INSTRUMENTS
 
    The  Company has adopted FASB Statement No. 107, DISCLOSURE ABOUT FAIR VALUE
OF FINANCIAL INSTRUMENTS, which requires disclosure of fair value, to the extent
practical, of certain  of the  Company's financial instruments.  The fair  value
amounts do not necessarily represent the amount that could be realized in a sale
or  settlement. The Company's financial instruments are comprised principally of
an interest rate swap and long-term debt.
 
    The estimated  fair  value of  long-term  bank  debt at  December  31,  1995
approximated  book value  since, in  management's opinion,  such obligations are
subject to fluctuating market rates of interest and can be settled at their face
amounts. The fair value of the Senior Note at December 31, 1995 was estimated by
management to be its carrying value at that date. The Company amended its Senior
Note at January 4, 1996 and  among other things, changed its effective  interest
rate. The Company does not anticipate settlement of long-term debt at other than
book value.
 
    The  fair value of other financial  instruments classified as current assets
or  liabilities  approximates  their  carrying  values  due  to  the  short-term
maturities of these instruments.
 
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
 
    In  March  1995,  the FASB  issued  Statement  No. 121,  ACCOUNTING  FOR THE
IMPAIRMENT OF LONG-LIVED  ASSETS AND  FOR LONG-LIVED  ASSETS TO  BE DISPOSED  OF
("Statement 121"), which requires impairment losses to be recorded on long-lived
assets  used in  operations when  indicators of  impairment are  present and the
undiscounted cash flows estimated to be generated by those assets are less  than
the  asset's carrying  amount. Statement 121  also addresses  the accounting for
long-lived assets  which are  expected  to be  disposed.  The Company  does  not
believe  that the adoption of  Statement 121 will have  a material impact on the
Company's financial position.
 
RECLASSIFICATIONS
 
    Certain amounts in the  accompanying consolidated financial statements  have
been reclassified to conform to the 1995 format.
 
B.  BUSINESS ACQUISITIONS
    The Company's acquisitions have been accounted for under the purchase method
of  accounting.  Under  the  purchase  method  of  accounting,  the  results  of
operations  of  the  acquired  businesses  are  included  in  the   accompanying
consolidated  financial statements as of their respective acquisition dates. The
assets  and  liabilities  of  acquired  businesses  are  included  based  on  an
allocation of the purchase price.
 
PENDING ACQUISITIONS
 
    In December 1995, the Company agreed to acquire certain assets owned by John
H.  Phipps,  Inc.  ("Phipps").  The  assets  include  WCTV-TV,  the  CBS network
affiliate serving the Tallahassee,  Florida and Thomasville, Georgia  television
market,  WKXT-TV,  the  CBS network  affiliate  in Knoxville,  Tennessee,  and a
communications and paging  business located  in three  southeastern states.  The
purchase  price is estimated  at approximately $185.0  million. The transaction,
which is expected to close  in 1996, is subject  to approval by the  appropriate
regulatory  agencies. If  approved, the  Company will  be required  to divest of
certain of its broadcasting operations due to a signal overlap with WCTV, unless
the rules of the Federal Communications Commission are modified to permit common
ownership of television stations with overlapping signals.
 
    The Company plans to fund the costs of this acquisition through the issuance
of debt and equity securities. Additionally,  the Company will amend or  replace
its existing bank credit facilities.
 
    In  connection with  this acquisition, a  bank has provided  a $10.0 million
letter of credit to Phipps on behalf  of the Company. The letter of credit  will
be   payable   under   certain   conditions   if   this   acquisition   is   not
 
                                      F-36
<PAGE>
                       GRAY COMMUNICATIONS SYSTEMS, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
B.  BUSINESS ACQUISITIONS (CONTINUED)
completed.  In  connection  with  the  issuance  of  the  letter  of  credit,  a
stockholder  of the  Company has  executed a  put agreement  which the  bank can
exercise if the Company defaults on repayment of any amounts that might be  paid
in accordance with the terms of the letter of credit.
 
    In  connection with the proposed acquisition  of assets owned by Phipps, the
Company's Board  of Directors  has agreed  to pay  Bull Run  Corporation  ("Bull
Run"),  a stockholder, a finder's fee equal to 1% of the proposed purchase price
for services  performed, of  which $550,000  was due  and included  in  accounts
payable at December 31, 1995.
 
   
    On January 4, 1996, the Company purchased substantially all of the assets of
WRDW-TV,  a  CBS television  affiliate serving  the Augusta,  Georgia television
market (the "Augusta  Acquisition"). The purchase  price of approximately  $35.9
million,  excluding  assumed  liabilities  of  approximately  $4.0  million, was
financed primarily through long-term  borrowings. The assets acquired  consisted
of  office equipment and broadcasting operations located in North Augusta, South
Carolina. Based on a preliminary allocation of the purchase price, the excess of
the purchase  price over  the fair  value of  net tangible  assets acquired  was
approximately  $32.4 million.  In connection  with the  Augusta Acquisition, the
Company's Board of Directors approved the payment of a $360,000 finder's fee  to
Bull Run.
    
 
    Funds for the Augusta Acquisition were obtained from the sale to Bull Run of
an 8% subordinated note due January 3, 2005 in principal amount of $10.0 million
(the "Subordinated Note"). In connection with the sale of the Subordinated Note,
the  Company also  issued warrants  to Bull  Run to  purchase 487,500  shares of
Common Stock at $17.88  per share, 300,000 of  which are currently vested,  with
the  remaining warrants  vesting in five  equal installments  commencing in 1997
provided that the  Subordinated Note  is outstanding.  The warrants  may not  be
exercised  prior to  January 3,  1998 and  expire in  January 2006.  The Company
modified its existing  bank debt to  a variable rate  reducing revolving  credit
facility  providing a credit line of $55.0 million (see Note C). The outstanding
credit facility balance subsequent to the Augusta Acquisition was  approximately
$54.0  million; including $28.4 million, which  was outstanding under the credit
facility at December 31, 1995, $25.2  million used for the Augusta  Acquisition,
and  $425,000  used  for the  Company's  working capital.  The  transaction also
required a modification  of the  interest rate  of the  Company's $25.0  million
senior  secured note  with an  institutional investor  (the "Senior  Note") from
10.08% to 10.7%.
 
    An unaudited pro  forma balance  sheet as of  December 31,  1995 and  income
statements  for the years ended  December 31, 1994 and  1995 are presented below
giving effect to the Augusta Acquisition as though it had occurred on January 1,
1994.
 
                                      F-37
<PAGE>
                       GRAY COMMUNICATIONS SYSTEMS, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
B.  BUSINESS ACQUISITIONS (CONTINUED)
   
    Pro forma December 31, 1995 balance sheet (in thousands):
    
 
<TABLE>
<CAPTION>
                                                                             AUGUSTA        PRO FORMA         ADJUSTED
                                                               GRAY      ACQUISITION      ADJUSTMENTS        PRO FORMA
                                                    ---------------  ---------------  ---------------  ---------------
                                                                                                (Unaudited)
<S>                                                 <C>              <C>              <C>              <C>
Current assets                                              $13,437           $3,061            $(594)         $15,904
Property and equipment                                       17,017            1,778              402           19,197
Goodwill and other intangibles                               46,566            4,129           26,152           76,847
Other long-term assets                                        1,220            2,571           (2,518)           1,273
                                                    ---------------  ---------------  ---------------  ---------------
                                                            $78,240          $11,539          $23,442         $113,221
                                                    ---------------  ---------------  ---------------  ---------------
                                                    ---------------  ---------------  ---------------  ---------------
Current liabilities                                         $13,659           $1,131             $(41)         $14,749
Long-term debt                                               51,462              -0-           33,729           85,191
Other long-term liabilities                                   4,133            2,680           (2,518)           4,295
Stockholders' equity                                          8,986            7,728           (7,728)           8,986
                                                    ---------------  ---------------  ---------------  ---------------
                                                            $78,240          $11,539          $23,442         $113,221
                                                    ---------------  ---------------  ---------------  ---------------
                                                    ---------------  ---------------  ---------------  ---------------
</TABLE>
 
   
    These pro forma unaudited results of operations do not purport to  represent
what  the Company's actual results of operations  would have been if the Augusta
Acquisition had occurred on January 1, 1994, and should not serve as a  forecast
of  the  Company's  operating results  for  any  future periods.  The  pro forma
adjustments are based solely upon  certain assumptions that management  believes
are  reasonable under the circumstances at this time. Subsequent adjustments are
expected upon final determination of the  allocation of the purchase price.  Pro
forma  statement  of operations  for the  year  ended December  31, 1994  are as
follows (in thousands, except per share data):
    
 
<TABLE>
<CAPTION>
                                                                             AUGUSTA        PRO FORMA         ADJUSTED
                                                               GRAY      ACQUISITION      ADJUSTMENTS        PRO FORMA
                                                    ---------------  ---------------  ---------------  ---------------
                                                                                                (Unaudited)
<S>                                                 <C>              <C>              <C>              <C>
Revenues, net                                               $36,518           $8,046             $255          $44,819
Expenses                                                     30,242            5,854              935           37,031
                                                    ---------------  ---------------  ---------------  ---------------
                                                              6,276            2,192             (680)           7,788
Miscellaneous income (expense), net                             189              (55)              90              224
Interest expense                                              1,923              -0-            3,156            5,079
                                                    ---------------  ---------------  ---------------  ---------------
                                                              4,542            2,137           (3,746)           2,933
Income tax expense (benefit)                                  1,776              -0-             (603)           1,173
                                                    ---------------  ---------------  ---------------  ---------------
    NET EARNINGS                                             $2,766           $2,137          $(3,143)          $1,760
                                                    ---------------  ---------------  ---------------  ---------------
                                                    ---------------  ---------------  ---------------  ---------------
Average shares outstanding                                    4,689                                              4,689
                                                    ---------------                                    ---------------
                                                    ---------------                                    ---------------
Earnings per share                                             $.59                                               $.38
                                                    ---------------                                    ---------------
                                                    ---------------                                    ---------------
</TABLE>
 
                                      F-38
<PAGE>
                       GRAY COMMUNICATIONS SYSTEMS, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
B.  BUSINESS ACQUISITIONS (CONTINUED)
   
    Pro forma statement of operations for  the year ended December 31, 1995  are
as follows (in thousands, except per share data):
    
 
<TABLE>
<CAPTION>
                                                                             AUGUSTA        PRO FORMA         ADJUSTED
                                                               GRAY      ACQUISITION      ADJUSTMENTS        PRO FORMA
                                                    ---------------  ---------------  ---------------  ---------------
                                                                                                (Unaudited)
<S>                                                 <C>              <C>              <C>              <C>
Revenues, net                                               $58,616           $8,660             $227          $67,503
Expenses                                                     51,756            6,198              944           58,898
                                                    ---------------  ---------------  ---------------  ---------------
                                                              6,860            2,462             (717)           8,605
Miscellaneous income (expense), net                             143             (220)             128               51
Interest expense                                              5,438              -0-            3,355            8,793
                                                    ---------------  ---------------  ---------------  ---------------
                                                              1,565            2,242           (3,944)            (137)
Income tax expense (benefit)                                    634              -0-             (675)             (41)
                                                    ---------------  ---------------  ---------------  ---------------
    NET EARNINGS (LOSS)                                        $931           $2,242          $(3,269)            $(96)
                                                    ---------------  ---------------  ---------------  ---------------
                                                    ---------------  ---------------  ---------------  ---------------
Average shares outstanding                                    4,481                                              4,354
                                                    ---------------                                    ---------------
                                                    ---------------                                    ---------------
Earnings (loss) per share                                      $.21                                              $(.02)
                                                    ---------------                                    ---------------
                                                    ---------------                                    ---------------
</TABLE>
 
    The pro forma results presented above include adjustments to reflect (i) the
reclassification of national representative commissions as an expense consistent
with the presentation of the Company, (ii) the incurrence of interest expense to
fund  the  Augusta Acquisition,  (iii) depreciation  and amortization  of assets
acquired, and  (iv) the  income tax  effect of  such pro  forma adjustments  and
income  taxes on the  earnings of the  Augusta Acquisition. With  respect to the
Augusta Acquisition,  the pro  forma adjustments  are based  upon a  preliminary
allocation of the purchase price.
 
1995 ACQUISITIONS
 
   
    On January 6, 1995, the Company purchased substantially all of the assets of
The  Gwinnett  Post-Tribune  and  assumed  certain  liabilities  (the  "Gwinnett
Acquisition").  The  assets  consisted   of  office  equipment  and   publishing
operations   located   in  Lawrenceville,   Georgia.   The  purchase   price  of
approximately $3.7  million,  including  assumed  liabilities  of  approximately
$370,000,  was  paid by  approximately $1.2  million  in cash  (financed through
long-term borrowings and cash from operations), issuance of 44,117 shares of the
Company's Common Stock (having fair value of $500,000), and $1.5 million payable
to the sellers pursuant  to non-compete agreements. The  excess of the  purchase
price over the fair value of net tangible assets acquired was approximately $3.4
million.  In connection  with the Gwinnett  Acquisition, the  Company's Board of
Directors approved the payment of a $75,000 finders' fee to Bull Run. Pro  forma
results  of the Gwinnett  Acquisition have not  been presented as  the effect on
prior periods is not significant.
    
 
    On September 1, 1995, the Company purchased substantially all of the  assets
of  three area  weekly advertising  only direct  mail publications,  and assumed
certain  liabilities  (the  "Tallahassee  Acquisition").  The  tangible   assets
acquired  consist  of land  and office  buildings, office  equipment, mechanical
equipment and automobiles used  in operations located  in southwest Georgia  and
north  Florida. The  purchase price of  approximately $1.4  million consisted of
$833,000 in cash and approximately  $583,000 in assumed liabilities. The  excess
of  the purchase price over  the fair value of  net tangible assets acquired was
approximately $934,000.  Pro  forma results  giving  effect to  the  Tallahassee
Acquisition  have  not been  presented as  the  effect on  prior periods  is not
significant.
 
1994 ACQUISITIONS
 
    On September 2, 1994, the Company purchased substantially all of the  assets
of Kentucky Central Television, Inc. ("Kentucky Central") and assumed certain of
its liabilities (the "Kentucky Acquisition").
 
                                      F-39
<PAGE>
                       GRAY COMMUNICATIONS SYSTEMS, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
B.  BUSINESS ACQUISITIONS (CONTINUED)
Kentucky  Central operated two  television stations, WKYT  located in Lexington,
Kentucky and WYMT located in Hazard,  Kentucky, both of which are affiliates  of
the  CBS television network. The purchase  price of approximately $38.1 million,
excluding  acquisition  costs   of  approximately  $2.1   million  and   assumed
liabilities  of  approximately  $2.3  million,  was  financed  primarily through
long-term borrowings. The excess  of the purchase price  over the fair value  of
net tangible assets acquired was approximately $31.4 million.
 
    On  May 31, 1994, the  Company purchased substantially all  of the assets of
Citizens Publishing Company, Inc.  and assumed certain  of its liabilities  (the
"Rockdale  Acquisition").  The acquired  assets consist  of  land and  an office
building located in Conyers, Georgia, containing The Rockdale Citizen  newspaper
and  other assets  relating to the  newspaper publishing  business. The purchase
price of approximately  $4.8 million consisted  of a $2.8  million cash  payment
financed  through long-term bank borrowings, and 225,000 shares of the Company's
Common Stock (with a fair value of $2.0 million at the closing date). The excess
of the purchase price over  the fair value of  net tangible assets acquired  was
approximately $4.0 million.
 
   
    On  October 18, 1994, the Company  purchased substantially all of the assets
of four  area  weekly advertising  only  direct mail  publications  and  assumed
certain of their liabilities. The assets consist of land and an office building,
office  equipment, automobiles,  and publishing operations  located in southwest
Georgia. The  purchase  price  of  approximately $1.5  million  consisted  of  a
$545,000  cash payment and  approximately $1.0 million  financed by the sellers.
The excess of  the purchase price  over the  fair value of  net tangible  assets
acquired was approximately $1.2 million. Pro forma results giving effect to this
acquisition  have  not been  presented as  the  effect on  prior periods  is not
significant.
    
 
    Unaudited pro forma statements of income from continuing operations for  the
years  ended December 31, 1993  and 1994, are presented  below, giving effect to
the Rockdale Acquisition  and the Kentucky  Acquisition (collectively the  "1994
Acquisitions") as though they had occurred on January 1, 1993.
 
                                      F-40
<PAGE>
                       GRAY COMMUNICATIONS SYSTEMS, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
B.  BUSINESS ACQUISITIONS (CONTINUED)
   
    These  pro forma unaudited results of operations do not purport to represent
what the Company's  actual results  of operations would  have been  if the  1994
Acquisitions had occurred on January 1, 1993, and should not serve as a forecast
of  the  Company's  operating results  for  any  future periods.  The  pro forma
adjustments are  based upon  certain assumptions  that management  believes  are
reasonable   under  the  circumstances.  The  unaudited  pro  forma  results  of
continuing operations are as follows (in thousands, except per share data):
    
 
<TABLE>
<CAPTION>
                                                                        YEAR ENDED DECEMBER 31, 1993
                                                                      KENTUCKY      ROCKDALE     PRO FORMA      ADJUSTED
                                                            GRAY   ACQUISITION   ACQUISITION   ADJUSTMENTS     PRO FORMA
                                                    ------------  ------------  ------------  ------------  ------------
                                                                                (UNAUDITED)
<S>                                                 <C>           <C>           <C>           <C>           <C>
Operating revenues                                       $25,113       $14,526        $2,660          $-0-       $42,299
Operating expenses                                        21,582        10,827         2,646           877        35,932
                                                    ------------  ------------  ------------  ------------  ------------
  Operating income                                         3,531         3,699            14          (877)        6,367
Miscellaneous income, net                                    202           219           -0-           -0-           421
                                                    ------------  ------------  ------------  ------------  ------------
                                                           3,733         3,918            14          (877)        6,788
Interest expense                                             985             4             9         3,187         4,185
                                                    ------------  ------------  ------------  ------------  ------------
  Income from continuing operations before income
   taxes                                                   2,748         3,914             5        (4,064)        2,603
Income tax expense (benefit)                               1,068         1,326           -0-        (1,405)          989
                                                    ------------  ------------  ------------  ------------  ------------
Income from continuing operations                         $1,680        $2,588            $5        $2,659        $1,614
                                                    ------------  ------------  ------------  ------------  ------------
                                                    ------------  ------------  ------------  ------------  ------------
Average shares outstanding                                 4,611                                                   4,836
                                                    ------------                                            ------------
                                                    ------------                                            ------------
Earnings per common share from continuing
 operations                                                 $.36                                                    $.33
                                                    ------------                                            ------------
                                                    ------------                                            ------------
</TABLE>
 
<TABLE>
<CAPTION>
                                                                        YEAR ENDED DECEMBER 31, 1994
                                                                      KENTUCKY      ROCKDALE     PRO FORMA      ADJUSTED
                                                            GRAY   ACQUISITION   ACQUISITION   ADJUSTMENTS     PRO FORMA
                                                    ------------  ------------  ------------  ------------  ------------
                                                                                (UNAUDITED)
<S>                                                 <C>           <C>           <C>           <C>           <C>
Operating revenues                                       $36,518       $10,237          $980          $-0-       $47,735
Operating expenses                                        30,242         7,382           930           559        39,113
                                                    ------------  ------------  ------------  ------------  ------------
  Operating income                                         6,276         2,855            50          (559)        8,622
Miscellaneous income, net                                    189            19           -0-           -0-           208
                                                    ------------  ------------  ------------  ------------  ------------
                                                           6,465         2,874            50          (559)        8,830
Interest expense                                           1,923           -0-             4         2,412         4,339
                                                    ------------  ------------  ------------  ------------  ------------
  Income from continuing operations before income
   taxes                                                   4,542         2,874            46        (2,971)        4,491
Income tax expense (benefit)                               1,776           237           -0-          (208)        1,805
                                                    ------------  ------------  ------------  ------------  ------------
  Net income from continuing operations                   $2,766        $2,637           $46       $(2,763)       $2,686
                                                    ------------  ------------  ------------  ------------  ------------
                                                    ------------  ------------  ------------  ------------  ------------
Average shares outstanding                                 4,689                                                   4,780
                                                    ------------                                            ------------
                                                    ------------                                            ------------
Earnings per common share from continuing
 operations                                                 $.59                                                    $.56
                                                    ------------                                            ------------
                                                    ------------                                            ------------
</TABLE>
 
    The pro forma results presented above include adjustments to reflect (i) the
incurrence of interest expense to fund the 1994 Acquisitions, (ii)  depreciation
and amortization of assets acquired, and (iii) the
 
                                      F-41
<PAGE>
                       GRAY COMMUNICATIONS SYSTEMS, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
B.  BUSINESS ACQUISITIONS (CONTINUED)
income tax effect of such pro forma adjustments. Average outstanding shares used
to  calculate earnings  per share from  continuing operations for  1994 and 1993
include the 225,000 shares issued in connection with the Rockdale Acquisition.
 
C.  LONG-TERM DEBT
   
    Long-term debt consists of the following (in thousands):
    
 
<TABLE>
<CAPTION>
                                                              DECEMBER 31,
                                                               1994             1995
                                                    ---------------  ---------------
Senior Note                                                 $25,000          $25,000
<S>                                                 <C>              <C>
Bank Loan                                                    26,926           28,375
Other                                                         1,013              950
                                                    ---------------  ---------------
                                                             52,939           54,325
Less current portion                                         (1,293)          (2,862)
                                                    ---------------  ---------------
                                                            $51,646          $51,463
                                                    ---------------  ---------------
                                                    ---------------  ---------------
</TABLE>
 
    On September 2, 1994, the Company issued through a private placement with an
institutional investor,  a $25.0  million 9.33%  note (the  "Senior Note").  The
Senior  Note  provides  for  semi-annual  principal  payments  of  $2.5  million
beginning March  1999. Interest  is  payable semi-annually  in arrears  and  the
Senior  Note, as amended on  January 4, 1996, bears  interest at 10.7% (see Note
B). The agreement pursuant to which the Senior Note was issued contains  certain
restrictive  provisions, which,  among other things,  limit capital expenditures
and additional indebtedness, and  require minimum levels of  net worth and  cash
flows.
 
    On  September 2, 1994, the  Company entered into a  bank term loan agreement
(the "Bank Loan") which provided for borrowings of approximately $21.4  million.
On  November  30, 1994,  the Bank  Loan  was amended  to provide  for additional
borrowings of $6.7  million which were  used to purchase  663,180 shares of  the
Company's  Common Stock (SEE  NOTE E). The  Bank Loan, as  amended on January 4,
1996, bears interest, at the Company's option,  at a spread over LIBOR, or at  a
spread  over the bank's prime rate (8.96% at  January 4, 1996) (see Note B). The
Bank Loan is due  in varying, quarterly principal  payments of $750,000 to  $2.0
million  through September  2002 with two  quarterly installments  of $7 million
payable starting  December 2002.  The  Bank Loan  provides  for an  annual  loan
prepayment  based  on the  Company's  cash flow  as  defined by  the  Bank Loan.
Additionally, the effective interest rate of the Bank Loan can be changed  based
upon  the Company's  maintenance of certain  operating ratios as  defined by the
Bank Loan, not to exceed  the bank's prime rate plus  1.25% or LIBOR plus  3.5%.
The  Bank Loan contains restrictive provisions  similar to the provisions of the
Senior Note.
 
    The Senior Note and the  Bank Loan are secured  by substantially all of  the
Company's existing and hereafter acquired assets.
 
    The Company entered into a five year interest rate swap agreement on June 2,
1995, to effectively convert a portion of its floating rate debt to a fixed rate
basis.  Approximately $25.0 million of the  Company's outstanding debt under the
Bank Loan was subject to this interest rate swap agreement at December 31, 1995.
The effective rate of the Bank Loan and interest rate swap at December 31, 1995,
was approximately 8.64%  and 9.10%,  respectively. The unrealized  loss for  the
interest  rate swap was approximately $565,000  at December 31, 1995, based upon
comparison to treasury bond yields for bonds with similar maturity dates as  the
interest rate swap.
 
    At  December  31, 1995,  retained  earnings of  approximately  $500,000 were
available for dividends.
 
                                      F-42
<PAGE>
                       GRAY COMMUNICATIONS SYSTEMS, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
C.  LONG-TERM DEBT (CONTINUED)
   
    Aggregate minimum principal maturities on long-term debt as of December  31,
1995, were as follows (in thousands):
    
 
<TABLE>
<S>                                                       <C>
1996                                                          $2,862
1997                                                           5,039
1998                                                           6,634
1999                                                          12,615
2000                                                          11,303
Thereafter                                                    15,872
                                                          ----------
                                                             $54,325
                                                          ----------
                                                          ----------
</TABLE>
 
   
    The  Company made interest payments  of approximately $902,000, $1.2 million
and $5.4 million during 1993, 1994 and 1995, respectively.
    
 
D.  SUPPLEMENTAL EMPLOYEE BENEFITS AND OTHER AGREEMENTS
    The Company has an  employment agreement with  its President which  provides
him  122,034 shares  of the  Company's Common Stock  if his  employment with the
Company continues until September 1999. The Company will recognize approximately
$1.2 million of compensation  expense for this award  over the five year  period
ending  in 1999 ($80,000 and $240,000 of  expense was recorded in 1994 and 1995,
respectively).
 
   
    Pursuant to the terms of his employment agreement, Mr. Williams was  awarded
an  aggregate of 150,000 shares of Class A Common Stock in three separate grants
(the "Common Stock Award") based upon the Class A Common Stock attaining certain
designated values. Upon Mr. Williams'  resignation from the Company in  December
1995,  the Company entered into a separation agreement with him, which provided,
among other things, for  the payment of $596,000  over a two-year period  ending
November   1997  as   consideration  for  consulting   services,  Mr.  Williams'
resignation and certain non-compete and confidentiality agreements. The  Company
has  recorded approximately  $596,000 of  corporate and  administrative expenses
during the year  ended December 31,  1995 in  accordance with the  terms of  the
separation  agreement. In  addition, the  separation agreement  provided for the
removal of the  restrictions on  the Common Stock  Award and  such Common  Stock
Award  became fully vested.  Compensation expense of  approximately $2.1 million
(including $865,000 during the quarter ended December 31, 1995), was  recognized
in 1995 for the Common Stock Award.
    
 
    The Company has entered into supplemental retirement benefit agreements with
certain  key employees. These benefits  are to be paid  in equal monthly amounts
over the employees' life for a period  not to exceed 15 years after  retirement.
The  Company charges against  operations amounts sufficient  to fund the present
value of  the  estimated  lifetime supplemental  benefit  over  each  employee's
anticipated remaining period of employment. The Company maintains life insurance
coverage  on these  individuals (with  a cash  surrender value  of approximately
$280,000 at December 31, 1995) in adequate amounts to fund the agreements.
 
                                      F-43
<PAGE>
                       GRAY COMMUNICATIONS SYSTEMS, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
D.  SUPPLEMENTAL EMPLOYEE BENEFITS AND OTHER AGREEMENTS (CONTINUED)
   
    The following summarizes activity  relative to certain officers'  agreements
and the supplemental employee benefits (in thousands):
    
 
<TABLE>
<CAPTION>
                                                                      DECEMBER 31,
                                                               1993             1994             1995
                                                    ---------------  ---------------  ---------------
Beginning liability                                          $3,495           $2,960           $2,518
<S>                                                 <C>              <C>              <C>
                                                    ---------------  ---------------  ---------------
  Provision                                                     166              184              976
  Forfeitures                                                  (399)            (266)            (169)
                                                    ---------------  ---------------  ---------------
  Net (income) expense                                         (233)             (82)             807
  Payments                                                     (302)            (360)            (387)
                                                    ---------------  ---------------  ---------------
    Net change                                                 (535)            (442)             420
                                                    ---------------  ---------------  ---------------
Ending liability                                              2,960            2,518            2,938
Less current portion                                           (162)            (175)            (725)
                                                    ---------------  ---------------  ---------------
                                                             $2,798           $2,343           $2,213
                                                    ---------------  ---------------  ---------------
                                                    ---------------  ---------------  ---------------
</TABLE>
 
                                      F-44
<PAGE>
                       GRAY COMMUNICATIONS SYSTEMS, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
E.  STOCKHOLDERS' EQUITY
    The  Company has  a Stock  Purchase Plan  which allows  outside directors to
purchase up to  7,500 shares  of the Company's  Common Stock  directly from  the
Company  before the  end of January  following each calendar  year. The purchase
price per share approximates the market price of the Common Stock at the time of
the grant. During 1993, 1994 and 1995, certain directors purchased an  aggregate
of 3,000, -0- and 23,500 shares of Common Stock, respectively, under this plan.
 
    The  Company has  a long-term  incentive plan  (the "Incentive  Plan") under
which 600,000 shares of  the Company's Common Stock  are reserved for grants  to
key personnel for (i) incentive stock options, (ii) non-qualified stock options,
(iii)  stock  appreciation rights,  (iv)  restricted stock  and  (v) performance
awards, as defined by the  Incentive Plan. Stock underlying outstanding  options
or  performance awards are  counted against the  Incentive Plan's maximum shares
while such options  or awards  are outstanding.  Under the  Incentive Plan,  the
options  granted vest after a two year  period and expire three years after full
vesting. Options granted through December 31, 1995, have been granted at a price
which approximates fair market value on the date of the grant.
 
<TABLE>
<CAPTION>
                                                        EXERCISE PRICE PER SHARE
                                                    --------------------------------
                                                              $9.67           $13.33
<S>                                                 <C>              <C>
Stock options granted on November 18, 1993                   92,250              -0-
Forfeitures                                                  (3,000)             -0-
                                                    ---------------  ---------------
Stock options outstanding at
  December 31, 1993                                          89,250              -0-
  Options granted                                            73,559              -0-
  Forfeitures                                               (16,500)             -0-
                                                    ---------------  ---------------
Stock options outstanding at
  December 31, 1994                                         146,309              -0-
  Options granted                                               -0-           58,050
  Options exercised                                          (5,000)             -0-
  Forfeitures                                               (14,250)          (3,900)
                                                    ---------------  ---------------
Stock options outstanding at December 31, 1995              127,059           54,150
                                                    ---------------  ---------------
                                                    ---------------  ---------------
</TABLE>
 
    At December  31, 1995,  56,500 of  the  $9.67 options  issued in  1993  were
exercisable.
 
    On  December 1, 1994,  the Company repurchased 663,180  shares of its Common
Stock at a price of $10.00 per share for a total purchase price before expenses,
of $6.63 million. The trading value of the Common Stock on the NASDAQ Small  Cap
Issues  Market was $10.83  on December 1,  1994. The Common  Stock was purchased
from The Prudential Insurance Company of America and Sandler Associates (420,000
and 243,180 shares, respectively). The purchase  was funded by a bank loan  (SEE
NOTE C).
 
F.  INCOME TAXES
    The  Company uses the liability method in accounting for income taxes. Under
this method,  deferred  tax  assets  and liabilities  are  determined  based  on
differences  between financial reporting and tax bases of assets and liabilities
and are measured using  the enacted tax  rates and laws that  will be in  effect
when the differences are expected to reverse.
 
                                      F-45
<PAGE>
                       GRAY COMMUNICATIONS SYSTEMS, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
F.  INCOME TAXES (CONTINUED)
   
    Federal  and state income tax expense (benefit) included in the consolidated
financial statements are summarized as follows (in thousands):
    
 
<TABLE>
<CAPTION>
                                                                 YEAR ENDED DECEMBER 31,
                                                               1993             1994             1995
                                                    ---------------  ---------------  ---------------
Current
<S>                                                 <C>              <C>              <C>
  Federal                                                      $982           $1,093            $(253)
  State                                                         181              160               24
Deferred                                                        436              523              863
                                                    ---------------  ---------------  ---------------
                                                             $1,599           $1,776             $634
                                                    ---------------  ---------------  ---------------
                                                    ---------------  ---------------  ---------------
</TABLE>
 
    The total  provision  for  income  taxes  for  1993  included  $531,000  for
discontinued operations.
 
   
    The  components of  deferred income  tax expense  for federal  and state and
local income taxes resulted from the following (in thousands):
    
 
<TABLE>
<CAPTION>
                                                                 YEAR ENDED DECEMBER 31,
                                                               1993             1994             1995
                                                    ---------------  ---------------  ---------------
Accelerated depreciation for tax purposes                       $50              $19             $349
<S>                                                 <C>              <C>              <C>
Accelerated amortization for tax purposes                       -0-              164              726
Employee benefits and other agreements                          181               96             (150)
Temporary difference related to loss on sales of
 assets                                                         174              248              -0-
Excess of book over tax deductions for lease                      7               91              -0-
Other                                                            24              (95)             (62)
                                                    ---------------  ---------------  ---------------
                                                               $436             $523             $863
                                                    ---------------  ---------------  ---------------
                                                    ---------------  ---------------  ---------------
</TABLE>
 
                                      F-46
<PAGE>
                       GRAY COMMUNICATIONS SYSTEMS, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
F.  INCOME TAXES (CONTINUED)
   
    Significant components of the Company's deferred tax liabilities and  assets
are as follows (in thousands):
    
 
<TABLE>
<CAPTION>
                                                                      DECEMBER 31,
                                                               1993             1994             1995
                                                    ---------------  ---------------  ---------------
Deferred tax liabilities:
<S>                                                 <C>              <C>              <C>
  Net book value of property and equipment                     $704             $723           $1,069
  Goodwill                                                      -0-              164              890
  Other                                                         120              120              120
                                                    ---------------  ---------------  ---------------
    Total deferred tax liabilities                              824            1,007            2,079
Deferred tax assets:
  Liability under supplemental retirement plan                1,125            1,029            1,127
  Allowance for doubtful accounts                               168              335              195
  Difference in basis of assets held for sale                 1,189              941              941
  Other                                                         135              117              368
                                                    ---------------  ---------------  ---------------
    Total deferred tax assets                                 2,617            2,422            2,631
  Valuation allowance for deferred tax assets                  (753)            (753)            (753)
                                                    ---------------  ---------------  ---------------
    Net deferred tax assets                                   1,864            1,669            1,878
                                                    ---------------  ---------------  ---------------
  Deferred tax assets (liabilities)                          $1,040             $662            $(201)
                                                    ---------------  ---------------  ---------------
                                                    ---------------  ---------------  ---------------
</TABLE>
 
   
    A  reconciliation of income tax expense  at the statutory federal income tax
rate and income taxes as reflected  in the consolidated financial statements  is
as follows (in thousands):
    
 
<TABLE>
<CAPTION>
                                                                 YEAR ENDED DECEMBER 31,
                                                               1993             1994             1995
                                                    ---------------  ---------------  ---------------
Statutory rate applied to income                             $1,409           $1,544             $532
<S>                                                 <C>              <C>              <C>
State and local taxes, net of federal tax benefits              164              195               91
Other items, net                                                 26               37               11
                                                    ---------------  ---------------  ---------------
                                                             $1,599           $1,776             $634
                                                    ---------------  ---------------  ---------------
                                                    ---------------  ---------------  ---------------
</TABLE>
 
    The  Company made  income tax payments  of approximately  $2.1 million, $1.5
million and $742,000 during 1993, 1994  and 1995, respectively. At December  31,
1995,  the Company  had current recoverable  income taxes  of approximately $1.3
million.
 
G.  RETIREMENT PLANS
 
PENSION PLAN
 
    The Company  has  a retirement  plan  covering substantially  all  full-time
employees.  Retirement benefits are based on years of service and the employees'
highest average  compensation for  five consecutive  years during  the last  ten
years  of employment. The Company's funding policy is to contribute annually the
minimum amounts deductible for federal income tax purposes.
 
                                      F-47
<PAGE>
                       GRAY COMMUNICATIONS SYSTEMS, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
G.  RETIREMENT PLANS (CONTINUED)
   
    The net pension expense includes the following (in thousands):
    
 
<TABLE>
<CAPTION>
                                                                 YEAR ENDED DECEMBER 31,
                                                               1993             1994             1995
                                                    ---------------  ---------------  ---------------
Service costs-benefits earned during the year                  $224             $204             $221
<S>                                                 <C>              <C>              <C>
Interest cost on projected benefit obligation                   374              359              384
Actual return on plan assets                                   (377)             (91)            (655)
Net amortization and deferral                                   (63)            (338)             187
                                                    ---------------  ---------------  ---------------
Net pension expense                                            $158             $134             $137
                                                    ---------------  ---------------  ---------------
                                                    ---------------  ---------------  ---------------
Assumptions:
  Discount rate                                                8.0%             7.0%             8.0%
  Expected long-term rate of return on assets                  8.0%             7.0%             8.0%
  Estimated rate of increase in compensation
   levels                                                      6.0%             5.0%             6.0%
</TABLE>
 
   
    The following summarizes  the plan's funded  status and related  assumptions
(in thousands):
    
 
<TABLE>
<CAPTION>
                                                              DECEMBER 31,
                                                               1994             1995
                                                    ---------------  ---------------
Actuarial present value of accumulated benefit
 obligation is as follows:
<S>                                                 <C>              <C>
  Vested                                                     $4,452           $5,308
  Other                                                          66              135
                                                    ---------------  ---------------
                                                             $4,518           $5,443
                                                    ---------------  ---------------
                                                    ---------------  ---------------
Plan assets at fair value, primarily mutual funds
 and an unallocated insurance contract                       $5,307           $5,680
Projected benefit obligation                                 (5,015)          (5,904)
                                                    ---------------  ---------------
Plan assets in excess of (less than) projected
 benefit obligation                                             292             (224)
Unrecognized net (gain) loss                                   (135)             190
Unrecognized net asset                                         (409)            (355)
                                                    ---------------  ---------------
Pension liability included in consolidated balance
 sheet                                                        $(252)           $(389)
                                                    ---------------  ---------------
                                                    ---------------  ---------------
Assumptions:
  Discount rate                                                8.0%             7.0%
  Estimated rate of increase in compensation
   levels                                                      6.0%             5.0%
</TABLE>
 
    Effective  December  31,  1995,  the  Company  changed  certain  assumptions
utilized in the actuarially computed costs  and liabilities. The effect of  such
changes  was to increase the present  value of the projected benefit obligations
by approximately $613,000.
 
CAPITAL ACCUMULATION PLAN
 
    Effective October  1,  1994, the  Company  adopted the  Gray  Communications
Systems,  Inc. Capital Accumulation  Plan (the "Capital  Accumulation Plan") for
the purpose of  providing additional retirement  benefits for substantially  all
employees. The Capital Accumulation Plan is intended to meet the requirements of
section 401(k) of the Internal Revenue Code.
 
                                      F-48
<PAGE>
                       GRAY COMMUNICATIONS SYSTEMS, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
G.  RETIREMENT PLANS (CONTINUED)
    Employee contributions to the Capital Accumulation Plan, not to exceed 6% of
the  employees' gross pay,  are matched by  Company contributions. The Company's
percentage match is made by a contribution of the Company's Common Stock, in  an
amount declared by the Company's Board of Directors before the beginning of each
plan  year.  The Company's  percentage match  was  50% for  both the  year ended
December 31, 1995  and the  three months ended  December 31,  1994. The  Company
contributions  vest, based upon each employee's number of years of service, over
a period not to exceed  five years. The Company  has reserved 150,000 shares  of
its Common Stock for issuance under the Capital Accumulation Plan.
 
    Company matching contributions aggregating $32,676 and $298,725 were charged
to expense for 1994 and 1995, respectively, for the issuance of 3,160 and 18,354
shares, respectively of the Company's Common Stock.
 
H. COMMITMENTS AND CONTINGENCIES
    The  Company has various operating lease commitments for equipment, land and
office space which expire through the  year 2027. Future minimum payments  under
operating  leases with initial or remaining non-cancelable lease terms in excess
of one year are not material.
 
    The Company  has  entered  into  commitments  for  various  television  film
exhibition  rights  for  which  the  license  periods  have  not  yet commenced.
Obligations under these commitments are payable in the following years:
 
<TABLE>
<S>                                                 <C>
1996                                                       $491,360
1997                                                      1,431,983
1998                                                      1,351,273
1999                                                      1,133,860
2000                                                        456,733
                                                    ---------------
                                                         $4,865,209
                                                    ---------------
                                                    ---------------
</TABLE>
 
    The Company is subject  to legal proceedings and  claims which arise in  the
normal  course of  its business.  In the  opinion of  management, the  amount of
ultimate liability, if any,  with respect to these  actions will not  materially
affect the Company's financial position.
 
I.  DISCONTINUED OPERATIONS
    On  April 13, 1994, the Company completed the sale of the assets of Gray Air
Service (an operation discontinued in 1993) for approximately $1.2 million,  and
used  the proceeds  to reduce  the Company's  outstanding debt.  During the year
ended December  31,  1993,  the  Company  sold  its  investment  in  undeveloped
farmland, another asset held for sale, for approximately $2.0 million.
 
    On  March  31,  1993,  the  Company  completed  the  sale  of  its warehouse
operations to Gray Distribution Services, Inc., a Georgia corporation, owned  by
a  former  director  and  officer  of  the  Company.  The  net  sales  price  of
approximately $2.9 million was paid in cash at the date of closing. The  Company
recognized  a gain of approximately  $1.5 million, net of  income tax expense of
approximately $932,000, relative to the disposal of the warehouse operations.  A
special  independent committee of the Company's  Board of Directors approved the
terms and conditions of the sale.
 
                                      F-49
<PAGE>
                       GRAY COMMUNICATIONS SYSTEMS, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
I.  DISCONTINUED OPERATIONS (CONTINUED)
   
    The following summarizes information  relative to the discontinued  business
segment for the year ended December 31, 1993 (in thousands):
    
 
<TABLE>
<S>                                                 <C>
Operating revenues                                           $1,695
                                                    ---------------
                                                    ---------------
Operating earnings                                             $100
                                                    ---------------
                                                    ---------------
Net earnings                                                    $48
                                                    ---------------
                                                    ---------------
</TABLE>
 
J.  INFORMATION ON BUSINESS SEGMENTS
   
    The  Company operates in two business segments: broadcasting and publishing.
A transportation segment was discontinued in 1993 (see Note I). The broadcasting
segment operates five television stations  at December 31, 1995. The  Publishing
segment operates three daily newspapers in three different markets, and six area
weekly  advertising only direct mail publications in southwest Georgia and north
Florida. The following tables  present certain financial information  concerning
the   Company's  two  operating  segments   and  its  discontinued  segment  (in
thousands).
    
 
<TABLE>
<CAPTION>
                                                                 YEAR ENDED DECEMBER 31,
                                                               1993             1994             1995
                                                    ---------------  ---------------  ---------------
OPERATING REVENUE
<S>                                                 <C>              <C>              <C>
  Broadcasting                                              $15,004          $22,826          $36,750
  Publishing                                                 10,109           13,692           21,866
                                                    ---------------  ---------------  ---------------
                                                            $25,113          $36,518          $58,616
                                                    ---------------  ---------------  ---------------
                                                    ---------------  ---------------  ---------------
OPERATING PROFIT (LOSS) FROM CONTINUING OPERATIONS
  Broadcasting                                               $2,491           $5,241           $7,822
  Publishing                                                  1,040            1,036             (962)
                                                    ---------------  ---------------  ---------------
Total operating profit from continuing operations             3,531            6,277            6,860
Miscellaneous income and expense, net                           202              188              144
Interest expense                                               (985)          (1,923)          (5,439)
                                                    ---------------  ---------------  ---------------
Income from continuing operations before income
 taxes                                                       $2,748           $4,542           $1,565
                                                    ---------------  ---------------  ---------------
                                                    ---------------  ---------------  ---------------
</TABLE>
 
    Operating  profit  is  total  operating  revenue  less  operating  expenses,
excluding  miscellaneous  income  and  expense  (net)  and  interest.  Corporate
administrative expenses are allocated to  operating profit based on net  segment
revenues.
 
<TABLE>
<CAPTION>
                                                                 YEAR ENDED DECEMBER 31,
                                                               1993             1994             1995
                                                    ---------------  ---------------  ---------------
DEPRECIATION AND AMORTIZATION EXPENSE
<S>                                                 <C>              <C>              <C>
  Broadcasting                                                 $904           $1,326           $2,723
  Publishing                                                    438              690            1,190
                                                    ---------------  ---------------  ---------------
                                                              1,342            2,016            3,913
  Corporate                                                     223              126               46
                                                    ---------------  ---------------  ---------------
                                                              1,565            2,142            3,959
  Discontinued operations                                       224              -0-              -0-
                                                    ---------------  ---------------  ---------------
Total depreciation and amortization expense                  $1,789           $2,142           $3,959
                                                    ---------------  ---------------  ---------------
                                                    ---------------  ---------------  ---------------
</TABLE>
 
                                      F-50
<PAGE>
                       GRAY COMMUNICATIONS SYSTEMS, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
J.  INFORMATION ON BUSINESS SEGMENTS (CONTINUED)
<TABLE>
<S>                                                 <C>              <C>              <C>
CAPITAL EXPENDITURES
  Broadcasting                                                 $787           $1,330           $2,285
  Publishing                                                    755              366              973
                                                    ---------------  ---------------  ---------------
                                                              1,542            1,696            3,258
  Corporate                                                     124               72               22
                                                    ---------------  ---------------  ---------------
                                                              1,666            1,768            3,280
  Discontinued operations                                       916              -0-              -0-
                                                    ---------------  ---------------  ---------------
Total capital expenditures                                   $2,582           $1,768           $3,280
                                                    ---------------  ---------------  ---------------
                                                    ---------------  ---------------  ---------------
</TABLE>
 
<TABLE>
<CAPTION>
                                                                      DECEMBER 31,
                                                               1993             1994             1995
                                                    ---------------  ---------------  ---------------
IDENTIFIABLE ASSETS
<S>                                                 <C>              <C>              <C>
  Broadcasting                                               $9,984          $53,173          $54,022
  Publishing                                                  4,753           11,878           18,170
                                                    ---------------  ---------------  ---------------
                                                             14,737           65,051           72,192
  Corporate                                                   5,699            3,738            6,048
                                                    ---------------  ---------------  ---------------
                                                             20,436           68,789           78,240
  Discontinued operations                                       936              -0-              -0-
                                                    ---------------  ---------------  ---------------
Total identifiable assets                                   $21,372          $68,789          $78,240
                                                    ---------------  ---------------  ---------------
                                                    ---------------  ---------------  ---------------
</TABLE>
 
   
K. SUBSEQUENT EVENTS
    
   
    On  May  2,  1996,  the  Company filed  a  Registration  Statement  with the
Securities and Exchange Commission (the "SEC") on Form S-1 to register the  sale
of  4,025,000 shares of Class B Common Stock, including an over-allotment option
granted by the  Company to the  underwriters of  such offering. Also  on May  2,
1996,  the Company filed  a Registration Statement  with the SEC  on Form S-1 to
register the sale  of $150,000,000 Senior  Subordinated Notes due  in 2006  (the
"Notes"). On May 13, July 9, and August 9, 1996, the Company filed amendments to
such Registration Statements. The Notes will be jointly and severally guaranteed
(the  "Subsidiary  Guarantees")  by  all  of  the  Company's  subsidiaries  (the
"Subsidiary Guarantors"). The obligations of the Subsidiary Guarantors under the
Subsidiary  Guarantees  will  be  subordinated,  to  the  same  extent  as   the
obligations of the Company in respect of the Notes, to the prior payment in full
of  all existing and future senior debt of the Subsidiary Guarantors (which will
include any guarantee issued by such Subsidiary Guarantors of any senior debt).
    
 
   
    The Company is  a holding  company with  no material  independent assets  or
operations,  other  than  its  investment in  its  subsidiaries.  The Subsidiary
Guarantors are, directly or indirectly, wholly-owned subsidiaries of the Company
and the Subsidiary Guarantees will be full, unconditional and joint and several.
All of the current  and future direct and  indirect subsidiaries of the  Company
will  be guarantors of the Notes.  Accordingly, separate financial statements of
each of  the Subsidiary  Guarantors  are not  presented because  management  has
determined that they are not material to investors.
    
 
                                      F-51
<PAGE>
                         REPORT OF INDEPENDENT AUDITORS
 
Partners of Television Station Partners, L.P.
 
    We  have audited  the accompanying  balance sheet  of WRDW-TV,  an operating
station of Television Station Partners, L.P.,  as of December 31, 1995, and  the
related  statements of income, partnership's equity, and cash flows for the year
then  ended.  These   financial  statements  are   the  responsibility  of   the
Partnership's  management. Our responsibility is to  express an opinion on these
financial statements based on our audit.
 
    We conducted  our  audit  in accordance  with  generally  accepted  auditing
standards.  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 audit provides a reasonable basis for our opinion.
 
    In our opinion, the financial  statements referred to above present  fairly,
in  all material  respects, the  financial position  of WRDW-TV  at December 31,
1995, and the results  of its operations  and its cash flows  for the year  then
ended in conformity with the generally accepted accounting principles.
 
                                          ERNST & YOUNG LLP
Atlanta, Georgia
January 26, 1996
 
                                      F-52
<PAGE>
                                    WRDW-TV
                             (THE AUGUSTA BUSINESS)
                                 BALANCE SHEET
                               DECEMBER 31, 1995
 
<TABLE>
<S>                                                                                                  <C>
ASSETS
 
Current assets:
  Cash                                                                                                   $333,658
  Accounts receivable, net of allowance for doubtful accounts of approximately $117,380                 1,748,208
  Television film exhibition rights                                                                       924,107
  Prepaid and other current assets                                                                         55,342
                                                                                                     ------------
      Total current assets                                                                              3,061,315
Property, buildings and equipment-net (NOTE 3):                                                         1,778,429
Television film exhibition rights                                                                       2,570,850
Intangible assets-net                                                                                   4,128,730
                                                                                                     ------------
      Total                                                                                           $11,539,324
                                                                                                     ------------
                                                                                                     ------------
 
LIABILITIES AND PARTNERSHIP'S EQUITY
 
Current liabilities:
  Accounts payable and accrued expenses (NOTE 4)                                                         $233,197
  Obligations for television film exhibition rights                                                       898,251
                                                                                                     ------------
      Total current liabilities                                                                         1,131,448
Obligations for television film exhibition rights                                                       2,680,267
Commitments and contingencies (NOTE 5)
Partnership's equity (NOTES 1 AND 7)                                                                    7,727,609
                                                                                                     ------------
      Total                                                                                           $11,539,324
                                                                                                     ------------
                                                                                                     ------------
</TABLE>
 
SEE ACCOMPANYING NOTES.
 
                                      F-53
<PAGE>
                                    WRDW-TV
                             (THE AUGUSTA BUSINESS)
                              STATEMENT OF INCOME
                          YEAR ENDED DECEMBER 31, 1995
 
<TABLE>
<S>                                                                                                  <C>
REVENUES:
  Broadcasting revenues                                                                               $10,059,555
  Less:
    Advertising agency commissions                                                                      1,171,595
    National sales representative commissions                                                             227,368
                                                                                                     ------------
  Total advertising agency and national sales representative commissions                                1,398,963
                                                                                                     ------------
Net operating revenues                                                                                  8,660,592
                                                                                                     ------------
OPERATING EXPENSES:
  Operating, technical and programming costs                                                            3,142,280
  Selling, general and administrative                                                                   2,631,952
  Depreciation                                                                                            272,298
  Amortization of intangible assets                                                                       151,620
                                                                                                     ------------
Total operating expenses                                                                                6,198,150
                                                                                                     ------------
 
INCOME BEFORE OTHER EXPENSES                                                                            2,462,442
Other-expenses, net                                                                                       220,211
                                                                                                     ------------
Net income                                                                                             $2,242,231
                                                                                                     ------------
                                                                                                     ------------
</TABLE>
 
SEE ACCOMPANYING NOTES.
 
                                      F-54
<PAGE>
                                    WRDW-TV
                             (THE AUGUSTA BUSINESS)
                       STATEMENT OF PARTNERSHIP'S EQUITY
                          YEAR ENDED DECEMBER 31, 1995
 
<TABLE>
<S>                                                                                                  <C>
Balance at December 31, 1994                                                                           $7,410,422
  Net income                                                                                            2,242,231
  Distribution to Television Station Partners, L.P.                                                    (1,925,044)
                                                                                                     ------------
Balance at December 31, 1995                                                                           $7,727,609
                                                                                                     ------------
                                                                                                     ------------
</TABLE>
 
SEE ACCOMPANYING NOTES.
 
                                      F-55
<PAGE>
                                    WRDW-TV
                             (THE AUGUSTA BUSINESS)
                            STATEMENT OF CASH FLOWS
                          YEAR ENDED DECEMBER 31, 1995
 
<TABLE>
<S>                                                                                                  <C>
CASH FLOW FROM OPERATING ACTIVITIES
Net income                                                                                             $2,242,231
Adjustments to reconcile net income to net cash provided by operating activities:
    Depreciation and amortization                                                                       1,359,415
    Provision for bad debt (recoveries)                                                                   (14,000)
    Net trade barter revenue                                                                              (59,356)
    Gain on sale of property and equipment                                                                (12,868)
    Changes in operating assets and liabilities:
    Accounts receivable                                                                                   (60,155)
    Prepaid and other assets                                                                              102,937
    Accounts payable and accrued expenses                                                                (359,296)
    Payments of obligations for television film exhibition rights                                      (1,017,754)
    Other                                                                                                 274,956
                                                                                                     ------------
Net cash provided by operating activities                                                               2,456,110
 
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sale of property and equipment                                                               12,868
Capital expenditures                                                                                     (121,987)
                                                                                                     ------------
Net cash used in investing activities                                                                    (109,119)
 
CASH FLOWS FROM FINANCING ACTIVITIES
Cash transferred to Partnership                                                                        (2,200,000)
                                                                                                     ------------
Net cash used in financing activities                                                                  (2,200,000)
 
NET INCREASE IN CASH                                                                                      146,991
CASH AT BEGINNING OF YEAR                                                                                 186,667
                                                                                                     ------------
CASH AT END OF YEAR                                                                                      $333,658
                                                                                                     ------------
                                                                                                     ------------
 
SUPPLEMENTAL DISCLOSURE OF NONCASH OPERATING, INVESTING AND FINANCIAL ACTIVITIES
  Television film exhibition obligations were incurred when the Station entered into contracts for
   film exhibition rights totaling:                                                                      $387,450
                                                                                                     ------------
                                                                                                     ------------
  Property and equipment was acquired in exchange for advertising time totaling:                          $59,356
                                                                                                     ------------
                                                                                                     ------------
</TABLE>
 
SEE ACCOMPANYING NOTES.
 
                                      F-56
<PAGE>
                                    WRDW-TV
                             (THE AUGUSTA BUSINESS)
                         NOTES TO FINANCIAL STATEMENTS
                               DECEMBER 31, 1995
 
1.  STATION ORGANIZATION AND BASIS OF PRESENTATION
    WRDW-TV  (the "Station") is a commercial television station located in North
Augusta, South  Carolina.  The Station  was  owned and  operated  by  Television
Station  Partners,  L.P. (the  "Partnership") from  July 7,  1989 to  January 4,
1996-See Note 8.  The Partnership is  a Delaware limited  partnership which  was
organized  on May 24, 1989 for the  sole purpose of acquiring, owning, operating
and, at  such  time  as  GP  Station Partners  (the  "general  partner"  of  the
Partnership)  determines is appropriate, reselling or otherwise disposing of its
television stations.
 
    The Station was acquired by the Partnership  on July 7, 1989 pursuant to  an
Exchange  Agreement dated  May 24, 1989  between the  Partnership and Television
Station Partners,  a  New  York  partnership  ("TSP").  The  Exchange  Agreement
provided  for the transfer to the partnership of all of TSP's assets in exchange
for all of the units of partnership interest in the Partnership, followed by the
liquidation and distribution of those units to the partners of TSP. For tax  and
accounting  purposes, the Partnership has been treated as a continuation of TSP.
The Station had been operated by TSP since March 23, 1983.
 
    The financial statements of the Station are prepared on the accrual basis of
accounting,  and  include  only  those  assets,  liabilities,  and  results   of
operations that relate to the business of the Station.
 
    The  preparation  of  financial  statements  in  conformity  with  generally
accepted  accounting  principles  requires  management  to  make  estimates  and
assumptions  that affect  the amounts reported  in the  financial statements and
accompanying notes. Actual results could differ from those estimates.
 
2.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
TELEVISION FILM EXHIBITION RIGHTS
 
    Television film exhibition rights are recorded at the amount of the  license
fees  payable when purchased and amortized  using the straight-line method based
on the  license  period  or  usage, whichever  yields  the  greater  accumulated
amortization.  Television film exhibition  rights are classified  based upon the
portion of the unamortized balance expected  to be broadcast within the  current
year.
 
PROPERTY, BUILDINGS AND EQUIPMENT
 
    Property,  buildings  and  equipment  is  stated  at  cost  less accumulated
depreciation. Depreciation is provided  principally by the straight-line  method
over  the estimated useful lives of the  assets. Any gains or losses realized on
disposition are reflected  in operations.  Maintenance and repairs,  as well  as
minor  renewals and betterments,  are charged to  operating expenses directly as
incurred.
 
INTANGIBLE ASSETS
 
    Intangible  assets  are  comprised  principally  of  Federal  Communications
Commission  licenses and network affiliation agreements and are amortized on the
straight-line basis, primarily over 40 years. Intangible assets are periodically
evaluated for impairments using a measurement  of fair value, calculated at  the
current  market multiple times  operating income. If  this review indicates that
the intangible assets will not be  recoverable, the Company's carrying value  of
the intangible assets would be reduced to its estimated fair value.
 
TRADE/BARTER TRANSACTIONS
 
    Trade/barter  transactions  involve  the exchange  of  advertising  time for
products and/or services and are recorded based on the fair market value of  the
products   and/or  services  received.  Revenue  is  recorded  when  advertising
schedules air, and expense is recognized when products and/or services are used.
 
                                      F-57
<PAGE>
                                    WRDW-TV
                             (THE AUGUSTA BUSINESS)
                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)
                               DECEMBER 31, 1995
 
2.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INCOME TAXES
 
    No income tax provision has been included in the financial statements  since
income  or loss of the Station is required to be reported by the partners of the
Partnership on their respective income tax returns.
 
3.  PROPERTY, BUILDINGS, AND EQUIPMENT
    The major classes of property, buildings and equipment at December 31,  1995
are as follows:
 
<TABLE>
<S>                                                               <C>
Land                                                                $190,000
Buildings and tower                                                2,062,613
Automobiles                                                          136,245
Furniture and fixtures                                             5,999,846
Machinery and equipment                                            1,769,175
                                                                  ----------
                                                                  10,157,879
Less accumulated depreciation                                      8,379,450
                                                                  ----------
                                                                  $1,778,429
                                                                  ----------
                                                                  ----------
</TABLE>
 
4.  ACCOUNTS PAYABLE AND ACCRUED EXPENSES
    Accounts  payable and accrued  expenses at December 31,  1995 consist of the
following:
 
<TABLE>
<S>                                                               <C>
Accounts payable                                                     $10,275
Accrued state taxes                                                    9,096
Accrued payroll, commissions, and bonuses                            152,201
Other accrued expenses                                                61,625
                                                                  ----------
                                                                    $233,197
                                                                  ----------
                                                                  ----------
</TABLE>
 
5.  COMMITMENTS AND CONTINGENCIES
 
FILM EXHIBITION RIGHTS
 
    The obligations for  television film  exhibition rights are  payable in  the
following years:
 
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31                                               AMOUNT
- - ----------------------------------------------------------------  ----------
<S>                                                               <C>
  1996                                                              $898,251
  1997                                                               875,838
  1998                                                               838,254
  1999                                                               672,724
  2000                                                               293,451
                                                                  ----------
                                                                  $3,578,518
                                                                  ----------
                                                                  ----------
</TABLE>
 
LITIGATION
 
    The  Station is subject to  legal proceedings and claims  which arise in the
ordinary course of  its business. In  the opinion of  management, the amount  of
ultimate  liability with respect to these actions will not materially affect the
financial statements of the Station.
 
                                      F-58
<PAGE>
                                    WRDW-TV
                             (THE AUGUSTA BUSINESS)
                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)
                               DECEMBER 31, 1995
 
5.  COMMITMENTS AND CONTINGENCIES (CONTINUED)
DEBT
 
    The Partnership had indebtedness outstanding  under an Amended and  Restated
Credit  Agreement (the "Agreement"). The Agreement is secured by a first lien on
substantially all  the assets  of the  Partnership. The  Agreement required  the
Partnership  to enter into one or more binding sales contracts for the assets of
each station, satisfactory to the Banks, on or before June 30, 1995. During  the
latter  part of 1994,  the Partnership contracted the  services of Media Venture
Partners for the  purpose of  marketing the stations.  On January  4, 1996,  the
Partnership sold the assets of the Station. (Note 8).
 
6.  TRANSACTIONS WITH RELATED PARTIES
    The  Partnership pays various operating and non-operation expenses on behalf
of the Station. These expenses have  been allocated for the year ended  December
31,  1995. The Station is allocated a portion of management fees and expenses in
the amount  of approximately  $90,000  to RP  Television for  financial  support
services  such as accounting. Additionally, the Station transfers excess cash to
the Partnership's headquarters. Excess cash  transferred was $2,200,000 for  the
year  ended December 31,  1995. This money  is primarily used  for principal and
interest payments on the Partnership's debt obligations.
 
7.  PENSION PLAN
    Effective January  1,  1993,  the  defined  contribution  pension  plan  was
converted  to  a  401(k)  salaried  deferral  plan,  covering  substantially all
employees, with a Partnership  profit sharing contribution of  3 1/2 percent  of
the   participants'   salary   per  annum.   Annual   contributions  aggregating
approximately $53,803 were made to the Plan during 1995.
 
8.  SUBSEQUENT EVENT
    On January  4, 1996,  the Partnership  sold the  assets of  WRDW-TV to  Gray
Communication  Systems, Inc., for approximately $34 million plus an amount equal
to the excess of the current assets over the current liabilities assumed by  the
buyer, as defined in the Asset Purchase Agreement.
 
                                      F-59
<PAGE>
INDEPENDENT AUDITORS' REPORT
 
To the Partners' of
 Television Station Partners, L.P.:
 
    We  have audited  the accompanying balance  sheets of  WRDW-TV (an operating
station of Television Station  Partners, L.P.), (the  "Station") as of  December
31,  1994 and the  related statements of income,  partnership's equity, and cash
flows for the years ended December 31, 1993 and 1994. These financial statements
are the responsibility of the Partnership's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
 
    We conducted  our  audits in  accordance  with generally  accepted  auditing
standards.  Those standards require that we plan and perform the audit to obtain
reasonable assurance  about  whether  the financial  statements  are  free  from
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, such  financial statements present  fairly, in all material
respects, the financial position of the Station as of December 31, 1994, and the
results of their operations  and their cash flows  for the years ended  December
31, 1993 and 1994 in conformity with generally accepted accounting principles.
 
DELOITTE & TOUCHE LLP
New York, New York
May 12, 1995
 
                                      F-60
<PAGE>
WRDW-TV
(AN OPERATING STATION OF TELEVISION STATION PARTNERS, L.P.)
BALANCE SHEET
DECEMBER 31, 1994
 
<TABLE>
<CAPTION>
                                                                                                         1994
                                                                                                     ------------
 
<S>                                                                                                  <C>
ASSETS
CURRENT ASSETS:
 
  Cash                                                                                                   $186,667
  Accounts receivable, net of allowance for doubtful accounts of approximately $131,000                 1,674,053
  Television film exhibition rights                                                                       874,495
  Prepaid and other current assets                                                                        158,279
                                                                                                     ------------
      Total current assets                                                                              2,893,494
PROPERTY, BUILDINGS AND EQUIPMENT-Net (NOTE 3):                                                         1,869,384
TELEVISION FILM EXHIBITION RIGHTS                                                                       3,168,509
INTANGIBLE ASSETS-Net                                                                                   4,280,350
                                                                                                     ------------
      TOTAL                                                                                           $12,211,737
                                                                                                     ------------
                                                                                                     ------------
 
LIABILITIES AND PARTNERSHIP'S EQUITY
 
CURRENT LIABILITIES:
  Accounts payable and accrued expenses (NOTE 4)                                                         $592,493
  Obligations for television film exhibition rights (NOTE 5)                                              908,652
                                                                                                     ------------
      Total current liabilities                                                                         1,501,145
OBLIGATIONS FOR TELEVISION FILM EXHIBITION RIGHTS (NOTE 5)                                              3,300,170
COMMITMENTS AND CONTINGENCIES (NOTE 6)
PARTNERSHIP'S EQUITY (NOTES 1 AND 8)                                                                    7,410,422
                                                                                                     ------------
      Total                                                                                           $12,211,737
                                                                                                     ------------
                                                                                                     ------------
</TABLE>
 
SEE NOTES TO FINANCIAL STATEMENTS.
 
                                      F-61
<PAGE>
WRDW-TV
(AN OPERATING STATION OF TELEVISION STATION PARTNERS, L.P.)
STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 1993 AND 1994
 
<TABLE>
<CAPTION>
                                                                                          1993          1994
                                                                                      ------------  ------------
<S>                                                                                   <C>           <C>
REVENUES:
  Broadcasting revenues                                                                 $7,933,825    $9,460,307
  Less:
    Advertising agency commissions                                                         943,174     1,158,952
    National sales representative commissions                                              194,516       255,379
                                                                                      ------------  ------------
      Total advertising agency and national sales representative commissions             1,137,690     1,414,331
                                                                                      ------------  ------------
      Net operating revenues                                                             6,796,135     8,045,976
                                                                                      ------------  ------------
 
OPERATING EXPENSES:
  Operating, technical and programming costs                                             2,555,795     2,958,364
  Selling, general and administrative                                                    2,126,770     2,434,477
  Depreciation                                                                             290,730       309,949
  Amortization of intangible assets                                                        151,620       151,620
                                                                                      ------------  ------------
      Total operating expenses                                                           5,124,915     5,854,410
                                                                                      ------------  ------------
INCOME BEFORE OTHER EXPENSES                                                             1,671,220     2,191,566
Other-expenses, net                                                                         77,408        54,570
                                                                                      ------------  ------------
NET INCOME                                                                              $1,593,812    $2,136,996
                                                                                      ------------  ------------
                                                                                      ------------  ------------
</TABLE>
 
SEE NOTES TO FINANCIAL STATEMENTS.
 
                                      F-62
<PAGE>
WRDW-TV
(AN OPERATING STATION OF TELEVISION STATION PARTNERS, L.P.)
STATEMENTS OF PARTNERSHIP'S EQUITY
YEARS ENDED DECEMBER 31, 1993 AND 1994
 
<TABLE>
<CAPTION>
                                                     PARTNERSHIP'S
                                                        EQUITY
                                                    ---------------
<S>                                                 <C>
BALANCE, JANUARY 1, 1993                                 $7,829,582
  Net income                                              1,593,812
  Transfer to Television Station Partners, L.P.          (1,909,588)
                                                    ---------------
BALANCE, DECEMBER 31, 1993                                7,513,806
  Net income                                              2,136,996
  Transfer to Television Station Partners, L.P.          (2,240,380)
                                                    ---------------
BALANCE, DECEMBER 31, 1994                               $7,410,422
                                                    ---------------
                                                    ---------------
</TABLE>
 
SEE NOTES TO FINANCIAL STATEMENTS.
 
                                      F-63
<PAGE>
WRDW-TV
(AN OPERATING STATION OF TELEVISION STATION PARTNERS, L.P.)
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1993 AND 1994
 
<TABLE>
<CAPTION>
                                                                                          1993          1994
                                                                                      ------------  ------------
<S>                                                                                   <C>           <C>
CASH FLOW FROM OPERATING ACTIVITIES
  Net income                                                                            $1,593,812    $2,136,996
  Adjustments to reconcile net income to net cash provided by operating activities:
    Depreciation and amortization                                                        1,355,485     1,345,658
    Provision for bad debt                                                                  24,800        62,000
    Net trade barter revenue                                                               (15,850)      (30,105)
    Gain on sale of property and equipment                                                  (1,137)         (400)
    Changes in operating assets and liabilities:
      Accounts receivable                                                                 (413,414)     (173,216)
      Prepaid and other assets                                                             (51,535)      (34,480)
      Accounts payable and accrued expenses                                                155,264         2,443
      Payments of obligations for television film exhibition rights                     (2,645,344)   (3,048,878)
                                                                                      ------------  ------------
      Net cash provided by operating activities                                              2,081       260,018
                                                                                      ------------  ------------
 
CASH FLOWS FROM INVESTING ACTIVITIES:
  Proceeds from sale of property and equipment                                               9,470           400
  Capital expenditures                                                                    (230,718)     (176,374)
                                                                                      ------------  ------------
      Net cash used in investing activities                                               (221,248)     (175,974)
                                                                                      ------------  ------------
NET INCREASE (DECREASE) IN CASH                                                           (219,167)       84,044
 
CASH, BEGINNING OF YEAR                                                                    321,790       102,623
                                                                                      ------------  ------------
 
CASH, END OF YEAR                                                                         $102,623      $186,667
                                                                                      ------------  ------------
                                                                                      ------------  ------------
 
SUPPLEMENTAL INFORMATION:
  Cash transferred to Television Station Partners, L.P.                                 $2,075,000    $2,417,500
                                                                                      ------------  ------------
                                                                                      ------------  ------------
SUPPLEMENTAL DISCLOSURE OF NONCASH OPERATING, INVESTING AND FINANCIAL ACTIVITIES:
  Television film exhibition obligations of $1,969,210 and 3,112,615 in 1993 and
   1994, respectively, were incurred when the Station entered into contracts for
   film exhibition rights.
  Property and equipment totaling $15,850 and $30,105 was acquired in 1993 and 1994,
   respectively, in exchange for advertising time.
</TABLE>
 
SEE NOTES TO FINANCIAL STATEMENTS.
 
                                      F-64
<PAGE>
WRDW-TV
(AN OPERATING STATION OF TELEVISION STATION PARTNERS, L.P.)
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1993 AND 1994
 
1.  STATION ORGANIZATION AND BASIS OF PRESENTATION
 
    WRDW-TV  (the "Station") is a commercial television station located in North
    Augusta, South Carolina.  The Station  is owned and  operated by  Television
    Station  Partners, L.P.  (the "Partnership") since  July 7, 1989,  as one of
    four  commercial  television   stations  owned  by   the  Partnership.   The
    Partnership is a Delaware limited partnership which was organized on May 24,
    1989  for the sole purpose of acquiring, owning, operating and, at such time
    as GP Station Partners (the "general partner" of the Partnership) determines
    is appropriate, reselling or otherwise disposing of its television stations.
 
    The Station was acquired by the Partnership  on July 7, 1989 pursuant to  an
    Exchange Agreement dated May 24, 1989 between the Partnership and Television
    Station  Partners, a  New York  partnership ("TSP").  The Exchange Agreement
    provided for  the transfer  to the  partnership of  all of  TSP's assets  in
    exchange  for all of  the units of partnership  interest in the Partnership,
    followed by the liquidation and distribution of those units to the  partners
    of TSP. For tax and accounting purposes, the Partnership has been treated as
    a  continuation of TSP. The Station has been operated by TSP since March 23,
    1983.
 
    The financial statements of the Station are prepared on the accrual basis of
    accounting, and  include  only those  assets,  liabilities, and  results  of
    operations that relate to the business of the Station.
 
2.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
    TELEVISION  FILM  EXHIBITION  RIGHTS --  Television  film  exhibition rights
    relating to films which are currently available for telecasting are recorded
    at  the  gross  cost   method  when  purchased   and  amortized  using   the
    straight-line  method  over  the greater  of  the license  period  or usage.
    Television film exhibition rights are  classified based upon the portion  of
    the unamortized balance expected to be broadcast within the current year.
 
    PROPERTY,  BUILDINGS AND EQUIPMENT --  Property, buildings and equipment are
    stated at  cost  less  accumulated depreciation.  Depreciation  is  provided
    principally  by the straight-line method over  the estimated useful lives of
    the assets. Any  gains or losses  realized on disposition  are reflected  in
    operations.   Maintenance  and  repairs,  as  well  as  minor  renewals  and
    betterments, are charged to operating expenses directly as incurred.
 
    INTANGIBLE ASSETS -- Intangible assets are comprised principally of  Federal
    Communications  Commission licenses  and network  affiliation agreements and
    are  amortized  on  the  straight-line  basis,  primarily  over  40   years.
    Intangible  assets  are  periodically  evaluated  for  impairments  using  a
    measurement of fair value, calculated  at the current market multiple  times
    operating  income. The  current market value  multiple used  at December 31,
    1994 was 8.5 times.
 
    TRADE/BARTER TRANSACTIONS -- Trade/barter transactions involve the  exchange
    of  advertising time for products and/or  services and are recorded based on
    the fair market value of the  products and/or services received. Revenue  is
    recorded  when  advertising schedules  air, and  expense is  recognized when
    products and/or services are used.
 
    INCOME TAXES -- No income tax  provision has been included in the  financial
    statements since income or loss of the Station is required to be reported by
    the partners of the Partnership on their respective income tax returns.
 
                                      F-65
<PAGE>
WRDW-TV
(AN OPERATING STATION OF TELEVISION STATION PARTNERS, L.P.)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1993 AND 1994
 
3.  PROPERTY, BUILDINGS AND EQUIPMENT
    The major classes of property, buildings and equipment are as follows:
 
<TABLE>
<CAPTION>
                                                                                         DECEMBER 31,
                                                                                             1994
                                                                                        ---------------
<S>                                                                                     <C>
Land                                                                                           $190,000
Buildings and Tower                                                                           2,043,123
Automobiles                                                                                     153,378
Furniture and fixtures                                                                        5,994,475
Machinery and equipment                                                                       1,637,285
                                                                                        ---------------
                                                                                             10,018,261
Less accumulated depreciation                                                                 8,148,877
                                                                                        ---------------
                                                                                             $1,869,384
                                                                                        ---------------
                                                                                        ---------------
</TABLE>
 
4.  ACCOUNTS PAYABLE AND ACCRUED EXPENSES
    Accounts payable and accrued expenses consist of the following:
 
<TABLE>
<CAPTION>
                                                                                         DECEMBER 31,
                                                                                             1994
                                                                                        ---------------
<S>                                                                                     <C>
Accounts payable                                                                                $99,042
Accrued state taxes                                                                              25,126
Accrued payroll, commissions, and bonuses                                                       133,473
Other accrued expenses                                                                          334,852
                                                                                        ---------------
                                                                                               $592,493
                                                                                        ---------------
                                                                                        ---------------
</TABLE>
 
5.  OBLIGATIONS FOR TELEVISION FILM EXHIBITION RIGHTS
    Obligation for television film exhibition rights at December 31, 1994 are as
follows:
 
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31                                                                       AMOUNT
- - -----------------------------------------------------------------------------------------  ------------
<S>                                                                                        <C>
1995                                                                                           $908,652
1996                                                                                            907,886
1997                                                                                            822,655
1998                                                                                            736,849
1999                                                                                            539,332
Thereafter                                                                                      293,448
                                                                                           ------------
                                                                                              4,208,822
Current portion                                                                                 908,652
                                                                                           ------------
Long-term obligations                                                                        $3,300,170
                                                                                           ------------
                                                                                           ------------
</TABLE>
 
6.  COMMITMENTS AND CONTINGENCIES
 
    LITIGATION  -- In March 1990, a suit  was commenced in the Superior Court of
    California, County of Alameda, against the Partnership, GP Station Partners,
    and certain individuals,  in connection  with the July  1989 transaction  in
    which  the  assets  of  TSP  were transferred  to  the  Partnership  and the
    Partnership distributed to the partners a major portion of the proceeds of a
    $72 million borrowing. The plaintiffs in
 
                                      F-66
<PAGE>
WRDW-TV
(AN OPERATING STATION OF TELEVISION STATION PARTNERS, L.P.)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1993 AND 1994
 
6.  COMMITMENTS AND CONTINGENCIES (CONTINUED)
    the suit sought rescission of the asset transfer, the return by the  general
    partner  of  all cash  distributions made  from  the $72  million borrowing,
    damages and other relief. The suit was subsequently dismissed on the grounds
    that the California courts were an inconvenient forum.
 
    On April  8,  1992,  the  plaintiffs in  the  California  suit  and  another
    plaintiff  commenced an action  in the United States  District Court for the
    Southern District of New  York against GP Station  Partners and each of  its
    general  partners.  The  action,  which the  plaintiffs  purported  to bring
    individually and as representatives of the limited partners, sought  damages
    and  other  relief.  The  Partnership  Agreement  contains  exculpation  and
    indemnification provisions relating  to claims against  GP Station  Partners
    and its affiliates. In November 1992 the action was settled and discontinued
    following   the  court's  denial   of  the  plaintiff's   motion  for  class
    certification. The settlement agreement provided for an exchange of  general
    releases  and for payment to  the original plaintiffs of  an amount equal to
    their share of the  July 1989 distribution to  partners (which the  original
    Television  Station Partners had  been escrowing pending  the outcome of the
    litigation), plus  accrued interest,  and those  plaintiffs also  agreed  to
    waive  all  rights  to  any further  distribution  and  to  relinquish their
    interest in the Partnership without further consideration. No amount will be
    payable to the other  plaintiff in the action.  The agreement also  provides
    for  payment of $75,000 to the  plaintiffs' counsel as partial reimbursement
    of legal fees and  expenses incurred in prosecuting  the action. As part  of
    the  settlement, the limited partners' original investment of $203,000, plus
    interest of approximately $63,000 was paid.  As a result of the  litigation,
    the Partnership incurred legal fees of approximately $579,000.
 
    The  Station is subject to  legal proceedings and claims  which arise in the
    ordinary course of its business. In the opinion of management, the amount of
    ultimate liability with respect to these actions will not materially  affect
    the financial statements of the Station.
 
    DEBT  -- At December  31, 1994 the Partnership  had $71,900,000 of principal
    indebtedness outstanding under an Amended and Restated Credit Agreement (the
    "Agreement"). The Agreement is secured by a first lien on substantially  all
    the  assets of  the Partnership. The  Agreement requires  the Partnership to
    enter into  one or  more binding  sales  contracts for  the assets  of  each
    station,  satisfactory to the Banks, on or  before June 30, 1995. During the
    latter part  of  1994, the  Partnership  contracted the  services  of  Media
    Venture  Partners for  the purpose  of marketing  the stations.  In February
    1995, the Partnership signed letters of intent for the sale of the assets of
    each station. (Note 9)
 
7.  TRANSACTIONS WITH RELATED PARTIES
 
    The Partnership pays various operating and non-operating expenses on  behalf
    of  the Station. These expenses  totaled approximately $165,000 and $177,000
    for the years ended December 31, 1993 and 1994, respectively.  Additionally,
    the  Station transfers excess cash to the Partnership's headquarters. Excess
    cash transferred was $1,909,588 and $2,240,380 for the years ended  December
    31,  1993 and 1994, respectively. This money is primarily used for principal
    and interest payments on the Partnership's debt obligations.
 
8.  PENSION PLAN
    Effective January  1,  1993,  the  defined  contribution  pension  plan  was
    converted  to  a 401(k)  salaried deferral  plan  with a  Partnership profit
    sharing contribution of 3 1/2 percent of the participants' salary per annum.
    Annual contributions aggregating approximately $40,585 and $57,314 were made
    to the Plan during 1993 and 1994, respectively.
 
                                      F-67
<PAGE>
WRDW-TV
(AN OPERATING STATION OF TELEVISION STATION PARTNERS, L.P.)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1993 AND 1994
 
9.  SUBSEQUENT EVENT
    On February 10, 1995, the Partnership signed a letter of intent for the sale
    of the assets of WRDW-TV for approximately $34 million, plus an amount equal
    to the excess of the current assets over the current liabilities assumed  by
    the  buyer, as defined in the Asset Purchase Agreement, if applicable, to be
    paid in cash at the closing of the sale.
 
                                      F-68
<PAGE>
                       BROADCASTING AND PAGING OPERATIONS
                                       OF
                              JOHN H. PHIPPS, INC.
                             (THE PHIPPS BUSINESS)
                      CONDENSED BALANCE SHEETS (UNAUDITED)
 
   
<TABLE>
<CAPTION>
                                                    --------------------------------
                                                       DECEMBER 31,
                                                               1995          JUNE 30
                                                    ---------------  ---------------
                                       ASSETS
<S>                                                 <C>              <C>
Current assets:
  Cash and cash equivalents                                $620,015         $662,576
  Accounts receivable, less allowance for doubtful
   accounts of $49,000 and $53,500, respectively          5,152,778        5,188,446
  Program broadcast rights, current portion                 919,281          924,281
  Other current assets                                      347,785          337,452
                                                    ---------------  ---------------
                                                          7,039,859        7,112,755
Property and equipment, net                              10,492,583        9,985,084
Goodwill and other intangibles                            9,454,775        9,096,855
Program broadcast rights, less current portion              575,111          111,230
                                                    ---------------  ---------------
                                                         10,029,886        9,208,085
                                                    ---------------  ---------------
                                                        $27,562,328      $26,305,924
                                                    ---------------  ---------------
                                                    ---------------  ---------------
 
                           LIABILITIES AND OWNER'S EQUITY
 
Current liabilities:
  Accounts payable and accrued expenses                    $365,468         $308,308
  Program broadcast obligations, current portion            921,579          458,353
  Deferred paging service income                            833,264          975,000
  Current portion of long-term debt                       1,389,931        1,473,681
  Other current liabilities                                 907,345          995,901
                                                    ---------------  ---------------
                                                          4,417,587        4,211,243
Long-term debt                                            3,419,918        2,560,175
Program broadcast obligations, less current
 portion                                                    345,140          213,906
Minority interest                                           585,768          654,918
Commitments and contingencies
Owner's equity                                           18,793,915       18,665,682
                                                    ---------------  ---------------
                                                        $27,562,328      $26,305,924
                                                    ---------------  ---------------
                                                    ---------------  ---------------
</TABLE>
    
 
           See accompanying notes to condensed financial statements.
 
                                      F-69
<PAGE>
                       BROADCASTING AND PAGING OPERATIONS
                                       OF
                              JOHN H. PHIPPS, INC.
                             (THE PHIPPS BUSINESS)
                   CONDENSED STATEMENTS OF INCOME (UNAUDITED)
 
   
<TABLE>
<CAPTION>
                                                            SIX MONTHS ENDED
                                                                JUNE 30,
                                                               1995             1996
                                                    ---------------  ---------------
  Revenues:
<S>                                                 <C>              <C>
    Broadcast revenues, net                              $9,977,857      $10,444,960
    Paging operations                                     2,422,911        2,743,524
    Production and other revenues                           796,437          900,731
                                                    ---------------  ---------------
                                                         13,197,205       14,089,215
                                                    ---------------  ---------------
  Expenses:
    Operating, technical and programming                  2,641,775        2,805,292
    Selling, general and administrative                   3,636,715        4,035,891
    Amortization of program broadcast rights                422,408          463,890
    Depreciation and amortization                         1,435,474        1,530,027
    Pension credit (NOTE 2)                                (224,500)        (113,000)
    Management fees                                       1,538,720          734,502
                                                    ---------------  ---------------
                                                          9,450,592        9,456,602
                                                    ---------------  ---------------
                                                          3,746,613        4,632,613
  Interest                                                  222,592          158,491
  Other (income) expense, net                                 4,862           (4,744)
                                                    ---------------  ---------------
  Income before minority interests                        3,519,159        4,469,378
  Minority interests                                       (256,219)        (296,387)
                                                    ---------------  ---------------
  Net income                                             $3,262,940       $4,172,991
                                                    ---------------  ---------------
                                                    ---------------  ---------------
  Supplemental pro-forma net income
    Net income, as above                                 $3,262,940       $4,172,991
    Pro-forma provision for income tax expense           (1,239,900)      (1,585,700)
                                                    ---------------  ---------------
  Pro-forma net income                                   $2,023,040       $2,587,291
                                                    ---------------  ---------------
                                                    ---------------  ---------------
</TABLE>
    
 
           See accompanying notes to condensed financial statements.
 
                                      F-70
<PAGE>
                       BROADCASTING AND PAGING OPERATIONS
                                       OF
                              JOHN H. PHIPPS, INC.
                             (THE PHIPPS BUSINESS)
                 CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
 
   
<TABLE>
<CAPTION>
                                                    --------------------------------
                                                            SIX MONTHS ENDED
                                                                JUNE 30,
                                                               1995             1996
                                                    ---------------  ---------------
<S>                                                 <C>              <C>
OPERATING ACTIVITIES:
Net income                                               $3,262,940       $4,172,991
Adjustments to reconcile net income to net cash
 provided by operating activities:
  Depreciation and amortization                           1,435,474        1,530,027
  Gain (loss) on disposition of fixed assets                 44,011          179,264
  Amortization of program broadcast rights                  422,408          463,890
  Payments of program broadcast rights obligations         (464,553)        (591,960)
  Minority interests                                        256,219          296,387
Changes in operating assets and liabilities:
  Accounts receivable                                      (437,692)         (35,668)
  Other current assets                                     (283,242)           2,833
  Accounts payable and accrued expenses                    (183,408)         (57,160)
  Other current liabilities                                 (43,074)          88,556
  Deferred paging income                                    127,078          141,736
                                                    ---------------  ---------------
Net cash provided by operating activities                 4,136,161        6,190,896
Investing activities:
  Purchases of property and equipment                    (1,901,966)      (1,647,485)
  Proceeds from disposition of property and
   equipment                                                530,938          807,978
  Purchase of minority interest                          (1,780,794)              --
  Net cash used in investing activities                  (3,151,822)        (839,507)
                                                    ---------------  ---------------
Financing activities:
  Indebtedness:
    Borrowings                                            1,671,015          386,152
    Repayments                                           (2,538,371)      (1,162,145)
  Distributions to minority interests                      (186,384)        (342,130)
  Other                                                      (1,235)          (4,375)
  Payments to J.H. Phipps, Inc., net                        137,992       (4,186,330)
                                                    ---------------  ---------------
Net cash used in financing activities                      (916,983)      (5,308,828)
                                                    ---------------  ---------------
Increase (decrease) in cash and cash equivalents             67,356           42,561
  Cash and cash equivalents at beginning of period           95,210          620,015
                                                    ---------------  ---------------
  Cash and cash equivalents at end of period               $162,566         $662,576
                                                    ---------------  ---------------
                                                    ---------------  ---------------
</TABLE>
    
 
           See accompanying notes to condensed financial statements.
 
                                      F-71
<PAGE>
           BROADCASTING AND PAGING OPERATIONS OF JOHN H. PHIPPS, INC.
                             (THE PHIPPS BUSINESS)
              NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
 
NOTE 1 -- BASIS OF PRESENTATION
   
    The  accompanying unaudited  condensed consolidated  financial statements of
the Broadcasting and  Paging Operations  of John  H. Phipps,  Inc. (the  "Phipps
Business")  have been prepared in  accordance with generally accepted accounting
principles for interim financial information  and with the instructions to  Form
10-Q  and Article 10 of Regulation S-X.  Accordingly, they do not include all of
the  information  and  footnotes  required  by  generally  accepted   accounting
principles  for complete financial statements. In the opinion of management, all
adjustments (consisting of normal recurring accruals) considered necessary for a
fair presentation have been included. Operating results for the six month period
ended June 30, 1996, are not necessarily  indicative of the results that may  be
expected  for the year ending December  31, 1996. For further information, refer
to the annual financial statements and footnotes thereto of the Phipps  Business
included herein.
    
 
NOTE 2 -- EMPLOYEE BENEFIT PLANS
 
    Management of J.H. Phipps, Inc. has elected to terminate the defined benefit
pension  plan effective  March 31, 1996  subject to obtaining  approval from the
appropriate regulatory agencies.
 
NOTE 3 -- SALE OF PHIPPS BUSINESS
 
    Pursuant to an agreement dated December 15, 1995 as amended March 15,  1996,
Gray  Communications Systems, Inc. ("Gray") agreed to purchase substantially all
of the  assets  and  assume  certain  liabilities  and  commitments  of  certain
operations owned by J.H. Phipps, Inc. ("Phipps"). The operations include (i) two
CBS  affiliates-a  VHF  television  station  (WCTV-TV  located  in  Tallahassee,
Florida), and 74.5%  interest in a  UHF television station  (WKXT-TV located  in
Knoxville,  Tennessee),  (the  "Broadcast  Operations");  and  (ii)  a  portable
communications and  paging  service  business (the  "Paging  Operations"),  with
operations  in  three  southeastern  states  (collectively  referred  to  as the
"Broadcasting and Paging  Operations"). The  purchase is  subject to  regulatory
approval.
 
   
    At  June  30, 1996,  a  Phipps subsidiary  held  the 74.5%  interest  in the
partnership that  owns  WKXT-TV  (the "Knoxville  Partnership").  The  Knoxville
Partnership's  remaining 25.5%  interest is owned  by four  limited partners and
their ownership is shown as  "minority interests" in the accompanying  financial
statements.  Gray,  in  separate agreements,  has  also agreed  to  purchase the
limited partners' interests.
    
 
    Phipps also owns and operates other businesses which are not being purchased
by Gray.  The  condensed  financial  statements  are  intended  to  present  the
Broadcasting  and Paging Operations which are to be acquired by Gray pursuant to
the letter of intent described above and do not include the other operations  of
Phipps.
 
    The condensed financial statements are derived from the historical books and
records  of Phipps and do not give effect to any purchase accounting adjustments
which  Gray  may  record  as  a  result  of  its  acquisition.  Certain  current
liabilities  and long-term debt  on the accompanying balance  sheets will not be
assumed by Gray. Such liabilities will be  retained by Phipps or retired at  the
closing date of the acquisition by Gray.
 
                                      F-72
<PAGE>
                         REPORT OF INDEPENDENT AUDITORS
 
The Board of Directors
John H. Phipps, Inc.
 
    We  have audited  the accompanying  balance sheets  of the  Broadcasting and
Paging Operations of John H. Phipps, Inc.  (see Note 1) as of December 31,  1994
and 1995 and the related statements of operations and cash flows for each of the
three  years in the  period ended December 31,  1995. These financial statements
are  the  responsibility  of  the  management  of  John  H.  Phipps,  Inc.   Our
responsibility  is to express an opinion  on these financial statements based on
our audits.
 
    We conducted  our  audits in  accordance  with generally  accepted  auditing
standards.  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 financial  statements referred to above present  fairly,
in  all material respects, the financial position of the Broadcasting and Paging
Operations of John H. Phipps, Inc. at December 31, 1994 and 1995 and the results
of their operations  and their cash  flows for each  of the three  years in  the
period  ended December 31, 1995 in conformity with generally accepted accounting
principles.
 
                                          ERNST & YOUNG LLP
 
Atlanta,Georgia
February 19, 1996
 
                                      F-73
<PAGE>
                       BROADCASTING AND PAGING OPERATIONS
                                       OF
                              JOHN H. PHIPPS, INC.
                             (THE PHIPPS BUSINESS)
                                 BALANCE SHEETS
 
<TABLE>
<CAPTION>
                                                    --------------------------------
                                                              DECEMBER 31,
                                                               1994             1995
                                                    ---------------  ---------------
                                       ASSETS
<S>                                                 <C>              <C>
Current assets:
  Cash and cash equivalents                                 $95,210         $620,015
  Accounts receivable, less allowance of $49,000
   for each year                                          4,474,754        5,152,778
  Program broadcast rights, current portion                 521,921          919,281
  Other current assets                                      329,343          347,785
                                                    ---------------  ---------------
      Total current assets                                5,421,228        7,039,859
Program broadcast rights, excluding current
 portion                                                    579,561          575,111
Property and equipment, net (NOTE 3)                     10,720,196       10,492,583
Goodwill and other intangibles (NOTE 3)                   8,576,721        9,454,775
                                                    ---------------  ---------------
      Total assets                                      $25,297,706      $27,562,328
                                                    ---------------  ---------------
                                                    ---------------  ---------------
 
                           LIABILITIES AND OWNER'S EQUITY
 
Current liabilities:
  Accounts payable and accrued expenses                    $467,300         $365,468
  Program broadcast obligations, current portion            722,676          921,579
  Deferred paging service income                            579,109          833,264
  Current portion of long-term debt (NOTE 4)              1,206,483        1,389,931
  Other current liabilities                               1,025,042          907,345
                                                    ---------------  ---------------
    Total current liabilities                             4,000,610        4,417,587
Long-term debt, less current portion (NOTE 4)             4,858,433        3,419,918
Program broadcast obligations, less current
 portion                                                    245,421          345,140
Commitment and contingencies (NOTES 9 AND 10)
Minority interests                                          728,293          585,768
Owner's equity                                           15,464,949       18,793,915
                                                    ---------------  ---------------
      Total liabilities and owner's equity              $25,297,706      $27,562,328
                                                    ---------------  ---------------
                                                    ---------------  ---------------
</TABLE>
 
                            See accompanying notes.
 
                                      F-74
<PAGE>
                       BROADCASTING AND PAGING OPERATIONS
                                       OF
                              JOHN H. PHIPPS, INC.
                             (THE PHIPPS BUSINESS)
                              STATEMENTS OF INCOME
 
<TABLE>
<CAPTION>
                                                    -------------------------------------------------
                                                                 YEAR ENDED DECEMBER 31,
                                                               1993             1994             1995
                                                    ---------------  ---------------  ---------------
<S>                                                 <C>              <C>              <C>
  Revenues:
    Broadcast revenues, net (NOTE 3)                    $17,963,667      $20,209,523      $20,768,121
    Paging operations                                     3,787,946        4,276,640        4,897,522
    Production and other revenues                         1,496,417        1,314,779        1,655,940
                                                    ---------------  ---------------  ---------------
                                                         23,248,030       25,800,942       27,321,583
                                                    ---------------  ---------------  ---------------
  Expenses:
    Operating, technical and programming                  5,221,729        5,306,801        5,449,435
    Selling, general and administrative                   6,919,769        7,056,510        7,693,715
    Amortization of program broadcast rights              1,552,438        1,021,395          844,815
    Depreciation and amortization                         2,835,966        2,672,209        3,120,442
    Pension credit (NOTE 5)                                (431,000)        (409,000)        (449,000)
    Management fees (NOTE 7)                              2,462,195        2,485,423        3,280,354
                                                    ---------------  ---------------  ---------------
                                                         18,561,097       18,133,338       19,939,761
                                                    ---------------  ---------------  ---------------
                                                          4,686,933        7,667,604        7,381,822
  Interest                                                  631,333          479,852          498,714
  Other (income) expense, net                               (15,765)        (666,657)         (12,526)
                                                    ---------------  ---------------  ---------------
  Income before minority interests                        4,071,365        7,854,409        6,895,634
  Minority interests                                       (140,586)        (635,302)        (547,045)
                                                    ---------------  ---------------  ---------------
  Net income                                             $3,930,779       $7,219,107       $6,348,589
                                                    ---------------  ---------------  ---------------
                                                    ---------------  ---------------  ---------------
  Supplemental unaudited pro-forma information
   (NOTE 6):
    Net income, as above                                 $3,930,779       $7,219,107       $6,348,589
    Pro-forma provision for income tax expense           (1,500,300)      (2,743,300)      (2,412,500)
                                                    ---------------  ---------------  ---------------
  Pro-forma net income                                   $2,430,479       $4,475,807       $3,936,089
                                                    ---------------  ---------------  ---------------
                                                    ---------------  ---------------  ---------------
</TABLE>
 
                            See accompanying notes.
 
                                      F-75
<PAGE>
                       BROADCASTING AND PAGING OPERATIONS
                                       OF
                              JOHN H. PHIPPS, INC.
                             (THE PHIPPS BUSINESS)
                            STATEMENTS OF CASH FLOWS
 
<TABLE>
<CAPTION>
                                                    -------------------------------------------------
                                                                 YEAR ENDED DECEMBER 31,
                                                               1993             1994             1995
                                                    ---------------  ---------------  ---------------
<S>                                                 <C>              <C>              <C>
OPERATING ACTIVITIES:
Net income                                               $3,930,779       $7,219,107       $6,348,589
Adjustments to reconcile net income to net cash
 provided by operating activities:
  Depreciation and amortization                           2,835,966        2,672,209        3,120,442
  Gain on disposition of fixed assets                       (13,408)        (665,047)          (9,023)
  Amortization of program broadcast rights                1,552,438        1,021,395          844,815
  Payments of program broadcast rights obligations       (1,072,008)        (863,344)        (931,004)
  Minority interests                                        140,586          635,302          547,045
Changes in operating assets and liabilities:
  Accounts receivable                                        40,092         (396,373)        (678,024)
  Other current assets                                      (12,091)         (90,846)         (18,442)
  Accounts payable and accrued expenses                    (292,863)        (206,137)        (101,832)
  Other current liabilities                                 219,336          277,681         (117,697)
  Deferred paging income                                     68,136          204,356          254,155
                                                    ---------------  ---------------  ---------------
  Net cash provided by operating activities               7,396,963        9,808,303        9,259,024
                                                    ---------------  ---------------  ---------------
INVESTING ACTIVITIES:
  Purchases of minority interests                               -0-         (818,000)      (1,780,794)
  Purchases of property and equipment                    (3,537,592)      (3,353,068)      (3,187,596)
  Proceeds from disposition of property and
   equipment                                                584,187        1,665,504        1,140,520
                                                    ---------------  ---------------  ---------------
  Net cash used in investing activities                  (2,953,405)      (2,505,564)      (3,827,870)
                                                    ---------------  ---------------  ---------------
FINANCING ACTIVITIES:
Indebtedness:
  Borrowings                                              6,266,780        5,761,977        3,422,586
  Repayments                                             (7,421,873)      (6,239,305)      (4,677,653)
  Distributions to minority interests                      (495,150)        (539,596)        (505,532)
  Other                                                     134,536         (156,475)        (126,128)
  Payments to J.H. Phipps, Inc., net                     (2,901,945)      (6,060,036)      (3,019,622)
                                                    ---------------  ---------------  ---------------
  Net cash used in financing activities                  (4,417,652)      (7,233,435)      (4,906,349)
                                                    ---------------  ---------------  ---------------
  Increase in cash and cash equivalents                      25,906           69,304          524,805
  Cash and cash equivalents at beginning of year                -0-           25,906           95,210
                                                    ---------------  ---------------  ---------------
  Cash and cash equivalents at end of year                  $25,906          $95,210         $620,015
                                                    ---------------  ---------------  ---------------
                                                    ---------------  ---------------  ---------------
</TABLE>
 
                            See accompanying notes.
 
                                      F-76
<PAGE>
           BROADCASTING AND PAGING OPERATIONS OF JOHN H. PHIPPS, INC.
                             (THE PHIPPS BUSINESS)
                         NOTES TO FINANCIAL STATEMENTS
                               DECEMBER 31, 1995
 
1.  BASIS OF PRESENTATION
    Pursuant to a letter of intent dated December 15, 1995, Gray  Communications
Systems,  Inc. ("Gray") agreed  to purchase substantially all  of the assets and
assume certain liabilities and commitments  of certain operations owned by  J.H.
Phipps,  Inc. ("Phipps").  The operations include  (i) two  CBS affiliates-a VHF
television station (WCTV-TV located in Tallahassee, Florida), and 74.5% interest
in a  VHF television  station (WKXT-TV  located in  Knoxville, Tennessee),  (the
"Broadcast  Operations"); and (ii) a  portable communications and paging service
business (the "Paging Operations"), with operations in three southeastern states
(collectively referred  to as  the "Broadcasting  and Paging  Operations").  The
purchase is subject to regulatory approval.
 
    At  December 31, 1995,  a Phipps subsidiary  held the 74.5%  interest in the
partnership that  owns  WKXT-TV  (the "Knoxville  Partnership").  The  Knoxville
Partnership's  remaining 25.5%  interest is owned  by four  limited partners and
their ownership is shown as  "minority interests" in the accompanying  financial
statements.  Gray,  in  separate agreements,  has  also agreed  to  purchase the
limited partners' interests. Phipps' ownership of the Knoxville Partnership  has
increased,  from 65.8% during  1993 to the 74.5%  ownership interest at December
31, 1995,  through purchases  of certain  minority interests  for  approximately
$818,000  in 1994  and approximately  $1.78 million  in 1995.  Goodwill recorded
related to these acquisitions of  minority interests was approximately  $200,000
and $1.78 million in 1994 and 1995, respectively.
 
    Phipps also owns and operates other businesses which are not being purchased
by  Gray.  The accompanying  financial statements  are  intended to  present the
Broadcasting and Paging Operations which are to be acquired by Gray pursuant  to
the  letter of intent described above and do not include the other operations of
Phipps.
 
    The accompanying financial statements are derived from the historical  books
and  records  of  Phipps and  do  not  give effect  to  any  purchase accounting
adjustments which  Gray may  record  as a  result  of its  acquisition.  Certain
current  liabilities and long-term debt on  the accompanying balance sheets will
not be assumed by Gray. Such liabilities  will be retained by Phipps or  retired
at the closing date of the acquisition by Gray.
 
2.  ACCOUNTING POLICIES
 
USE OF ESTIMATES
 
    The  preparation of  the financial  statements in  conformity with generally
accepted  accounting  principles  requires  management  to  make  estimates  and
assumptions  that affect  the amount  reported in  the financial  statements and
accompanying notes. Actual results could differ from those estimates.
 
REVENUE RECOGNITION
 
    Broadcasting revenues are  recognized as the  related advertising  broadcast
services  are  rendered. Agency  commissions  are deducted  from  gross revenue,
reflecting the net amount due for  broadcast services. Revenues from paging  and
communications  services  are  recognized over  the  applicable  service period.
Revenues from  mobile  broadcasting contracts  are  recognized as  services  are
provided.
 
CONCENTRATION OF CREDIT RISK
 
    The  Broadcast Operations provide advertising air time to national, regional
and local  advertisers  within  the  geographic areas  in  which  the  Broadcast
Operations  operate. Credit is extended based on an evaluation of the customer's
financial condition, and generally advance  payment is not required. The  Paging
Operations  provide  services to  individuals and  corporate customers  in three
southeastern states.  Such  services are  generally  billed in  advance.  Credit
losses  for  the Broadcasting  and  Paging Operations  are  provided for  in the
financial  statements   and   consistently   have   been   within   management's
expectations.
 
                                      F-77
<PAGE>
           BROADCASTING AND PAGING OPERATIONS OF JOHN H. PHIPPS, INC.
                             (THE PHIPPS BUSINESS)
                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)
 
2.  ACCOUNTING POLICIES (CONTINUED)
BARTER ARRANGEMENTS
 
    The  Broadcasting and Paging Operations, in the ordinary course of business,
provide services and advertising air time  to certain customers in exchange  for
products  or services. In addition, the Broadcasting Operations provide air time
to certain program syndicators in exchange for program licenses or reductions in
program license  fees. Barter  transactions are  recorded on  the basis  of  the
estimated  fair market  value of the  products or services  received. Revenue is
recognized as the related advertising  is broadcast and expenses are  recognized
when the merchandise or services are received or utilized.
 
CASH AND CASH EQUIVALENTS
 
    Cash  and cash equivalents include cash on deposit with banks. Deposits with
banks are generally insured in limited  amounts. All liquid investments with  an
original  maturity of three months  or less when purchased  are considered to be
cash equivalents.
 
PROGRAM BROADCAST RIGHTS
 
    Rights to programs  available for  broadcast are initially  recorded at  the
amounts  of  total license  fees payable  under the  license agreements  and are
charged to operating expense on the basis of total programs available for use on
the straight-line method. The portion of the unamortized balance expected to  be
charged  to operating expense in the succeeding  year is classified as a current
asset, with the remainder  classified as a noncurrent  asset. The liability  for
program  broadcast rights is  classified as current  or long-term, in accordance
with the payment terms of the various licenses. The liability is not  discounted
for imputation of interest.
 
PROPERTY AND EQUIPMENT
 
    Property  and equipment are  stated at cost,  less accumulated depreciation.
Depreciation is computed by the  straight-line method over the estimated  useful
life  of the assets for financial  reporting purposes and by accelerated methods
for income tax purposes.
 
INTANGIBLE ASSETS
 
    Intangible  assets  are  stated  at   cost  and  are  amortized  using   the
straight-line  method. Goodwill  is amortized  over 15  to 40  years. Intangible
assets  other  than  goodwill,  which  include  broadcasting  licenses,  network
affiliation agreements, and other intangibles carried at an allocated cost based
on  appraisals are amortized over 15  years. Loan acquisition fees are amortized
over the life of the specific agreement.
 
    In the event  that facts  and circumstances  indicate that  the goodwill  or
other  intangibles may be  impaired, an evaluation of  continuing value would be
performed. If an evaluation is required, the estimated future undiscounted  cash
flows  associated with this  asset would be  compared to its  carrying amount to
determine if a write down to fair market value or discounted cash flow value  is
required.
 
INTEREST SWAP
 
    The  Knoxville Partnership had an interest rate swap agreement to modify the
interest characteristics  of a  portion of  its outstanding  debt (see  Note  4.
INDEBTEDNESS).  The agreement, which expired  during 1995, involved the exchange
of amounts based on a fixed interest rate for amounts based on variable interest
rates over the life of the agreement without an exchange of the notional  amount
upon  which the payments are  based. The differential to  be paid or received as
interest rates changed was accrued and  recognized as an adjustment of  interest
expense  related to the  debt (the accrual  accounting method). Interest expense
(income) adjustments resulting from the interest rate swap were $44,385 in 1993,
$(986) in 1994 and $(2,805) in 1995.
 
                                      F-78
<PAGE>
           BROADCASTING AND PAGING OPERATIONS OF JOHN H. PHIPPS, INC.
                             (THE PHIPPS BUSINESS)
                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)
 
2.  ACCOUNTING POLICIES (CONTINUED)
STOCK BASED COMPENSATION
 
    Phipps accounted for its stock Appreciation Rights Plan (see Note 7. PHIPPS'
CORPORATE ALLOCATIONS)  in accordance  with APB  Opinion No  25, Accounting  for
Stock Issued to Employees and related interpretations.
 
INCOME TAXES
 
    Phipps  and its subsidiaries  file a consolidated  federal income tax return
and  separate  state  tax  returns.  The  operating  results  of  the  Knoxville
Partnership  are included  in the  income tax returns  of Phipps  based on their
percentage ownership. All states where  the Broadcast and Paging Operations  are
located  have taxes based on income. Income tax expense for the Broadcasting and
Paging Operations are not presented in the accompanying financial statements  as
such amounts are computed and paid by Phipps. Pro-forma federal and state income
taxes  for the  Broadcast and Paging  Operations are calculated  on a pro-forma,
separate return basis (see Note 6. PRO-FORMA INCOME TAXES).
 
FAIR VALUES OF FINANCIAL INSTRUMENTS
 
    Phipps has adopted FASB Statement No.  107, "Disclosure about Fair Value  of
Financial  Instruments", which requires disclosure of  fair value, to the extent
practical, of certain of Phipps'  financial instruments. The fair value  amounts
do  not necessarily  represent the amount  that could  be realized in  a sale or
settlement. Phipps'  financial  instruments  are  comprised  principally  of  an
interest rate swap and long-term debt.
 
    The  estimated  fair  value of  long-term  bank  debt at  December  31, 1995
approximates book value  since, in  management's opinion,  such obligations  are
subject to fluctuating market rates of interest and can be settled at their face
amounts.  The Company does not anticipate  settlement of long-term debt at other
than book value and currently intends to hold such financial instruments through
maturity.
 
    The fair value of other  financial instruments classified as current  assets
or   liabilities  approximate  their  carrying  values  due  to  the  short-term
maturities of these instruments.
 
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
 
    In March  1995, the  FASB  issued Statement  No.  121, "Accounting  for  the
Impairment  of Long-Lived  Assets and for  Long-Lived Assets to  Be Disposed Of"
("Statement 121"), which requires impairment losses to be recorded on long-lived
assets used in  operations when indicators  of impairments are  present and  the
undiscounted  cash flows estimated to be generated by those assets are less than
the asset's carrying  amount. Statement  121 also addresses  the accounting  for
long-lived  assets that are expected to be  disposed of. Phipps does not believe
that the  adoption of  Statement 121  will  have a  material impact  on  Phipps'
financial position.
 
                                      F-79
<PAGE>
           BROADCASTING AND PAGING OPERATIONS OF JOHN H. PHIPPS, INC.
                             (THE PHIPPS BUSINESS)
                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)
 
3.  SUPPLEMENTAL FINANCIAL STATEMENT INFORMATION
   
    Major  classifications of property and  equipment and their estimated useful
lives are summarized as follows (in thousands):
    
 
<TABLE>
<CAPTION>
                                                    -------------------------------------------------
                                                          ESTIMATED
                                                       USEFUL LIVES            DECEMBER 31,
CLASSIFICATION                                              (YEARS)             1994             1995
- - --------------------------------------------------  ---------------  ---------------  ---------------
<S>                                                 <C>              <C>              <C>
Land                                                                            $593             $593
Buildings and improvements                                       40            2,630            3,104
Broadcasting equipment and furniture                           5-20           15,440           14,567
Communications and paging equipment                             5-7            4,561            4,739
                                                                     ---------------  ---------------
                                                                              23,224           23,003
Less accumulated depreciation                                                (12,504)         (12,510)
                                                                     ---------------  ---------------
                                                                             $10,720          $10,493
                                                                     ---------------  ---------------
                                                                     ---------------  ---------------
</TABLE>
 
   
    The composition of intangible assets was as follows (in thousands):
    
 
<TABLE>
<CAPTION>
                                                    --------------------------------
                                                              DECEMBER 31,
                                                               1994             1995
                                                    ---------------  ---------------
<S>                                                 <C>              <C>
Goodwill                                                     $3,050           $4,663
Broadcast licenses and network affiliation
 agreements                                                   6,162            6,162
Other                                                           812              812
Accumulated amortization                                     (1,447)          (2,182)
                                                    ---------------  ---------------
                                                             $8,577           $9,455
                                                    ---------------  ---------------
                                                    ---------------  ---------------
</TABLE>
 
   
    The composition of other current liabilities is as follows (in thousands):
    
 
<TABLE>
<CAPTION>
                                                    --------------------------------
                                                              DECEMBER 31,
                                                               1994             1995
                                                    ---------------  ---------------
<S>                                                 <C>              <C>
Customer deposits                                               $63              $85
Accrued bonuses                                                 163              265
Other compensation related accruals                             404              439
Other                                                           395              118
                                                    ---------------  ---------------
                                                             $1,025             $907
                                                    ---------------  ---------------
                                                    ---------------  ---------------
</TABLE>
 
   
    The Broadcast Operations' revenues are  presented net of agency  commissions
as follows (in thousands):
    
 
<TABLE>
<CAPTION>
                                                    -------------------------------------------------
                                                                 YEAR ENDED DECEMBER 31,
                                                               1993             1994             1995
                                                    ---------------  ---------------  ---------------
<S>                                                 <C>              <C>              <C>
Broadcast revenues, gross                                   $20,523          $23,131          $23,767
Agency commissions                                           (2,559)          (2,921)          (2,999)
                                                    ---------------  ---------------  ---------------
Broadcast revenues, net                                     $17,964          $20,210          $20,768
                                                    ---------------  ---------------  ---------------
                                                    ---------------  ---------------  ---------------
</TABLE>
 
                                      F-80
<PAGE>
           BROADCASTING AND PAGING OPERATIONS OF JOHN H. PHIPPS, INC.
                             (THE PHIPPS BUSINESS)
                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)
 
3.  SUPPLEMENTAL FINANCIAL STATEMENT INFORMATION (CONTINUED)
   
    Components of "Other (income) expense, net" are as follows (in thousands):
    
 
<TABLE>
<CAPTION>
                                                    -------------------------------------------------
                                                                 YEAR ENDED DECEMBER 31,
                                                               1993             1994             1995
                                                    ---------------  ---------------  ---------------
<S>                                                 <C>              <C>              <C>
Interest income                                                 $(2)             $(2)             $(4)
Gain on sale of assets                                          (14)            (665)              (9)
                                                    ---------------  ---------------  ---------------
                                                               $(16)           $(667)            $(13)
                                                    ---------------  ---------------  ---------------
                                                    ---------------  ---------------  ---------------
</TABLE>
 
4.  INDEBTEDNESS
   
    A summary of indebtedness is as follows (in thousands):
    
 
<TABLE>
<CAPTION>
                                                    --------------------------------
                                                              DECEMBER 31,
                                                               1994             1995
                                                    ---------------  ---------------
<S>                                                 <C>              <C>
Bank Credit Agreement:
  Revolving credit loan                                        $302             $498
  Term loan                                                   4,500            3,202
Partnership Note Payable                                        744              725
PortaPhone Acquisition Debt                                     518              385
                                                    ---------------  ---------------
                                                              6,064            4,810
Less current portion                                         (1,206)          (1,390)
                                                    ---------------  ---------------
                                                             $4,858           $3,420
                                                    ---------------  ---------------
                                                    ---------------  ---------------
</TABLE>
 
BANK CREDIT AGREEMENT
 
    The  Knoxville Partnership  has a  bank credit  agreement (the  "Bank Credit
Agreement") which provides a term loan and a revolving credit facility. The loan
has provisions which, among other things, requires that the loan be redeemed  in
the event of a change in control.
 
    Under the terms of the Bank Credit Agreement, the Knoxville Partnership may,
at  its option,  have a  Base Rate Advance  or LIBOR  (London Interbank Official
Rate) Advance, as specified by  the bank in the  notice of borrowing. Base  Rate
Advances  and LIBOR Advances may be outstanding  at the same time with Base Rate
Advances bearing interest at the bank's index rate (8.5% at December 31,  1995),
plus .25% or .50% as applicable based on the Partnership's leverage ratio. LIBOR
Advances  bear interest at the LIBOR (5.88% at December 31, 1995), plus 1.25% or
1.5% as applicable  based on  the Knoxville Partnership's  leverage ratio.  Base
Rate  Advances and LIBOR Advances totaled  $0 and $3.7 million, respectively, at
December 31, 1995.
 
    The Bank Credit  Agreement contains numerous  financial covenants and  other
affirmative  covenants  with regard  to  payment of  distributions  to partners,
operating and capitalized leases, and acquisition of property. The advances  are
guaranteed  by  Phipps and  collateralized  by substantially  all  the Knoxville
Partnership's assets. In  connection with the  Phipps guarantee, Phipps  charged
the  Knoxville Partnership guaranty fees, classified  as interest expense in the
accompanying financial statements, of approximately $55,000 in 1993, $54,000  in
1994 and $42,000 in 1995.
 
PARTNERSHIP NOTE PAYABLE
 
    On  September  30,  1994,  Phipps  acquired  approximately  4.2%  additional
ownership interest  in the  Knoxville Partnership  from a  limited partner.  The
total  amount to be paid to the former limited partner by the remaining partners
is $2 million and is  payable over 20 years at  $100,000 a year. The payment  of
this
 
                                      F-81
<PAGE>
           BROADCASTING AND PAGING OPERATIONS OF JOHN H. PHIPPS, INC.
                             (THE PHIPPS BUSINESS)
                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)
 
4.  INDEBTEDNESS (CONTINUED)
amount is guaranteed by the Knoxville Partnership. The first payment of $100,000
was  made at the time  the assignment was executed.  Subsequent payments are due
annually at  September 30.  The present  value of  the total  purchase price  at
September  30,  1994  was  $1,098,841  based  on  an  interest  factor  of 7.46%
compounded annually. Phipps Tennessee has recorded a liability of  approximately
$725,000 at December 31, 1995 for its portion of the outstanding balance.
 
PORTAPHONE ACQUISITION DEBT
 
   
    In  connection with a 1988 asset  acquisition, PortaPhone is required to pay
the seller a consulting fee of $15,000 monthly for ten years. The liability  for
the  monthly payments required  under the agreement is  recorded at a discounted
present value in the accompanying financial statements.
    
 
   
    Future scheduled reductions of principal for indebtedness are as follows (in
thousands):
    
 
<TABLE>
<S>                                                 <C>
Year Ended December 31
  1996                                              $         1,390
  1997                                                        1,155
  1998                                                        1,557
  1999                                                           81
  2000 and thereafter                                           627
                                                             ------
                                                    $         4,810
                                                             ------
                                                             ------
</TABLE>
 
    Cash payments of net interest  expense were approximately $339,000 in  1993,
$449,000 in 1994 and $564,000 in 1995.
 
5.  EMPLOYEE BENEFIT PLANS
 
DEFINED BENEFIT PENSION PLAN
 
    Phipps  has a defined benefit pension plan that covers substantially all its
full-time employees. Benefits are based on years of service and each  employee's
compensation during the last ten years of employment (average final pay) up to a
maximum of 50% of average final pay.
 
    Benefits  become vested upon completion of five years of service. No vesting
occurs until the employee has completed  five years of service. Phipps'  funding
policy is to make the maximum contribution allowable by applicable regulations.
 
    Total  pension  credit  for  the  Broadcasting  and  Paging  Operations  was
($431,000), ($409,000) and ($449,000) for 1993, 1994 and 1995, respectively.
 
                                      F-82
<PAGE>
           BROADCASTING AND PAGING OPERATIONS OF JOHN H. PHIPPS, INC.
                             (THE PHIPPS BUSINESS)
                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)
 
5.  EMPLOYEE BENEFIT PLANS (CONTINUED)
   
    The following summarizes information for all Phipps operations including the
plan's funded status as of the plan's September 30 year end and assumptions used
to develop the net periodic pension expense credit (in thousands).
    
 
<TABLE>
<CAPTION>
                                                    -------------------------------
                                                             DECEMBER 31,
                                                         1993       1994       1995
                                                    ---------  ---------  ---------
<S>                                                 <C>        <C>        <C>
Actuarial present value of accumulated benefit
 obligation is as follows:
  Vested                                               $3,691     $3,451     $4,348
  Other                                                   382        284        358
                                                    ---------  ---------  ---------
                                                       $4,073     $3,735     $4,706
                                                    ---------  ---------  ---------
                                                    ---------  ---------  ---------
Plan assets at fair value, primarily common stocks
 and bonds                                             $9,582     $9,367    $10,206
Projected benefit obligation                           (4,993)    (4,419)    (5,568)
                                                    ---------  ---------  ---------
Plan assets in excess of projected benefit
 obligation                                             4,589      4,948      4,638
Unrecognized net loss                                     804        688      1,288
Unrecognized net asset                                 (3,394)    (3,149)    (2,904)
                                                    ---------  ---------  ---------
Pension asset                                          $1,999     $2,487     $3,022
                                                    ---------  ---------  ---------
                                                    ---------  ---------  ---------
</TABLE>
 
   
    The net pension credit included in the accompanying financial statements  is
calculated as follows (in thousands):
    
 
<TABLE>
<CAPTION>
                                                    -------------------------------
                                                        YEAR ENDED DECEMBER 31,
                                                         1993       1994       1995
                                                    ---------  ---------  ---------
<S>                                                 <C>        <C>        <C>
Service costs-benefits earned during the year            $168       $207       $144
Interest cost on projected benefit obligation             280        306        303
Actual return on plan assets                             (670)      (713)      (687)
Net amortization and deferral                            (209)      (209)      (209)
                                                    ---------  ---------  ---------
Net pension credit                                      $(431)     $(409)     $(449)
                                                    ---------  ---------  ---------
                                                    ---------  ---------  ---------
</TABLE>
 
    The  assumptions used to develop the  plan's funded status and expenses were
as follows:
 
<TABLE>
<S>                                                <C>        <C>        <C>
Assumptions:
  Discount rate                                          7.5%       8.5%       7.5%
  Expected long-term rate of return on assets            9.0%       9.0%       9.0%
  Estimated rate of increase in compensation
   levels                                                4.5%       4.5%       4.5%
</TABLE>
 
401(K) PLAN
 
    The Company also sponsors two  401(k) plans which provide for  discretionary
employer   contributions  equal  to  25%  of  the  first  4%  of  an  employee's
contribution. Contributions by Phipps to the plans are not material.
 
MANAGEMENT INCENTIVE BONUS PLAN
 
    Phipps maintains an incentive  bonus plan in  which managers participate  in
the  performance of the division of Phipps which they manage. Eligible employees
are selected by the Board of Directors, and the bonus formula is established and
reviewed annually  by the  Board of  Directors and  key members  of  management.
Bonuses  are calculated  in the  year following the  year earned,  at which time
one-half of the
 
                                      F-83
<PAGE>
           BROADCASTING AND PAGING OPERATIONS OF JOHN H. PHIPPS, INC.
                             (THE PHIPPS BUSINESS)
                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)
 
5.  EMPLOYEE BENEFIT PLANS (CONTINUED)
calculated bonus is paid as compensation. The remaining portion is deferred  and
earned  by the employee over  five years based on  a vesting schedule adopted by
the Board. Employees become eligible to receive payment of deferred amounts upon
full vesting. Deferred amounts are recognized as an expense in the year  earned.
Expenses  under this plan were approximately  $128,000 in 1993, $170,000 in 1994
and $233,000 in 1995.
 
    Cumulative amounts vested for the  Broadcasting and Paging Operations  since
the  inception of the plan in 1990, total approximately $303,000 at December 31,
1995 and  are included  as a  current liability  in the  accompanying  financial
statements.
 
6.  PRO-FORMA INCOME TAXES
   
    Pro-forma  income tax expense differed from the amounts computed by applying
the statutory federal income tax  rate of 34% as a  result of the following  (in
thousands):
    
 
<TABLE>
<CAPTION>
                                                      -------------------------------
                                                          YEAR ENDED DECEMBER 31,
                                                           1993       1994       1995
                                                      ---------  ---------  ---------
<S>                                                   <C>        <C>        <C>
Computed "expected" tax rate                          $   1,342  $   2,454  $   2,159
Increase resulting from:
  State income taxes                                        158        289        253
                                                      ---------  ---------  ---------
                                                      $   1,500  $   2,743  $   2,412
                                                      ---------  ---------  ---------
                                                      ---------  ---------  ---------
</TABLE>
 
7.  PHIPPS' CORPORATE ALLOCATIONS
    Interest  expense incurred  by Phipps is  allocated to  the Broadcasting and
Paging Operations based on specific borrowings. Such allocated interest  expense
totaled  approximately $134,700  in 1993, $44,000  in 1994 and  $64,500 in 1995.
Pension expense (credit)  is allocated  based on an  actuarial calculation  (see
Note 5. EMPLOYEE BENEFITS PLANS)
 
   
    The corporate operations and employees of Phipps provide certain services to
the  Broadcasting  and Paging  Operations  including executive  management, cash
management, accounting, tax and other corporate services which are allocated  to
the operating units of Phipps. Corporate expenses of Phipps, including corporate
officers  salaries and related employee  benefits (see Stock Appreciation Rights
and Performance Incentive  Agreement below), travel  costs, and related  support
staff  and  operations, are  allocated  to the  operating  units of  Phipps. The
Broadcasting and  Paging  Operations  were charged  $2,462,195,  $2,485,423  and
$3,280,354  for these services during 1993,  1994 and 1995, respectively. In the
opinion of Phipps management, these charges have  been made on a basis which  is
reasonable,  however,  they  are  not necessarily  indicative  of  the  level of
expenses  which  might  have  been  incurred  by  the  Broadcasting  and  Paging
Operations on a stand-alone basis.
    
 
    Phipps  maintains a Stock Appreciation Rights Plan and Performance Incentive
Agreement for  certain  key  corporate  officers  identified  by  the  Board  of
Directors.   The  expenses  incurred  for  these  plans  are  allocated  to  the
Broadcasting and Paging Operations as part of the management fee allocation  for
Phipps' corporate expenses as discussed above. All amounts due under these plans
were  paid in  December 1995. Compensation  expense recorded for  these plans in
1993, 1994 and  1995 was  approximately $2,828,000,  $2,458,000 and  $2,861,000,
respectively.
 
8.  SUMMARY ACTIVITY IN OWNER'S EQUITY
    Phipps  provides centralized cash management for the Broadcasting and Paging
Operations.  Substantially  all  cash  receipts  are  remitted  to  Phipps   and
substantially all disbursements are made by Phipps. There
 
                                      F-84
<PAGE>
           BROADCASTING AND PAGING OPERATIONS OF JOHN H. PHIPPS, INC.
                             (THE PHIPPS BUSINESS)
                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)
 
8.  SUMMARY ACTIVITY IN OWNER'S EQUITY (CONTINUED)
are  no terms of settlement for interest charges on these intercompany accounts.
The amounts due to/from Phipps are included  as a part of owner's equity as  the
Broadcasting and Paging operations are not required to settle these amounts on a
current basis.
 
   
    An  analysis of the net transactions in the owner's equity accounts for each
of the three years in the period ended December 31 is as follows (in thousands):
    
 
<TABLE>
<CAPTION>
                                                    -------------------------------------------------
                                                               1993             1994             1995
                                                    ---------------  ---------------  ---------------
<S>                                                 <C>              <C>              <C>
Balance of the beginning of year                            $13,276          $14,306          $15,465
  Payments to Phipps                                         (5,067)          (8,181)          (7,696)
  Phipps' purchase of minority interests                        -0-              -0-            1,781
  Phipps allocations                                          2,166            2,121            2,895
  Net earnings                                                3,931            7,219            6,349
                                                    ---------------  ---------------  ---------------
Balance at the end of year                                  $14,306          $15,465          $18,794
                                                    ---------------  ---------------  ---------------
                                                    ---------------  ---------------  ---------------
</TABLE>
 
9.  LITIGATION
    At December 31, 1995,  the Broadcast and Paging  Operations are involved  in
various  lawsuits  arising  in the  normal  course of  their  business. However,
management believes that any potential losses that may occur from such  lawsuits
would  be covered by insurance and the  final outcome of these lawsuits will not
have a material effect to the accompanying combined financial statements.
 
10. COMMITMENTS AND CONTINGENCIES
   
    Program  rights  payable  for  films   and  syndicated  series,  which   are
noninterest bearing, are due as follows at December 31, 1995 (in thousands):
    
 
<TABLE>
<S>                                                 <C>
1996                                                     $922
1997                                                      171
1998 and later                                            174
                                                    ---------
                                                       $1,267
                                                    ---------
                                                    ---------
</TABLE>
 
   
    Payments  related  to commitments  for films  and syndicated  series, rights
which are  not yet  available for  broadcast at  December 31,  1995 are  due  as
follows (in thousands):
    
 
<TABLE>
<S>                                               <C>
1996                                                    $106
1997                                                     631
1998                                                     515
1999                                                     440
2000                                                     283
                                                  ----------
                                                      $1,975
                                                  ----------
                                                  ----------
</TABLE>
 
    The  Paging  Operations  lease  office space,  office  equipment  and paging
network towers. The Broadcasting Operations lease land and broadcast towers. The
operating leases with unaffiliated entities have various
 
                                      F-85
<PAGE>
           BROADCASTING AND PAGING OPERATIONS OF JOHN H. PHIPPS, INC.
                             (THE PHIPPS BUSINESS)
                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)
 
10. COMMITMENTS AND CONTINGENCIES (CONTINUED)
   
renewal options. Certain of the towers used in the Paging Operations are  leased
from  Phipps. Written contracts do not exist  for such leases but management has
established that the leases are for five  years and are renewable at the end  of
five years. Rental expense for operating leases was as follows (in thousands):
    
 
<TABLE>
<CAPTION>
                                          ----------------------------------
                                                           OTHER
                                              PHIPPS     LESSORS       TOTAL
                                          ----------  ----------  ----------
<S>                                       <C>         <C>         <C>
Year Ended December 31
  1993                                           $58        $384        $442
  1994                                            64         316         380
  1995                                            83         385         468
</TABLE>
 
   
    The  minimum  aggregate  rentals under  noncancelable  operating  leases are
payable the lessors as follows (in thousands):
    
 
<TABLE>
<CAPTION>
                                          ----------------------------------
                                                           OTHER
                                              PHIPPS     LESSORS       TOTAL
                                          ----------  ----------  ----------
<S>                                       <C>         <C>         <C>
Year Ended December 31
  1996                                          $118        $329        $447
  1997                                           122         240         362
  1998                                           125         190         315
  1999                                           129          61         190
  2000 and thereafter                            133          59         192
                                          ----------  ----------  ----------
                                                $627        $879      $1,506
                                          ----------  ----------  ----------
                                          ----------  ----------  ----------
</TABLE>
 
                                      F-86
<PAGE>
           BROADCASTING AND PAGING OPERATIONS OF JOHN H. PHIPPS, INC.
                             (THE PHIPPS BUSINESS)
                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)
 
   
11. INFORMATION ON BUSINESS SEGMENTS (IN THOUSANDS):
    
 
<TABLE>
<CAPTION>
                                          ----------------------------------
                                               YEAR ENDED DECEMBER 31,
                                                1993        1994        1995
                                          ----------  ----------  ----------
<S>                                       <C>         <C>         <C>
REVENUES
  Broadcasting Operations                    $19,460     $21,524     $22,424
  Paging Operations                            3,788       4,277       4,898
                                          ----------  ----------  ----------
Total revenues                               $23,248     $25,801     $27,322
                                          ----------  ----------  ----------
                                          ----------  ----------  ----------
OPERATING PROFIT:
  Broadcasting Operations                     $4,631      $7,287      $7,040
  Paging Operations                               56         381         342
                                          ----------  ----------  ----------
Total operating profit                        $4,687      $7,668      $7,382
                                          ----------  ----------  ----------
                                          ----------  ----------  ----------
DEPRECIATION AND AMORTIZATION EXPENSE:
  Broadcasting Operations                     $2,089      $2,015      $2,302
  Paging Operations                              747         657         818
                                          ----------  ----------  ----------
Total depreciation and amortization
 expense                                      $2,836      $2,672      $3,120
                                          ----------  ----------  ----------
                                          ----------  ----------  ----------
CAPITAL EXPENDITURES:
  Broadcasting Operations                     $2,429      $1,515      $1,216
  Paging Operations                            1,109       1,838       1,972
                                          ----------  ----------  ----------
Total capital expenditures                    $3,538      $3,353      $3,188
                                          ----------  ----------  ----------
                                          ----------  ----------  ----------
IDENTIFIABLE ASSETS (AT END OF YEAR):
  Broadcasting Operations                    $21,003     $21,059     $23,036
  Paging Operations                            3,816       4,239       4,526
                                          ----------  ----------  ----------
Total identifiable assets                    $24,819     $25,298     $27,562
                                          ----------  ----------  ----------
                                          ----------  ----------  ----------
</TABLE>
 
    Operating profit  is  total  operating  revenue  less  expenses  and  before
miscellaneous income and expense (net), interest expense and minority interests.
 
                                      F-87
<PAGE>
                                   APPENDIX A
 
                             ARTICLES OF AMENDMENT
                                       OF
                       GRAY COMMUNICATIONS SYSTEMS, INC.
 
                                       1.
 
    The name of the corporation is Gray Communications Systems, Inc.
 
                                       2.
 
    The  Articles of  Incorporation of the  Corporation are  amended by striking
paragraphs one and two of Article 4  and the section entitled "Common Stock"  of
Article  4  thereof in  their  entirety and  inserting  in lieu  thereof amended
paragraphs one and  two of  Article 4 and  an amended  section entitled  "Common
Stock" of Article 4 as set forth in Exhibit A attached hereto.
 
                                       3.
 
    Upon  the filing of these Articles of  Amendment with the Secretary of State
of the State of Georgia (the  "Effective Date"), and without any further  action
on  the  part  of  the  Corporation  or  its  shareholders,  each  share  of the
Corporation's Class  A Common  Stock, no  par  value, one  vote per  share  (the
"Existing  Class A  Common Stock"),  then issued  (including shares  held in the
treasury of the  Corporation) shall automatically  be reclassified, changed  and
converted into one share of Class A Common Stock, no par value, having ten votes
per  share.  Certificates previously  representing  shares of  Existing  Class A
Common Stock shall be deemed to represent shares of Class A Common Stock.
 
                                       4.
 
   
    Upon the Effective Date and  without any further action  on the part of  the
Corporation  or its shareholders, each share of the Corporation's Class B Common
Stock, no  par value,  non voting  (the "Existing  Class B  Common Stock")  then
issued  (including  shares  held  in  the  treasury  of  the  Corporation) shall
automatically be reclassified, changed and converted  into one share of Class  B
Common  Stock, no par value, having  one vote per share. Certificates previously
representing shares  of  Existing  Class  B Common  Stock  shall  be  deemed  to
represent shares of Class B Common Stock.
    
 
                                       5.
 
   
    This  amendment was duly  adopted by the shareholders  of the Corporation on
August   , 1996, in accordance with the provisions of O.C.G.A. 14-2-1003.
    
 
    IN WITNESS WHEREOF, the Corporation  has caused these Articles of  Amendment
to  be executed by its duly authorized officer on this the      day of         ,
1996.
 
                                  GRAY COMMUNICATIONS SYSTEMS, INC.
 
                                  By:
                                        ----------------------------------------
 
                                  Its:
                                        ----------------------------------------
 
                                      A-1
<PAGE>
                                                                       EXHIBIT A
 
                                       4.
 
    The  total number of shares of all  classes which the Corporation shall have
authority to  issue is  50,000,000 shares,  consisting of  15,000,000 shares  of
Class  A Common Stock, no par value  ("Class A Common Stock"); 15,000,000 shares
of Class B Common Stock, no par  value ("Class B Common Stock"); and  20,000,000
shares of Preferred Stock ("Preferred Stock").
 
    The  designations and the  preferences, conversion and  other rights, voting
powers, restrictions, limitations as to dividends, qualification, and terms  and
conditions of redemptions of the shares of each class of stock are as follows:
 
                                  COMMON STOCK
 
    The powers, preferences and rights of the Class A Common Stock and the Class
B  Common Stock,  and the  qualifications, limitations  or restrictions thereof,
shall be as follows:
 
        (a)  VOTING.  Holders of Class  A Common Stock are entitled to ten  (10)
    votes  per share. Holders  of Class B  Common Stock are  entitled to one (1)
    vote per share. All actions submitted to a vote of shareholders are voted on
    by holders of Class A and Class  B Common Stock voting together as a  single
    class, except as otherwise provided herein or by law.
 
        (b)  DIVIDENDS AND OTHER DISTRIBUTIONS.  Holders of Class A Common Stock
    and  holders of Class B  Common Stock are entitled  to receive dividends and
    other distributions in cash, stock or property of the Corporation as may  be
    declared  thereon by the  Board of Directors out  of funds legally available
    therefor. Each share  of Class  A Common  Stock and  each share  of Class  B
    Common  Stock  shall have  identical rights  with  respect to  dividends and
    distributions   (including    distributions   in    connection   with    any
    recapitalization,  and upon  liquidation, dissolution or  winding up, either
    partial or complete, of the Corporation.)
 
        (c)  CLASS B RIGHTS.
 
   
           (1) If, after the date on which the Articles of Amendment adding this
       provision to these  Articles are  filed with  the Secretary  of State  of
       Georgia  (the "Effective Date"), any  person or group acquires beneficial
       ownership of 100% of  the then issued and  outstanding shares of Class  A
       Common Stock (such acquisition making such person or group a "Significant
       Shareholder"),  and such person or group  does not immediately after such
       acquisition beneficially own an equal  percentage of the then issued  and
       outstanding  shares of Class B Common Stock, such Significant Shareholder
       must,  within  a  90-day  period  beginning  the  day  after  becoming  a
       Significant  Shareholder, commence  a public  tender offer  in compliance
       with all applicable laws and regulations to acquire additional shares  of
       Class  B Common Stock (a "Class B Protection Transaction") as provided in
       this subsection  (c)  of the  section  entitled "Common  Stock"  of  this
       Article 4.
    
 
           (2)  In a Class B Protection Transaction, the Significant Shareholder
       must offer to acquire from  all the other holders  of the Class B  Common
       Stock  all of the issued  and outstanding shares of  Class B Common Stock
       beneficially owned by them. The Significant Shareholder must acquire  all
       shares validly tendered.
 
           (3)  The offer price for any shares  of Class B Common Stock required
       to be  purchased by  a  Significant Shareholder  pursuant  to a  Class  B
       Protection  Transaction shall be the greater of (i) the highest price per
       share paid by the Significant Shareholder for any share of Class A Common
       Stock or Class  B Common  Stock (whichever  is higher)  in the  six-month
       period  ending  on the  date such  person or  group became  a Significant
       Shareholder and (ii)  the highest  closing price of  a share  of Class  A
       Common  Stock or Class  B Common Stock  (whichever is higher)  on The New
       York Stock  Exchange  (or  such  other  quotation  system  or  securities
       exchange  constituting the principal  trading market for  either class of
       Common Stock)  during  the  30  calendar days  preceding  the  date  such
 
                                      A-2
<PAGE>
       person  or  group became  a Significant  Shareholder. If  the Significant
       Shareholder has acquired Class A Common Stock or Class B Common Stock  in
       the  six-month period ending on  the date such person  or group becomes a
       Significant Shareholder for consideration other  than cash, the value  of
       such  consideration per share of  Class A Common Stock  or Class B Common
       Stock shall be as determined in good faith by the Board of Directors.
 
           (4) The requirement to engage in a Class B Protection Transaction  is
       satisfied  by making the requisite  offer and purchasing validly tendered
       shares, even if the number of shares tendered is less than the number  of
       shares for which tender was sought in the required offer.
 
   
           (5)  If a Significant Shareholder fails  to make an offer required by
       this subsection  (c)  of the  section  entitled "Common  Stock"  of  this
       Article 4, or to purchase shares validly tendered and not withdrawn, such
       Significant Shareholder shall not be entitled to vote any shares of Class
       A  Common Stock  beneficially owned  by such  Significant Shareholder and
       acquired by such  Significant Shareholder after  the Effective Date  that
       exceeded  such Significant Shareholders comparable  percentage of Class B
       Common Stock  unless and  until such  requirements are  complied with  or
       unless  and until all shares of Class  A Common Stock which would require
       an offer to be made are no longer owned by such Significant  Shareholder.
       To the extent that the voting power of any shares of Class A Common Stock
       is so suspended, such shares will not be included in the determination of
       aggregate   voting  shares  for  any  purpose  under  these  Articles  of
       Incorporation or the Georgia Business Corporation Code.
    
 
           (6) All calculations with respect  to percentage ownership of  issued
       and outstanding shares of either class of Common Stock will be based upon
       the  numbers of issued and outstanding shares reported by the Corporation
       on the last filed of (i)  the Corporation's most recent Annual Report  on
       Form  10-K, (ii)  its most recent  definitive proxy  statement, (iii) its
       most recent Quarterly Report on Form 10-Q or (iv) if any, its most recent
       Current Report on Form 8-K.
 
   
           (7) For  purposes of  this  subsection (c)  of the  section  entitled
       "Common  Stock"  of this  Article 4,  the term  "person" means  a natural
       person,  company,  government,  or   political  subdivision,  agency   or
       instrumentality  of a government, or  other entity. The terms "beneficial
       ownership" and "group" have the same  meanings as used in Regulation  13D
       promulgated  under the Securities  Exchange Act of  1934, as amended (the
       "Exchange  Act"),   subject   to  the   following   qualifications:   (i)
       relationships  by blood or marriage between or among any persons will not
       constitute any of such persons  a member of a  group with any other  such
       persons,  absent  affirmative attributes  of  concerted action;  (ii) any
       person acting in his  official capacity as a  director or officer of  the
       Corporation  shall not  be deemed  to beneficially  own shares  of Common
       Stock where  such beneficial  ownership exist  solely by  virtue of  such
       person's status as a trustee (or similar position) with respect to shares
       of  Common  Stock held  by plans  or  trusts for  the general  benefit of
       employees or retirees of the Corporation, and actions taken or agreed  to
       be  taken  by him  in such  official  capacity or  in any  other official
       capacity will not be  deemed to constitute  such a person  a member of  a
       group  with any other person; and (iii)  formation of a group will not be
       deemed to  be an  acquisition by  the group  (or any  member thereof)  of
       beneficial  ownership of any shares of Class A Common Stock then owned by
       a group  member and  acquired by  such member  from the  Corporation,  by
       operation  of law,  by will  or the laws  of descent  or distribution, by
       charitable contribution or gift, or by  foreclosure of a bona fide  loan.
       Furthermore,  for the  purposes of  calculating the  number of  shares of
       Class B Common Stock beneficially owned by such shareholder or group: (a)
       shares of Class B  Common Stock acquired  by gift shall  be deemed to  be
       beneficially  owned by such  shareholder or member of  such group only if
       such gift is made in good faith and not for the purposes of circumventing
       the Class B  Rights; (b) only  shares of  Class B Common  Stock owned  of
       record  by such shareholder or member of such group, or held by others as
       nominees of such  shareholder or  member and  identified as  such to  the
       Corporation, shall be deemed to be beneficially owned by such shareholder
       or  group (provided that shares with respect to which such shareholder or
       member has  sole  investment and  voting  power  shall be  deemed  to  be
       beneficially  owned thereby); and (c) only shares of Class B Common Stock
       acquired   by    such   shareholder    or    member   of    such    group
    
 
                                      A-3
<PAGE>
       for  an "equitable price" shall be treated as being beneficially owned by
       such shareholder or group.  An "equitable price" will  be deemed to  have
       been  paid only when shares of Class B Common Stock have been acquired at
       a price at least equal to the greater of (i) the highest price per  share
       paid by the Significant Shareholder in cash or in non-cash consideration,
       for any shares of Class A Common Stock or Class B Common Stock (whichever
       is  higher) in  the six-month  period ending on  the date  such person or
       group became a Significant Shareholder and (ii) the highest closing price
       of a share of Class A Common Stock or Class B Common Stock (whichever  is
       higher) on The New York Stock Exchange (or such other quotation system or
       securities  exchange constituting the principal trading market for either
       class of Common  Stock) during the  30 calendar days  preceding the  date
       such  person or group became a Significant Shareholder, with the value of
       any non-cash consideration in either  case being determined by the  Board
       of Directors acting in good faith.
 
        (d)   PREEMPTIVE RIGHTS.   The holders  of the Class  A Common Stock and
    Class B  Common  Stock  do  not have  preemptive  rights  enabling  them  to
    subscribe  for or receive shares of any class of stock of the Corporation or
    any other securities convertible  into shares of any  class of stock of  the
    Corporation.
 
        (e)     MERGER  AND  CONSOLIDATION.    In  the  event  of  a  merger  or
    consolidation of the Corporation with or into another entity (whether or not
    the Corporation  is the  surviving entity),  or a  statutory share  exchange
    involving  the Common Stock,  the holders of  Class B Common  Stock shall be
    entitled to receive the same amount  and form of consideration per share  as
    the  per share consideration, if any, received by the holders of the Class A
    Common Stock in such merger or consolidation.
 
        (f)  SUBDIVISION  OF SHARES.   If the  Corporation shall  in any  manner
    split,  subdivide or combine the outstanding  shares of Class A Common Stock
    or Class B Common Stock, the outstanding  shares of the other such class  of
    Common  Stock shall be  proportionally split, subdivided  or combined in the
    same manner and on  the same basis  as the outstanding  shares of the  other
    class of Common Stock have been split, subdivided or combined.
 
        (g)   POWER TO SELL  AND PURCHASE SHARES.   The Board of Directors shall
    have the power to cause the Corporation to issue and sell all or any part of
    any  class  herein   or  hereafter  authorized   to  such  persons,   firms,
    associations,  or corporations, and for such  consideration, as the Board or
    Directors shall from time to time, in its discretion, determine, whether  or
    not  greater consideration could be  received upon the issue  or sale of the
    same number of shares of another  class, and as otherwise permitted by  law.
    The  Board of  Directors shall  have the power  to cause  the Corporation to
    purchase any  class  of  stock  herein or  hereafter  authorized  from  such
    persons,  firms, associations, or corporations,  and for such consideration,
    as the  Board of  Directors shall  from  time to  time, in  its  discretion,
    determine,  whether or not less consideration could be paid upon to purchase
    of the same number of shares of another class, and as otherwise permitted by
    law.
 
        (h)  AMENDMENTS.  In addition to any other vote provided for by law,  by
    these  Articles  or  the By-Laws  of  the  Corporation or  by  the  Board to
    Directors, the affirmative vote of at least  a majority of the vote cast  by
    the  holders of shares of Class B  Common Stock, voting as a separate group,
    at any meeting of shareholders shall  be required to amend, alter or  repeal
    any provision of Article 4 (c).
 
                                      A-4
<PAGE>
                                   APPENDIX B
 
    RESOLVED,  that  the Bylaws  of the  Company  be, and  the same  hereby are,
amended by deleting the current Section 9 of Article II thereof in its entirety,
and substituting in lieu thereof the following:
 
    Section 9.  VOTING  OF SHARES.   All elections by  stockholders shall be  by
ballot  unless waived by the unanimous  consent of those stockholders present in
person or by proxy in the meeting. The  vote on any questions, upon demand of  a
stockholder  present in  person or  by proxy, shall  be by  a stock  vote and by
ballot. The stockholders shall have power by  a majority vote at any meeting  to
remove any director or officer from office."
 
                                      B-1
<PAGE>
                                   APPENDIX C
                         1992 LONG TERM INCENTIVE PLAN
            [SENTENCES OR PARAGRAPHS CONTAINING PROPOSED AMENDMENTS
                     ARE ITALICIZED AND IN BOLD-FACE TYPE.]
 
                     SECTION 1. ESTABLISHMENT AND PURPOSE.
 
    Gray  Communications Systems, Inc. hereby  establishes a long term incentive
plan to be named the Gray Communications Systems, Inc. 1992 Long Term  Incentive
Plan,  for certain employees of the Company and its subsidiaries. The purpose of
this Plan  is  to  encourage certain  employees  of  the Company,  and  of  such
subsidiaries  of the Company as the Committee administering the Plan designates,
to acquire Common Stock of the Company or to receive monetary payments based  on
the  value  of such  stock  or based  upon achieving  certain  goals on  a basis
mutually advantageous to  such employees  and the  Company and  thus provide  an
incentive  for continuation of the  efforts of employees for  the success of the
Company and for continuity of employment.
 
                            SECTION 2. DEFINITIONS.
 
    Whenever used herein, the following terms shall have the respective meanings
set forth below:
 
    (a) ACT means the Securities Exchange Act  of 1934, as amended from time  to
       time.
 
    (b)  AWARD  means any  Stock  Option, Stock  Appreciation  Right, Restricted
       Stock, or Performance Award granted under the Plan.
 
    (c) BASE PRICE  means, in  the case  of an  Option or  a Stock  Appreciation
       Right,  a price fixed by  the Committee at which  the Option or the Stock
       Appreciation Right may be  exercised, which in the  case of an  Incentive
       Stock Option or a Stock Appreciation Right shall not be less than 100% of
       the  Fair Market Value of a  share of Stock on the  date of grant of such
       option or right.
 
    (d) BOARD means the Board of Directors of the Company.
 
    (e) CHANGE OF CONTROL IS DEFINED IN SECTION 14.
 
    (f) CODE means the Internal Revenue Code  of 1986, as amended and in  effect
       from time to time.
 
    (g) COMMITTEE means those members of the Compensation Committee of the Board
       who  are not eligible for participation in  the Plan or any other plan of
       the  Company,   except   plans   meeting   the   requirements   of   Rule
       16b-3(c)(2)(i)(A)-(D)  promulgated under the Act,  and who during the one
       year period prior to becoming a member of the Compensation Committee were
       not eligible for selection as a Participant in the Plan or any other plan
       of  the  Company,   except  plans  meeting   the  requirements  of   Rule
       16b-3(c)(2)(i)(A)-(D).
 
    (h) COMPANY means Gray Communications Systems, Inc., a Georgia Corporation.
 
    (i)  DISABILITY means permanent  and total disability  as defined in Section
       22(e)(3) of the Code, as determined by the Committee in good faith,  upon
       receipt of and in reliance on sufficient competent medical advice.
 
    (j) EMPLOYEE means a salaried employee (including officers and directors who
       are also employees) of any member of the Group.
 
    (k)  FAIR MARKET VALUE  means, for any  particular date, (i)  for any period
       during which the  Stock shall  not be listed  for trading  on a  national
       securities  exchange, but when prices for  the Stock shall be reported by
       the National  Market System  of the  National Association  of  Securities
       Dealers Automated Quotation System ("NASDAQ"), the last transaction price
       per  share as quoted  by National Market  System of NASDAQ,  (ii) for any
       period during  which the  Stock shall  not  be listed  for trading  on  a
       national securities exchange or its price reported by the National Market
       System of
 
                                      C-1
<PAGE>
       NASDAQ,  but when prices for  the Stock shall be  reported by NASDAQ, the
       closing bid price as reported by the NASDAQ, (iii) for any period  during
       which  the Stock  shall be  listed for  trading on  a national securities
       exchange, the closing price per share of stock on such exchange as of the
       close of such trading day or (iv) the market price per share of Stock  as
       determined by a nationally recognized investment banking firm selected by
       the  Board of  Directors in  the event neither  (i), (ii)  or (iii) above
       shall be applicable. If Market Price is to be determined as of a day when
       the securities markets are not open,  the Market Price on that day  shall
       be the Market Price on the preceding day when the markets were open.
 
    (l) GROUP means the Company and every Subsidiary of the Company.
 
    (m)  OPTION  means the  right  to purchase  Stock at  the  Base Price  for a
       specified period of time. For purposes of  the Plan, an Option may be  an
       INCENTIVE  STOCK OPTION within the meaning of  Section 422 of the code, a
       NONQUALIFIED STOCK OPTION, or any other type of option encompassed by the
       Code.
 
    (n)  PARTICIPANT  means  any  Employee   designated  by  the  Committee   to
       participate in the Plan.
 
    (o)  PERFORMANCE AWARD means a right to receive a payment equal to the value
       of a  unit or  other measure  as  determined by  the Committee  based  on
       performance during a Performance Period.
 
    (p) PERFORMANCE PERIOD means a period of not more than ten years established
       by  the  Committee  during which  certain  performance goals  set  by the
       Committee are to be met.
 
    (q) PERIOD OF RESTRICTION means the period during which a grant of shares of
       Restricted Stock is restricted pursuant to Section 11 of the Plan.
 
    (r) REPORTING PERSON means a person subject to Section 16 of the act.
 
    (s) RESTRICTED STOCK means Stock granted pursuant to Section 11 of the Plan,
       but a share of  such Stock shall  cease to be  Restricted Stock when  the
       conditions  to and limitations  on transferability under  Section 11 have
       been satisfied or have expired, respectively.
 
    (t) RETIREMENT (INCLUDING  NORMAL, EARLY, and  DISABILITY Retirement)  means
       termination   of  employment  with  eligibility   for  normal,  early  or
       disability retirement benefits under the terms of the Gray Communications
       Systems, Inc. Pension Plan, as amended and in effect at the time of  such
       termination of employment.
 
    (u)  STOCK MEANS THE AUTHORIZED AND UNISSUED SHARES OF THE COMPANY'S CLASS A
       COMMON STOCK AND CLASS B COMMON STOCK OR SHARES OF THE COMPANY'S CLASS  A
       COMMON STOCK OR CLASS B COMMON STOCK HELD IN ITS TREASURY.
 
    (v)  STOCK APPRECIATION RIGHT  or SAR means  the right to  receive a payment
       from the Company equal to the excess of the Fair Market Value of a  share
       of  Stock at the date of  exercise over the Base Price.  In the case of a
       Stock Appreciation Right which is granted in conjunction with an  Option,
       the Base Price shall be the Option exercise price.
 
    (w)  SUBSIDIARY means a subsidiary corporation  as defined in Section 425 of
       the Code.
 
    (x) WINDOW PERIOD means the third to the twelfth business day following  the
       release  for publication  of the  Company's quarterly  or annual earnings
       report.
 
                           SECTION 3. ADMINISTRATION.
 
    The Plan will be  administered by the Committee.  The determinations of  the
Committee  shall  be made  in  accordance with  their  judgment as  to  the best
interests of the Company and its stockholders and in accordance with the purpose
of the Plan. A majority of members  of the Committee shall constitute a  quorum,
and  all determinations  of the  Committee shall  be made  by a  majority of its
members. Any determination of the Committee  under the Plan may be made  without
notice or meeting of the Committee,
 
                                      C-2
<PAGE>
by  a writing  signed by  a majority  of the  Committee members. Determinations,
interpretations, or other actions made or taken by the Committee pursuant to the
provisions of  the  Plan shall  be  final and  binding  and conclusive  for  all
purposes and upon all persons whomsoever.
 
                   SECTION 4. SHARES RESERVED UNDER THE PLAN.
 
    THERE IS HEREBY RESERVED FOR ISSUANCE UNDER THE PLAN AN AGGREGATE OF 600,000
SHARES  OF STOCK, OF WHICH 200,000 SHARES  SHALL BE THE COMPANY'S CLASS A COMMON
STOCK AND 400,000 SHARES SHALL  BE THE COMPANY'S CLASS  B COMMON STOCK. No  more
than 100,000 of these shares may be issued as Restricted Stock. Stock underlying
outstanding  Options  or Performance  Awards will  be  counted against  the Plan
maximum while such options or awards are outstanding. Shares underlying expired,
canceled or forfeited options or awards  (except Restricted Stock) may be  added
back  to the Plan maximum.  When the exercise price of  stock options is paid by
delivery of shares of Stock, the  number of shares available for issuance  under
the  Plan shall continue to be reduced by the gross (rather than the net) number
of shares issued pursuant to such  exercise, regardless of the number of  shares
surrendered  in payment.  Restricted Stock issued  pursuant to the  Plan will be
counted against  the  Plan  maximum  while outstanding  even  while  subject  to
restrictions.
 
                            SECTION 5. PARTICIPANTS.
 
    Participants  will consist of such officers and key employees of the Company
or any designated subsidiary as the Committee in its sole discretion  determines
have  a major impact on  the success and future  growth and profitability of the
Company. Designation  of  a  Participant  in any  year  shall  not  require  the
Committee  to designate such person to receive an  Award in any other year or to
receive the same type or  amount of Award as granted  to the Participant in  any
other  year or as  granted to any  other Participant in  any year. The Committee
shall consider such factors as it deems pertinent in selecting Participants  and
in determining the type and amount of their respective Awards.
 
                          SECTION 6. TYPES OF AWARDS.
 
    The  following Awards  may be  granted under  the Plan:  (a) Incentive Stock
Options; (b)  Nonqualified Stock  Options; (c)  Stock Appreciation  Rights;  (d)
Restricted  Stock; and (e) Performance Awards; all as described below. Except as
specifically limited herein,  the Committee  shall have  complete discretion  in
determining  the type and number of Awards to be granted to any Participant, and
the terms and conditions which attach to each Award, which terms and  conditions
need  not be uniform as  between different participants. All  Awards shall be in
writing.
 
                      SECTION 7. DATE OF GRANTING AWARDS.
 
    All Awards granted  under the Plan  shall be  granted as of  an Award  Date.
Promptly  after each Award Date, the Company shall notify the Participant of the
grant of the Award, and shall hand  deliver or mail to the Participant an  Award
Agreement,  duly executed by and on behalf of the Company, with the request that
the Participant execute and  return the Agreement within  thirty days after  the
date  of mailing or delivery by the Company of the Agreement to the Participant.
If the Participant shall fail to execute and return the written Award  Agreement
within  said  thirty  day  period,  his  or  her  Award  shall  be automatically
terminated, except that if  the Participant dies within  said thirty day  period
such  Option Agreement shall  be effective notwithstanding the  fact that it has
not been signed prior to death.
 
                      SECTION 8. INCENTIVE STOCK OPTIONS.
 
    Incentive Stock Options shall consist of options to purchase shares of Stock
at purchase prices not less than 100% of the Fair Market Value of the shares  on
the  date the option is granted. Said purchase price may be paid by check or, in
the discretion of the Committee, by the  delivery of shares of Stock then  owned
by the Participant. Incentive Stock Options will be exercisable not earlier than
six  months and not  later than ten years  after the date  they are granted and,
except as  provided below,  will terminate  not later  than three  months  after
termination  of employment for any reason other than death or disability. In the
event
 
                                      C-3
<PAGE>
termination of employment  occurs as a  result of death  or Disability, such  an
option will be exercisable for 12 months after such termination. If the optionee
dies  within 12 months after termination  of employment by reason of Disability,
then the  period of  exercise following  death  shall be  the remainder  of  the
12-month  period, or  three months,  whichever is  longer. If  the optionee dies
within three months after termination of  employment for any other reason,  then
the  period of exercise  following death shall  be three months.  However, in no
event shall any Incentive  Stock Option be exercised  more than ten years  after
its  grant.  Leaves of  absence  granted by  the  Company for  military service,
illness, and  transfers of  employment between  the Company  and any  subsidiary
thereof  shall  not constitute  termination  of employment.  The  aggregate Fair
Market Value (determined as of the time an option is granted) of the stock  with
respect  to which an  Incentive Stock Option  is exercisable for  the first time
during any  calendar  year  (under all  option  plans  of the  Company  and  its
subsidiary corporations) shall not exceed $100,000 per participant.
 
                     SECTION 9. NONQUALIFIED STOCK OPTIONS.
 
    Nonqualified Stock Options shall consist of nonqualified options to purchase
shares  of Stock  at purchase prices  determined by the  Committee. The purchase
price may  be paid  by check  or, in  the discretion  of the  Committee, by  the
delivery  of shares of  Stock then owned by  the Participant. Nonqualified Stock
Options will be exercisable not earlier than  six months and not later than  ten
years  after the date they are granted,  and will terminate not later than three
months after  termination  of  employment  for  any  reason  other  than  death,
Retirement  or Disability.  In the event  termination of employment  occurs as a
result of death, Retirement  or Disability, such an  option will be  exercisable
for  12 months  after such  termination. If the  optionee dies  within 12 months
after termination of employment by Retirement or Disability, then the period  of
exercise  following death shall be three months.  However, in no event shall any
option be  exercised more  than ten  years after  its grant.  Leaves of  absence
granted  by  the  Company  for  military  service,  illness,  and  transfers  of
employment between the Company and  any subsidiary thereof shall not  constitute
termination  of employment. The  Committee shall have the  right to determine at
the time  the  option  is granted  whether  shares  issued upon  exercise  of  a
Nonqualified  Stock  Option shall  be subject  to restrictions,  and if  so, the
nature of the restrictions.
 
                     SECTION 10. STOCK APPRECIATION RIGHTS.
 
    Stock Appreciation Rights  may be granted  which, at the  discretion of  the
Committee,  may  be exercised  (1)  in lieu  of exercise  of  an Option,  (2) in
conjunction with the exercise  of an Option,  (3) upon lapse  of an Option,  (4)
independent  of  an  Option, or  (5)  each of  the  above in  connection  with a
previously awarded Option under the Plan. SARs issued to Reporting Persons shall
be held for at least six months prior to exercise. If the Option referred to  in
(1), (2) or (3) above qualified as an Incentive Stock Option pursuant to Section
422  of the Code, the related SAR shall comply with the applicable provisions of
the Code  and the  regulations issued  thereunder.  At the  time of  grant,  the
Committee  may establish,  in its  sole discretion,  a maximum  amount per share
which will be payable upon exercise of a SAR, and may impose such conditions  on
exercise of an SAR (including, without limitation, the right of the Committee to
limit  the time of exercise to specified  periods) as may be required to satisfy
the requirements of Rule 16b-3  (or any successor rule),  under the Act. At  the
discretion  of the Committee, payment for SARs may  be made in cash or Stock, or
in a combination thereof,  provided, however, that payment  may be made in  cash
for  SARs  exercised by  Reporting  Persons only  upon  the condition  that such
exercise is  made  during the  Window  Period.  The following  will  apply  upon
exercise of an SAR:
 
    (a)   EXERCISE OF SARS IN LIEU OF  EXERCISE OF OPTIONS.  SARs exercisable in
    lieu of Options  may be exercised  for all or  part of the  shares of  Stock
    subject  to the related Option upon the exercise of the right to exercise an
    equivalent number of Options.  A SAR may be  exercised only with respect  to
    the  shares of stock for which its  related Option is then exercisable. Upon
    exercise of a SAR in lieu of exercise of an Option, shares of Stock equal to
    the number of SARs exercised shall  no longer be available for Awards  under
    the  Plan, provided  that if  SARs are exercised  for cash,  shares of stock
    equal to the number  of SARs exercised  shall be restored  to the number  of
    shares available for issuance under the Plan.
 
                                      C-4
<PAGE>
    (b)    EXERCISE OF  SARS  IN CONJUNCTION  WITH  EXERCISE OF  OPTIONS.   SARs
    exercisable in conjunction with the exercise  of Options shall be deemed  to
    be  exercised upon the exercise of the  related Options, and shares of Stock
    equal to the sum of the number of shares acquired by exercise of the  Option
    plus  the number of SARs  exercised shall no longer  be available for Awards
    under the Plan,  provided that  if SARs are  exercised for  cash, shares  of
    stock  equal to the number of SARs exercised shall be restored to the number
    of shares available for issuance under the Plan.
 
    (c)  EXERCISE OF SARS UPON LAPSE OF OPTIONS.  SARs exercisable upon lapse of
    Options shall be deemed to have been exercised upon the lapse of the related
    Options as to the number of shares  of Stock subject to the Options.  Shares
    of Stock equal to the number of SARs deemed to have been exercised shall not
    be  available again  for Awards  under the Plan,  provided that  if SARs are
    exercised for cash, shares  of stock equal to  the number of SARs  exercised
    shall  be restored to the number of  shares available for issuance under the
    Plan.
 
    (d)  EXERCISE OF SARS INDEPENDENT OF OPTIONS.  SARs exercisable  independent
    of  Options  may  be  exercised  upon  whatever  terms  and  conditions  the
    Committee, in its  sole discretion,  imposes upon  the SARs,  and shares  of
    Stock equal to the number of SARs exercised shall no longer be available for
    Awards  under the Plan, provided that if SARs are exercised for cash, shares
    of stock equal  to the number  of SARs  exercised shall be  restored to  the
    number of shares available for issuance under the Plan.
 
                         SECTION 11. RESTRICTED STOCK.
 
    Restricted Stock shall consist of Stock issued or transferred under the Plan
(other  than upon  exercise of  Stock Options or  as Performance  Awards) at any
purchase price less than the Fair Market  Value thereof on the date of  issuance
or transfer, or as a bonus. In the case of any Restricted Stock:
 
    (a)  The purchase price, if any, will be determined by the Committee.
 
    (b)   Restricted  Stock may be  subject to  (i) restrictions on  the sale or
    other disposition thereof, provided, however, that Restricted Stock  granted
    to  a Reporting Person shall, in addition to any other restrictions thereon,
    not be sold or disposed  of for not less than  six (6) months following  the
    date of grant; (ii) rights of the Company to reacquire such Restricted Stock
    at  the purchase price, if any, originally paid therefor upon termination of
    the employee's employment within specified periods, (iii) representation  by
    the  employee  that  he  or  she intends  to  acquire  Restricted  Stock for
    investment and not for resale, and (iv) such other restrictions,  conditions
    and terms as the Committee deems appropriate.
 
    (c)  The Participant shall be entitled to all dividends paid with respect to
    Restricted  Stock during the Period of Restriction and shall not be required
    to return any such dividends to the  company in the event of the  forfeiture
    of the Restricted Stock.
 
    (d)   The Participant shall be entitled  to vote the Restricted Stock during
    the Period of Restriction.
 
    (e)   The  Committee shall  determine  whether  Restricted Stock  is  to  be
    delivered  to the  Participant with an  appropriate legend  imprinted on the
    certificate or if the shares are  to be deposited in escrow pending  removal
    of the restrictions.
 
                        SECTION 12. PERFORMANCE AWARDS.
 
    Performance  Awards shall  consist of  Stock, stock  units or  a combination
thereof, to be issued  without any payment therefor,  in the event that  certain
performance   goals  established  by  the  Committee  are  achieved  during  the
Performance Period. The goals established by the Committee may include return on
average total  capital employed,  earnings per  share, return  on  stockholders'
equity and such other goals as may be established by the Committee. In the event
the  minimum Corporate goal is not achieved at the conclusion of the Performance
Period, no payment shall be made to the Participant. Actual payment of the award
earned shall be in cash or in Stock or in a combination of both, in a single sum
or in periodic
 
                                      C-5
<PAGE>
installments, all as the Committee in  its sole discretion determines. If  Stock
is  used, the Participant shall not have the right to vote and receive dividends
until the goals are achieved  and the actual shares are  issued. In the event  a
Reporting  Person received a Performance Award  which includes Stock, such stock
shall not  be sold  or disposed  of for  six (6)  months following  the date  of
issuance  pursuant to such award. In the event  an Award is paid in cash instead
of Stock, the number of shares reserved for issuance hereunder and the number of
shares which  may be  granted in  the form  of Restricted  Stock or  Performance
Awards shall be reduced as if shares had been issued.
 
                       SECTION 13. ADJUSTMENT PROVISIONS.
 
    (a)   If the Company shall at any time change the number of issued shares of
    Stock without new consideration to the  Company (such as by stock  dividends
    or  stock splits),  the total number  of shares reserved  for issuance under
    this Plan,  the  number of  shares  which may  be  granted in  the  form  of
    Restricted  Stock  or  Performance  Awards,  the  maximum  number  of shares
    available to a particular Participant, and  the number of shares covered  by
    each   outstanding  Award,   shall  be   adjusted  so   that  the  aggregate
    consideration payable to  the Company, if  any, and the  value of each  such
    Award  shall not  be changed. Awards  may also contain  provisions for their
    continuation or for other equitable  adjustments after changes in the  Stock
    resulting  from  reorganization,  sale, merger,  consolidation,  issuance of
    stock rights or warrants, or similar occurrence.
 
    (b)  Notwithstanding any other provision of this Plan, and without affecting
    the number of shares reserved or available hereunder, the Board of Directors
    may authorize the equitable  adjustment of benefits  in connection with  any
    merger,  consolidation, acquisition of property  or stock, or reorganization
    upon such terms and conditions as it may deem appropriate.
 
                         SECTION 14. CHANGE OF CONTROL.
 
    Notwithstanding any  other  provision of  this  Plan,  if the  terms  of  an
agreement  under which the Committee has granted  an Award under this Plan shall
so provide, upon a Change of Control outstanding Awards shall become immediately
and fully exercisable or payable according to the following terms:
 
    (a)  Any  outstanding and  unexercised Option shall  become immediately  and
    fully  exercisable, and  shall remain  exercisable until  it would otherwise
    expire by reason of lapse of time.
 
    (b)  During the six  month and seven day period  from and after a Change  of
    Control  (the  "Exercise  Period"),  unless  the  Committee  shall determine
    otherwise at the time of grant, a Participant shall have the right, in  lieu
    of  the payment  of the Base  Price of  the shares of  Stock being purchased
    under an Option and by giving notice to the Committee, to elect (within  the
    Exercise  Period and, in the case of Reporting Persons, only within a Window
    Period within such Exercise  Period) in lieu  of exercise thereof,  provided
    that  if such Option is held by a  Reporting Person more than six (6) months
    have elapsed from the grant thereof to  surrender all or part of the  Option
    to  the Company  and to receive  in cash within  30 days of  such notice, an
    amount equal to the amount by which the Change in Control Price per share of
    Stock on the date of such elections shall exceed the Base Price per share of
    Stock under the Option multiplied by  the number of shares of Stock  granted
    under  the Option as to which the  right granted under this subsection 14(b)
    shall have been exercised. Change in Control Price shall mean the higher  of
    (i)  (A)  for any  period during  which the  Stock shall  not be  listed for
    trading on a  national securities exchange,  but when prices  for the  Stock
    shall  be reported by the  National Market System of  the Nasdaq Market, the
    highest price  per share  as  quoted by  National  Market System  of  Nasdaq
    Market,  (B) for any period  during which the Stock  shall not be listed for
    trading on  a national  securities exchange  or its  price reported  by  the
    National  Market System of  NASDAQ, but when  prices for the  Stock shall be
    reported by NASDAQ, the highest average of the high bid and low asked prices
    as reported by the NASDAQ, (C) for  any period during which the Stock  shall
    be listed for trading on a national securities exchange, the highest closing
    price  per share of Stock  on such exchange as of  the close of such trading
    day or (D) the highest  market price per share of  Stock as determined by  a
    nationally  recognized  investment banking  firm  selected by  the  Board of
    Directors  in  the   event  neither  (A),   (B)  or  (C)   above  shall   be
 
                                      C-6
<PAGE>
    applicable  in each case during the 60 day period prior to and ending on the
    date of the  Change of  Control and  (ii) if the  Change of  Control is  the
    result  of a transaction or series  of transactions described in subsections
    14(f)(i) or (iii) hereof, the highest price  per share of the Stock paid  in
    such  transaction or series  of transaction (which in  the case of paragraph
    (i) shall be  the highest price  per share of  the Stock as  reflected in  a
    Schedule  13D by the person having made the acquisition); provided, however,
    that with respect to any Incentive Stock Option, the Change of Control Price
    shall not  exceed the  market  price of  a share  of  Stock (to  the  extent
    required  pursuant to Section 422  of the Internal Revenue  Code of 1986, as
    amended) on the date of surrender thereof.
 
    (c)  Any outstanding and  unexercised Stock Appreciation Rights (other  than
    such  rights which arise  pursuant to subsection  14(b) hereof) shall become
    exercisable as follows:
 
        (i) Any SAR described in subsections 10(a)  or (b) shall continue to  be
            treated as provided in those subsections, except that SARs exercised
            by  Reporting  Persons for  cash shall  be  exercised only  during a
            Window Period, and  shall have  been held  for six  months prior  to
            exercise.
 
        (ii) Any  SAR described in subsection 10(c) shall be deemed to have been
             exercised if  and when  the Participant  advises the  Committee  in
             writing that he or she elects to have options with respect to which
             the  SAR was  granted treated  as having  lapsed, except  that SARs
             exercised by Reporting  Persons for  cash shall  be exercised  only
             during  a Window  Period, and shall  have been held  for six months
             prior to exercise.
 
       (iii) Any  SAR  described  in  Subsection  10(d)  shall  be   exercisable
             immediately,  without  regard  to  limitations  imposed;  upon such
             exercise which are related to the passage of time, except that SARs
             exercised by Reporting  Persons for  cash shall  be exercised  only
             during  a Window  Period, and shall  have been held  for six months
             prior to exercise.
 
    (d)   Any Restricted  Stock  granted pursuant  to  Section 11  shall  become
    immediately  and fully  transferable, and the  Committee shall  be deemed to
    have exercised its  discretion to waive  any automatic forfeitures  provided
    with  respect to such Restricted  Stock. Any shares held  in escrow shall be
    delivered to the Participant, and  the share certificates shall not  contain
    the  legend  specified  by  subsection 11(e).  Reporting  Persons  shall not
    dispose of any Restricted Stock until  six (6) months following the date  of
    grant of such Restricted Stock.
 
    (e)   Any  Performance Award  granted pursuant to  Section 12  which has not
    expired or  been  forfeited shall  be  deemed to  have  been earned  on  the
    assumption  that all  performance goals  have been  achieved to  the fullest
    extent scheduled in the Award. All payment shall be made promptly in a  lump
    sum, notwithstanding any other provision for installment or deferred payment
    prescribed in the Award.
 
    (f)   For purposes  of this Plan, Change  of Control shall  mean a change in
    control of the Company of a nature that would be required to be reported  in
    response  to Item 6(e)  of Schedule 14A of  Regulation 14A promulgated under
    the Act; provided that, for purposes of this Agreement, a Change in  Control
    shall  be deemed to have occurred if (i) any Person (other than the Company)
    is or becomes  the "beneficial owner"  (as defined in  Rule 13d-3 under  the
    Act),  directly or indirectly, of securities  of the Company which represent
    20% or more of the combined  voting power of the Company's then  outstanding
    securities;  (ii) during any period of two (2) consecutive years individuals
    who at  the beginning  of such  period constitute  the Board  cease for  any
    reason  to constitute at  least a majority thereof,  unless the election, or
    the nomination  for election,  by the  Company's stockholders,  of each  new
    director is approved by a vote of at least two-thirds (2/3) of the directors
    then  still in office who were directors  at the beginning of the period but
    excluding any  individual whose  initial assumption  of office  occurs as  a
    result  of either an actual or threatened  election contest (as such term is
    used in Rule 14a-11  of Regulation 14A promulgated  under the Act) or  other
    actual  or threatened solicitation of proxies or consents by or on behalf of
    a person other than the Board; (iii) there is consummated any  consolidation
    or  merger of  the Company  in which  the Company  is not  the continuing or
    surviving corporation or pursuant  to which shares  of the Company's  Common
    Stock  are converted into cash, securities,  or other property, other than a
    merger of the  Company in which  the holders of  the Company's Common  Stock
 
                                      C-7
<PAGE>
    immediately  prior to  the merger have  the same  proportionate ownership of
    common stock of the surviving corporation immediately after the merger; (iv)
    there is consummated any consolidation or merger of the Company in which the
    Company is the continuing or surviving  corporation in which the holders  of
    the  Company's  Common Stock  immediately  prior to  the  merger do  not own
    seventy percent (70%)  or more  of the  stock of  the surviving  corporation
    immediately  after the  merger; (v)  there is  consummated any  sale, lease,
    exchange, or  other transfer  (in one  transaction or  a series  of  related
    transactions) of all, or substantially all, of the assets of the Company, or
    (vi)  the stockholders of the  Company approve any plan  or proposal for the
    liquidation or dissolution of the Company.
 
                        SECTION 15. NONTRANSFERABILITY.
 
    Each Award granted under the Plan to a Participant shall not be transferable
other wise than by will or the laws of descent and distribution or pursuant to a
Qualified Domestic  Relations Order  (as  defined in  Section 206(d)(3)  of  the
Employee  Retirement  Income Security  Act of  1974, as  amended, and  the rules
promulgated thereunder),  and shall  be  exercisable, during  the  Participant's
lifetime,  only by the Participant. In the  event of the death of a Participant,
exercise of payment shall be made only:
 
    (a)  By or to  the executor or administrator of  the estate of the  deceased
    Participant  or the  person or  persons to  whom the  deceased Participant's
    rights under  the Award  shall  pass by  will or  the  laws of  descent  and
    distribution; and
 
    (b)  To the extent that the deceased Participant was entitled thereto at the
    date  of  his  death,  provided,  however,  that  any  otherwise  applicable
    six-month holding period shall not be required for exercise by or payment to
    an executor or administrator of the estate of a deceased Reporting Person.
 
                               SECTION 16. TAXES.
 
    The Company shall be entitled to withhold the amount of any tax attributable
to any amounts  payable or shares  deliverable under the  Plan after giving  the
person  entitled to receive such payment or delivery notice as far in advance as
practicable, and the  Company may  defer making payment  or delivery  as to  any
Award  if any  such tax  is payable until  indemnified to  its satisfaction. The
person entitled to any such delivery may,  by notice to the Company at the  time
the  requirement  for such  delivery is  first established,  elect to  have such
withholding satisfied  by a  reduction  of the  number  of shares  otherwise  so
deliverable  (a "Stock Withholding  Election"), such reduction  to be calculated
based on a closing market  price on the date  of such notice. Reporting  Persons
may  make a Stock Withholding Election either  (i) during a Window Period, as to
an Option or  SAR exercise  during such  Window Period,  or (ii)  six months  in
advance  of an Option  or SAR exercise,  which exercise need  not occur during a
Window Period, and  which election  may not be  suspended or  revoked except  by
another such election which shall not become effective until six months after it
is made.
 
                      SECTION 17. NO RIGHT TO EMPLOYMENT.
 
    A  Participant's right,  if any,  to continue to  serve the  Company and its
subsidiaries as an  officer, employee, or  otherwise, shall not  be enlarged  or
otherwise affected by his or her designation as a Participant under the Plan.
 
                SECTION 18. DURATION, AMENDMENT AND TERMINATION.
 
    No  Award shall be granted  more than ten years  after the effective date of
this Plan; provided, however,  that the terms and  conditions applicable to  any
Award granted within such period may thereafter be amended or modified by mutual
agreement  between the Company and  the Participant or such  other person as may
then have an interest therein. Also, by mutual agreement between the Company and
a Participant hereunder, Stock  Options or other Awards  may be granted to  such
Participant in substitution and exchange for, and in cancellation of, any Awards
previously  granted such  Participant under  this Plan.  To the  extent that any
Stock Options or other Awards which may be granted within the terms of the  Plan
would  qualify under present or future laws for tax treatment that is beneficial
to a recipient, then  any such beneficial treatment  shall be considered  within
the  intent, purpose and operational  purview of the Plan  and the discretion of
the
 
                                      C-8
<PAGE>
Committee and to the extent that any such Stock Options or other Awards would so
qualify within the terms of the Plan, the Committee shall have full and complete
authority to grant Stock Options or other Awards that so qualify (including  the
authority  to grant, simultaneously or otherwise,  Stock Options or other Awards
which do not so qualify) and to  prescribe the terms and conditions (which  need
not be identical as among recipients) in respect to the grant or exercise of any
such  Stock Option or  other Awards under  the Plan. The  Board of Directors may
amend the Plan from time to time or terminate the Plan at any time. However,  no
action  authorized by  this paragraph  shall reduce  the amount  of any existing
Award or  change the  terms  and conditions  thereof without  the  Participant's
consent.  No amendment of the Plan,  shall, without approval of the stockholders
of the Company (a) increase the total number of shares which may be issued under
the Plan or increase the amount of type of Awards that may be granted under  the
Plan;  (b) change the minimum purchase price,  if any, of shares of Common Stock
which may  be  made  subject  to  Awards under  the  Plan;  or  (c)  modify  the
requirements as to eligibility for Awards under the Plan.
 
                       SECTION 19. STOCKHOLDER APPROVAL.
 
    The  Plan shall  be effective on  July 1,  1992, and shall  be submitted for
approval  by  the  stockholders  of  the  Company  at  the  Annual  Meeting   of
Stockholders  in 1992. If the stockholders do  not approve the Plan, it, and any
action taken hereunder, shall be void and of no effect.
 
                                      C-9
<PAGE>

PROXY

                        GRAY COMMUNICATIONS SYSTEMS, INC.

THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS OF THE COMPANY

     The undersigned does hereby constitute and appoint WILLIAM E. MAYHER, III
and RALPH W. GABBARD and each of them with power of substitution to each, the
proxies of the undersigned to vote all shares of GRAY COMMUNICATIONS SYSTEMS,
INC. which the undersigned may be entitled to vote at the Annual Meeting of its
shareholders to be held on September 3, 1996, at 9:30 a.m. local time and at 
any adjournment or adjournments thereof upon the matters described in the
accompanying Proxy Statement and upon any other business that may properly come
before the meeting or adjournment thereof.  Said proxies are directed to vote or
to refrain from voting as checked below upon the following matters, and
otherwise in their discretion upon other matters in connection with the
following or otherwise as may properly come before the meeting or any
adjournment thereof.


                          (CONTINUED ON THE OTHER SIDE)


<PAGE>

BOARD OF DIRECTORS RECOMMENDS A VOTE FOR ALL PROPOSALS




1. Election of eight (8) Directors
   NOMINEES: Richard L. Boger, Ralph W. Gabbard, Hilton H. Howell, Jr.,
             William E. Mayher, III, Howell W. Newton, Hugh Norton,
             Robert S. Prather, Jr., and J. Mack Robinson


          FOR all except                          WITHHOLD
            as listed                             AUTHORITY
               below

                / /                                  / /


(INSTRUCTION: To refrain from voting on any individual nominee, write that
nominee's name on the space provided below.)


- - -------------------------------------------------------------------------------

                      UNLESS OTHERWISE SPECIFIED THIS PROXY
                   SHALL BE VOTED "FOR" EACH OF THE PROPOSALS

             Please mark your votes as indicated in this example /X/

2. Proposal to adopt and approve articles of amendment to the Company's Articles
of Incorporation to (a) increase the voting rights of the Class A Common Stock
of no par value such that the Class A Common Stock shall have 10 votes per
share on each matter that is submitted to shareholders for approval, (b)
redesignate the presently authorized Class B Common Stock of no par value with
no voting rights, such that the Class B Common Stock of no par value shall have
one vote per share on each matter that is submitted to shareholders for
approval and shall have certain rights as described in the accompanying Proxy
Statement and (c) increase the authorized number of shares of the Company's
capital stock to 50,000,000 shares designating 15,000,000 shares as Class A 
Common Stock of no par value; 15,000,000 shares as Class B Common Stock of no 
par value and 20,000,000 shares as Preferred Stock.

                     FOR          AGAINST         ABSTAIN
                     / /            / /             / /

3. Proposal to amend the Company's Bylaws to permit an increase of the voting
rights of the Class A Common Stock to 10 votes per share.

                     FOR          AGAINST         ABSTAIN
                     / /            / /             / /

4. Proposal to amend the Company's 1992 Long Term Incentive Plan for certain
employees of the Company and its subsidiaries to provide for the issuance
thereunder of shares of Class B Common Stock in addition to shares of Class A
Common Stock.

                     FOR          AGAINST         ABSTAIN
                     / /            / /             / /

5. Proposal to approve the issuance to Bull Run Corporation of warrants to
purchase 487,500 shares of Class A Common Stock.

                     FOR          AGAINST         ABSTAIN
                     / /            / /             / /

6. Proposal to approve the issuance to Bull Run Corporation of warrants to
purchase 500,000 shares of Class A Common Stock.

                     FOR          AGAINST         ABSTAIN
                     / /            / /             / /

7. Proposal to ratify the Board of Directors' approval of an amendment to the
Company's non-qualified stock option plan for non-employee directors of the
Company.

                     FOR          AGAINST         ABSTAIN
                     / /            / /             / /

8. Proposal to approve the appointment of Ernst & Young LLP as independent
auditors of the Company and its subsidiaries for the year ending December 31,
1996.

                     FOR          AGAINST         ABSTAIN
                     / /            / /             / /

SIGNATURES(S)______________ SIGNATURE(S)__________________ DATE________ , 1996
NOTE: Please sign as name appears hereon.  Joint owners should each sign.  When
signing as attorney, executor, administrator, trustee or guardian, please give
full title as such.


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